Disputes are an inevitable part of doing business, particularly when parties are in business together within a franchise system. For many franchisors and franchisees, arbitration has long been viewed as a faster, less expensive alternative to litigation. Although arbitration often delivers efficiencies, it is still at its core a rights-based dispute resolution process, i.e., like litigation, arbitration places the outcome of a dispute in the hands of a third party.
Resolving disputes in a rights-based process, however, often comes at significant cost. Legal expenses accumulate, management time is diverted, relationships deteriorate, and adversariness endemic to the process can leave both sides very dissatisfied. For franchise systems built on long-term collaboration, even a favorable outcome in arbitration or litigation can undermine trust and negatively affect the system.
Ultimately, whether disputes involve operational standards, territory issues, supplier relationships, or contractual obligations, conflicts can quickly become costly distractions if they escalate to arbitration or litigation. Indeed, when disagreements arise in a franchise system, the goal should not simply be to figure out who wins—it should be to protect the long-term health and business relationships that serve as the system’s foundation.
That is where multi-tiered dispute resolution (MTDR) systems come in. A MTDR system uses multiple tiers or steps of party-drive dispute resolution processes before arbitration or litigation begins. Those processes offer franchisors and franchisees meaningful opportunities to problem-solve before sending their disputes for ultimate resolution by another.
A Better Way to Resolve Conflict
Not every dispute requires an immediate march into arbitration or litigation. Most franchisors are aware that negotiation, conciliation, and mediation differ fundamentally from litigation and arbitration because they are party-driven. Rather than asking someone else to decide who is right and wrong, these approaches focus on helping the parties better understand one another’s interests, challenge assumptions, improve communication, and find mutually beneficial solutions.
This distinction is important because many franchisor-franchisee disputes are fueled not simply by legal or positional disagreements, but by differing beliefs and expectations about what occurred and what each party needs to move forward. When explored through structured dialogue, seemingly irreconcilable positions may become far more manageable. For franchise systems, preserving productive relationships can be just as valuable as “wining” the immediate disagreement.
Building Opportunities for Party-Drive Resolution into the Franchise Relationship
MTDR systems are built through obtaining informed consent or “buy in” to include a MTDR clause in the franchise contract that governs the system. A properly drafted MTDR establishes a series of escalating steps that parties must follow before starting formal legal proceedings. A typical process may include:
Tier 1: Executive-level negotiations between individuals with authority to resolve the dispute, which may include online dispute resolution (ODR) processes and artificial intelligence (AI) that help parties effectively communicate and explore resolutions without escalating their dispute through adversarial decision-making.
Tier 2: Non-binding mediation or conciliation with a neutral third party.
Tier 3: Binding arbitration or litigation.
An MTDR system is not meant to make dispute resolution more difficult or quell either party’s assertion of rights. Rather, the system seeks meaningful engagement before formal rights-based processes begin, and to create opportunities for communication and problem-solving at the earliest stages of conflict—often before positions become entrenched and legal costs escalate. Notably, even if the parties need to resolve their dispute through a rights-based process, the work the parties performed in Tiers 1 and 2 may narrow and streamline their efforts in Tier 3. In other words, even if Tiers 1 and 2 do not resolve the dispute, they typically are a value add.
The Importance of Informed Consent
An MTDR system is most effective when both parties understand and genuinely support the process before a dispute ever arises, i.e., the system works best when based on “informed consent.” To obtain informed consent, the parties should understand how the system works (particularly if it involves using ODR processes and AI), why it is being adopted, and what rights the parties may be waiving by agreeing to it. Equally important is developing a shared understanding of the system’s goals. All of this helps obtain “buy in” to use the system, particularly when franchisees are part of the drafting and implementation process, or are educated about the system before being asked to agree to it. Obtaining that “buy in” encourages good-faith participation in the party-driven tiers and honoring agreements ultimately reached through those tiers.
Drafting Matters
Although tiered or stepped dispute resolution clauses are enforceable across the United States, courts and arbitrators often examine whether the party-driven tiers were sufficiently defined and intended as mandatory conditions before rights-based proceedings could begin. As such, an MTDR clause should clearly define each stage of the process, including timelines, responsibilities, procedures, and the circumstances under which the parties may advance to the next step. Terms such as “good-faith negotiation” should be drafted with enough clarity to avoid creating more disputes over what the parties were expected to do, and to prevent a finding that the clause is too vague to enforce. Because enforceability may vary among jurisdictions—and becomes even more complex in international franchise relationships—organizations should work with experienced legal counsel when developing or revising these clauses and implementing any MTDR system. Resources such as the International Bar Association’s guidance on arbitration clauses and the American Arbitration Association’s clause-drafting materials can provide useful starting points, but contract language should ultimately reflect the unique needs of each franchise system.
A Strategic Investment in Long-Term Relationships
Strong franchise systems depend on collaboration, communication, and mutual success. While arbitration and litigation will always have an important role when disputes cannot be resolved otherwise, they need not be the first response. A thoughtfully designed MTDR system—supported by a properly drafted MTDR clause and informed consent—gives franchisors and franchisees other opportunities to address disputes through communication, negotiation, and problem-solving before positions harden and relationships deteriorate. The result is often more than just lower legal costs. Rather, MTDR systems support stronger conflict management cultures, greater trust between business partners, and offer dispute resolution frameworks designed to foster the long-term success of franchise systems.
About the Author
David G. Thomas is a shareholder with Greenberg Traurig, LLP, where he advises businesses on preventing, managing, and resolving complex disputes. As a seasoned litigator, who also holds an LL.M. in Dispute Resolution and is a certified mediator, David helps clients navigate every stage of the dispute resolution process—from strategic negotiation through trial if necessary. David counsels companies on developing practical strategies to minimize litigation risk while preserving important business relationships when conflicts occur. He has been recognized by The Best Lawyers in America for Commercial Litigation, named a Massachusetts Lawyers Weekly “Go To Business Litigation Lawyer,” and recognized by Boston Magazine as a “Top Lawyer” in Class Action litigation.