Arbitration: advantage or disadvantage?

Mr DL van Dam – Franchise lawyer 

Franchise agreements often include a dispute settlement procedure that governs the way in which the parties involved in the franchise deal with a possible dispute and to which forum they submit it for settlement. More and more, such dispute resolution starts with a reference to mediation, a mediation process on a voluntary basis. If mediation does not lead to a solution, the dispute settlement procedure usually prescribes either going to the regular court or to an arbitral tribunal, ultimately resulting in a decision that is binding on the parties in both cases. 

If such a clause is not included in a dispute settlement, the parties must turn to the ordinary court in the event of a conflict, unless they mutually agree otherwise. An arbitration clause is therefore an exception to the rule. This exception is often created with the assumption in mind that arbitration proceedings are shorter in duration than court proceedings, are more efficient and are handled with more specific expertise by arbitrators, now that the arbitrators are usually appointed by and in consultation with parties are appointed. In that context, one or more arbitrators often come from the sector of the parties themselves, which, it is assumed, would do better justice to the specific circumstances in which the parties find themselves. 

Practice shows that the advantages of franchising arbitrage described above are not always realised. First of all, the duration of the procedure: since the new procedural law was introduced on 1 January 2002, the duration of the average court procedure has been considerably reduced. The relative advantage enjoyed by arbitration proceedings in that context has therefore virtually disappeared, now that arbitration proceedings easily exceed a year, especially in complex cases.

The specific expertise of arbitrators can be an advantage in some situations. However, practice in franchising shows that expertise in this field is not widely available. Strict requirements must also be imposed on the selection process of arbitrators by the parties, since if this does not happen, the risk of partiality of one or more arbitrators cannot be completely ruled out. 

A disadvantage of arbitration is the cost of the procedure. Unlike the ordinary courts, arbitrators must be paid by the parties themselves. Particularly in the case of an arbitral tribunal consisting of three or more arbitrators, the costs of those arbitrators can be particularly high, in addition to the costs of the attorneys involved in the proceedings. Certainly in the case of a more complex matter, those costs are generally not in proportion to those of proceedings before the ordinary court. More than once, practice shows in this context that, where an arbitration clause is included in a franchise agreement, it is effectively made impossible for a franchisee to invoke that clause, because he is simply unable to to pay the associated costs, especially if the franchisee concerned is not doing well financially. 

The bottom line of all this is that arbitration in general can have advantages when it comes to highly specialized conflicts where the specific expertise of arbitrators can be a real advantage. In franchising, however, this will often not be the case, so that in most cases a choice for the ordinary court seems indicated. 

Mr DL van Dam is a lawyer in Rotterdam. The law firm Ludwig & Van Dam is specialized in franchising. 

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