In recent years, franchising has become a popular business expansion mode across borders. Franchisors not only use it to increase brand and business growth opportunities but also to provide a low-risk means to expand into new markets. However, franchisors face unique legal and economic challenges when they develop their brand beyond their home country. This includes navigating foreign regulations, cultural differences, and language barriers. One potential solution to mitigate these challenges is establishing an international arbitration agreement in their International Franchising Contract. This blog will delve into the various complexities of franchising across borders and highlight the importance of international arbitration as a conflict resolution mechanism.
Complexities of Franchising Across Borders
Franchising is a complex process that requires meticulous planning and legal documentation. Franchisors must prepare to face multiple complex layers when expanding internationally. Implementing the same model that worked in another country might be challenging due to different legal systems, business practices, cultures, and languages.
Franchisors can protect their interest with an international arbitration clause even if cultural, language, or legal differences lead to a dispute. This agreement avoids domestic litigation, which is subject to different laws in every country, and provides consistency across different markets. Furthermore, it tends to be difficult for local courts to enforce foreign judgments from other countries.
International Arbitration: A Conflict Resolution Mechanism
International arbitration is a mechanism through which disputes between two parties from different countries can be resolved by a neutral, third-party arbitrator. This type of arbitration takes place outside the court system, which allows for a more flexible and efficient process. Unlike court proceedings, where the legal process and policies differ from country to country, international arbitration provides consistency and procedural uniformity.
Franchisors who operate in multiple countries can minimize their legal risks of doing business abroad by using international arbitration as a conflict resolution mechanism. This is because they are exposed to different legal systems, languages, and cultural barriers that cause disputes. International arbitration offers the perfect platform for franchisors to resolve these disputes with a standardized ruling and mitigation.
Which Tribunal Is Effective To Hear These Disputes
The WIPO (“World Intellectual Property Organization”) has the proper expertise to arbitrate this type of disputes. See WIPO Alternative Dispute Resolution (ADR) for Franchising. However, the WIPO isn’t the only tribunal who can arbitrate International Franchising Disputes. Other Tribunals such as AAA, ICC, ICSID and more… can also be as effective as the WIPO.
The Advantages of International Arbitration for Franchisors
International arbitration allows franchisors to customize agreements for different markets, considering local regulations and customs that differ from their home market. Furthermore, international arbitration reduces legal costs, time-consuming procedures, and the uncertainty of court proceedings.
However, an arbitration clause cannot be reversed, even if the contract was found to invalid. This means that if there is an arbitrational clause in an international franchising contract, such clause can survive past the termination or the invalidation of the contract. For more information about this issue visit Does an Arbitrational clause survive past the termination of your contract? – Transnational Matters.
Consequences If Not Utilizing International Arbitration
If franchisors fail to establish an international arbitration agreement upfront, they may find themselves in costly litigation proceedings, in which they can lose their entire franchise investment. This is because of the different legal regulations and rules. These differences lead to costly court proceedings, which run the risk of unfair rulings in favor of the opposing party due to the unfamiliarity with local rules and customs.
In conclusion, Franchisors expanding internationally should use an international arbitration agreement to mitigate cross-border franchising challenges. It eliminates potential legal risks, saves time and money, and provides an efficient conflict resolution process that benefits investors and franchisors alike. As a result, established businesses are better placed to focus on long-term growth and expand their business globally. Therefore, Franchisors should invest time and resources in setting up an international arbitration agreement which is beneficial for the growth and longevity of any franchising business.