Franchise Arbitrations – Concurrent Claims and Multiple Parties

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This article was originally published in The Lawyer’s Daily as a two-part series on September 23 and 24, 2020.  It is partially based on a paper presented by Ben Hanuka on September 23, 2020, at the ADRIC session titled “Confidentiality, Consolidation and Concurrent Disputes”, during CanArbWeek 2020.  The assistance of Anthony Pugh, associate at Law Works PC, in writing this article is acknowledged with thanks.     

Franchise and related disputes increasingly raise issues about multi-party disputes involving concurrent claims in arbitration and court.  This article outlines some of the franchise and related decisions in this area over the past ten years.  As can be observed from the cases, the court decisions are in some respect consistent with one another – when dealing with multiple agreements and multiple parties; while not too consistent – when dealing with disputes involving affiliated parties. 

Multiple parties, multiple agreements 

Graves v. Correactology Health Care Group Inc., 2018 ONSC 4263, involved a dispute between an unlicensed alternative health college and related parties, and three plaintiff students.   

The students dealt with the Correactology Practitioner Program at the Canadian Institute of Correactology (the “Institute”), the Correactology Health Care Inc. (“CHC”) and the Canadian Association of Correactology Practitioners (the “Association”), all three of which were closely affiliated. 

Each student signed the following agreements: 

• With the Institute:  Enrollment Agreement  
• With CHC: Licence Agreement and a Confidentiality Agreement  

The Association was supposed to accredit the students after they completed their examinations. 

The Enrollment Agreement and Licence Agreement contained arbitration agreements. 

A confidentiality agreement did not contain an arbitration agreement. 

After the students consulted a lawyer about the agreements, they were expelled from the program, alleging breach of the confidentiality agreement.  The students brought a court action for, among other things, fraudulent misrepresentation, conspiracy, and breach of contract.  They sued all three entities, as well as the individuals controlling them, all of whom were closely related. 

The defendants brought a motion to stay proceedings in favour of arbitration.  Neither the individual defendants, nor the Association, were parties to the arbitration agreements.  

The court held that the individual defendants and Association were not named merely to defeat the arbitration agreements. Rather, they were non-parties and could not rely on the arbitration agreements.   

The court also held that it was not reasonable to order a partial stay because the claims against the Association and the individual defendants could not easily be separated from the claims against the Institute and CHC.   

The court also noted that the scope of the claim exceeded the arbitration agreement.  The scope of the arbitration agreements was restricted to disputes about the Enrollment Agreements or the Licence Agreements. 

In Eggiman v. Martin, 2019 ONSC 1388, the plaintiff franchisees (Eggiman) entered into two franchise agreements with the defendant franchisor, The TDL Group Corp., for two Tim Hortons restaurants.   

They also entered into operating agreements with operators (Martin), which contained an arbitration agreement.   

TDL had referred the operators to the plaintiffs and had received a finder’s fee.  In addition, the arbitration agreement gave TDL the authority to appoint an arbitrator, even though it was not a party to those agreements. 

Eggiman terminated the operating agreements after the operator’s principal sexually assaulted an employee.  They then sued the operator and TDL for damages.   

The operator defendants sought to stay the action in favour of arbitration. 

The court held that a stay of proceeding could not apply to the plaintiff’s claim against TDL, since TDL was not a party to the operating agreements.   

The claims against Martin and TDL arose from closely related facts. To allow the stay would split the proceedings into two very similar matters.  Given section 138 of the Courts of Justice Act which requires a court to avoid multiplicity of legal proceedings, it would be unreasonable to split the proceedings. 

The court was also concerned that if a partial stay were granted, it would allow TDL to appoint an arbitrator and possibly control the arbitration, even though it was not a party to it. 

The Court of Appeal for Ontario dismissed an appeal on the basis that it did not have jurisdiction to hear it under section 7(6) of the Arbitration Act. 

Affiliates – Court Proceeding Upheld 

In Kanda Franchising Inc. v. 1795517 Ontario Inc., 2017 ONSC 7064, the franchisor brought an action against the corporate franchisee and its two individual principals.  The two principals were non-signatories to the franchise agreement, which contained the arbitration agreement.   

It was uncontested that the dispute between the franchisor and the franchisee company should be referred to arbitration.  But the individual principals, non-signatories, took the position that they were not parties to the arbitration agreement.   

The court applied a straightforward interpretation of the contract and held that the individuals could not be bound by the arbitration agreement since they were not named in it.  The court also applied the contra proferentem doctrine since the franchisor drafted the arbitration agreement and franchise agreement.  

The court held that resolving the dispute about the arbitrator’s jurisdiction in relation to the two individuals required only a superficial consideration of the documentary evidence because the words of the contract were clear. 

In 2296423 Ontario Limited v. FOF Franchise Corp., 2014 ONSC 4038, the plaintiff franchisees sought to rescind the franchise agreement and brought a claim for damages for rescission in court.  The franchisor took the position that the rescission was unlawful and intended to start a claim, and that the entire dispute should be referred to arbitration.  It brought a motion to stay the action in favour of arbitration. 

The franchise agreement, which contained the arbitration agreement, was explicitly between the franchisor and corporate franchisee.   

The individual plaintiff and defendants, as well as affiliated companies, were not parties to the franchise agreement.  They included a guarantor of the sublease (on behalf of the franchisee), and various parties affiliated with the franchisor, some of whom were alleged to be franchisor’s associates. 

The defendants took the position that the franchise agreement was intended to include all affiliates, employees and other related parties of the franchisor, because of references in the franchise agreement to affiliates, directors, shareholders, officers etc., and because of the broad scope in the arbitration agreement.  

The court dismissed the franchisor’s motion.  It held that non-parties to the arbitration agreement cannot unilaterally alter the terms of the agreement by consenting to the arbitrator’s jurisdiction.  

The court also refused to order that only the franchisor and franchisee submit to arbitration, because it would delay a resolution to the matter, risk inconsistent findings, and result in wasted resources. 

 Affiliates – court proceeding stayed in favour of arbitration  

In Alpina Holdings Inc. v. Data & Audio-Visual Enterprises Wireless Inc., 2013 ONSC 3087, the plaintiff, Alpina, started a court action against Data & Audio-Visual Enterprises, alleging that their dealer agreement was a franchise agreement.  It rescinded the agreement.   

Alpina started the court action against Data & Audio-Visual and two of its principals, which it alleged were franchisor’s associates.  Data & Audio-Visual sought a stay of the proceeding in favour of arbitration. 

The indemnification paragraph in the dealer agreement extended to the parties’ “shareholders, officers, directors, employees, affiliates, agents and other representatives”.  Even though the purported claim appeared to be based on franchise legislation, and not on the indemnity clause, the court held that it was arguable that the case against the individual defendants, who were directors and shareholders of the respondent corporation, should also be referred to arbitration. 

In Adlakha v. Meehan, 2011 ONSC 444, two sets of franchisees sued the franchisor and affiliated parties for rescission of the franchise agreement.  The affiliated parties were not signatories to the franchise agreement.  However, the arbitration agreement referred to affiliated entities. 

The respondents conceded that the individual defendants would be bound by the arbitration agreement if found to be ‘franchisor’s associates’ under the Arthur Wishart Act. 

But the respondent franchisor applied for court directions about whether the individual respondents were bound to the arbitration and whether the arbitrations should be consolidated or heard together. 

The court held that the affiliated parties may be captured by the use of the words ‘affiliated person/entity” in the arbitration agreement and were therefore required to submit to arbitration. 

The court also held that, in the absence of consent of all the parties, it did not have jurisdiction to consolidate the arbitrations or order that the arbitrations be heard together.