A recent decision of the Ontario Superior Court of Justice has turned on the language of arbitration clauses, emphasizing the need for franchisors to meaningfully contemplate their inclusion and their terms in future franchise agreements.

In a remarkable case for franchisors, 1146845 Ontario Inc v Pillar to Post Inc., 2014 ONSC 7400 (“Pillar to Post”), a proposed franchise class action was dismissed on the basis that the language of an arbitration clause precluded class proceedings.

The case emphasizes the need for franchisors to thoughtfully contemplate arbitration clauses at the drafting stage as the language may be a deciding factor in whether to dismiss or stay future claims. In light of the case summary below, franchisors should take away the following drafting tips:

  • To preclude potential class proceedings, franchisors should include arbitration clauses containing language prohibiting the initiation or participation in class proceedings against the franchisor; and
  • To preclude submission to the courts, if arbitration is the preferred dispute resolution mechanism, franchisors should use broad language to ensure that the terms of the arbitration clause capture all potential disputes that may arise between any potential parties.

In Pillar to Post, the Court granted the defendant franchisor’s motion to stay a proposed class action brought by three (3) franchisees claiming $25 million in general damages. The Court relied on the arbitration clause in the Franchise Agreements, which contained language that precluded the initiation or participation in class proceedings, and dismissed the action against the franchisor. It was held that the franchisees should be held to their agreement to arbitrate and that the enforceability of the arbitration clause was to be determined by the Arbitrator, not the court.

Franchisors are encouraged to include arbitration clauses going forward and can rely on the following principles in contemplating the language at the drafting stage:

  • Arbitration clauses that preclude the initiation and participation in class proceedings are sufficient to warrant a stay or dismissal in court proceedings;
  • Class actions cannot function to circumvent an arbitration clause as the Arthur Wishart Act (Franchise Disclosure) (the “Wishart Act”) does not expressly protect the right to bring a class action;
  • the Wishart Act does not confer exclusive jurisdiction on the courts to resolve franchisor-franchisee disputes; rather, the Wishart Act envisions that parties may arbitrate their disputes if expressly provided for;
  • At first instance, it is for an arbitrator to determine whether disputes between parties are arbitrable and not the court (known as the competence-competence principle);
  • To determine whether a court proceeding should be stayed on the basis of an arbitration clause, the court must interpret the arbitration clause and analyze whether the claim falls within the scope its terms. Where the dispute is contemplated by the arbitration clause, the court shall defer to the arbitrator and, on motion of another party to the arbitration clause, stay the proceeding;
  • Conversely, where the dispute is outside the terms of the arbitration clause or a party to the dispute is not a party to the arbitration clause, the competence-competence principle does not apply;
  • Absent legislation to the contrary, courts must give effect to the terms of an arbitration clause;
  • Where parties have agreed to arbitrate their claims, they should be held to their bargain and not resort to the court; and
  • The issue of whether a class proceeding should be stayed on the basis of an arbitration clause is a matter of statutory interpretation independent of the motives of the parties in seeking arbitration or class proceeding.