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Mediation and Arbitration Provisions in Franchise Agreements - Part 1

March 12, 2019

Are Parties Other Than the Franchisor and the Franchisee Bound by the Mediation or Arbitration Provision?

It is not uncommon for franchise agreements to include provisions requiring the parties to resolve any future disputes that may arise between them by means of alternative dispute resolution, such as mediation and/or arbitration, instead of by commencing a court lawsuit.

The inclusion of such mediation and arbitration provisions in the franchise agreement can further the intention of one or both of the contracting parties. For instance, franchisors often favour such provisions because of the private and confidential nature of mediations and arbitrations; disputes are capable of being aired “behind closed doors”, without the disclosure to the public of information potentially damaging to the brand, or of trade secrets. Franchisees sometimes favour mediation provisions because mediation can stand as an obstacle to the commencement of costly litigation by the franchisor. In the case of arbitration provisions, both parties stand to benefit from being able to select the arbitrator, instead of allowing the dispute to be decided by an unknown judge.

This series will describe some of the franchising-specific considerations that have emerged as a result of recent court cases, with respect to both the drafting and interpretation of mediation and arbitration provisions. In this article, we consider the following question:

Are Parties Other Than the Franchisor and the Franchisee Bound by the Mediation or Arbitration Provision?

Typically, mediation or arbitration provisions are drafted in a way that expressly bind only the franchisor and the franchisee. But what if the dispute involves parties related to the franchisor, such as “franchisor’s associates” under the Arthur Wishart Act? And what about the shareholders or principals of the franchisee, in cases when the franchisee is a corporation?

In the 2017 decision, Kanda Franchising Inc. v. 1795517 Ontario Inc.[1], the Ontario court had occasion to consider that issue from the perspective of parties related to the franchisee. That decision concerned the interpretation of an arbitration clause contained in a franchise agreement. The individual principals of the franchisee were not parties to the franchise agreement and did not consent to participate in arbitration. Moreover, the arbitration clause itself referred only to the franchisor and the franchisee and not to the individual principals or other related parties. Accordingly, the court concluded that the individual principals were not bound to the arbitration clause and could not be compelled to submit to arbitration.

Hoffer Adler LLP acted for the individual principals in that litigation.

From the perspective of parties related to the franchisor, the Ontario court reached a different conclusion in the 2011 decision, Adlakha v. Meehan.[2] In that case, the franchisees sought to rescind their respective franchise agreements. The franchise agreements contained an arbitration provision. The defendants to the lawsuit included not only the corporate franchisor, but also a number of related parties, including individuals alleged to be the franchisor’s principals. While the corporate franchisor consented to participate in an arbitration of the rescission claim, the related parties refused to, on the basis that they were not parties to the franchise agreement or the arbitration provision it contained. Nonetheless, the court found that all of the related parties were bound by the arbitration provision and required to submit to arbitration. The court’s conclusion was based on the fact that the arbitration agreements contained references throughout not just to the franchisor but also the franchisor’s “affiliates”. The court also was mindful of the fact that some of the related parties were alleged to be “franchisor’s associates” within the meaning of the Arthur Wishart Act.

The uncertainty giving rise to the disputes in both Kanda and Adlkaha may well have been avoided through more careful drafting of the subject arbitration clause. Parties drafting or negotiating a franchise agreement that includes a mediation or arbitration clause should carefully consider both (i) whether they mutually intend non-parties to be bound to it, and (ii) whether the mediation or arbitration provision is drafted in a way that accomplishes the parties’ intention.

 


[1] 2017 ONSC 7064 (S.C.J.): http://canlii.ca/t/hp0lc

[2] 2011 ONSC 444 (S.C.J.): http://canlii.ca/t/2fcx4