Buying a franchise: review dispute resolution before signing

When you buy a franchise, you join a network of independent business owners. A lasting partnership needs clear ground rules, including when the parties disagree. The contract’s dispute resolution clause determines how a dispute will be decided and can affect both the cost and your practical ability to obtain a ruling. Review it before you sign, not only once a dispute has arisen.

Start with the information you are entitled to receive

Sweden has no comprehensive law governing every aspect of a franchise agreement. It does, however, have the Franchisors’ Disclosure Obligations Act (2006:484). This requires the franchisor to provide clear, comprehensible written information about the agreement’s implications and other relevant matters in good time before the agreement is concluded.

Among other things, that information must explain how disputes arising from the agreement will be resolved and who will be liable for the costs. This is therefore not a detail to leave until a later review.

Ask for the full dispute resolution clause and any rules it refers to. If the agreement refers to an arbitration institution, you need to understand the procedure involved, not just the institution’s name.

The disclosure legislation does not, however, require a particular method of dispute resolution to be chosen in every case. For proceedings in Sweden, relevant legislation includes the Swedish Code of Judicial Procedure and the Arbitration Act (1999:116). The Swedish Contracts Act also matters when assessing contractual terms. You will normally enter into a franchise agreement as a business operator, not as a consumer.

Understand the difference between court proceedings and arbitration

If a dispute goes to the ordinary courts, it will normally be heard first by a district court. Court proceedings are generally public, although some information may be subject to confidentiality restrictions. Appeals are governed by specific rules, and permission to appeal is normally required for civil cases to be heard by the Court of Appeal.

Arbitration means that a dispute is decided by appointed arbitrators outside the ordinary courts. A valid arbitration agreement can prevent a court from hearing the substance of the dispute if the other party raises an objection in time. An arbitral award cannot be appealed on its merits in the same way as a court judgment; the grounds for challenging it are limited.

Do not assume that arbitration automatically imposes complete confidentiality on the parties. Check what the agreement and the applicable rules actually say about documents, information and the award.

Ask the franchisor to explain why the chosen approach is also suitable for a smaller franchisee. A procedure that works for a large organisation may not be financially viable for a single outlet.

Assess the cost of pursuing your rights

The cost of resolving a dispute extends beyond your own legal fees. Arbitration normally also involves arbitrators’ fees and, where an institution administers the proceedings, administrative charges. Advance payments may be required before the dispute is decided.

In court proceedings, the parties do not pay the judge’s fees in the same way. However, the costs of legal representation, evidence and the other party’s legal costs can be substantial. The general rule in ordinary civil cases is that the losing party pays the other party’s reasonable legal costs, although there are exceptions.

Ask a lawyer to assess the likely costs in two possible scenarios: a modest payment claim and a larger dispute over the interpretation of the agreement. Request estimates based on clearly stated assumptions, rather than a promise of a fixed final cost.

Check in particular:

• How many arbitrators will be appointed if arbitration is used?
• Are there rules for an expedited procedure for smaller disputes?
• Who must make advance payments, and how will the final costs be allocated?
• Does the agreement contain any specific provisions on liability for costs that need reviewing?
• Does the business’s legal expenses insurance cover the dispute and the procedure concerned?

Do not count on insurance cover without checking the policy terms. The excess, cover limits and exclusions can affect your ability to fund the proceedings.

Negotiate a clear and workable route forward

A dispute resolution clause may include several stages: negotiation between designated representatives, mediation and then a binding decision. These stages can create opportunities to find a solution that preserves the relationship within the franchise network, but they need to be clearly defined.

Ask for the agreement to specify how negotiations are requested, who must take part and when the next stage may begin. A requirement to negotiate first should not leave the parties in uncertainty indefinitely. Also ask your lawyer to check how urgent protective measures and any time limits are handled.

For international brands, you need to distinguish between governing law, the location of proceedings and the language of proceedings. These are separate issues. Foreign law or proceedings abroad may require additional legal advice, travel and translation. Ask for a concrete explanation of the implications for your Swedish business.

Finally, summarise the clause in your own words: where the dispute will be decided, which rules apply, how the process begins and which costs each party could face. If you cannot summarise it clearly, the terms need further explanation or negotiation.

Practical takeaway: Do not sign until you understand both the route to a decision and how it will be funded. Have an independent lawyer review the dispute resolution clause while you can still negotiate changes.