Planning for Disputes Before Franchising Your Business

Before franchising an existing business, establish how you will resolve disagreements with future franchisees. This is not about customer complaints, but disputes over contractual responsibilities: support that was not provided, contested charges or unmet obligations. In franchising, trust is easier to protect when a clear process is in place before problems arise.

1. Base the process on the relevant law

The Philippines has no single comprehensive law covering every aspect of franchising. The Civil Code governs contracts, while Republic Act No. 8293, or the Intellectual Property Code, governs relevant trade mark and other intellectual property rights.

Executive Order No. 169, series of 2022, also establishes protections for micro, small and medium-sized enterprises in the franchising sector. For agreements within its scope, a dispute resolution mechanism is among the minimum required provisions. This includes a provision allowing the parties to seek voluntary mediation under Republic Act No. 9285, the Alternative Dispute Resolution Act.

The order also contains requirements for registering agreements with the Department of Trade and Industry. Ask a lawyer to identify the applicable requirements and current procedure for your business; do not assume that ordinary business name registration is sufficient.

An important clarification: Republic Act No. 9178 concerns barangay micro business enterprises — micro businesses at the local community level — and is not a “Franchising Act of 1995”. Do not use it as the basis for your dispute resolution clause.

2. Set out a clear route from notice to discussion

Do not rely on a promise that “we will talk it through”. When money is at stake, both parties need to know whom to contact and what happens next.

Prepare a written process with four elements:

• Formal notice: Specify the authorised recipient, the method of delivery and when notice will be deemed received.
• Description of the dispute: Set out what happened, the obligation in dispute, the relevant evidence and the remedy sought.
• Initial review: Designate someone to gather records and respond with the authority to propose a solution.
• Escalation to decision-makers: Arrange discussions between representatives authorised to reach a settlement if the dispute cannot be resolved at the first stage.

Set reasonable timeframes for acknowledging receipt, responding and meeting. These are proposed procedural terms for the parties to agree, not automatic statutory deadlines.

For example, if a franchisee claims that promised support for opening the business was not provided, compare the contract, visit records and messages. Do not immediately treat an allegation as a breach without considering both sides’ explanations.

3. Distinguish between mediation and arbitration

In mediation, a neutral person helps the parties reach a mutually acceptable agreement. The mediator does not simply impose a decision. Any settlement should be carefully recorded in writing, including the actions required, who is responsible and the deadlines.

In arbitration, the dispute is submitted to an arbitrator or tribunal under agreed rules and applicable law. This can result in a binding award enforceable under the law. It is not the same as an ordinary meeting or mediation.

Before choosing a clause, have the following points reviewed:

• Which disputes will each stage cover?
• How will the neutral mediator or arbitrator be selected?
• Where will the process take place, and will remote participation be possible?
• What language will be used, and how will costs be shared?
• What happens if one party refuses to participate?

Avoid simply copying a clause from a foreign contract. A distant venue and substantial costs can make the process difficult for a small franchisee. Also have exceptions for urgent legal relief reviewed; not every problem should have to wait through lengthy discussions.

4. Keep the business running while resolving the dispute

Make clear which obligations will continue during a dispute, in accordance with the contract and the law. For example, a disputed charge may be reviewed separately from the payment of amounts that are not being challenged.

Do not automatically resort to threats of cutting off supplies, blocking system access or public shaming. Any restriction should have a proper basis and undergo legal review, particularly where employees and customers may be affected.

Appoint someone to maintain records of notices, evidence and agreements. Share information only with those who need to know. Once the dispute has been resolved, record the agreed commitments and monitor compliance; do not assume the problem is over simply because the meeting has ended.

Practical summary: Before taking on your first franchisee, have your dispute resolution clause reviewed, assign responsibility and test the process using a hypothetical scenario. The aim is a fair, workable way to resolve disagreements, not merely a lengthy contract.