Franchise disputes: agreeing in advance how to resolve them

When turning an existing business into a franchise, it is easy to talk about growth and harder to discuss future disagreements. Yet dispute resolution rules should be in place before the first agreement is signed. A franchise network relies on cooperation between independent businesses: a misunderstanding over an invoice, promised support or the interpretation of an obligation need not become a protracted conflict if both parties know whom to contact and what happens next.

1. Distinguish a business problem from a legal dispute

The first step is not to draft a court jurisdiction clause, but to list the situations in which the franchisor and franchisee might interpret their agreement differently. Review your business and identify obligations whose performance could be assessed in different ways: the response time for an enquiry, the availability of an agreed system, the calculation of a shared cost or the scope of promised specialist support.

For each situation, set out what counts as a routine operational difficulty and what calls for a formal response. A late reply to one enquiry is not the same as repeated failure to meet a contractual obligation. If every difficulty immediately prompts a solicitor’s letter, the relationship soon comes under strain. If a serious disagreement is treated as an informal conversation for months, evidence and time are lost.

Prepare a simple reporting form covering:

• a description of the incident and the date the problem was identified;
• the contractual obligation concerned;
• the available documentation;
• the impact on the business;
• a proposed solution and an assessment of urgency.

This form is not an admission of liability. Its purpose is to allow the facts to be checked and prevent the discussion from being based solely on impressions.

2. Agree a procedure that complies with Croatian law

Croatia has no dedicated law comprehensively regulating franchising. Franchise agreements are governed primarily by the Croatian Civil Obligations Act, including its general rules on contracts, performance of obligations, liability for damages and the principle of good faith and fair dealing. Freedom of contract does not mean that every contractual provision is permissible.

Other legislation may also matter, depending on the subject of the disagreement. For example, a dispute over the use of branding may involve the Trade Mark Act, while certain business restrictions may fall under the Competition Act and applicable European Union rules. The Civil Procedure Act is relevant to court proceedings.

The agreement should therefore clearly specify how formal notices are to be delivered, the individuals or roles to which they should be addressed, and the procedure for updating contact details. Distinguish everyday electronic communications from notices that have legal effect.

Allow a reasonable period for acknowledging receipt and a separate period for providing a reasoned response. These are contractual deadlines to be tailored to the business, not presented as statutory deadlines for franchises. State what happens if no response is received and when the matter is escalated to the next decision-making level.

A lawyer should also review the court jurisdiction clause. Do not assume that the choice of court is valid for every possible dispute simply because it appears in a contract template.

3. Provide for negotiation and mediation without delaying legal protection

A practical procedure can have three stages: a discussion between those responsible for operations, a meeting of authorised representatives of both contracting parties, and an attempt at mediation. Each stage should have a clearly defined starting point, objective and endpoint. An endless series of meetings is not a dispute resolution procedure.

In Croatia, mediation is governed by the Act on the Amicable Resolution of Disputes. A mediator does not decide who is right, as a judge does, but helps the parties reach an agreement. The contract can set out how a mediator will be proposed, how costs will be agreed and how the meeting will be organised. The final wording should comply with the rules in force and reflect the nature of the relationship.

Do not use mediation and arbitration as interchangeable terms. Arbitration is a separate method of deciding disputes, governed by the Arbitration Act. Do not copy an arbitration clause without assessing its costs, suitability and legal consequences.

An attempt to reach agreement must not become a trap that prevents either party from protecting its rights in time. Provide exceptions for urgent cases, such as the need to apply for interim relief. Nor should you assume that an ordinary exchange of messages automatically suspends a limitation period or other deadline: the legal effect of the particular steps taken needs to be checked separately.

4. Decide how the business will operate while a disagreement continues

A franchise relationship often has to keep functioning during a dispute. Clarify in advance how undisputed obligations will be met, essential communication maintained and documentation preserved. A disputed invoice does not, in itself, automatically entitle either party to suspend all payments or support; whether a particular action is permitted depends on the contract and the law.

Keep a record of the initial report, responses, meetings and agreed actions. Meeting minutes should distinguish between established facts, disputed claims and accepted obligations. Store documents with restricted access and comply with data protection rules where they contain personal data.

If you reach an agreement, record who will do what, by when, and how completion will be confirmed. For a settlement with significant financial or legal consequences, seek a legal review, including an assessment of its enforceability.

Before offering your first franchise, run a simulation of a disagreement. If it is unclear who receives the report, who responds and when professional advice should be sought, the procedure is not yet ready. The practical takeaway: write your dispute resolution rules while the relationship is good — that is when they can best protect cooperation and both contracting parties.