Franchising an Existing Business: Designing Dispute Resolution Procedures for Franchisors and Franchisees

When you turn an existing business into a franchise, issues previously settled internally at company-owned outlets can become disputes between independent businesses. Building a healthy franchise community requires more than agreement: you also need a way forward when the parties disagree. Before recruiting franchisees, design procedures for receiving disputes, establishing the facts and working towards a resolution.

1. Treat disputes as discussions between businesses, not internal management instructions

Suppose a franchisee claims that promised support has not been provided, while the franchisor believes it has delivered the necessary assistance. Repeated instructions from the person responsible will not resolve the issue. You need to establish separately what was promised, what was delivered and where perceptions differ.

Japan’s Small and Medium Enterprise Agency explains that franchisors and franchisees enter into contracts as independent businesses, each taking responsibility for its own decisions. The dispute resolution process should therefore allow both parties to present their arguments and supporting documents, rather than serve as a means of forcing franchisees to comply.

Japan has no single, comprehensive statute dedicated to governing franchise agreements as a whole. That does not mean the sector is unregulated. The Civil Code applies to matters such as contractual interpretation and breach of contract, while the Antimonopoly Act applies to dealings between franchisors and franchisees. The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act explain how that legislation applies in practice.

Article 11 of the Act on the Promotion of Small and Medium-sized Retail Business also requires franchisors whose operations qualify as a ‘specified chain business’ under the Act to provide written disclosures and explanations before a contract is signed. Not all franchises fall within its scope. The starting point is to recognise that a dispute resolution clause cannot remove these statutory duties or liabilities.

2. Separate routine enquiries from formal complaints

If routine enquiries and disputes are handled exclusively through the same channel, a complaint about a particular member of staff may go no further than that person. Let operational support staff handle everyday enquiries, but provide a separate route for referring formal objections about contractual breaches or cost allocation to another responsible person.

A small franchisor does not need a dedicated department. It should, however, arrange for an owner, another member of staff or, where necessary, an external professional to review the matter, so that the person who made the disputed decision is not solely responsible for the outcome. Someone with an interest in the matter may help explain the facts, but should not be the sole decision-maker.

The complaint form should include, at a minimum:

• The event concerned, when it occurred, and the outlets or staff involved
• The contractual provisions, explanations or operational decisions being challenged
• Previous communications and supporting documents
• The outcome sought and the reasons for any urgent action

Set realistic target times for acknowledging receipt, providing an initial response and starting discussions. These are operational standards set by the franchisor, not statutory deadlines that apply throughout Japan. If an investigation takes longer than expected, explain why and give a date for the next update, rather than leaving the complaint unanswered.

Make clear that raising a concern will not, in itself, lead to adverse treatment. At the same time, explain that submitting a complaint does not automatically suspend contractual obligations unrelated to the dispute.

3. Assemble the records and separate disputed issues from interim measures

Before discussions begin, gather the contract, pre-contractual explanatory materials, manuals in force at the relevant time, communication records and reports of work carried out. The latest versions alone will not establish what the obligations were when the issue arose. Identify each document’s version and period of application, and preserve relevant materials without overwriting them.

In practice, a one-page issues table can be useful. Include columns for ‘franchisee’s position’, ‘franchisor’s position’, ‘agreed facts’, ‘facts requiring verification’, ‘supporting documents’ and ‘next steps’. The aim is to address each issue separately, without confusing dissatisfaction with a member of staff with the question of whether a contract has been breached.

For example, if the dispute concerns inadequate business guidance, simply counting visits is not enough. Review the support required by the contract, requests from the franchisee, advice provided and any circumstances that prevented support from being delivered. Also distinguish between a failure to achieve results and a failure to carry out a promised action.

If operational disruption is likely to continue until the dispute is resolved, discuss interim measures separately. Record the activities covered, the duration, who will bear the costs and the review date. Also clarify whether those measures are intended to constitute an admission of ultimate liability. Bear in mind, however, that this agreement alone will not necessarily determine their legal effect.

Franchisors should also avoid immediately withdrawing support or supplies simply because a franchisee has challenged a decision. Such measures require careful consideration, both of their contractual basis and of any potential issues under the Antimonopoly Act.

4. Set out routes to third-party resolution in the contract

Plan how unresolved disputes can move from direct discussions to further talks between senior decision-makers, discussions involving external professionals, civil conciliation or litigation. There is no need to make every stage compulsory: urgent proceedings may be necessary to keep the business operating or protect legal rights.

If an external lawyer is involved, make their role clear. A lawyer representing the franchisor advises and negotiates on its behalf; that is different from acting as a neutral facilitator for both parties. Avoid suggesting that a conclusion is impartial merely by saying that ‘an expert has assessed the matter’.

When drafting the contract, consider including:

• The address or contact point for formal notices, and permitted methods of delivery
• How to request discussions and who is responsible for handling them
• The procedure to follow if discussions do not produce an agreement
• The court designated in any jurisdiction clause
• Provisions ensuring that urgent applications for interim relief are not prevented

When choosing a court, consider not only the franchisor’s convenience but also where prospective franchisees are likely to be based and the burden of travel. Conciliation and arbitration are different procedures. An arbitration agreement generally means that the disputes it covers will be resolved through arbitration rather than court proceedings. Do not simply adopt standard wording: ask a qualified professional whether it is appropriate.

Franchisors operating a specified chain business should check the statutory disclosure requirements. Separately, it is good practice to explain dispute resolution clauses in advance as terms that may affect the decision to enter into the contract. Even where the Act does not apply, make important obligations, costs and procedures easy to understand.

5. Include follow-up on the agreement as part of the process

Even when discussions produce an agreement, a promise to ‘respond appropriately in future’ leaves room for renewed disagreement. Record in a settlement agreement or written confirmation who will do what, by when, who will pay and how completion will be verified. Distinguish between matters that have been settled and those that remain under discussion.

The franchisor should periodically review whether the same issues are recurring. Check whether recruitment-stage explanations differ from the support actually provided, whether contract wording is ambiguous or whether staff lack the authority to make decisions. Address the underlying cause. Individual settlements require appropriate confidentiality safeguards, but lessons needed to prevent recurrence can be shared with outlet names and other identifying details removed.

Before recruiting franchisees, test the process with a fictional complaint, from receipt and document preservation through escalation to the responsible person and the eventual response. A procedure that exists on paper will not work if staff cannot put it into practice.

Practical takeaway: Start with three essentials: a clear contact point, an issues table and a route for escalating unresolved matters. Trust within a franchise community depends not on suppressing disputes, but on having procedures that treat them fairly.