Franchise arbitration: too high a threshold? – mr. M. Munnik

When entering into an agreement, it is possible for the parties – contrary to the law – to designate a competent court. This
also applies to the franchise agreement. This option is sometimes used by the franchisor. A court close to home is often preferred. Although the franchisee may have to travel a bit in that case, the (financial) interests of the franchisee will not be (significantly) harmed. However, this may be different when arbitration is chosen.

Arbitration is an alternative to court proceedings. The dispute is then submitted to a so-called arbitration committee. The committee consists of one or three arbitrators who work within the sector in question. The procedure usually proceeds in the same way as in court and the decision is binding. Although all this sounds sound and in some cases even desirable, the arbitration procedure is often (within franchise) labeled as an unfair or undesirable course of action. But why?

Firstly, conducting arbitration proceedings is many times more expensive than normal legal proceedings. As a result, the often less wealthy franchisee is hindered in his choice to conduct proceedings. The cost aspect can also be to the detriment of the franchisor in the case of a collective procedure: in that case the franchisees can share the costs while the franchisor must bear the considerable costs itself. Moreover, in arbitration it is the case that the losing party often has to pay the full costs of the proceedings, which makes the financial risk even higher.

Secondly, the quality of arbitration is often debatable. While a judge follows a four-year law study, followed by an internal training of another four years, in order to be allowed to practice the profession of judge, an arbitrator is in principle not obliged to follow any (legal) training. On the other hand, the arbitrator often has market-specific knowledge. However, the question can rightly be asked whether, for example, a technical expert is also capable of making a legal decision. It is not uncommon for an arbitral award to be quashed on formal grounds. 

Thirdly, the arbitrator is in principle not bound by the law. The arbitrators may, at their discretion, disregard the law and  decide as “good men according to equity”. The decision can only be annulled if this leads to a decision contrary to public order. This can therefore lead to a decision that is not in line with the laws and regulations.

Although the last two objections apply to both parties, the financial impediment in particular – and therefore a higher threshold for starting proceedings – will be a reason for the franchisor to opt for an arbitration clause in a franchise agreement. The court has already ruled that this obstruction of often the franchisee is not permitted in all cases in the light of reasonableness and fairness.   

Is arbitration inadvisable in all cases? No, definitely not. In some situations, arbitration offers a solution, especially in international cases, for example
proportions.  From an international perspective (particularly outside Europe), an arbitration award is in many cases easier to enforce than a decision by a public court. Because it is increasingly the case that franchise formulas do not stop at national borders, arbitration is still advisable in some cases. If you opt for arbitration, it is advisable to join a specific arbitration institute where training as an arbitrator is mandatory and quality is guaranteed as far as possible.

Ludwig & Van Dam Advocaten advises on a very regular basis on dispute resolution, including arbitration and the content of your franchise agreement. If you have any questions about, among other things, the arbitration clause, please do not hesitate to contact us. 

mr. M. Munnik  – franchise lawyer

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