Buying a franchise: Agree how disputes will be resolved

When you join a franchise network, it is natural to focus on working together. But the agreement’s provisions on disputes can have a major impact on your ability to enforce your rights. Even a clear obligation is worth less if enforcing it requires disproportionately expensive proceedings abroad. That is why you should review the dispute resolution provisions before signing.

1. Distinguish between governing law, jurisdiction and procedure

Three separate questions are often covered in the same section of a contract: Which country’s law applies? Where must proceedings take place? And will the dispute be decided by the courts or through arbitration?

Governing law determines the rules against which the agreement will be assessed. Jurisdiction concerns which court will hear the case. Arbitration is a private form of dispute resolution in which one or more arbitrators decide the dispute instead of the ordinary courts.

An agreement might, for example, be governed by Danish law while requiring arbitration abroad. Choosing Danish law therefore does not, in itself, guarantee a local or affordable process.

Denmark has no specific franchise law, no franchise-specific registration scheme and no statutory standard disclosure package that must be provided before an agreement is signed. This does not mean that franchisors are free to provide false information or withhold material facts; general contract law rules and principles of good faith may apply.

Franchise agreements are governed primarily by the Danish Contracts Act and general principles of contract law. Depending on the circumstances, legislation including the Danish Competition Act and Marketing Practices Act may also apply. Section 36 of the Contracts Act allows unreasonable agreements to be amended or set aside, but it is no substitute for negotiating clear terms in advance.

For cross-border agreements, governing law and jurisdiction must be assessed separately. A choice of foreign law does not necessarily make all mandatory Danish or EU rules irrelevant. Ask a lawyer to assess the specific wording.

2. Check whether the dispute resolution process is genuinely accessible

As a franchisee, you are acting as a business. You should therefore not expect the complaints procedures and protections that apply to ordinary consumer purchases.

Read the dispute resolution clause with a practical question in mind: Can my business afford to pursue a claim over a significant but limited breach of contract?

Ask for clear answers to the following:

• Will proceedings take place in Denmark or another country?
• Which language will be used, and will translations be needed?
• Will there be one arbitrator or several?
• Which procedural rules apply, and who will administer any arbitration?
• How will costs be allocated, and will advance payments be required?
• Do the same rules apply to both parties?

Arbitration can offer access to specialist decision-makers and a less public process. However, it is not automatically cheaper or faster than court proceedings. The parties normally have to pay for the arbitral tribunal itself, and an arbitral award generally cannot be appealed to obtain a fresh review of the merits of the case. The grounds for setting an award aside are limited.

Check the specific confidentiality arrangements too. Do not assume that the word ‘arbitration’ alone guarantees full confidentiality for everyone involved.

3. Negotiate a clear route from disagreement to decision

A franchise network benefits when mistakes and misunderstandings can be resolved without immediately turning into legal proceedings. The agreement can therefore provide for a staged process.

The first step might be a written notice describing the problem, the supporting evidence and the proposed solution. The next could be a meeting between people authorised to agree a settlement. The parties could then try mediation, in which a neutral mediator helps them find a voluntary solution.

Set clear deadlines and an end date for each stage. An obligation to negotiate ‘until agreement is reached’ could leave you without a workable way forward. Also specify how notices must be sent and when they are deemed to have been received.

The process should not prevent necessary urgent action, such as an application for an interim injunction. You should also clarify how limitation periods will be handled. Do not rely on informal discussions or an internal complaint to automatically prevent your claim from becoming time-barred.

4. Check costs, documentation and consistency

Ask your lawyer to review the dispute resolution provisions in both the franchise agreement and any related agreements. If different parts of the same dispute have to be heard by different courts or arbitral tribunals, this could lead to parallel proceedings and additional costs.

Check your business insurance before factoring legal expenses cover into your budget. Cover may include exclusions, excesses and limits relating to contractual disputes or arbitration. Get the insurer’s assessment in writing.

Keep the signed agreement, schedules, relevant versions of the operations manual and important correspondence in an organised filing system. Confirm verbal agreements in writing so that any later disagreement does not depend solely on conflicting recollections.

Practical takeaway: Only sign once you know which rules apply, where a dispute will be decided and whether your business can realistically afford to enforce its rights.