Franchising: check jurisdiction and arbitration clauses before signing

Before joining a franchise network, it is natural to focus on opening your business and working with the brand. But understanding how any disagreement will be handled is just as important. A dispute resolution clause can affect the cost of enforcing your rights, how far you may need to travel and the steps required to obtain a decision. Here is how to assess it before committing.

1. Identify the procedure set out in the contract

Do not stop at the section headed ‘Disputes’. The rules may be spread across general terms and conditions, schedules and governing law clauses. Map out the full process, distinguishing between three mechanisms:

• Direct negotiation: the parties seek a solution through designated contacts and agreed communication channels.
• Mediation or conciliation: a third party helps the parties reach an agreement, normally without imposing a decision.
• Court proceedings or arbitration: the dispute is referred to a judge or to arbitrators appointed to decide it.

A clause may require several steps in sequence. Ask when each stage starts, how long it may last and what happens if the other party does not co-operate.

In Italy, franchising is governed by Law No. 129 of 6 May 2004. Article 7 allows the parties to agree that, before going to court or starting arbitration, they will attempt conciliation at the Chamber of Commerce for the area in which the franchisee is based.

This provision does not, in itself, impose a general requirement to attempt conciliation in every franchise dispute. The contract and any other procedural rules applicable to the particular case must be checked.

2. Assess the choice of court without assuming consumer protections apply

If the contract specifies ‘exclusive jurisdiction’, it is intended to direct disputes to the courts of a particular location, within the limits permitted by law. A court far from your business may create practical difficulties and additional costs.

A franchisee operates as an independent business owner: do not assume that the protections concerning jurisdiction available to consumers will apply. Being a small business or a first-time entrepreneur is not, on its own, enough to bring you within those rules.

Have at least the following points checked:

• Does the named court have exclusive jurisdiction, or is it an option alongside the courts that would ordinarily have jurisdiction?
• Does the clause cover all disputes or only certain ones?
• Are there exceptions that only the franchisor can use?
• Does the contract refer to foreign courts or a governing law other than Italian law?

In contracts drawn up unilaterally using general terms and conditions, clauses that depart from the ordinary rules on court jurisdiction require specific written approval under Article 1341 of the Italian Civil Code, where the relevant conditions are met. Article 1342 must also be considered where standard forms are used.

However, the so-called ‘double signature’ does not automatically make every provision valid. Ask your lawyer to assess the wording, how the clause is accepted and any applicable limits.

3. Understand how much arbitration could cost

Arbitration is not simply an informal meeting with an expert. It is an alternative to ordinary court proceedings for deciding disputes, governed by the Italian Code of Civil Procedure and the arbitration agreement. It may offer specialist expertise, but it is not necessarily cheaper or faster.

Before signing, request the rules and fee schedule of any arbitration institution named in the contract. Check:

• Number of arbitrators: a sole arbitrator and a panel involve different cost structures.
• Appointment: it must be clear how arbitrators are selected and what happens if the parties cannot agree.
• Seat and language: these affect how your legal representation is organised and whether translations are needed.
• Advance payments: clarify who must pay them and the consequences of non-payment.
• Type of arbitration: the distinction in Italian law between arbitrato rituale and arbitrato irrituale has legal consequences that your adviser should explain.

Ask for an estimate of the total cost of a dispute relevant to your business, including legal representation, arbitrators’ fees and any expert advice. Knowing the initial fee is not enough.

Arbitration clauses also require specific written approval where the conditions under Article 1341 are met. In addition, the grounds for challenging an arbitration decision do not amount to an ordinary review of the merits: you need to understand this before agreeing.

4. Negotiate a procedure that works in practice

A good procedure should allow you to address a problem without turning every disagreement into a confrontation. You could propose an initial discussion between named contacts, followed by an attempt to reach a settlement within defined time limits, and then the agreed dispute resolution process.

Ask for clear provisions on addresses for communications, how receipt is to be documented and the deadline for responding. Also have your adviser check that preliminary steps do not obstruct urgent legal relief where it is needed and legally available.

Do not assume that simply entering negotiations automatically suspends limitation periods, time limits for exercising rights or other deadlines. If a problem arises, retain the contract, correspondence and evidence of any breach, and seek professional advice promptly.

In practice: before signing, ask for a summary setting out the dispute resolution process, location, procedural timescales and estimated costs. A balanced relationship within a franchise network also requires accessible ways to resolve disagreements.