can you opt out of ARBITRATION?

In Sure Care Services Ltd and others v At Your Request Franchise Group Ltd and others, an ex-master franchisee pursued its claims against the franchisor in the High Court. At Your Request Franchise Group Ltd, the franchisor, opposed the claims being proceeded with in court claiming that, because the franchise agreement had an arbitration clause and the franchisor had advised the other side that it wanted to proceed through arbitration, it was mandatory for the parties to arbitrate rather than go through the courts.

The Judge agreed with the franchisor that the arbitration clause was valid and that the franchisor had properly elected arbitration, and that there was no reason to hear the claims in the court system.

This case reinforced that if there is a valid arbitration clause in a franchise agreement, and one party clearly elects to have a dispute resolved at arbitration, then the other party is bound to go with arbitration. A well-drafted clause and various other factors worked in the franchisor’s favour this time, but there will be many cases that come out with the opposite result due to unclear drafting or not following proper procedures and people who wish to use arbitration will not have that choice.

Arbitration is a more formal alternative to court than mediation. Formal documents and processes are used, lawyers are almost always involved, the arbitrator is often experienced and knowledgeable in the area of law and commercial disputes, and the arbitrator can make a binding and final decision. Arbitration is often less costly than court proceedings and can be a lot quicker. For these reasons, it is seen as a good option these days for commercial disputes or disputes involving specialised areas such as franchising.

You cannot make the other side go to arbitration; both parties have to agree. But if the franchise agreement specifically says that arbitration will be the process for resolving disputes after mediation has been attempted then, as the above case showed, only one party needs to choose arbitration and the other party will have to accept that choice.

The wording of the franchise agreement around this area is therefore particularly important. If you are a franchisor, check this area with your lawyer when your franchise agreement is being drafted or updated. Decide whether you do want disputes to be able to be referred to arbitration rather than court. Then ask your lawyer to ensure that the wording unequivocally says that this is the path that will be followed and that if one party elects arbitration that is enough to mean that both parties submit to arbitration. The wording might then set out how an arbitrator will be selected, who will pay costs and so on; or it might provide for these things to be governed by identified sections of the relevant legislation and rules. These are specialised clauses and sometimes an old paragraph is used that no-one has reviewed or thought about for years. You need to understand the arbitration clause in your agreement and make sure it works for you.

If you are a franchisee, ask your lawyer if there is an arbitration clause in your franchise agreement, and have it explained how it works. Be aware that if there is such a clause, unless it is an extremely urgent claim neither of you can take the other to court if the other selects arbitration.

We welcome links from other websites to this article. Please note that this article is copyright © Eden Exchange NZ Holdings Limited, Franchise New Zealand magazine and Franchise New Zealand On Line. While it may be downloaded for personal use, no part may be reproduced on any other website, in electronic or printed form or in any other form whatsoever.