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Which is Best: Arbitration or Litigation?

Neither is “best.”  “Best” is where the franchisor and franchisee have a good enough relationship that if a problem arises, one picks up the phone and calls the other.  They resolve it without the need for attorneys.  However, it takes two to tango.  We all know people who will not take “yes” for an answer.

My agreements usually say the parties will litigate disputes, rather than arbitrate them.  Here’s why:

  • Cost.  You are a taxpayer.  You are already paying for a court.  Arbitration is extra.  The cost to file a court case usually ranges from $150 to $250.  To file the same proceeding in arbitration may cost $15,000 or more.  A three-arbitrator panel may cost $1,500 per hour or more.
  • Arbitrators can be arbitrary.  “Arbitrator” and “arbitrary” share the same root word. This is fitting.  An arbitrator brings a lifetime of biases to the table and is less accountable to an organized system of checks and balances than a judge (whose decisions are subject to appellate review).
  • Uncertainty.  Courts are bound by statues, rules, and case law interpreting them.  Arbitrators may rule on what they believe is subjectively “right” regardless of the law.  As a result, you may have complied with the law in all respects, but may nonetheless lose because the arbitrator sides with the “little guy.”
  • Limited recourse.  In arbitration, parties rarely have a right to interlocutory appeal (the right to appeal a bad ruling during the proceedings).  With binding arbitration, they usually give up all rights of appeal.  If an arbitrator’s decision is clearly erroneous, the party is usually stuck with it.  In litigation, the party has a right to appeal.

There is another alternative: mediation.  “Mediation” is a procedure where the parties choose an individual to serve as “mediator.”  In the franchise context, the mediator is usually an experienced commercial law attorney who has undergone special mediation training.  The mediator hears both sides of the story, points out the strengths and weaknesses of each party’s positions, and tries to bring the sides together.  There is no “decision”: there is only an “agreement” or an “impasse.”  Mediation is fast and relatively inexpensive.  If the parties can’t reach an agreement, they still have the right to litigate or arbitrate.

Here’s the point: the best way to resolve disputes is by mutual agreement, whether the agreement arises from personal relationships or mediation.  Failing that, if you must choose a formal procedure, litigation may involve lower costs and less risk.

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