Unauthorized Dispute Resolutions Within Franchise Organizations

Mr Th.R. Ludwig – Franchise attorney 

Franchise agreements occasionally contain dispute resolutions that grant powers to the franchisee(s), the franchise council and/or a franchise association. In such disputes – representatives of – franchisees thus directly or indirectly judge their (former) colleagues. This may be the case, for example, when a franchise agreement contains a dispute resolution scheme that gives the franchise board discretion with regard to the influence of certain advertisements of a franchisee in the exclusive territory of another franchisee. If the latter is negatively affected by this, he can then turn to the disputes committee, as described in the relevant provisions in the franchise agreement. This disputes committee then consists of, for example, two members of the franchise council and two representatives of the franchisor. This creates a situation in which fellow franchisees have a power comparable to that of a judicial authority. 

In general, one should be very cautious about the durability of such constructions. This is because this often involves so-called horizontal anti-competitive agreements: the franchisees have mutually agreed on a dispute settlement that, often exclusively, must settle the conflict that has arisen. The individual franchisee is subject to such judgment at all times. Usually such constructions are legally impermissible. In concrete terms, this means that they are simply not allowed under the system of the law. In a large number of cases they are, by their very nature, null and void. 

In the example outlined above, franchisees make judgments about their fellow franchisees. In principle, they may have an interest in the outcome of the problem presented to them. A situation thus arises which may impede an independent, neutral judicial process. The legislator has precisely wanted to prevent these situations. If such dispute resolutions are found in agreements, they should at least be viewed very critically. In a number of cases it is then possible to bypass these regulations and, if necessary, go to the Civil Court. The latter is not an interested party and is neutral in all cases. Incidentally, it should be noted that the quality of conflict management in the courts is generally somewhat higher. Not surprising, it’s his profession.

Ludwig & Van Dam franchise attorneys, franchise legal advice