Buying a franchise: where and how will you resolve a dispute?

When choosing a franchise, it is easy to overlook the clauses at the end of the agreement dealing with governing law and dispute resolution. Yet these may determine whether you can effectively enforce what you have been promised or defend yourself against an unjustified claim. Cooperation within the franchise community rests on trust, but it still needs an agreed procedure for when partners disagree. This is not about planning for conflict; it is about ensuring you can exercise your rights in practice.

1. Distinguish governing law from where disputes will be heard

Governing law determines which legal rules apply to the agreement. Court jurisdiction determines which court will hear a dispute. They are not the same thing. An agreement with an overseas franchisor may specify both foreign law and a foreign court; each provision needs to be checked separately.

The Czech Republic has no dedicated franchising legislation. A franchise agreement is usually concluded as an agreement not specifically defined by statute under section 1746(2) of Act No. 89/2012 Coll., the Civil Code. Depending on its content, it may also incorporate elements of licensing, sale and other contractual arrangements. General rules on pre-contractual negotiations and other legislation, such as competition law, also apply.

Czech law does not impose a specific requirement to register franchise agreements or provide a mandatory, standardised pre-contractual disclosure document. This does not, however, remove the general duties to provide information during negotiations. Ask to see the dispute resolution provisions in the draft agreement, rather than waiting until you sign.

For cross-border arrangements, the Rome I Regulation on governing law and the Brussels I Recast Regulation on jurisdiction and the recognition of judgments may be particularly relevant. Choosing a governing law does not mean that all otherwise mandatory rules can be excluded. Nor should you assume that operating a franchise in the Czech Republic automatically guarantees access to a Czech court.

2. Check whether the agreement directs disputes to a court or an arbitrator

Look for terms such as ‘competent court’, ‘arbitration clause’, ‘arbitration’ and ‘dispute resolution’ in the agreement. Then check the annexes and terms and conditions. The decisive provision may be tucked away in a document that the agreement merely refers to.

For court proceedings, check the country and, where specified, the particular court. In Czech business-to-business relationships, the parties may agree in writing to give territorial jurisdiction to a different court of first instance, subject to statutory conditions. Simply naming a court in the agreement does not guarantee that the clause will be effective; it must comply with the applicable procedural rules.

Arbitration in the Czech Republic is governed by Act No. 216/1994 Coll., on Arbitration Proceedings and the Enforcement of Arbitral Awards. For eligible disputes concerning property or financial rights between businesses, a valid arbitration agreement can transfer decision-making from a state court to an arbitrator. A franchisee generally enters into the agreement as a business, not as a consumer.

Before accepting an arbitration clause, ask for an explanation of:

• who appoints the arbitrator and how;
• which procedural rules will apply;
• where the arbitration will take place and in which language;
• how fees and remuneration are calculated;
• what options exist for reviewing the outcome.

An arbitral award cannot ordinarily be appealed in the same way as a court judgment. A court can set it aside only on limited statutory grounds; this is not a fresh assessment of the entire commercial dispute. Arbitration is not automatically cheaper or quicker, either.

3. Calculate whether you can afford to enforce your rights, not just whether you legally can

Ask an independent lawyer for an indicative budget for two scenarios: enforcing the franchisor’s contractual obligations and defending a monetary claim brought by the franchisor. Have the estimate broken down into your own legal representation, court or arbitration fees, translations, any expert reports and travel.

For proceedings abroad, factor in the need for local legal representation and coordination with your Czech adviser. Also check where the other party holds assets and how a judgment or award would be enforced there. Winning a dispute and actually recovering money are not the same thing.

A useful practical question is: would it make financial sense to pursue a claim that is significant for your outlet but relatively small for the franchisor? If the cost of enforcing your rights is likely to swallow up the value of the claim, you have grounds to negotiate a different clause. Do not assume that the other party will always reimburse all your expenses.

4. Negotiate a procedure that gives agreement a chance

Propose starting with written notification of the problem to named contacts, followed by discussions between both parties’ management teams. Specify how notices must be delivered and set a clear deadline for a response. This helps distinguish operational misunderstandings from genuine legal disputes.

The next step could be mediation, which in the Czech Republic is governed by Act No. 202/2012 Coll., on Mediation. A mediator does not decide who is right, but helps the parties reach an agreement. Agree in advance how the mediator will be selected, how costs will be shared and what happens if mediation fails.

The settlement stage should not indefinitely block access to the courts or any necessary urgent legal protection. Nor should you assume that simply exchanging emails automatically stops the limitation period from running. Have a lawyer assess the implications of your chosen procedure.

Practical takeaway: Before signing, summarise the governing law, the location and language of proceedings, the institution that will decide the dispute and the estimated costs on a single page. If you cannot explain any of these points, the clause is not yet ready for you to sign.