Ontario – arbitrator appointment procedure in franchise agreement risks “absurd and likely unfair result” – #178

In Eggiman v. Martin, 2019 ONSC 1388, Mr. Justice Wolfram Tausendfreund exercised his discretion to refuse a partial stay because the claims subject to arbitration were based on closely related facts and issues in dispute and a partial stay would likely bifurcate the claims, leading to a multiplicity of proceedings. In addition, Tausendfreund J. considered that the right of a franchisor to appoint the arbitrator for a dispute between franchisee and sub-franchisees would lead to “the absurd and likely unfair result of allowing [that party] to either appoint the arbitrator or effect control and/or direct the arbitration of this dispute”.

TDL Group Corp. (“TDL”), a corporation responsible for issuing licences to operate Tim Hortons restaurants, signed two (2) franchise agreements with Plaintiffs.  The 2004 and 2009 franchise agreements authorized Plaintiffs to become franchisee-operators of two (2) locations in Belleville, Ontario and to appoint an operator for each restaurant, subject to TDL’s approval.

Three (3) individuals (the “Martin Defendants”) were represented by TDL to Plaintiffs in September 2012 as potential operators for the Belleville restaurants based on the Martin Defendants’ prior involvement in owning Tim Hortons restaurants in Oshawa and Whitby. 

Based on TDL’s referral, Plaintiffs signed a sub-franchisee agreement (“Operating Agreement”) with each of the Martin Defendants to operate the Belleville restaurants, each of which contained the same arbitration clause:

All matters in difference between the parties in relation to this Agreement shall be referred to the arbitration of a single arbitrator appointed by TDL, which shall either be an employee of TDL or a third party arbitrator, at TDL’s discretion.  The award and determination of the arbitrator shall be binding upon the parties and their respective heirs, executors, administrators and assigns.

TDL was not a party to either Operating Agreement and not bound by the agreement to arbitrate.

Plaintiffs alleged that TDL highly recommended the Martin Defendants but failed to disclose to Plaintiffs prior, grave misconduct of one of the Martin Defendants (“SM”) at the Oshawa and Whitby restaurants. 

In his reasons, Tausendfreund J. states that SM’s conduct had attracted investigation at the time and, later, lead to: (i) a July 22, 2016 civil lawsuit by the victim (“P”) against SM, the corporate Plaintiff, the corporate Martin Defendant and TDL; and, (ii) a December 15, 2017 criminal conviction for SM following a trial on charges under section 153(1)(a) of the Criminal Code, RSC 1985, c C-46

In response to the civil action by P, Plaintiffs filed a cross-claim against the Martin Defendants and TDL seeking contribution, indemnity and relief over.  At paras 11-15, Tausendfreund J. summarizes the key allegations made in P’s action and the key allegations made by Plaintiffs against the Martin Defendants and TDL.

In Plaintiffs’ cross-claim, the Martin Defendants applied for a stay in favour of arbitration, relying on section 7(1) of the Arbitration Act, 1991, SO 1991, c 17

Having first noted section 138 of the Courts of Justice Act, RSO 1990, c C.43 which urges that “[a]s far as possible, multiplicity of legal proceedings shall be avoided”, Tausendfreund J. next looked to Haas v. Gunasekaram, 2016 ONCA 744 para. 17 for guidance on how to approach section 7.

[17] An analytical framework has emerged from the jurisprudence. It breaks the judge’s task of considering a stay under s. 7 down into a number of sub-issues:

(1)  Is there an arbitration agreement?

(2)  What is the subject matter of the dispute?

(3)  What is the scope of the arbitration agreement?

(4)  Does the dispute arguably fall within the scope of the arbitration agreement?

(5)  Are there grounds on which the court should refuse to stay the action?

Tausendfreund J. addressed each of the issues in turn.

1. Each Operating Agreement contained an arbitration clause but TDL was not a party to them.

2. The subject matter of the dispute involved the Martin Defendants’ performance of each Operating Agreement and the termination of those same agreements.

3. Relying on Dancap Productions Inc., v. Key Brand Entertainment, Inc., 2009 ONCA 135 para. 38, Taunsendfreund J. referred to the Court of Appeal’s determination that “relating to” language “has been generously interpreted to enjoy “a wide compass”” and to favour arbitration over litigation.

4. and 5. Tausendfreund J. combined both and analysed them together.

He distinguished Haas v. Gunasekaram, 2016 ONCA 744 from the case before him. All the parties in Haas v. Gunasekaram had signed the contract containing the agreement to arbitrate whereas TDL was not a party.

[26]  As TDL is not a party to the arbitration clause, a stay as sought by the Martin Defendants would not include the Plaintiffs’ claim against TDL and the counterclaim of TDL against the Plaintiffs.  That leads me to consider s. 138 of the Courts of Justice Act and that a stay would probably result in a multiplicity of legal proceedings.

He considered the courts’ handling of a partial stay in Radewych v. Brookfield Homes (Ontario) Ltd., 2007 ONCA 721 para. 3, Wellman v. TELUS Communications Company, 2017 ONCA 433 para. 72 and Graves v. Correactology Health Care Group Inc., 2018 ONSC 4263 para. 63.  Those cases; (i) noted that ordering a partial stay was an exercise of the court’s discretion; (ii) cautioned a partial stay should only be granted where it is reasonable to separate the matters dealt with in arbitration from the others; and, (iii) expressed concern not to create/lead to delay, multiplicity of proceedings, potentially inconsistent findings or duplication of resources.

Based on the applicable legislation and the approach set out by the courts, Tausendfreund J. held that Plaintiffs’ claims against the Martin Defendants and TDL are “based on closely related facts and issues in dispute” and that a partial stay would “for that reason, likely lead to bifurcate the Plaintiffs’ claims and give rise to “a multiplicity of legal proceedings” focused on those same factual and legal issues” and a partial stay was therefore “not reasonable”.

Having decided that a partial stay was not appropriate, Tausendfreund J. went on to consider the terms of the arbitration clause.  His additional observations could be considered as either obiter or an alternative ground.  He focused on the wording of the arbitration agreement which give TDL, the franchisor, the right to appoint the arbitrator in the dispute between the franchisees and sub-franchisees : “a single arbitrator appointed by TDL, which shall either be an employee of TDL or a third party arbitrator, at TDL’s discretion”.

TDL may not be a party to the arbitration agreement but, unlike an independent institution which administers arbitrations for the parties, TDL would be closely involved in the disputes.

[31] Additionally, I am concerned that if a stay were granted, s. 20 of the Operating Agreement would likely lead to the absurd and likely unfair result of allowing TDL to either appoint the arbitrator or effect control and/or direct the arbitration of this dispute.

Given that he had refused a partial stay, Tausendfreund J. did not need to develop his response or tie his comment of “absurd and likely unfair result” to any of the provisions of the Arbitration Act whose variance or exclusion may or may not be the subject of a valid agreement between the parties.

Section 3 of the Arbitration Act acknowledges that parties to an arbitration agreement may agree, expressly or by implication, to vary or exclude a provision of the Arbitration Act except those listed in section 3.  The list at section 3, para. 1(ii) includes section 19(1) which requires that the parties shall be treated equally and fairly.  Parties to arbitration agreements may not vary or exclude this provision.

In contrast, the list at section 3 para. 1 does not include mention of: section 6(3) of the Arbitration Act – a court can intervene to prevent unequal or unfair treatment of parties to arbitration agreements; or, section 7(2) of the Arbitration Act – a court can refuse a stay if the arbitration agreement is invalid.   The arbitration clause in the Operating Agreement, as excerpted in the reasons, does not purport to make any agreement, express or by implication, to vary or exclude these provisions so the agreement to allow TDL to control the appointment could fall under one or more of these sections and trigger the court’s intervention.

Had the issue of a partial stay not been raised, the court and the parties would have had to deal in more detail with the arbitration agreement’s validity and potential for unequal and unfair treatment.