Mandatory arbitration is a legal route that receives mixed opinions. The concept, which frequently appears as a contract provision or in the Franchise Disclosure Document through the FTC Franchise Rule, requires parties to resolve disputes, or legal conflicts, through an arbitrator, rather than the court system. The conflicting parties select a neutral third person who is officially appointed to settle the dispute–and determines the amount of the award–at hand. In franchise law specifically, arbitration is the preferred form of alternative dispute resolution.
Arbitration is the preferred form of alternative dispute resolution.
Is Arbitration the Right Route?
While arbitration is a formal and viable alternative to settling a dispute in court, this option comes with its own benefits or drawbacks, which both the franchisor and franchisee should consider.
For one, arbitration avoids the length and cost that comes with the courts. A formal trial not only takes time to begin but is a costly option due to attorneys’ fees, civil court fees, among others that are often tacked on. Arbitration eliminates the time and financial costs of court.
Arbitrators also often have more knowledge on the subject matter being disputed. If the dispute stems from a construction-related contract, for instance, the parties can choose an arbitrator that has experience with construction matters. Whereas a judge may have a docket full of varying disputes and legal issues, an arbitrator can give more of his undivided attention.
While in court you are not able to choose the judges of your dispute, the parties get some control over the chosen arbitrator, as they are required to agree on a neutral judge. This can often result in a less hostile or stressful proceeding.
Although arbitration is less costly than the court system, that certainly doesn’t make it free of expense. In fact, an arbitrator, much like a lawyer, can reap a serious financial hit depending on the nature of the dispute. The American Arbitration Association (AAA), for instance, charges anywhere between $1,000 and $1 million, depending on the claim. An arbitrator’s daily fees can easily exceed $1,500 per day, according to the AAA’s website.
Arbitration is less costly but not free
While an arbitrator’s previous experience in certain fields may bring depth to their understanding of the dispute, it can also result in a biased viewpoint. Although an arbitrator is a “neutral third party,” it is possible that they may come with their own preconceived notions or perspectives.
Unlike the court system, arbitration makes an appeal all the more difficult. When one files an appeal in the court system, there is an increased likelihood that higher courts may catch mistakes in the decision making of the lower courts. Appeals are more difficult, and in some cases, impossible, if the route of arbitration is taken.
Many franchisors prefer the route of franchise arbitration as the route to resolve disputes or conflicts. Due to the method’s popularity, it has become a common practice in franchise law and has become a key part of The Franchise Agreement. Typically, both franchisees and franchisors tend to prefer this route as it allows them to settle matters quickly and privately. A public legal procession or scandal is the last thing that the franchisor or franchisee would want.
Typically, the third party selected is a franchisee arbitration attorney. These sources offer representation and help settle disputes in franchise agreements, breaches of contract, trademark violations, among others.