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FRANCHISING - Franchise agreement - Arbitration

Thursday, May 03, 2018 @ 7:44 AM  

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Appeal by the franchisor from the dismissal of its appeal from an arbitrator's decision that the two-year limitation period had not expired and arbitration could proceed. In 2008, the parties entered into a franchise agreement for the development of 13 "Le Pain Quotidien" locations in Ontario and Quebec. In 2009, the franchisee delivered a notice of rescission asserting that the franchisor had breached its disclosure obligations. The franchisor disputed the validity of the franchisee's notice of rescission. Almost two years later, the franchisee commenced an action. The franchisor objected on the grounds that the franchise agreement required that disputes be mediated and then arbitrated. The franchisee claimed that the mediation requirement was void because it required mediation in Delaware and, in any event, the entire franchise agreement was void because of the franchisor's breaches. The action was dismissed for delay in 2013. The franchisee tried to revive the action, but it was stayed on the basis of the ADR provisions. The parties appointed an arbitrator and the franchisor brought a preliminary motion to dismiss the arbitration as out of time. The arbitrator determined that the arbitration was not time barred. The franchisor appealed. The appeal judge dismissed the appeal. He concluded that the arbitrator's finding that mediation was a precondition to arbitration was based on a reasonable interpretation of the franchise agreement. He also upheld the arbitrator's determination that the Delaware provision was severable. The franchisor appealed arguing that both the arbitrator and the appeal judge erred in their interpretation of the franchise agreement and the relevant statutory provisions in refusing to allow its preliminary motion to dismiss the arbitration as out of time.

HELD: Appeal dismissed. The arbitrator was engaged in the determination of an issue that depended on the interpretation of the parties' contract and the application of relevant legal principles to determine whether the time for commencement of the arbitration process had expired. There was nothing about the issue decided by the arbitrator that displaced the presumptive standard of reasonableness. The arbitrator's decision that the arbitration was not time-barred was reasonable. The conclusions that lead to that decision were also reasonable. The parties' agreement provided for mediation as a precondition to arbitration, which had the effect of suspending the running of the limitation period. This did not make the limitation period uncertain as the franchisee was required under the agreement to provide notice of an alleged breach within one year. The two-year limitation period for arbitration began on the date that mediation was deemed complete as that was the date when the parties knew arbitration was appropriate. The requirement that mediation occur in Delaware could be severed from the agreement as that was the only part of the provision that offended s. 10 of the Arthur Wishart Act. Removal of the requirement to mediate in Delaware would uphold the ADR process the parties agreed to and cure the illegality in the provision, while remaining close to the parties' intention.

PQ Licensing S.A. v. LPQ Central Canada Inc., [2018] O.J. No. 1761, Ontario Court of Appeal, R.J. Sharpe, H.S. LaForme and K.M. van Rensburg JJ.A., April 5, 2018. Digest No. TLD-April302018008