Published in Franchise Law Journal, Volume 31, Number 1, Summer 2011. © 2011 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof
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Alternative dispute resolution is often touted as a
necessity in the American legal system to avoid the
high monetary, time, and people costs of litigating.
Given these benets, one would think that prelitigation dis-
pute resolution clauses—contractual clauses that require
parties to mediate or negotiate before they resort to litiga-
tion—would be routinely enforced. The enforcement of such
clauses, however, is not a foregone conclusion.
These clauses are sometimes present in franchise agree-
ments and usually take the form of requiring either party-to-
party negotiation or third-party neutral assisted mediation.
Litigants attempting to enforce such clauses usually assert
that compliance is a condition precedent to initiating litiga-
tion and move either to dismiss or for summary judgment to
effectuate these clauses. Some courts are receptive to enforc-
ing prelitigation dispute resolution clauses based on the
parties’ agreement, but others are more ready to ignore the
clauses and send the matters on their way to litigation.
Courts that do not enforce the provisions often focus on
an ambiguity or failure in the language of the applicable
provision. But concerns about the voluntary nature of dis-
pute resolution by settlement may also play a part in the
reluctance to force parties to attend a mediation or engage
in settlement negotiations even if they contractually agreed
to a provision requiring it. Despite these possible obstacles,
some parties go to great efforts to enforce prelitigation dis-
pute resolution clauses to take advantage of the hoped-for
benets of early settlement efforts.
If one wants to create a prelitigation dispute resolution
provision that is likely to be enforced, the provision should
expressly state that it is a condition precedent to litigation and
should be as specic as possible about the required process.
Likewise, if one wants to enforce a prelitigation dispute reso-
lution provision, the party should bring it to the attention of
the court at the earliest possible point, such as by a motion to
dismiss or a prediscovery motion for summary judgment.
WHY PRELITIGATION DISPUTE RESOLUTION
CLAUSES ARE USED
If prelitigation dispute resolution clauses can be hard to
enforce, why go to the trouble of incorporating them into con-
tracts and taking the time, effort, and risk to enforce them?
The benets to enforcing prelitigation dispute resolution
clauses are much the same as the benets of settling litigation,
but there are additional reasons why some litigants make the
effort to compel dispute resolution at a preliminary stage.
Prelitigation Dispute Resolution Clauses:
Getting the Benet of Your Bargain
ElizabEth M. WEldon and Patrick W. kElly
Elizabeth M. Weldon is a partner and Patrick W. Kelly is an associ-
ate with Snell & Wilmer L.L.P. in Costa Mesa, California.
The most obvious benet of
prelitigation dispute resolution
clauses is that, if successful, they
facilitate settlement between the
franchisor and franchisee before
litigation is led or before it is
pursued to completion. This
saves all parties costs, time, and
risk, such as with discovery dis-
putes, depositions, expert witness
costs, and disruptions in the lives
of the parties, all of which are
often part of litigation.1 Nego-
tiations and mediations, which
the provisions generally require,
are typically fairly short affairs,
often just requiring a one-day
meeting and not requiring the
expenses of discovery or motion
practice. Moreover, negotiations
and mediation may be highly
effective. The mediation success
rate for resolving disputes before
litigation has been estimated to
be 70 percent.2
These clauses allow disputes to be aired and resolved pri-
vately and, particularly if the matter settles, perhaps con-
dentially.3 Parties can listen to and address each other’s
grievances without broadcasting them to the franchise sys-
tem as a whole and without the advocacy and rhetoric that
are usually part of the litigation process.4
This process can increase the odds of a mended relation-
ship. Because alternative dispute mechanisms often seek
or result in compromises between the disputing parties in
which both parties feel as though they have won something
(or, sometimes, both feel they have lost something equal-
ly), there is a greater possibility of a continued relation-
ship between the parties if termination is not a part of the
agreed-upon outcome. This can be particularly relevant in
the franchise arena when concerns about continuing a sys-
tem or a relationship or protecting an investment can be key
to one or both parties.
From the enforcing party’s perspective, compelling com-
pliance with a prelitigation dispute resolution clause gives
meaning to the contract language and the rule of freedom
of contract. The doctrine of freedom of contract stands for
the simple principle that agreements freely and voluntarily
entered into should be enforced.5 Under this principle, par-
ties are generally free to agree to whatever they like, and, in
Patrick W. Kelly
Elizabeth M. Weldon
