In Jamani v. Subway Franchise Systems of Canada Ltd., [2008] A.J. No. 1226, the Alberta Court of Queen’s Bench dismissed an application for leave to appeal an Arbitration Award that ordered the termination of two Edmonton Subway franchises. The arbitrator ordered termination on the basis that the Subway franchisees were operating two Extreme Pita restaurants contrary to the restrictive covenants in the Subway franchise agreements. In dismissing the application for leave to appeal, the court refused to interfere with the findings of the arbitrator and refused to accept the franchisees’ argument that there were questions of law arising out of the arbitrator’s interpretation and application of the franchise agreements to the facts.

Restrictive Covenant

The franchisees held two Edmonton Subway chain franchises. They subsequently purchased two Extreme Pita franchises, also in the Edmonton area. The Subway franchise agreements included a restrictive covenant which provided that no franchisee will

own or operate, or assist another person to own or operate, any other business anywhere, directly or indirectly, during the term of this agreement, which is identical with or similar to the business reasonably contemplated by this agreement.

A dispute about the meaning and enforceability of the restrictive covenant was referred to arbitration. In an award dated February 26, 2008, the arbitrator found that the franchisees had breached the franchise agreements by violating the restrictive covenant in their ownership and operation of “similar businesses,” the two Extreme Pita franchises. The arbitrator also held that penalties to be imposed should include termination of those agreements.

Leave to Appeal Denied

Since the franchise agreements in issue did not contain a provision for appeal from an arbitration decision, leave to appeal was required and only available in this case pursuant to the Arbitration Act, R.S.A. 2000 c. A-43. That statute allows for an appeal on questions of law where “the importance to the parties of the matters at stake in the arbitration justifies an appeal and determination of the question of law at issue will significantly affect the rights of the parties.”

On application for leave to appeal to the Alberta Court of Queen’s Bench, the franchisees contended that the arbitrator erred in her definition of the term “similar,” in her understanding of the law on restrictive covenants, in her conclusion as to the effect of an oral representation on the franchise agreements, and in failing to apply the fair dealing provisions of the Franchises Act, R.S.A. 2000 c. F-23. They also argued that all such errors were errors of law.

The court disagreed with the franchisees, concluding that the alleged errors were not errors of law. Refusing to interfere with the arbitrator’s upholding of the time frame and geographic radius of the restrictive covenant in issue, the court found that the interpretation of the restrictive covenant, particularly with respect to the words “similar” and “reasonably contemplated,” and the application of such interpretation to the facts of the case is, at best, a question of mixed fact and law for which no appeal is available.

Significance of Decision

The court’s refusal to interfere with the arbitrator’s decision to uphold the time frame and geographic radius of the restrictive covenant, and its further finding that the consideration or application of the legal tests in that regard are issues of mixed fact and law, are significant for franchisors who seek to protect their businesses by including such restrictive covenants in their franchise agreements. This decision is particularly important for the franchisor in this case, given Subway’s status as one of the largest global franchisors (if not the largest).