THE RELEVANCE OF DISPUTE RESOLUTION MECHANISMS FOR THE FRANCHISING INDUSTRY by Tan Tee Jim, S.C. Senior Partner, Head, IP & IT, Lee & Lee Kuala Lumpur,

THE RELEVANCE OF DISPUTE RESOLUTION MECHANISMS FOR THE FRANCHISING

INDUSTRY

by

Tan Tee Jim, S.C.Senior Partner,Head, IP & IT,

Lee & Lee

Kuala Lumpur, July 2008

Typical Dispute Areas

Royalty payments Use of intellectual property rights Franchisee not adhering to operating

protocol Franchisee engaging in competing business Claims of misrepresentation Training Support

Case Examples

Go Go Delicacy Pte Ltd v Carona Holdings Pte Ltd [2008] 1 SLR 161 Franchise agreement for frankfurters called

“GoGo franks” Sued for breach of franchise agreement

and for spoilt/rotting food supplies Interlocutory application

Case Examples

Telestop Pte Ltd v Telecom Equipment Pte Ltd [2004] SGHC 267 Franchise agreement for operation of

“SingTel” mobile phone shops in 1993 Disagreements and unhappiness arose Franchisor refused to allow franchisee to

relocate loss-making shop Franchisor started competing with franchisee Matter only resolved by court judgment after

6 years

Relevance of Dispute Resolution Mechanisms

Franchise agreements are complex agreements that often have a long duration

Disputes may arise several years into agreement involving un-contemplated matters

Difference in bargaining power usually places franchisees at a disadvantage

Dispute Resolution

Litigation Arbitration Mediation

Remedies

Damages/Account of Profits Injunction Search orders Delivery up Costs

Litigation

Substantial preparatory work, time and effort

Delays Costly Almost inevitably leads to irretrievable

breakdown of relationship

Alternative Dispute Resolution Mechanisms

Because franchisor and franchisee are bound by contract, it is possible to contract for dispute resolution by alternative means

Arbitration Mediation

Party control and autonomy

Relevance of Dispute Resolution Mechanisms

Reduces uncertainty Easier to ‘price’ risks involved when

entering into franchise Achieving a commercially sensible

solution for all parties concerned without irretrievably breaking down the relationship between franchisor and franchisee

Arbitration

Arbitration Litigation

•Private proceedings•May be adjudicated by experts in the field•Ease of international enforcement

•Public proceedings•Adjudicated by a judge•Difficulty in enforcing foreign judgments

Arbitration

Characteristics

Private proceedings, usually behind closed doors Useful if franchise involves trade secrets /know

how Parties can appoint a sole arbitrator, or a

panel of arbitrators Parties know who will resolve their dispute

Arbitration

Characteristics

Arbitrator can be an expert in the field Helpful if area is technical in nature or requires

special knowledge In certain situations, arbitration award may

be enforced in country where loser’s assets are situated Useful if dispute involves cross-border elements

Arbitration

However, arbitration is not necessarily cheaper than litigation in the courts

Arbitrators’ and counsels’ fees have to be paid

Arbitration

Requirements

Arbitration clause/agreement in writing signed by parties or contained in exchange of letters;

Parties undertake to submit disputes arising from the agreement to arbitration

Choice of arbitrator(s)

Arbitration

Requirements

Choice of governing law and applicable rules of arbitration

Choice of arbitration institution (ICC/AAA/CIETAC / LCIA / SIAC)

Arbitration

Typical arbitration clause

“Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration in [ country ] in accordance with the arbitration rules of [ arbitration institution ] for the time being in force, which rules are deemed to be incorporated by reference in this clause.“

Mediation

Mediation Litigation

•Co-operative•Quick•Problem-solving•Inexpensive•Private

•Confrontational•Takes time•Rights-determining•Expensive•No guarantee of confidentiality

Mediation

Characteristics Conciliatory, not adversarial, process Win-win situation sought Intended to achieve a lasting solution to

disputes Parties appoint 3rd party to serve as a mediator

Mediator can be a person with good knowledge of the business

Mediator’s duty is to facilitate a solution, not to impose his decision upon the parties

Mediation

Control over outcome Parties arrive own decision with help from

the mediator No risk of adverse or unexpected decision

being imposed upon the parties Allows parties to evaluate strength of each

other’s cases before deciding whether to proceed further

Mediation

Saves “face” Mediator does not decide who is right and

who is wrong Mediation is “forward-looking”. Focuses on

practical solutions to the problem at hand

Mediation

Confidentiality Mediation can take place behind closed

doors No need to address factual issues in open

court Trade secrets will not be divulged

Saves costs Informal procedure Can be resolved within a day

Mediation

Franchising agreements are long term agreements Franchisor expends substantial resources

creating the system Franchisee expends substantial resources

building infrastructure & receiving training in the system

Thus, it is in both parties’interests to ensure that relationship does not break down

Mediation

Typical mediation clause

“All disputes, controversies or differences arising out of or in connection with this agreement shall first be submitted for resolution by mediation by a single mediator to be jointly appointed by the parties. The parties agree to participate in the mediation in good faith and undertake to abide by the terms of any settlement reached.“

Dispute – often painful and expensive

Be wary of disputed areas Seek appropriate solutions through

litigation, arbitration or mediation

Conclusion

THANK YOU

Tan Tee Jim, S.C.

[email protected]

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