Buying a franchise: review dispute resolution before signing

When you buy a franchise, you join a network, but you still run an independent business with responsibilities of your own. You therefore need to know how any disagreement with the franchisor will be handled. The contract’s dispute resolution clause can affect both your ability to enforce your rights and your finances while proceedings are under way. Review it before you commit, not only once the relationship has broken down.

1. Ask for clear information about the dispute resolution terms

Sweden’s Act (2006:484) on Franchisors’ Disclosure Obligations requires franchisors to provide clear, understandable written information about the implications of the agreement and other relevant matters well before it is signed. This information must include how disputes concerning the agreement will be resolved and who will be responsible for the costs.

The Act does not specify a fixed number of days for your review. Ask for a timetable that allows time for legal advice and follow-up questions. A verbal assurance that the network “always solves problems together” is no substitute for written information.

Sweden does not have a comprehensive franchise law governing the entire relationship. Alongside the disclosure legislation, other relevant laws may include the Swedish Contracts Act, Code of Judicial Procedure and Arbitration Act. The disclosure obligation does not mean that the dispute resolution terms have official approval or are financially suitable for you.

Request the draft agreement, all schedules and any rules referred to in the dispute resolution clause. Keep the pre-contract information you receive, including dates and version numbers. This will make it easier to identify any changes made before signing.

2. Understand the difference between court proceedings and arbitration

Start by checking whether the agreement specifies the ordinary courts or arbitration. Then check where proceedings will take place, which language will be used and which country’s law will apply. Governing law and the location of proceedings are separate issues, particularly when the franchisor is based abroad.

Ordinary courts: In Sweden, a commercial dispute normally starts in a district court. Documents and hearings are generally public, except where information is protected by confidentiality rules. As a general rule, the losing party must reimburse the other party’s reasonable legal costs. Specific rules govern the right to appeal.

Arbitration: The dispute is decided by arbitrators rather than a court. In addition to their own legal fees, the parties may have to fund the arbitrators’ work and any arbitration institution’s fees. An arbitral award cannot normally be appealed on its merits; the grounds for challenging it are limited.

Arbitration is generally not public in the same way as court proceedings. However, do not assume that the parties are automatically bound by a comprehensive duty of confidentiality. Ask your legal adviser to check what the agreement and any applicable arbitration rules actually require.

Neither option is best in every situation. Your assessment should take account of your business’s resources, the complexity of the agreement and the types of dispute that could reasonably arise.

3. Assess the cost risk and check your insurance

Ask an independent legal adviser to explain the cost components of the proposed process. Request an assessment for both a limited dispute over fees and a more extensive contractual dispute, rather than a general assurance that proceedings will be inexpensive.

Your review should cover:

• your own legal representation and expert costs,
• the risk of having to pay the other party’s costs,
• any advance payments to arbitrators or an arbitration institution,
• travel, translation and time away from the business,
• the business’s cash flow while the dispute is ongoing.

Then contact your insurer. Legal expenses cover within a business insurance policy is not the same as unlimited funding for a dispute. Ask for written answers about the excess, cover limits, qualifying periods and exclusions. In particular, ask whether arbitration is covered and, if so, which costs the insurer will pay.

Also check whether the legal expenses cover applies to the legal entity that will sign the franchise agreement. If you provide a personal guarantee, you will need to investigate separately what protection is available for a dispute in which you personally become a party.

4. Negotiate a workable process for disagreements

A sustainable franchise network needs procedures that identify problems early. Propose a clear sequence: written notice of the complaint, a meeting between the people responsible and then, where appropriate, mediation before formal proceedings. Specify how each stage is initiated and how long it may last.

At the same time, ask your legal adviser to check that negotiation requirements do not prevent urgent legal action. Do not assume that informal discussions suspend statutory limitation periods or contractual deadlines.

If the agreement requires arbitration, ask whether expedited rules or a sole arbitrator could be used. This may limit some costs, but it does not make the process risk-free. Also check whether dispute resolution clauses in related agreements, such as guarantees or business premises leases, could lead to parallel proceedings.

Finally, ask for clarity on what applies while a dispute is ongoing: payments, access to systems and the parties’ continuing obligations. Do not withhold payment or stop fulfilling your obligations without a legal assessment.

Practical takeaway: Do not sign until you can explain where a dispute will be decided, who will pay and what insurance cover you have. Have an independent legal adviser review the clause and make sure any agreed changes appear in the final agreement.