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 •Public proceedings

•May be adjudicated by •Adjudicated by a
experts in the field judge
•Ease of international •Difficulty in enforcing
enforcement 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 •Confrontational
•Quick •Takes time
•Problem-solving •Rights-determining
•Inexpensive •Expensive
•Private •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.“
Conclusion

 Dispute – often painful and

expensive
 Be wary of disputed areas
 Seek appropriate solutions through
litigation, arbitration or mediation
 26

THANK YOU

Tan Tee Jim, S.C.

tanteejim@leenlee.com.sg