THE RELEVANCE OF DISPUTE RESOLUTION MECHANISMS FOR THE FRANCHISING INDUSTRY by Tan Tee Jim, S.C. Senior Partner, Head,

1. THE RELEVANCE OF DISPUTE RESOLUTION MECHANISMS FOR THE FRANCHISING INDUSTRYby Tan Tee Jim, S.C.Senior Partner,Head, IP & IT,Lee & Lee Kuala Lumpur, July 2008

2. Typical Dispute Areas • Royalty payments • Use of intellectual property rights • Franchisee not adhering to operating protocol • Franchisee engaging in competing business • Claims of misrepresentation • Training • Support

3. Case Examples • Go Go Delicacy Pte Ltd v Carona Holdings Pte Ltd [2008] 1 SLR 161 • Franchise agreement for frankfurters called “GoGo franks” • Sued for breach of franchise agreement and for spoilt/rotting food supplies • Interlocutory application

4. Case Examples • Telestop Pte Ltd v Telecom Equipment Pte Ltd [2004] SGHC 267 • Franchise agreement for operation of “SingTel” mobile phone shops in 1993 • Disagreements and unhappiness arose • Franchisor refused to allow franchisee to relocate loss-making shop • Franchisor started competing with franchisee • Matter only resolved by court judgment after 6 years

5. Relevance of Dispute Resolution Mechanisms • Franchise agreements are complex agreements that often have a long duration • Disputes may arise several years into agreement involving un-contemplated matters • Difference in bargaining power usually places franchisees at a disadvantage

6. Dispute Resolution • Litigation • Arbitration • Mediation

7. Remedies • Damages/Account of Profits • Injunction • Search orders • Delivery up • Costs

8. Litigation • Substantial preparatory work, time and effort • Delays • Costly • Almost inevitably leads to irretrievable breakdown of relationship

9. Alternative Dispute Resolution Mechanisms • Because franchisor and franchisee are bound by contract, it is possible to contract for dispute resolution by alternative means • Arbitration • Mediation • Party control and autonomy

10. Relevance of Dispute Resolution Mechanisms • Reduces uncertainty • Easier to ‘price’ risks involved when entering into franchise • Achieving a commercially sensible solution for all parties concerned without irretrievably breaking down the relationship between franchisor and franchisee

11. Arbitration

12. Arbitration Characteristics • Private proceedings, usually behind closed doors • Useful if franchise involves trade secrets /know how • Parties can appoint a sole arbitrator, or a panel of arbitrators • Parties know who will resolve their dispute

13. Arbitration Characteristics • Arbitrator can be an expert in the field • Helpful if area is technical in nature or requires special knowledge • In certain situations, arbitration award may be enforced in country where loser’s assets are situated • Useful if dispute involves cross-border elements

14. Arbitration • However, arbitration is not necessarily cheaper than litigation in the courts • Arbitrators’ and counsels’ fees have to be paid

15. Arbitration Requirements • Arbitration clause/agreement in writing signed by parties or contained in exchange of letters; • Parties undertake to submit disputes arising from the agreement to arbitration • Choice of arbitrator(s)

16. Arbitration Requirements • Choice of governing law and applicable rules of arbitration • Choice of arbitration institution (ICC/AAA/CIETAC / LCIA / SIAC)

17. Arbitration Typical arbitration clause “Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration in [ country ] in accordance with the arbitration rules of [ arbitration institution ] for the time being in force, which rules are deemed to be incorporated by reference in this clause.“

18. Mediation

19. Mediation Characteristics • Conciliatory, not adversarial, process • Win-win situation sought • Intended to achieve a lasting solution to disputes • Parties appoint 3rd party to serve as a mediator • Mediator can be a person with good knowledge of the business • Mediator’s duty is to facilitate a solution, not to impose his decision upon the parties

20. Mediation • Control over outcome • Parties arrive own decision with help from the mediator • No risk of adverse or unexpected decision being imposed upon the parties • Allows parties to evaluate strength of each other’s cases before deciding whether to proceed further

21. Mediation • Saves “face” • Mediator does not decide who is right and who is wrong • Mediation is “forward-looking”. Focuses on practical solutions to the problem at hand

22. Mediation • Confidentiality • Mediation can take place behind closed doors • No need to address factual issues in open court • Trade secrets will not be divulged • Saves costs • Informal procedure • Can be resolved within a day

23. Mediation • Franchising agreements are long term agreements • Franchisor expends substantial resources creating the system • Franchisee expends substantial resources building infrastructure & receiving training in the system • Thus, it is in both parties’interests to ensure that relationship does not break down

24. Mediation Typical mediation clause “All disputes, controversies or differences arising out of or in connection with this agreement shall first be submitted for resolution by mediation by a single mediator to be jointly appointed by the parties. The parties agree to participate in the mediation in good faith and undertake to abide by the terms of any settlement reached.“

25. Conclusion • Dispute – often painful and expensive • Be wary of disputed areas • Seek appropriate solutions through litigation, arbitration or mediation

26. THANK YOUTan Tee Jim, S.C. tanteejim@leenlee.com.sg