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Franchise Dispute Resolution - Is Arbitration Best?

When reviewing a business contract or franchise agreement for a client, we often read the dispute resolution section first. That section describes the process the parties will use to resolve disputes and what will happen if either party decides to file a lawsuit. Many agreements provide that any disputes will be resolved through binding arbitration, a private dispute resolution process where the parties hire an arbitrator to act as a private judge and resolve their dispute. Generally, the arbitrator can do every thing that a judge can do including deciding pre-trial issues, hearing evidence and deciding the case. An arbitrator can order the parties to pay damages, fines and legal fees. One of the major advantages of arbitration is that, generally, the parties may not appeal the arbitrator's decision, meaning for better or worse, the outcome is final.

Recently, an arbitrator ordered Starbucks Coffee to pay almost three billion dollars in damages and legal fees to Kraft foods for wrongfully terminating their contract to sell Starbucks branded coffee to grocery stores. Starbucks issued a statement that while they disagreed with the outcome "we are pleased the arbitration has ended." Kraft Foods also released a statement saying that they were "glad to put the issue behind us...we can now fully focus on...growing our business."

Of course, for a small business or franchise client, a large judgment against you can send your business into bankruptcy. If a judge or jury rules against you, you may be able to file an appeal. If an arbitrator rules against you, you have no choice but to open your checkbook and pay-even if the arbitrator misinterpreted or misapplied the law. A bad arbitration decision can force a small business owner into bankruptcy. We advise all of our clients to carefully review the franchise dispute resolution sections of their contracts and work with an experienced business attorney to design a solution that works best for you. All business people want to avoid disputes but when they happen you want to make sure the agreement protects your interests.

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