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(Noel Hendrickson/Getty Images)
(Noel Hendrickson/Getty Images)

Commentary

Forced mediation is like forcing a couple to marry Add to ...

Widespread delays in Canada’s courts can be attributed to a number of factors: an underfunded legal aid system, the failure to appoint enough judges to deal with the volume, and the high cost of legal services causing litigants to represent themselves.

Difficulties are encountered by criminal defendants, family law litigants and even judges. Businesses with legal disputes are finding it tougher to get a court date, and even if they do, the date may come and go after many months (or even years) of preparation if there isn’t a judge available.

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Many companies have turned to mediation, arbitration and other alternative dispute resolution (ADR) methods. As an old law professor of mine used to say: “There are pros and cons for, and pros and cons against.”

Mediation is an attempt to settle a legal dispute with the participation of a neutral third party (a “mediator”) who helps both sides reach an acceptable compromise. Mediators don’t make “decisions.” Instead, they help the parties reach a decision that avoids the risks of going to court and one side finding (to its surprise) that the judge has a totally different view of the case than the protagonist.

Mediation differs from arbitration, which is a more formal, quasi-judicial process where the neutral third party (the “arbitrator”) makes a binding award, like a judge would, based on the evidence. Arbitration is conducted in private – the proceedings are not open to the public, nor are the reasons for the judgment publicly available the way they are in court.

Parties can hire an arbitrator with specific skill sets, such as a knowledge of intellectual property, or international trade, or franchising. And if a suitable arbitrator both sides agree on can’t be found, the usual practice is for each party to choose one and then the two arbitrators appoint a third one. Arbitration awards can be entered as judgments in court, and enforced as such.

I’ve been involved in the mediation and arbitration of franchise disputes. With arbitration, it is certainly beneficial to be able to appoint an adjudicator who is experienced, who is knowledgeable about normal and customary business practices, and who knows the case law before walking into the room. In court, one might find eminently qualified judges hearing your case, but their experiences may lie in family or criminal law and not, say, franchising or intellectual property law.

In large cities such as Vancouver, Calgary or Toronto, there is a deep enough pool of qualified arbitrators that in all likelihood, you can get a “trial” before an arbitrator much faster than a trial before a judge. But since each side must pay for their own lawyers as well as the services of the arbitrator – the same long hours of hearings, determination and judgment writing that a judge must spend, plus a bill at the end – they might find dispute resolution through arbitration is just as expensive as court and could even cost more.

Canadian small businesses should resist, where practical, arbitration clauses that require the parties to arbitrate in some far off U.S. state, 1,500 kilometres and one international boundary away, and under the rules of the American Arbitration Association. You’ll be put at a strategic disadvantage by having to resolve your dispute solely through arbitration and only in places such as Atlanta, San Antonio or Denver, using local – and expensive – U.S. lawyers.

In Ontario, Alberta, Manitoba, PEI and New Brunswick, disputes involving breaches of franchise laws must be heard in those provinces and adjudicated under their laws. Unfortunately for residents of British Columbia, Nova Scotia, Newfoundland, Quebec and Saskatchewan, there are no laws to protect franchisees from having to arbitrate disputes in the United States under state laws specified in the contract (and at great expense). As a Vancouver-based franchise lawyer, I believe franchisees who have disputes with their U.S.-based franchisors are unfairly disadvantaged compared with their co-franchisees in provinces where there is legislation that voids governing law and forum provisions from outside their jurisdiction.

Note that Ontario-based franchisors can put B.C.-based franchisees at a disadvantage by requiring disputes to be arbitrated in Toronto.

When I’ve been involved in mediations, the results have been satisfactory for my franchisor clients and for the franchisees on the “other side.” You can get a mediator reasonably quickly. And it’s not like court or an arbitration, where one side wins and the other loses. It’s not a zero sum game. There can be horse-trading and negotiation, which is something that can’t be done in court.

The franchisor might water the wine a little on some issues, or forgive a payment in exchange for something else of value from the franchisee. There are legal costs, to be sure, but they would likely be higher in court and there is always the uncertainty factor: You could lose.

Franchisees should be aware of a few things, though. A franchise agreement between a U.S.-based franchisor and a franchisee in B.C., Nova Scotia, Newfoundland, and Saskatchewan, will normally still require mediation in the city and under the jurisdiction specified under the franchise contract. This could be Atlanta, Dallas, or Wasilla, Alaska.

Second, even though there may be a clause requiring the parties to mediate before litigation, does that mean they must seriously mediate and resolve the dispute, or does it simply allow them to sit on their hands and look out the window for a day or two, exhausting the franchisee’s financial resources in the process, with the franchisor using delay and procedure to win a war of attrition?

I’m actually thinking of removing mediation clauses from the agreements I write for franchisors, and asking to have them removed from the ones I negotiate for franchisees.

If the parties truly want to mediate, they’ll do it regardless of what the words of the agreement say. An agreement that “forces” the parties to mediate is like an agreement that forces a couple to get married. It won’t be cheap, it won’t last, and it’ll end in tears, metaphorically and otherwise.

Tony Wilson  is a franchising, licensing and intellectual property lawyer at  Boughton Law Corp.in Vancouver, he is an adjunct professor at Simon Fraser University (SFU), and he is the author of two books: Manage Your Online Reputation, and Buying a Franchise in Canada. His opinions do not reflect those of the Law Society of British Columbia, SFU or any other organization.

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