Arbitration Agreements and the Franchise Dispute: the Likely, the Unlikely and the Imponderable
Drawbacks of Arbitration to Franchisors
Not all disputes should be arbitrated
Despite these advantages to franchisors, drafters of franchise agreements should not automatically require every dispute arising during the course of the franchise relationship to be arbitrated. It is necessary in each case to consider restricting the ambit of the arbitration clause or dispensing with arbitration altogether. Deciding whether or not to include an arbitration clause in a franchise agreement requires the drafter and the franchisor-client to consider what types of disputes are most likely to arise in the course of the relationship. If the franchisor is unlikely to be a plaintiff, then a broadly drafted arbitration agreement covering all disputes between the parties may serve its purpose by limiting the franchisee’s access to the courts and corresponding discovery rights.
On the other hand, if the franchise agreement incorporates by reference other agreements, such as real estate leases, security agreements or promissory notes then care must be taken to ensure that the arbitration agreement does not inadvertently restrict the franchisor’s ability to exercise self-help remedies. Consider for example the case of a franchisor which subleases to the franchisee and wishes to terminate the sublease due to the franchisee’s failure to pay rent. An arbitration clause requiring the parties to submit “all disputes between the franchisor and the franchisee” to arbitration could be seen to make arbitration a condition precedent to re-entry. In this case, the arbitration agreement would have the unintended result of preventing the franchisor from exercising the self-help option which would otherwise be available. The franchisee could compel arbitration of a lease dispute simply to prevent or delay the termination of the lease.
Necessity of recourse to the courts
The primary purpose of arbitration is to avoid the costs and delays inherent in the court process. In an ideal setting, arbitration would never require court intervention. In order to achieve this ideal setting both parties must, to a certain extent, “buy into” the process. The existence of an arbitration agreement does not guarantee that the franchisee will cooperate in bringing the dispute forward before a privately-retained arbitrator. Unlike conventional litigation, arbitration does not offer the “Damocles sword” of default judgment for uncooperative or non-responsive defendants absent specific wording in the arbitration agreement to that effect.
A franchisee in fact has several opportunities to contest the arbitration process and, when faced with few options, will not be afraid to use them. The most common disputes arise over either the enforceability or the scope of the arbitration agreement. This will often occur where a franchisee alleges undue influence, fraud or unconscionability or wishes to assert a counterclaim based on these grounds. Despite the fact that most arbitration statutes give arbitrators the power to rule on their own jurisdiction[5], a franchisee may still commence an action and force the franchisor to seek a ruling from the court on whether these issues fit within the scope of the arbitration agreement. Given the amount of jurisprudence on the subject, these disputes arise with considerable regularity in the franchise context.[6]
A franchisee can also dispute the franchisor’s choice of arbitrator. Unless the agreement provides a mechanism for choosing an arbitrator or arbitration panel, a franchisee can dispute the appointment of the arbitrator and require the franchisor to bring an application under section 10 of the Arbitration Act (or similar legislation in other provinces) to confirm the appointment. These applications tend to be straightforward, but can result in several months of delays.
A third opportunity to dispute the process is after the arbitrator has rendered his or her Award. In order for the Award to be enforced in the same manner as a court judgment, the successful party must bring an application to the court, on notice to the opposite party[7]. This procedure affords the franchisee another, albeit slim, opportunity to dispute the legitimacy of the arbitration process and the arbitrator’s jurisdiction.
By the time arbitration is invoked, the franchise relationship has usually deteriorated to the point where the parties do not consider that there is much goodwill to be salvaged. Very often the outcome of the arbitration will determine whether the franchisee will succeed or fail, and franchisees therefore feel justified in employing no-holds-barred tactics. Even if the franchisee stands little chance of successfully disputing the enforceability of a broadly worded arbitration agreement[8], such disputes can delay the process for months or years and effectively require the franchisor to litigate both in court and in an arbitration setting.