Discrepancies are quite natural in franchise relationships. Hence, a well-defined process or a set of law is required to resolve disputes. For this reason, the legal framework of franchising covers Forum Selection Clause that comes to the fore in case the crisis situation reaches saturation level.
WHEN a franchisor selects a franchisee or a franchisee takes up a particular franchise, dispute is the last thing on their minds. But it is a fact that cannot be ignored or wished away. Considering the probability of such discrepancies and dispute-related situations beforehand and taking preventive measures to avoid trouble in future is always a wise option. The franchise attorneys and consultants recommend inclusion of Dispute Resolution Clause and Forum Selection Clause in the franchise contract.
Planning overseas expansion
Franchising overseas can be highly profitable and is an excellent way of expanding the business on foreign land. However, expanding overseas involves lot of risks, especially in case of inexperienced franchisors. Therefore, in order to provide certainty to both the franchisor and the franchisee, Forum Selection Clause must be included in the franchise agreement. As Rod Young, Executive Director, DC Strategy, a specialised consulting and law firm, says, “For the sake of commercial certainty, it is advisable to include Forum Selection Clause in every franchise agreement, whether in a nationwide franchise offering (which may be launched across a number of states or territories, each with their own laws and courts) or internationally.”
What is Forum Selection Clause?
This clause allows both the franchisor and the franchisee to resolve their litigations in a specific forum. The disputes in franchising usually arise due to breach of contract or misrepresentation of the franchise agreement. The franchise Selection Forum basically includes two clauses, Choice of Law Clause and Jurisdiction Clause
Choice of Law Clause
The Choice of Law Clause specifies the law of the state or country, which will apply to resolve arbitrations or dispute or misrepresentation of the contract. As Dawn Stallwood, Managing Director, Danetree Associates & Consultant Solicitor at Legal Services Consulting, UK says, “Choice of law basically tells both the parties which law will actually apply to resolve the conflict. It says that the franchisors do need to be aware of any mandatory laws, which might apply and override any choice of law clause.”
The Jurisdiction Clause decides which court or dispute resolution system will hear and determine the dispute litigation. In other words, this clause sets out the franchisor’s chosen place/country to sue an errant franchisee or to resolve the disputes. As per Stallwood, “It is risky to be silent on such issues, as jurisdictional issues can be complex and providing for certainty in the franchise contract is preferable.”
“The Forum Selection Clause does play a significant role in expanding overseas and its inclusion in the contract is necessary to determine the process by which the parties will have their disputes resolved and the venue for such dispute resolution,” says Shahnaz Husain, Founder, Chairman and Managing Director, Shahnaz Husain Group. But before selecting a specific Forum Selection Clause, a number of factors need to be considered.
Nationality of both the parties: Nationality of both the franchisor and the franchisee is a matter of concern while selecting the Forum Selection Law. As per Karnika Seth, Attorney, Law & Partner, Seth Associates, Advocates and Legal Consultants, says, “Usually, a franchisor who has franchisees in different jurisdictions will insist on selecting the forum for dispute settlement as courts of the place where the franchisor has its registered office.”
Need for neutrality: In case of different nationalities of the franchisor and the franchisee, one party can be at a disadvantage if the litigation takes place in other party’s home country. Lack of knowledge about the procedural and material laws applicable, legal culture, competency of the judges, language and physical distance must be allayed before selecting the Forum Selection Clause. As Young says, “Typically, a Forum Selection Clause will adopt the law and courts of either the region where the franchisor is domiciled or the region where the majority of its overseas franchise operations are situated.”
Complexities of issues: Generally, it is the complexity of the matter that determines the legal procedure. “Arbitration can be the best choice available since in court cases, both the parties will need to see the bargaining power, place where performance of a contract is to be made, location of both parties, inconvenience of forum,” says Seth.
Amount of money and time: When the franchisor and the franchisee are from different countries, the decision of Forum Selection Clause is also influenced by the amount of time and money that will be involved in the court proceedings. According to Young, “The franchisor establishes norms under his existing templates, as he is most familiar with the local law and courts. Besides, in the event of litigation, he will want proceedings to be controlled locally rather than the uncertainty and cost of ‘being dragged’ into proceedings in some distant and unknown jurisdiction bothers him.”
Brian Duckett, Chairman, The Franchising Centre, mentions, “Wherever in the world it takes place, the whole legal process is far too uncertain, takes far too long and costs far too much – not least because it suits the lawyers for that to be the situation.”
Recognition and enforcement of the ruling: Before finalising the place to sue or the law to apply, it is crucial to take legal advice, as recommended by Stallwood. It is because the choice of law and place of jurisdiction directly affects the legal course of action since rules and regulations differ from country to country.
Despite the brevity and simplistic drafting, commercial implications of these clauses can be complex and not at all self-evident from the contract itself.
While one cannot guarantee the enforceability of a Forum Clause, parties can take comfort from a clear, well-constructed provision prepared by a specialist legal adviser. Seth opines, “The contract should state that in case any clause is unenforceable or invalid or considered so by the courts, other clauses shall continue to be valid and binding on the parties and will be fully enforceable. This principle is commonly known as severability principle. The parties should state that decision taken by the courts shall be final and binding between parties.”
National or international lawyer
Various franchise regulations and the franchise agreement secures the right of both the franchisor and franchisees to take legal actions in the appropriate forum in case any dispute arises. This allows both the parties to bring in the legal representatives of their choice. However Young suggests, “Typically it will be advantageous to engage solicitors who are familiar with the local court system and any local franchise regulations.” While Seth believes, “It is in fact preferable to bring a lawyer from the party’s home country to fight the case. The lawyer may work with their associate lawyer in foreign jurisdiction and through combined efforts, case can be handled effectively .It is not essential for Indian lawyer to travel to foreign jurisdiction, video-conference and e-mail exchanges are enough to render litigation support.”
However, Duckett says, “It doesn’t matter what the legal forum is for a dispute because once it gets the stage of litigation, all hope is lost for the relationship and the result will only be rich lawyers and disillusioned franchisor and franchisee.”
If the Forum Selection Clause is not included in the franchise contract, then national court will ensure the jurisdiction by default. Under such circumstances, the place of litigation is decided as per the national rules and international conventions. As per Young, “If the forum clause is omitted from a franchise agreement, case law has shown that the parties can be drawn into a very protracted exercise of applying to their local courts to determine which jurisdiction has the closest and most real connection with the contract. This should be avoided at all costs through the adoption of an appropriately framed forum clause.” Therefore, it is advisable for the franchisor to include Forum Selection Clause in the franchise agreement, especially if the franchisor is planning to expand the business beyond national boundaries.
In spite of its significant role in dispute resolution, majority of the Indian franchisors do not even know about it. This lack of awareness may be because of the nascent stage of franchising in India and no specific franchising laws yet exist here. But for the franchisors who have ambition to expand beyond India need to bear in mind the laws of different countries and their different approaches to franchising and business practices.