Arbitration Agreements and the Franchise Dispute: the Likely, the Unlikely and the Imponderable
Crafting the Arbitration Agreement
The best way to avoid a contest over the enforceability of an arbitration agreement is to draft a complete code of procedure or incorporate by reference the rules of a recognized arbitration body such as the American Arbitration Association[9] or the ADR Chambers[10]. If the procedure is drafted within the franchise agreement or an Appendix, it should specify the following elements:
- How will the specific arbitrator be chosen?
- What rules will govern?
- Which disputes are exempted from arbitration, i.e. injunction applications and trademark disputes;
- What recourse is available if the other party does not comply with a Notice of Arbitration or submit a defence to the arbitration: Will the arbitrator be permitted to grant default judgment? If so, under what circumstances?
- Where will the arbitration be held?
- Which province’s arbitration legislation will govern?
- Who will bear the cost of the arbitration?
- Will there be any oral discovery prior to the hearing?
- Can the arbitration decision be appealed?
- Whether the arbitration agreement will remain in full force and effect notwithstanding the Agreement’s expiration or termination.
The arbitration agreement should also be referenced in any guarantees collateral to the franchise agreement in order to be binding on the guarantors. The arbitration agreement should state that it is made for the benefit of the franchisor, its officers, employees, agents, subsidiaries, affiliates and assigns such that the franchisee cannot attempt to remove the dispute from arbitration by joining parties not privy to the arbitration agreement.[11]
Conclusion
The decision to include an arbitration agreement in a franchise agreement is an important one to be made in consultation with the franchisor-client. Arbitration agreements are often the first target of attack by most franchisees and therefore should be carefully thought through and not considered as mere boilerplate. The arbitration agreement should be tailored to the types of disputes which the franchisor expects to encounter most frequently. Careful consideration should also be given to which disputes are to be excluded from arbitration.
There are many sources for good precedent agreements. Many of the independent arbitral institutes offer detailed Arbitration Rules on their websites which may be incorporated by reference into the arbitration agreement. If the franchisor wishes to draft its own rules, these should be set out in a customized procedure attached as an Appendix to the franchise agreement to allow for sufficient detail. Whatever arbitration procedure is selected, it should be fair and balanced in order to ensure that it will withstand judicial scrutiny, if necessary.
[1] According to a recent article, roughly half of all leading U.S. franchisors’ franchise agreements contain arbitration clauses: “Green Tree Financial Corp. v. Bazzle: More for the Arbitrator’s Plate” Franchising World, November/December 2003, p. 57
[2] See for example the Rule No. 7 of the ADR Chambers:
7. Privacy and Confidentiality of Arbitration
7(1) All arbitrations held with ADR Chambers are private and confidential. The parties and their representatives shall attend the arbitration. All other persons may only attend with the consent of the parties and the arbitrator(s).
7(2) Unless otherwise agreed by the parties or required by law, all hearings, meetings, and communications shall be private and confidential as between the parties, the arbitrator(s) and ADR Chambers.
7(3) Unless the parties agree to the contrary, or a party to binding dispute resolution appeals to court, all proceedings in ADR Chambers are private and confidential. All documents and exhibits filed are private and confidential.
[3] See Kanitz et al. v. Rogers Cable Inc. (2002), 58 O.R. (3d) 299. Two previous attempts by franchisors to stay a class action commenced in breach of binding arbitration agreements were unsuccessful: Hammer Pizza Ltd. v. Domino’s Pizza of Canada Ltd. [1997] A.J. No. 67 (Alta. Q.B.); Rosedale Motors Inc. v. Petro-Canada Inc. (1998), 42 O.R. (3d) 776 (Gen. Div.)
[4] It remains to be seen whether the Canadian courts will follow the U.S. Supreme Court in recognizing the possibility of class arbitrations: See Green Tree Financial Corp. v. Bazzle (02-634). The Court in Green Tree held that it is up to the arbitrator to decide whether parties in an arbitration proceeding actually agreed that their dispute could be decided on a class-wide basis. The Court said that a court’s role is limited to determining whether the parties have agreed to arbitration; once that determination is made, all further issues of contract interpretation are to be decided by the arbitrator.
[5] For example, section 17(1) of the Arbitration Act, S.O. 1991, c. 17 (“Arbitration Act“) states that an arbitral tribunal may rule on the validity of an arbitration clause, and its own jurisdiction.
[6] Cash Converters Canada Inc. v. 1167430 Ontario Inc. [2001] O.J. 5860 (S.C.J.); D.L.T. Holdings Inc. v. Grow Biz International, Inc. (2001), 199 Nfld. & P.E.I.R. 135 (P.E.I.S.C.T.D.); D.L.T. Holdings Inc. v. Grow Biz International, Inc. [2000] P.E.I.J. No. 95 (P.E.I.S.C.T.D.); Ellis v. Subway Franchise Systems of Canada Ltd. (2000), 8 B.L.R. (3d) 55 (S.C.J.); 711447 Alberta Ltd. v. Sarpinos Enterprises (Canada) Ltd. [2000] A.J. No. 1121 (Alta. Q.B.); Hammer Pizza Ltd. v. Domino’s Pizza of Canada Ltd. (supra); Bab Systems, Inc. v. McLurg; Bab Systems, Inc. v. McLurg, [1994] O.J. No. 3029 (Ont. Gen. Div.) aff’d [1995] O.J. No. 1344 (Ont. C.A.); 151429 Canada Inc. v. Scaletta [1991] M.J. No. 235 (Man. Q.B. Master); Under the former Arbitrations Act, R.S.O. 1970, c. 25, s. 7: Jussem et al. v. Nissan Automobile Co. (Canada) Ltd. et al. [1973] 1 O.R. 697 (H.C.J.)
[7] Section 50, Arbitration Act
[8] The vast majority of arbitrations agreements are upheld by the courts in Ontario. See for example Kaverit Steel and Crane Ltd. v. Kone Corp., [1992] A.J. No. 40 (Alta. C.A.); Gulf Canada Resources Ltd. v. Arochem International Ltd., [1992] B.C.J. No. 500 (B.C.C.A.); Automatic Systems Inc. v. Bracknell Corp., [1994] O.J. No. 828 (Ont. C.A.); BWV Investments Ltd. v. Saskferco Products Inc., [1994] S.J. No. 629 (Sask. C.A.); Prince George (City) v. McElhanney Engineering Services Ltd., [1995] B.C.J. No. 1474 (B.C.C.A.); Duferco International Investment Holding (Guernsey) Ltd. v. Pan Financial Insurance Co., [1996] O.J. No. 549 (Ont. Gen. Div.); Nutrasweet Kelco Co. v. Royal-Sweet International Technologies Ltd., [1997] B.C.J. No. 332 (B.C.S.C.); NetSys Technology Group AB v. Open Text Corp., [1999] O.J. No. 3134 (Ont. S.C.J.); Turnbridge (c.o.b. Turnbridge & Turnbridge) v. Cansel Survey Equipment (Canada) Ltd., [2000] B.C.J. No. 333 (B.C.S.C.)
[10] See www.adrchambers.com/arbrules
[11] See for example Hammer Pizza v. Domino’s (supra) where the franchisor sought to rely on an arbitration agreement while, at the same time, seeking to add parties to the arbitration who had not signed the arbitration agreement.