Legal Enforcement of International Franchise Relationships

U.S. franchisors tend to structure domestic franchise arrangements by contemplating almost every undesirable eventuality. Most franchisors structure domestic franchise arrangements to provide remedies for every "worst case" scenario. For franchisors, fighting a domestic dispute in an adversarial proceeding is not unusual, while often disregarding the possible desirable outcome of attempted resolution efforts.

When U.S. franchisors structure international franchise arrangements, they too often take the domestic approach that they are accustomed to, only to later realize that the rules change and that engaging in disputes in foreign adversarial proceedings can be substantially more difficult, expensive and time consuming than the domestic judicial battles to which they are accustomed. Many franchisors find that a domestic kitchen-sink approach to drafting international franchise agreements is frequently a "turn off" to prospective international franchisees. In many cases, broad inclusion of standard domestic requirements appropriate for a domestic arrangement could be characterized as a knee-jerk response, wholly inappropriate for an international transaction setting the arrangement up for immediate confrontation or failure, simply due to lack of forethought. For example, provisions governing events of default that subject the franchisee to automatic termination without notice, mandatory contributions to advertising funds, mandatory accounting reviews, certain concepts of equity and even jury trials are not always appropriate for inclusion in international franchise agreements. Such forced inclusions by the franchisor are often an initial recipe for disaster.

While all lawyers approach tasks differently, it should be incumbent upon them to approach litigation in the international arena with a different view than in the United States. This is especially true at the onset of a franchise arrangement in a country or jurisdiction that is completely unfamiliar to the franchise system and probably to the lawyer. This is where choice of law and forum can be the most effective enforcement tools even though there are no pending disputes and the relationship is in its infancy. Be keenly aware of countries that impose limitations on litigation, damages and jurisdiction, and be careful if the brand intends to agree on a "third party neutral" country as its choice of dispute resolution. The choice of law and jurisdiction can be very complex and time well spent on these aspects will have ultimate positive rewards. Choose the law and forum wisely.