When you get into a dispute with your franchisor, your legal rights are determined largely (though not entirely) by the terms of your franchise agreement. During a dispute, some franchise agreement terms are more important than others, and knowing which terms apply—and how they apply—is critical for making informed decisions. In this article, franchisee lawyer Jeffrey M. Goldstein discusses 10 key franchise agreement terms when facing a dispute with your franchisor.
Key Term #1: Mandatory Alternative Dispute Resolution (ADR)
Many franchise agreements include mandatory alternative dispute resolution (ADR) clauses. These clauses specify that, in the event of a franchisor-franchisee dispute, the parties must submit their dispute to mediation, arbitration or both.
While mediation and arbitration can be cost-effective alternatives to litigation, mandatory ADR clauses can still benefit franchisors in many ways (which is why so many franchise agreements have them). We’ll see why when we discuss these clauses in the context of some other key terms below.
Key Term #2: Choice of Jurisdiction and Venue
Along with mandatory mediation and arbitration clauses, many franchise agreements also include clauses that specify the jurisdiction and venue for resolving franchisor-franchisee disputes. Usually, franchise agreements will state that the exclusive venue for resolving disputes is the city where the franchisor’s headquarters are located. This serves as a cost-saving measure for franchisors—while adding to the costs that franchisees need to incur in order to protect their legal rights.
Key Term #3: Choice of Law
Some states’ laws are more franchisee-friendly, while other states’ laws are more franchisor-friendly. Oftentimes, franchisors will include “Choice of Law” clauses in their franchise agreements that require all disputes to be resolved under the laws of a franchisor-friendly state. This can have a significant impact on franchisees’ legal rights, and it can play a significant role in determining the viability of both claims and defenses that franchisees may (or may not) be able to assert during the dispute resolution process.
Key Term #4: Limitations Period
Another common tactic franchisors use to protect themselves is inserting “limitations periods” into their franchise agreements. Similar to statutes of limitations, these clauses establish an artificial (but legally enforceable) deadline for asserting claims in mediation, arbitration or litigation.
In many cases, contractual limitations periods will be significantly shorter than the statute of limitations for contract-based claims under a franchisor’s chosen governing law. For example, while statutes of limitations for contract-based claims are often in the range of two to three years, contractual limitation periods are commonly as short as 90 or 180 days.
Key Term #5: Damages Limitations
Yet another way franchisors protect themselves is by including damages limitations (or damages caps) in their franchise agreements. As their name suggests, these clauses limit (or cap) the damages franchisees can recover for franchisor breaches. In many cases, the damages caps in franchise agreements will be so low that it will not be worth it for franchisees to assert their legal rights. Conversely, as franchisors will typically have other remedies (i.e., termination) available, it will still be well worth it for them to pursue legal action.
Key Term #6: Liquidated Damages
In contrast to a damages limitation clause, a liquidated damages clause specifies the amount that a franchisor is entitled to recover in the event of a franchisee’s breach of the franchise agreement. Rather than proving its actual losses, the franchisor can simply assert its right to liquidated damages. These clauses can present substantial risks for franchisees—especially when they include provisions for “lost future royalties” after the franchise agreement is terminated or expires.
Key Term #7: Waivers
Like other types of commercial contracts, franchise agreements typically include waivers that insulate franchisors from liability for various types of claims. These waivers are generally enforceable, and if a franchisee has waived its right to pursue a claim, then the franchisee is not entitled to any remedies.
Waiver clauses are often extremely broad, and while this often works in franchisors’ favor, their ambiguity can be beneficial to franchisees in some cases. As a result, if you are concerned that you may have waived your right to pursue a claim against your franchisor, you should consult with an experienced franchisee lawyer before making any decisions about whether to pursue legal action.
Key Term #8: Indemnification
Indemnification clauses shift liability between franchisors, franchisees and other parties. They can play a central role in franchisor-franchisee disputes, either significantly limiting or expanding one party’s liability exposure. Similar to waivers, these clauses are often both extremely broad and extremely vague, and understanding their implications for franchisor-franchisee disputes can be challenging in many cases.
Key Term #9: Attorneys’ Fees and Costs of Dispute Resolution
Attorneys’ fees clauses also shift liability between franchisors and franchisees. Typically, these clauses will state that the “prevailing party” in a dispute is liable for both parties’ legal bills. These clauses will frequently cover other costs of dispute resolution as well, including filing fees, mediation fees and arbitration fees.
Key Term #10: Breach, Cure and Termination
Finally, breach, cure, and termination clauses will often play a central role in dispute resolution proceedings as well. This is true whether the franchisor initiates the proceedings in order to pursue termination or the franchisor alleges a breach in response to a franchisee’s claims. The risk of termination is a significant concern for franchisees facing disputes with their franchisors. Not only can termination lead to loss of a franchisee’s investment, but, as noted above, it may trigger liability for “lost future royalties” as well.
Discuss Your Dispute with Franchisee Lawyer Jeffrey M. Goldstein in Confidence
If you are facing a dispute with your franchisor and need to know more about your legal rights and legal risks, we invite you to get in touch. Firm founder and franchisee lawyer Jeffrey M. Goldstein has well over 30 years of experience representing franchisees in ADR and litigation. To speak with Mr. Goldstein about your dispute in confidence, call 202-293-3947 or request a free initial consultation online today.
