Why mediation works to resolve franchise disputes

Mediation to resolve franchise disputes has been a core component of the Franchising Code of Conduct since its introduction, and yet it still draws criticism from time to time among franchisees, franchisors and even service providers who claim the outcomes are unsatisfactory.

Unlike the drawn-out and expensive process of going to court, where a decision will be made that someone is “right” and someone else is “wrong”, the process of mediation doesn’t result in a black and white outcome where one party wins and the other party loses, but instead, results in an outcome that both parties can live with.

At the time such outcomes are reached, the mediator summarises the outcome in a written agreement that both parties agree to adhere to, and sign accordingly.

Criticism of mediation generally falls into two categories. The first is that the cost of mediation is excessive, particularly if one of the participants is financially distressed and struggling to make ends meet. The second criticism is that the outcome could have been markedly different if the issue had gone to court, and therefore the mediation has sold one or the other party short on the outcome they might otherwise have been able to achieve.

There may be an element of truth to both criticisms, but what must be taken into account is that mediation brings an issue to a head in a much shorter timeframe than the drawn-out process of going to court, and in doing so, saves everyone involved a lot of money in legal fees, the untold stress of preparing for a major legal battle, and the opportunity cost of what else could be done with the time and energy otherwise expended on litigation.

The cost of mediation

The issue of the cost of mediation is generally felt more by franchisees than franchisors in franchise disputes. If a franchisee’s business is underperforming, or has closed, and they are financially stressed, then any amount spent on dispute resolution – mediation nor otherwise – will be potentially viewed as unaffordable.

The Office of the Franchising Mediation Adviser (OFMA), a body funded by the federal government in parallel with the introduction of the Franchising Code of Conduct on July 1, 1998, indicates on its website that the average cost of mediation is $1200 per participant.

Compared to the tens of thousands (or even sometimes hundreds of thousands) of dollars that a full-blown litigation may cost, mediation is dirt cheap. Other agencies, such as the office of the Small Business Commissioner in Victoria also provide mediation services, which may be offered at a subsidised rate even cheaper than the OFMA. (However, at least one of the parties would need to be based in Victoria to warrant the use of this state-based mediation service).

The problem with claims that mediation is unaffordable is that those who are financially-distressed because of an underperforming business have left it too late before attempting mediation.

After working in the franchise and small business sector for many years, and advising hundreds of businesses, I have consistently noticed that business owners don’t want to hear bad news, and will frequently reject any suggestion that their business is in trouble until it is too late. By then of course, money is tight, and any cost that isn’t directly related to surviving on a day-to-day basis seems excessive, hence the criticism of the cost of mediation.

The second criticism of mediation – that the outcome could well be different if the matter went to court – is more than likely true. However what needs to be understood is that when two parties go to court, someone wins, and someone loses. It’s the ultimate zero sum game (+1-1=0).

Mediation vs litigation

Litigation is about enforcing legal rights. Mediation is about meeting needs.

Mediations can result in both parties meeting their respective needs by placing these above legal rights. Mediations bring the disputing parties together in a spirit of compromise that means they may trade off some perceived legal entitlement (and often this can be highly subjective) in return from a concession from the other party.

The job of the mediator is not to direct the parties to a predetermined outcome, but to help the parties understand each other’s grievances, and then to facilitate discussion and compromise which results in agreement. This process can generate amazingly creative solutions to both simple and complex problems that would be otherwise impossible to achieve via litigation.

So yes, the outcomes of mediation are different to those achieved by the courts. Instead of one party winning and the other losing, both parties can claim a partial victory (or be thankful they have reduced their losses) with the outcome they reach at mediation.

Occasionally legal practitioners, who are trained to seek outcomes by adversarial means, criticise mediation for not achieving the same outcome as a win in court. However, there is never a guarantee of a win in court, litigation isn’t cheap, and the time and resources required to pursue (or defend) a litigation can exhaust a person long before the matter is ever heard.

Aside from this, backlogged courts are often unwilling to hear matters unless the parties have made a serious attempt at mediating beforehand. So if courts are recognising the value of mediation, so too should potential litigants and their advisers.

The Office of the Franchising Mediation Advisor reports that more than four out of five (i.e. greater than 80%) of mediations result in an agreement being reached between the parties. This is an outstanding success rate, and when compared to the 50/50 chance of a court decision going one way or the other, represents much safer odds for anyone concerned about staking their future on a court decision.

Mediation may never solve every franchise or small business dispute, but it will give both parties to a dispute the best possible chance of resolving it more quickly and at lower cost and less stress than litigation. Aside from these obvious benefits, mediation also creates the opportunity for franchisors and franchisees to be heard by one another, thus creating an opportunity for relationships to be preserved and even enhanced by the process in a way that litigation can never achieve.

Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for 20 years at franchisee, franchisor and advisor level.