Is a compulsory mediation clause worth the paper its written on?

Most franchise agreements contain compulsory provisions requiring the parties to work through a dispute resolution process, usually ending in Mediation. These clauses are generally known as “dispute resolution” clauses.


Some such clauses require the parties to exhaust the dispute resolution process before court proceedings can be taken, except where there is the need to obtain interim relief, such as, for example, an interim injunction to stop someone from breaching a restraint of trade clause. It always stands to reason that an interim remedy should be permitted to bypass dispute resolution, which can waste valuable time.

Where, however, the dispute is really just one arising out of non-payment of franchise fees, the franchise is in a precarious financial position, and the franchisor wants to act quickly to secure a court judgment before other creditors line up, ought the franchisor have to plough through a dispute resolution process which might, after all, only lead to the inevitable outcome of no reasonable offer being made, or ought they be able to bypass dispute resolution and go straight to Court?

The answer to this question will of course, most of the time, be found in the provisions of the dispute resolution clause itself. Added to that, each case will always turn on its own facts.

A recent High Court case considered the issue of compulsory dispute resolution clauses and whether they continued to apply once Court proceedings had been filed. The case is a good example of the way in which the Courts interpret compulsory dispute resolution clauses.

In reciting the facts below, I have not repeated every single fact which arose in the case, but have attempted to confine this narrative to facts of key importance.

In Waterco (NZ) Ltd v Simpson the claimant was the franchisor of Swimart, a system of pool and spa retail outlets in New Zealand and Australia. Daco Investments (Glenfield) Ltd and its related company, Daco Investments Parnell Ltd purchased a number of Swimart franchises. The obligations of Daco as franchisee were guaranteed by its directors, who were the defendants in the case.

It was alleged that in September 2010, the franchisee fell into default under its franchise agreement in that it failed to pay sums due under its trading account. Mediation was proposed by one of the director/ guarantors. There was a meeting attended by the parties, however no independent facilitator or mediator was appointed to attend the meeting and the meeting was not followed up by mediation.

In October 2010 receivers were appointed by the franchisor under various security agreements. The appointment of receivers was a ground for immediate termination of the relevant franchise agreements, upon written notice being given. However, no written notice of termination was given at that time.

The franchisor eventually made formal demand of the defendants as guarantors on 29 June 2011.

On 29 July 2011, the receivers retired. The franchisor eventually issued proceedings in the High Court seeking judgment for all amounts owed by the franchisee.

The Defendants complained that dispute resolution under the agreements had not been fully exhausted and asked the Court to stay (stop/put on hold) the case, pending the outcome of the parties following through with the dispute resolution process set out in the franchise agreement.

That process provided that a party could not commence court proceedings or arbitration relating to any dispute with any other party to the franchise agreement where a dispute had arisen and the process for a resolution of that dispute had not been complied with. There was an exception where there were events which gave rise to the right to immediately terminate the franchise agreement.

The plaintiff franchisor argued that the dispute resolution clause did not apply to the dispute. One of the reasons was there had been the right of immediate termination, being the appointment of a receiver.

The Judge’s findings

In considering the relevant law, the Judge commented that an agreement to go to mediation will be enforced by the Court where the agreement is certain and/or is appropriate to do so. However, even where that is the case, a Judge always has a discretion as to whether legal proceedings, once started, ought to be put on hold or allowed to continue, where dispute resolution under the agreement has been invoked.
Some of the factors that will tell against putting legal proceedings on hold, pending the outcome of mediation and a dispute resolution clause, will include:
a) where there has been a period of prolonged and extensive negotiation over a period of years, b) where not all the parties to the litigation were parties to the agreement containing the mediation clause,
c) where neither party had sought to hold a mediation prior to proceedings issuing,
d) where there were matters likely to hinder the mediation such as a lack of proper disclosure of documentation,
e) where not all of the disputes were covered by the dispute resolution clause, with the effect hat the dispute resolution process might become fractured.

The Judge found that under the agreement, the exception (the right to immediately terminate) did not apply to the facts of the case, because no notice of termination had been issued. On the face of it, the parties were therefore required to work through the dispute resolution clause.
However he then went on to consider whether any of the above factors in a) to e) applied, such that the proceedings should not be stayed. On that aspect, he found that there would be no great delay by staying the proceedings for a short period and giving the parties the opportunity to comply with dispute resolution. He found that there were clear advantages in that process at least being attempted. He stated that he saw little disadvantage to the plaintiff requiring it to follow the dispute resolution process and granted a stay in the proceedings for 80 days to allow dispute resolution to proceed.

Conclusion

When parties agree to a particular dispute resolution process, there is an underlying assumption that they have turned their minds to how they would like their disputes to be resolved at the outset of their contract and, at least in the Swimart case, that they have specifically chosen an out-of-court procedure to apply before resorting to court proceedings.

There are very good commercial reasons, which I have covered in earlier articles, why parties to franchise agreements, elect to insert such dispute resolution clauses into their agreements. People want certainty about what will happen in the event of a dispute. There will always be occasions where dispute resolution is inappropriate, for example in cases of interim relief, however that can be provided for in the agreement and usually is.

This case serves as a good example of the Courts reflecting the commercial need for reliability in the strength of such clauses. If they can’t be enforced, these dispute resolution clauses will be perceived as having very little teeth or firepower behind them. What’s the point of having an obligation in an agreement which is not an obligation at all?

The case is therefore also a good example of the need to ensure these issues are covered carefully and ironed out within the body of the franchise agreement itself, so that nothing is left to chance or double interpretation.