Franchise Lawyer Blog

Arbitration: Pros and Cons

At least one study reveals that in 2007, over 45% of franchisors included arbitration as the method for dispute resolution in their franchise agreements. Arbitration can provide the parties to a dispute with substantial benefits. Arbitration is touted as a method for resolving disputes more efficiently than litigation, saving both money and time. In addition, arbitration provides the parties with the ability to control the process and to obtain an unappealable resolution.

Unfortunately, the process of arbitration does not always result in the hoped for benefits. Costs skyrocket with the addition of arbitrator fees and administrative fees. Arbitration often results in what may be perceived as an “arbitrary” determination; the oft-heard reputation of arbitrators to cut the baby in half. Also, with limited discovery and procedural safeguards, the parties can be left with a feeling that they did not have their day in court.

But arbitration does not necessarily have to result in such dissatisfaction (although, no doubt, any losing party is likely to be dissatisfied regardless of whether the claim was arbitrated or litigated). The parties should remember that arbitration is a creature of contract and the process can be tailored to the parties’ satisfaction. They can contract for certain discovery or discovery limits. They can contract to limit the arbitrator’s discretion. And, the parties can decide which administrative organization to use (if any) thereby possibly substantially reducing their costs.

If the parties to a franchise agreement consider all options and variations in the course of drafting the arbitration provision, the parties will have far greater control over the dispute resolution process. This will presumably result in a more favorably received method for resolution.

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