Franchise Arbitration

Franchisors and franchisees (and their respective legal counsel) concerned about the significant costs and delays associated with traditional court litigation should consider arbitration as a means of resolving their disputes. In August, 2014 the Supreme Court of Canada, in a landmark decision, significantly limited the right to appeal a commercial arbitral decision on issues of contract interpretation, making arbitration a very desirable method of dispute resolution in franchise cases.

In recent years growing interest in arbitration arbitration has resulted in the establishment of arbitral institutions like the ADR Institute of Canada, the British Columbia International Commercial Arbitration Centre and private ADR providers like ADR Chambers. These organizations have developed effective and practical arbitration rules and offer institutional arbitration services.

Here are a few comments on the advantages of arbitration in franchise disputes.

As long as the arbitration agreement is properly drafted, arbitration proceedings are private and confidential. No documents are available for public review, and the public cannot attend the proceedings. Consequently, the media cannot access the proceedings and adverse publicity can be avoided.

Conventional litigation trials are heard by a judge who may have no experience or expertise in franchise matters. The arbitration agreement can require that the arbitrator have specialized knowledge of franchising, resulting in a more efficient and predictable hearing. The conduct of the arbitration, including such matters as the number of hearing days, motions, admissibility of evidence, discovery, rights of appeal, the form of decision, and timelines for the proceeding can be specified in the agreement. The agreement can even limit the types of damages that may be awarded or allow the arbitrator to make preliminary findings or grant injunctions. Also, the arbitration agreement may specify grounds of appeal or limit the grounds of appeal. By tailoring the agreement, arbitration can be much quicker than an ordinary judicial proceeding.

Another advantage of arbitration, if the franchise has not been terminated and is ongoing, is the ability to preserve the relationship if the proceeding moves quickly and results in a final decision.

Provincial arbitration legislation states that if a party to an arbitration agreement commences a court proceeding in respect of a matter submitted to arbitration, the court shall stay the proceeding. Arbitration legislation also prevents parties from resorting to a court to rule on validity of the agreement.

Now to the recent Supreme Court of Canada case limiting appeals of arbitration decisions. Under provincial arbitration legislation, appeals of arbitration decisions are limited to questions of law, and leave to appeal is required if the parties do not agree to an appeal on other grounds. In Sattva Capital Corporation v. Creston Moly Corp., 2014 SCC 53, the parties entered into a finder’s fee agreement, but disagreed about the date when the amount should be determined. After several appeals from the decision of the arbitrator, the case went to the Supreme Court of Canada.

The court stated that the principal goal of contract interpretation is to give effect to the intentions of the parties and their understanding at the time of entering into the agreement. Because contract interpretation requires a consideration of the surrounding circumstances and the intention of the parties, interpreting a contract is fact-specific. Accordingly, the historical approach of the courts “according to which the legal rights and obligations of the parties under a written contract was considered a question of law should be abandoned. Contractual interpretation involves issues of mixed fact and law…”.

As a result of this critical decision, the franchise community should give renewed consideration to using arbitration to resolve franchise disputes in order to have a proceeding which will likely be final, binding and non-appealable. But a word of caution: only lawyers experienced in both franchising and alternative dispute resolution should be called upon to prepare the required arbitration clauses, agreements and rules.