Litigation vs. Arbitration: Optimal Dispute Resolution Mechanisms for Franchise Agreements in India

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Resolving a dispute is always a complex task in any business model, as it involves taking numerous decisions, and if a single decision goes wrong, everything can go in vain. Thus, businesses always beforehand choose that if any dispute arises in the future, which way or method of resolution they would choose, which would be, if not completely beneficial, then at least the least difficult for them in every aspect. And under the franchise model also, the franchisors prefer to include a dispute resolution clause in their franchise agreement to ensure that if they get in trouble into future, which method would be best suited for them. The franchisor usually prefers to discuss the choice of mechanism to resolve disputes with the franchisee so that later on there’s no wastage of time in deciding the mechanism. However, if the franchisor wants, he can alone decide the mechanism and write it in the agreement clause, which has to be complied with by the franchisee to get the franchise.

The two most common mechanisms for the resolution of disputes are litigation (in-court settlement) and arbitration (out-of-court settlement). Although both of these mechanisms are made to provide justice and resolve disputes, they differ from each other on numerous grounds. For instance,
• Engaging in litigation means resolving disputes or settling disagreements through the court or judicial system, where a judge delivers a decision based on certain legal principles that is binding on all parties to the dispute. However, the process of arbitration involves resolution of the disputes privately, where the disputing parties agree to resolve their dispute outside the court by selecting an arbitrator or panel of arbitrators who deliver a decision (known as an award) binding on that matter.
• The process of litigation is less flexible for the parties because it is a formal mechanism to resolve the disputes and rules are predefined, and under arbitration, the parties have the power to customize the process to a particular extent or on some matters like the selection of arbitrators, procedural rules, and scheduling.
• Under litigation, the proceedings are mostly held in public, which ensures transparency, and in arbitration, the proceedings are held in private, which helps in maintaining confidentiality of business practices and protects the brand value also to some extent, and that’s why many franchises prefer this form of mechanism.
• In litigation, the decision given by the court is appealable, and if any party feels that the decision or process was not fair, they can appeal through multiple levels of court. But under arbitration, the award given by the arbitrators is usually final, and there’s very little scope for an appeal in such cases.

Both of these mechanisms have evolved with time and proven their value in the eyes of the public. The choice of mechanism is totally dependent on the parties to the dispute. Special laws are made for dealing in every mechanism for the convenience of the parties. However, even after all these pros, there are several cons also attached to each of them, just like a coin which has two sides.
So, following are some of the pros of the litigation:
• Court proceedings are held in public, and thus, a public record of them is present and transparency is ensured.
• The decision of the courts creates legal precedents which can be later on used in other cases with similar facts about the dispute.
• The decisions or judgements pronounced by the court can be easily enforced by the state’s authority, which ensures that effective compliance with the decision is done.
• The presence of appeals at various levels ensures a thorough review of decisions.
• By having a formal structure with established procedural norms, it gets the benefit of managing the complex legal issues swiftly.

Now, following are some of the cons of the litigation:
• Conducting proceedings in public has a risk that the reputation of the franchise could be tarnished and its sensitive information could be revealed.
• Due to the heavy backlog of cases pending in the courts, the disputes of the franchise can also take years to get resolved.
• The court fees involved, the fees of the attorney, and prolonged procedures makes the whole process of litigation an expensive option.
• Due to the strict and inflexible rules of procedure of the court, delays are a common occurrence.

Let us discuss some pros of the arbitration as well:
• The process of arbitration is confidential; that is, the proceedings are held in private, which helps to keep the secrets of the franchise maintained. This way, the reputation of the franchise is also preserved.
• Parties are given the right to choose the arbitrators of their choice, and thus the franchisors and franchisees can ensure that the person they choose as arbitrator(s) have expertise in the franchise law so that more informed decisions can be made.
• The process under arbitration is more flexible in comparison to that under litigation. The terms of the schedule and the procedural rules can be tailored by the parties as per their needs and situations.
• Arbitration does not involve following the strict procedures of court, and thus the disputes under this can be resolved in a quicker manner than litigation.
• Because of certain international conventions and treaties, like the New York Convention, the awards made under arbitration are recognized and can be enforced easily in international spheres.

Now, following are some of the cons of the arbitration:
• Just like in litigation, there are fees of the advocates; under arbitration, there are to be paid the fees of the arbitrators, and there being no regularization regarding the cap of fees, this process also sometimes ends up being expensive because of the fees involved.
• Moreover, choosing the right arbitrator is also a difficult job, and if the arbitrator chosen doesn’t come out to be impartial, it can lead to a perceived or biased award.
• The awards made under the arbitration have a limited scope for appeal, and thus, if there’s any legal error in the dispute’s decision, the chances of its correction get reduced.
• The awards of the arbitration do not set a legal precedent, unlike court decisions, and this leads to inconsistent outcomes.
Choosing the best dispute resolution mechanism is always a tricky part, and thus all the pros and cons of every resolution mechanism have to be analyzed properly. After choosing the mechanism of choice, proper drafting of the clauses of resolution has to be made.

Some tips for drafting effective dispute resolution clauses are as follows:
• Specify clearly in the franchise agreement which resolution mechanism has to be chosen in case of any dispute between the parties.
• If chosen for arbitration, the details of the arbitrators, the number of arbitrators, the place, the scope for appeal, and process of arbitration shall be stated beforehand in the agreement. In India, the ICA and SIAC are the popular choices among parties.
• Determine the categories of disputes which would be dealt with by the arbitration process and which can be resolved through litigation.
• Address which party will bear the costs of arbitration or litigation and in what proportion.
• Confidentiality clauses can also be added to ensure that certain sensitive information is protected from being disclosed during the resolution process.
• Interim relief clauses can also be added, ensuring that urgent matters do not get missed while the disputes go on.
• The laws and jurisdiction shall also be clearly specified in the agreement to avoid future conflicts.
The decision on whether to opt for arbitration or litigation in franchise agreements is contingent upon the particular needs and preferences of the parties involved. Every aspect of both mechanisms must be discussed, analyzed and utilized in an effective manner so that the dispute gets resolved swiftly and the franchise can run smoothly.
Authored by: Adv. Anant Sharma & Sahil Arora

 

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