Resolving a dispute through arbitration can be faster, cheaper and more confidential than doing so through litigation. If the arbitration clause is not properly drafted, however, the dispute resolution may be slower, more expensive and aired in public because the parties ask a court to decide preliminary issues that have no impact on the real dispute. To avoid losing the benefits of arbitration, the arbitration clause should address at least these seven issues:
- Appointing an arbitrator: The arbitration clause must set out the process by which the arbitrator is appointed. If the clause does not explain how this critical first step is accomplished and the parties are unable to agree, they will end up in court asking a judge to appoint the arbitrator. If the parties are using an arbitral institute to appoint the arbitrator, make sure the institute (a) exists, (b) has a process for appointing a qualified arbitrator reasonably quickly, and (c) charges reasonable fees.
- Jurisdiction: The arbitration clause must grant the arbitrator the jurisdiction to decide the dispute in question. The courts have taken a highly technical approach to interpreting arbitration clauses, so parties should use simple, clear language. Finally, if one or both parties could potentially need urgent relief (e.g., an order requiring the franchisee to return confidential information), the clause should expressly give the arbitrator the jurisdiction to grant interim relief.
- Consistency with other agreements: The arbitration agreement could incorporate disputes under related agreements (i.e., leases, assignments and guarantees) to ensure that the entire dispute is arbitrable. Parties should also consider whether any other individuals should be party to the arbitration agreement (such as guarantors) to ensure that all of the necessary people are bound by the agreement.
- Confidentiality: Include provisions ensuring that the parties preserve the confidentiality of key documents, such as operating manuals.
- Location, location, location: Three locations matter in arbitration: the law governing the franchise agreement, the physical place of the arbitration hearing and the procedural law governing the arbitration (also known as the “seat” of the arbitration). The three locations can be different. The arbitration clause should specify the procedural law that applies (so that the parties know which law governs appeals and other procedural rights) and the physical place of the arbitration (including the option to hold the hearing by phone or video conference). If the arbitration clause refers to an arbitration statute, make sure it is the right one because provinces have both a domestic and an international statute.
- Appeal rights: The arbitration clause should specify whether parties can appeal and, if so, to whom (e.g., another set of arbitrators or a court) and whether appeals are limited to questions of law. Arbitration clauses cannot prevent all appeals (because courts retain jurisdiction to overturn arbitration awards that offend natural justice), but appeals can be limited.
- Status quo clauses: If it is important that the parties continue to perform their obligations while the dispute is being resolved, the arbitration clause can require that the parties continue to carry out the agreement in good faith regardless of the dispute.
If arbitration is the right approach to resolve disputes in the franchise system, make sure that the arbitration clause is drafted to generate all the benefits that arbitration can offer.