Buying a franchise: check the dispute resolution terms

When joining a franchise network, it is easy to focus on the concept, fees and day-to-day working relationship. Yet the dispute resolution clause tucked away at the end of the agreement may determine whether you can defend your rights in practice. Before buying a franchise, establish where any dispute would be heard, what the procedure would cost and whether disagreements can first be addressed through a less formal process. A well-drafted clause helps both parties find a solution without unnecessary expense.

1. Understand what the dispute resolution clause commits you to

Finland has no specific franchising legislation and no statutory, standard-form pre-contractual disclosure document for franchises. Franchise agreements are subject to legislation including the Finnish Contracts Act, while the Unfair Business Practices Act is also relevant when assessing misleading conduct. The franchise sector’s codes of ethics do not replace legislation or the dispute resolution clause in the agreement.

Civil proceedings in Finland’s ordinary courts are governed by the Code of Judicial Procedure. Arbitration is governed by the Arbitration Act. The distinction matters to a buyer: a valid arbitration agreement generally prevents the same dispute from being heard in an ordinary court if the other party properly invokes it.

Do not, therefore, treat arbitration as merely an optional extra. Read the clause to establish whether it covers all disputes arising from the agreement or only specific issues. Also check whether it extends to disputes over termination, damages or a separate personal undertaking.

A franchise agreement entered into for business purposes is generally not a consumer contract. Do not base your decision on the assumption that you can turn to Finland’s Consumer Advisory Services or Consumer Disputes Board. Under the Contracts Act, an unreasonable term may, in certain circumstances, be adjusted or disregarded, but this does not automatically make an unfavourable dispute resolution clause unenforceable.

2. Compare procedures in terms of costs and legal protection

In ordinary court proceedings, costs include court fees, legal representation and presenting evidence. The losing party will generally have to reimburse the other party’s necessary and reasonable legal costs. However, the outcome and liability for costs depend on the case, the claims made and the course of the proceedings.

In arbitration, the parties must pay the arbitrators’ fees and any administrative charges as well as their own legal fees. An advance on costs may be required during the proceedings. This can create a practical barrier to pursuing a claim before the dispute has even been decided.

Arbitration may offer advantages such as the ability to choose a decision-maker with relevant expertise and greater procedural flexibility. However, an arbitral award cannot be appealed in the same way as a Finnish district court judgment. The statutory grounds for setting aside an award or declaring it null and void are limited; this is not a routine reassessment of which party was right.

Ask a lawyer to compare the options in relation to your agreement, and establish at least the following:

• Will the dispute be decided by a sole arbitrator or a panel?
• Which organisation’s rules will apply, and where can you find the basis for calculating fees?
• Where will the proceedings take place, and in which language?
• How will the arbitrators be appointed if the parties cannot agree on their selection?
• Can documents be dealt with and parties heard remotely?

Do not assume that everything is automatically confidential, either. Arbitration is not a public court hearing, but you should check the agreement and applicable rules separately to establish the scope of the parties’ confidentiality obligations. Proceedings and documents in ordinary courts are generally public unless there is a statutory basis for confidentiality.

3. Agree on a workable negotiation stage before formal proceedings

Not every disagreement needs to go straight to adjudication. The agreement can set out a staged process in which written notice triggers negotiations, followed by mediation if necessary. The aim is to resolve the problem, not simply to add compulsory meetings.

Specify who should receive notice of a dispute, what the notice should contain and who will conduct the negotiations. Each side should involve someone with authority to agree a settlement. Otherwise, the process may stall because the person you are speaking to can only pass messages on.

Set a clear deadline or another unambiguous end point for the negotiation stage. If mediation is to be used, agree how the mediator will be selected and how costs will be shared. A mediator helps the parties reach a mutually acceptable solution but does not normally impose an outcome in the way a judge or arbitrator does.

Check with a lawyer that the negotiation stage does not prevent you from seeking necessary urgent legal relief. Check time limits separately, too: continuing discussions does not in itself mean that the limitation period for a claim has been properly interrupted or that all other deadlines have been protected.

4. Test the clause against a practical scenario for your business

Before signing, carry out a simple exercise. Imagine that the franchise network charges your business a fee whose basis you dispute. What must you do first, who will deal with the matter, and what happens if no settlement is reached? Work through the same steps for a situation in which you need a quick decision to keep your business operating.

Ask your legal adviser for an indicative cost estimate for each stage of the procedure. The purpose is not to guarantee a final price, but to reveal whether the means of enforcing your rights under the agreement is realistically accessible to your business. At the same time, ask your insurer to confirm in writing whether your legal expenses insurance covers this type of contractual dispute and how it treats arbitration costs.

If you are buying an existing franchise business, compare the dispute resolution clauses in the sale agreement and the franchise agreement. Claims involving the seller and the franchise network may end up in different proceedings. Disputes arising from a single event will not automatically be heard together, so investigate the risk of parallel proceedings in advance.

Keep the signed agreement, the rules named in the dispute resolution clause and important correspondence in an easily retrievable format. Defending your rights also requires evidence of what happened and what obligations were agreed.

Practical checklist: only accept a dispute resolution clause once you understand the venue, procedure, potential costs and limits of the negotiation stage. The right to bring a claim is only useful if you can actually exercise it.