Sector steps cautiously to resolve disputes

After almost four years, the case has yet to go to trial. The franchisees’ legal costs to date: more than $200,000…“If mediation isn’t undertaken seriously, it’s just an additional cost on the way to litigation.” …some franchisors use mediation cynically.

The Globe and Mail
June 30, 1999

Sector steps cautiously to resolve disputes
Although many long, costly lawsuits could be resolved quickly and easily through mediation or arbitration, franchise conflicts rarely end this way.
John Southerst

JohnSotos.jpg

Some franchisees suspect that franchisors use mediation as a delay tactic en route to court. 'It's absolutely possible to frustrate, delay and use the opportunity to scout the opposition's case,' lawyer John Sotos says.Patti Gower/The Globe and Mail

Brian Thurston’s case appears to be a perfect candidate for mediation or arbitration.

He and six other franchisees of Novus Glass Repair and Replacement ran mobile windshield-repair operations in Ontario. They became embroiled in a dispute over lucrative car insurance after Vancouver-based TCG International Inc. bought Novus in 1993.

The franchise filed a lawsuit against TCG in November 1995, after failing to negotiate a settlement. After almost four years, the case has yet to go to trial. The franchisees’ legal costs to date: more than $200,000.

Long, costly, acrimonious lawsuits such as this one are franchising’s ugliest hallmark. Most of these disputes could be resolved quickly and easily through some form of alternative dispute resolution (ADR): mediation (negotiation through a neutral moderator); arbitration (contractual justice leading to a binding decision from a private “judge”); or perhaps an ombudsman.

But franchise conflicts rarely end this way - and so far, the dispute between TCG and its Novus franchisees is no exception.

The franchisees allege that TCG pulled out of scheduled arbitration before it began last December when they were late in filing a document. TCG representatives say they merely postponed arbitration to review the late document.

“They didn’t really have any interest in mediating,” alleges Mr. Thurston, who no longer operates a windshield repair business but whose territory once covered the Niagara region in Southern Ontario.

TCG senior vice-president John Trigardi would not comment on the case or why it has gone so far without some form of dispute resolution.

But he says he has nothing against arbitration or mediation. “The more they’re used,” he says, “the better.”

The litigants are heading back to arbitration in August.

Few franchise disputes that drag on for years are mediated or arbitrated.

For five years, the Canadian Franchise Association (CFA) has had a standing agreement with a professional mediation service – Dispute Resolution Services (DRS) of Toronto – to handle conflicts between its 220 member franchisors and their franchisees. The number of mediations to date: zero.

‘By the time [franchisees] have a problem, they’re probably out money, if not out of the store, and they’re too far down the road.’

The experience is similar elsewhere. What passes for mediation in franchising is usually last-minute negotiation between lawyers.

So why hasn’t the CFA’s arrangement with DRS attracted franchise litigants by the score? For one thing, it appears that franchisees don’t trust it. “If the perception is that it’s a franchisor program, [then] nothing will happen,” DRS president Cliff Hendler says.

Some franchisees also suspect that franchisors will simply use the mediation as a delay tactic en route to court. “If mediation isn’t undertaken seriously,” says Les Stewart, head of the Canadian Alliance of Franchise Operators, “it’s just an additional cost on the way to litigation.”

Lawyer John Sotos, who often represents franchisees, confirms that some franchisors use mediation cynically. “It’s absolutely possible to frustrate, delay and use the opportunity to scout the opposition’s case,” he says. “Without some legislative underpinning that mandates legal rights [for franchisees], no ADR can help.”

CFA president Richard Cunningham insists that the association’s mediation program is an arm’s length arrangement that is completely neutral. But he says franchise disputes can quickly escalate past the point where mediation works.

“By the time [franchisees] have a problem, they’re probably out of money, if not out of the store, and they’re too far down the road,” he says. Then it’s all too easy for the well-financed franchisor to outlast them.

Mr. Cunningham believes that if franchisees trusted mediation and asked for it sooner, they could head off problems before they became serious.

The CFA last month decided to appoint a franchisee advisory board - composed of franchisees nominated by their franchisors - partially to act as a sounding board for the organizations programs such as its ethics policy and mandatory disclosure requirements that it imposes on members.

But Mr. Cunningham also hopes the franchisee body will take some messages back from the CFA, among them a vote of confidence in its mediation arrangement with DRS.

But franchisees suspect franchisors aren’t really interested in mediation or arbitration, because they deal
from a position of power.

“The franchisors don’t want to open up their processes to outsiders,” Mr. Sotos says. Most cases never get to court - and therefore are not exposed to public view - because franchisees run out of money.

The virtual absence of alternative dispute resolution in franchising causes concern. “I do find it startling,” DRS’s Mr. Hendler says, “because it’s so prominent at other commercial levels.” He says DRS resolves 90 per cent of disputes brought for mediation, mostly insurance-related matters and workplace issues.

He says that the cost of mediation through his service is $3,000 a day for each party and that most cases last a day. Within the community of franchisors, lawyers and concerned franchisees, the search is on to find a way to get bickering sides talking.

Some franchisors simply use a mandatory arbitration or mediation clause in their agreements. “It indicates, at least on the face of it, a culture to resolve disputes in a non-confrontational manner,” Mr. Sotos says.

Mr. Cunningham even allows that the CFA’s new advisory committee “could conceivably be involved in mediation,” perhaps within combined committees of franchisors, franchisees and lawyers who would listen to disputes and make recommendations.

Again, this raises the question of whether franchisors and their appointed franchisees could be entirely neutral.

Within a community weary of drawn out problems, all possibilities are worth considering.

John Southerst is a Toronto-area writer who covers franchising issues can be reached at ac.ratsi|htuosj#ac.ratsi|htuosj


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