Buying a franchise: check the dispute resolution clause

When joining a franchise network, it is easy to focus on the brand and getting your business started. Yet the dispute resolution clause on the final pages of the agreement may determine where, and at what cost, you can defend your rights. Check it before committing, even if the relationship looks excellent at the outset. The aim is not to prepare for a dispute, but to ensure that difficult situations can be resolved in practice.

1. Establish which law applies and where disputes will be heard

Finland has no specific franchising legislation, statutory franchise disclosure document or franchise agreement registration system. Franchise relationships are governed by general legislation, including the Finnish Contracts Act, the Unfair Business Practices Act and the Competition Act, as well as applicable EU competition rules. The franchise sector’s ethical codes are no substitute for the law or a review of the agreement.

The key legislation governing dispute proceedings is the Finnish Code of Judicial Procedure and the Arbitration Act. The former sets out rules for proceedings in the ordinary courts, while the latter governs arbitration. For international agreements, EU rules and international provisions on the choice of law and court jurisdiction may also affect the assessment.

Distinguish between three points in the agreement:

• Governing law: which country’s law will be used to interpret the agreement?
• Decision-making forum: will disputes be heard in a district court or through arbitration?
• Location and language: where will proceedings take place, and in which language will documents be prepared?

Choosing Finnish law does not, by itself, mean that a dispute will be heard in Finland. Equally, proceedings held in Finland may require the application of another country’s law. A foreign forum retained in an international franchise network’s standard agreement can increase translation, travel and professional fees.

A franchisee generally enters into the agreement for business purposes. They will not usually benefit from consumer contract protections, even if this is their first business venture. You should therefore not accept the clause on the assumption that consumer advisory services will resolve any problems.

2. Compare district court proceedings with arbitration

A dispute heard in a Finnish district court will usually involve legal fees and possible costs of presenting evidence, in addition to the court fee. As a general rule, the losing party must reimburse the other party’s necessary and reasonable legal costs. An appeal may be possible, subject to the conditions laid down by law.

In arbitration, the parties pay the arbitrators’ fees and any administrative charges as well as their own legal advisers’ fees. Arbitration can be faster and offers the opportunity to appoint a decision-maker with expertise in contractual disputes. However, it is not automatically cheaper, particularly where a relatively small sum is at stake.

An arbitral award cannot be appealed in the same way as a district court judgment. A court can consider setting it aside or declaring it invalid only on limited grounds, rather than conducting a general reassessment of which party interpreted the agreement correctly.

If the agreement requires arbitration, establish at least:

• whether there will be one arbitrator or several;
• which organisation’s rules will apply;
• who appoints the arbitrator if the parties cannot agree on the choice;
• how advance payments and final costs are determined;
• whether the clause covers all contractual disputes or only some of them.

Arbitration is not a public court process. However, this does not mean that the parties automatically have a comprehensive duty of confidentiality. Check confidentiality separately in the agreement and the applicable procedural rules.

3. Work out whether you can afford the agreed procedure

The dispute resolution clause should form part of a prospective franchisee’s cost and funding assessment. The right to enforce an agreement offers little practical protection if pursuing a claim exceeds the business’s available funds. This is particularly important where the dispute concerns a sum that matters to the business but is small relative to the total cost of proceedings.

Ask the lawyer reviewing the agreement to assess two scenarios: a dispute over a single charge and a dispute over terminating the entire agreement. The purpose is not to obtain a guaranteed price, but to understand how costs arise, what advance payments may be required and the risk of having to pay the other party’s costs.

Ask your insurer to confirm in writing how your legal expenses insurance applies to the particular franchise agreement. Ask about the cover limit, the excess, cover for the other party’s costs and whether arbitrators’ fees are covered. Also check the policy’s time-related restrictions: insurance taken out only after a dispute has arisen will not usually resolve an existing problem.

Do not assume that the franchise network’s insurance protects your own business. The franchisor and franchisee are independent contracting parties whose interests may diverge in a dispute. Confirm cover in your own business’s name and retain the answers you receive.

4. Negotiate a workable sequence of steps

A good clause allows disagreements to be addressed before formal, costly proceedings begin. The agreement can provide for a written complaint, negotiations between named representatives and a deadline after which the matter may be referred for a decision. Voluntary mediation can be a useful addition, but reaching a settlement should not be a condition for access to legal remedies.

Make sure that the obligation to negotiate does not prevent you from seeking necessary urgent legal protection. Also consider limitation periods for claims and contractual deadlines for notices and demands: negotiations alone do not guarantee that these deadlines will be preserved.

If arbitration appears too burdensome for your business, propose court proceedings or explore arbitration with a sole arbitrator. Any financial threshold used to determine which procedure applies needs careful drafting, so that choosing the correct procedure does not itself become a separate dispute.

Section 36 of the Finnish Contracts Act allows an unreasonable contractual term to be adjusted or set aside. However, you should not rely on this in advance when entering into a business-to-business agreement. Also have your adviser check whether the dispute resolution clause extends to any separate personal commitments you make, and ensure that all agreed changes are included in the agreement you sign.

Practical summary: accept the dispute resolution clause only once you know where you will defend your rights, how the proceedings will be funded and what your insurance actually covers.