Individual Non-Signatories to Franchise Agreement Not Bound to Arbitration

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Author: Evan Ivkovic, Student-at-Law, Law Works P.C.
Editor: Ben Hanuka

In Kanda Franchising Inc. et al. v. 1795517 Ontario Inc., Iftikhar Hossain and Parveen Hussain, a decision released by the Ontario Superior Court of Justice in Newmarket on November 28, 2017, the court held that the individual principals of the franchisee corporation were not bound by the arbitration agreement that was contained in the franchise agreement.  (Note: Law Works PC acted for the franchisor, Kanda Franchising.)

Summary of the Decision

The franchise dispute between the parties involved allegations of breach of contract and bad faith conduct, relating to the closure of an optical “Kanda” store.  The individual principals of the franchisee corporation objected to being added as parties to an arbitration proceeding on the ground that they did not sign the franchising agreement (which contained the arbitration clause) in their personal capacity; that only the corporate franchisee and Kanda Franchising were signatories and parties to the agreement.

By ruling that the individual principals did not have to submit to arbitration, the court applied an exemption to the exclusive jurisdiction of an arbitrator (in arbitration terms called the “Competence-Competence” principle).  Under the Competence-Competence principle, as confirmed by the Supreme Court of Canada in Dell Computer Corp. v Union des consommateurs, and codified in provincial arbitration statutes, an arbitrator has exclusive jurisdiction to first decide his or her own jurisdiction, including who are parties to the arbitration.

But the Supreme Court also decided in Dell Computer that if the determination of the arbitrator’s jurisdiction is a question of law or mixed fact and law – and if only a superficial review of the documentary evidence is required – a judge may decide the jurisdiction of the arbitrator.

The court in Kanda Franchising started with the premise that the interpretation of the scope of an arbitration agreement is a question of mixed fact and law, as set out by the Supreme Court of Canada in Sattva Capital Corp. v Creston Moly Corp.

Under the arbitration agreement, disputes between the corporate franchisee and Kanda Franchising had to be submitted to binding arbitration.  But it did not refer to the individual principals.  The court strictly interpreted the wording of the arbitration agreement to mean that the individual principals were not parties to the agreement.

Madam Justice Speyer rejected Kanda Franchising’s position that because the franchise agreement imposed obligations on directors, officers, shareholders and managers of the corporate franchisee, the individual principals – as either a director, officer, shareholder or manager of the corporate franchisee – were bound to the arbitration agreement.

She stated that the arbitration agreement did not explicitly impose the obligation to arbitrate on directors, officers, shareholders and managers of the corporate franchisee. and that Kanda Franchising, which drafted the agreement, could have done so.

In addition, she held that if there was an ambiguity in the interpretation of the arbitration agreement, it should be interpreted against the drafter, which was Kanda Franchising.

Lastly, Speyer J. favoured Kanda Franchising’s choice of arbitrator because it produced more compelling evidence of his qualifications than the franchisees produced for their choice.

Comments

 The court’s ruling in this case raises interesting consequences, including the possibility of duplicate proceedings and inconsistent findings as between a court case (involving the individual principals) and arbitration proceeding (involving the corporate franchisee).

The individual principals are key witnesses in the underlying dispute between the corporate franchisee and Kanda Franchising, and many of the same facts, evidence and legal analysis are relevant to both proceedings.

Jurisprudence in Ontario and Canada is sparse about binding non-signatories to arbitration.  On the surface, the main issue with binding non-signatories to arbitration is an alleged lack of consent, which is an important concept in arbitration.

Yet, the Court of Appeal for Ontario has consistently ruled in favour of the pro-arbitration policy of the courts to give effect to arbitration agreements.  Most recently, in Haas v Gunasekaram, the Court of Appeal for Ontario stated that where it is unclear if an arbitrator has jurisdiction, the issue should first be determined by the arbitrator (based on the Competence-Competence principle).

Jurisprudence about binding non-signatories to arbitration is more developed in the United States.  For example, in McBro Planning v Triangle Electrical, the United States Court of Appeals for the Eleventh Circuit ruled that a construction manager was required to submit to arbitration against a contractor even though there was no written arbitration agreement between them.

The construction manager and contractor had a dispute about a hospital construction project.  Because the arbitration agreement between the contractor and the hospital contained many references to the construction manager as acting on behalf of the hospital, the Eleventh Circuit wrote that the claims against the construction manager were intertwined with the underlying contractual obligations.

In Ontario and Canada, the tension between, on the one hand, pro-arbitration policy and, on the other hand, the principle of consent in arbitration, likely needs more judicial development in the future.

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