The End of Term Spring Dinner meeting of the Franchise Section of the Ontario Bar Association was held on June 10, 2013. I spoke at that meeting about Arbitration and Mediation clauses for Franchise Agreements. In the presentation I proposed three draft arbitration and mediation clauses for inclusion in franchise agreements. One of the arbitration clauses was for domestic arbitration agreements, that is, for use in franchise agreements applying only to Canada, and the other arbitration clause was for use in franchise agreements involving international parties, that is, when either the franchisor or franchisee is outside Canada.

The following are the draft arbitration and mediation agreements that I proposed. I have footnoted my comments to each of the elements in these agreements.

Draft Domestic Arbitration clause

All (1) disputes and claims [of whatever nature or kind] between the parties [including the franchisor's associates, and the franchisor’s (and franchisee’s) affiliates, successors and assigns, on behalf of whom the franchisor (and franchisee) have signed this arbitration agreement and warrant that they have the authority to do so] (2) arising out of, or in respect of or connection with, this franchise agreement, [including any conduct, performance or omissions relating to this agreement and the existence, interpretation, validity, breach or termination of this agreement, whether the claim or dispute be in contract, negligence, unjust enrichment or otherwise(3) ,] shall(4) be exclusively (5) decided by arbitration pursuant to the Ontario Arbitration Act, 1991 (6) by an arbitral tribunal composed of three arbitrators.(7) The franchisor and franchisee shall each appoint one arbitrator and the two arbitrators so appointed shall appoint the chairperson of the tribunal. (8) The decision of the arbitral tribunal shall be final and binding on the parties and there shall be no appeal from the decision. (9)

  1. Consider whether all disputes shall be arbitrated or whether some disputes may be taken to court.
  2. Consider including other parties besides the franchisor and franchisee as parties to the arbitration agreement, by having the franchisor/franchisee sign the arbitration agreement on their behalf. The enforceability of such an agreement may be challenged by the assignee, associate, successor or assign. Consider whether, instead of inserting this language in the arbitration clause, the wording may be inserted in the franchise agreement in the usual paragraph making the agreement binding on successors and assigns, rather than in the arbitration clause.
  3. Consider whether non-contractual claims should be arbitrated. If so, then draft the language broadly enough to include non-contractual claims.
  4. Consider whether arbitration is to be mandatory. If so, insert “shall” and not “may”. There is not much point to a permissive arbitration clause since the parties can always agree to arbitrate when the dispute arises.
  5. As with point 1, consider whether some claims should be dealt with other than by way of arbitration.
  6. Insert reference to the appropriate provincial arbitral regime most applicable to the dispute. Reference to “arbitration pursuant to the laws of Ontario” is likely sufficient. This regime will appoint arbitrators in the event of a dispute over the appointment, and will likely be the jurisdiction in which the arbitral award may be judicially reviewed. This regime may also determine whether an appeal is permissible, as some regimes permit the parties to allow for appeals (such as Ontario) and some do not (such as Quebec).
  7. Consider whether one or three arbitrators are appropriate. Three arbitrators are more expensive and likely unsuitable for a small arbitration. Three arbitrators may be appropriate for a large arbitration involving different disciplines, such as law and engineering. Absent an express provision, the domestic Ontario Act provides for one arbitrator, not three: section 9 of the Ontario Arbitration Act, 1991. (OAA)
  8. In the event of disagreement, the court will appoint the third arbitrator: section 10 of OAA.
  9. Consider whether an appeal is to be allowed at all, and if so, on matters of fact and/or law. In Ontario, the parties can by agreement:
  • Preclude appeals
  • Allow appeals as of right
  • Allow appeals as to facts as of right

Absent agreement, the parties must seek leave to appeal and there is only a right to appeal on matters of law if leave is granted: ( section 45 of OAA). The words “final and binding” may not preclude appeal and the express preclusion, or inclusion, of appeals should be stated.

Draft International Arbitration clause

All disputes and claims [of whatever nature or kind] between the parties [including the franchisor's associates, and the franchisor’s (and franchisee’s) affiliates, successors and assigns, on behalf of whom the franchisor (and franchisee) have signed this arbitration agreement and warrant that they have the authority to do so] arising out of, or in respect of or connection with, this franchise agreement, [including any conduct, performance or omissions relating this agreement and the existence, interpretation, validity, breach or termination of the agreement, whether the claim or dispute be in contract, negligence, unjust enrichment or otherwise,] shall be exclusively decided by arbitration [pursuant to the rules of the ADR Institute of Canada][administered by the British Columbia International Commercial Arbitration Centre.(10)] The arbitration shall be conducted pursuant to the laws of Ontario and in particular the Ontario International Arbitration Act,(11) by an arbitral tribunal seated in Toronto (12) composed of three persons. (13) The arbitration shall be conducted in English. (14) The rules of the arbitration shall be the UNCITRAL Arbitration Rules. (15) The franchisor and franchisee shall each appoint one arbitrator and the two arbitrators so appointed shall appoint the chairperson of the tribunal. (16)

  1. Consider whether the arbitration will be an ad hoc arbitration not administered by a commercial arbitration centre or association, or administered by a centre such as the ADR Institute of Canada, the British Columbia International Commercial Arbitration Centre (BCICAC) in Vancouver, British Columbia, the International Chamber of Commerce (ICC) in Paris, France, or the International Centre for Dispute Resolution (ICDR) of the American Arbitration Association in New York, USA. If the arbitration is an ad hoc arbitration then the court of the place of the arbitration may appoint arbitrators in the event that the parties or their nominees fail to do so: Article 11 of the UNCITRAL Model Law (Model Law) annexed to the Ontario International Commercial Arbitration Act (ICAA)
    1. Insert reference to the law and the provincial arbitral regime applicable to the dispute. Consider the impact of section 10 of the Arthur Wishart Act, which states that “any provision in a franchise agreement purporting to restrict the application of the law of Ontario or to restrict jurisdiction or venue to a forum outside Ontario is void with respect to a claim otherwise enforceable under this Act in Ontario.” Under Section 2, the Arthur Wishart Act applies “if the business operated by the franchisee under the franchise agreement or its renewal or extension is to be operated partly or wholly in Ontario.” Section 10 may preclude any law but Ontario law applying to the franchise dispute.
    2. Consider where the place of the arbitration is to be: Article 20 of theModel Law. The law of that place will determine whether the claim is arbitrable and the procedures and law of evidence applicable to the arbitration. Again, consider the impact of Section 10 of the Arthur Wishart Act. That section may preclude the place of the arbitration being outside Ontario and/or require that the law applicable to the arbitration be Ontario law.
    3. As with a domestic arbitration, consider whether one or three arbitrators are appropriate. Three arbitrators may be appropriate when the parties are from different jurisdictions. In the absence of a specific choice, three arbitrators will be appointed in an international arbitration governed by the Ontario Act: Article 10 of the Model Law.
    4. If the parties use different languages, ensure that a language is chosen in which the arbitration is to be conducted: Article 22 of the Model Law.
    5. Consider inserting the rules to be used by the arbitral tribunal in view of the reality that parties from different countries and legal regimes may need some certainty as to the rules to be used. Many of the commercial arbitration centres have their own rules of procedure. The UNCITRAL Arbitration Rules have the advantage of being internationally drafted and accepted.
    6. There is no appeal of decisions of international commercial arbitrations. The only recourse against the award is an application to set the award aside: Article 34 of the Model Law.

Draft Mediation Agreement

All (17) disputes and claims [of whatever nature or kind] between the parties [including the franchisor's associates, and the franchisor’s (and franchisee’s) associates, affiliates, successors and assigns, on behalf of whom the franchisor (and franchisee) have signed this arbitration agreement and warrant that they have the authority to do so] arising out of, or in respect of or connection with, this franchise agreement, [including any conduct, performance or omissions relating this agreement and the existence, interpretation, validity, breach or termination of the agreement, whether the claim or dispute be in contract, negligence, unjust enrichment or otherwise, (18) ] shall, before any step shall be taken to arbitrate the dispute or claim, be submitted to mediation in Toronto, Ontario before an independent third party to resolve or help the parties resolve the claim or dispute. (19) The third party shall be appointed the parties, or in the event of disagreement by [ADR Chambers in Toronto][the Chartered Institute of Arb iterators in London, UK]. (20) The mediation shall be conducted pursuant to the Mediation Rules of [ADR Chambers] [the Chartered Institute of Arbitrators] and shall be concluded within 40 days of its commencement. (21) The limitation period for the commencement of arbitration shall be stayed from the date of the date of the request for mediation until the conclusion of the mediation. (22)

  1. Consider whether all disputes must be mediated, or whether in some or all instances the parties should be free to proceed to arbitration without mediation.
  2. Consider whether non-contractual claims should be mediated.
  3. Consider tracking the language of Section 11 of the Limitations Act, 2002 to ensure that time does not run during the mediation for the commencement of the action or arbitration.
  4. Consider whether the procedures of the mediation, and the identity of the mediation authority, are sufficiently certain to be enforceable.
  5. Again, consider identifying the mediation rules to be used, and/or limiting the time period of the mediation, in an effort to make the mediation agreement enforceable.
  6. Consider staying the running of the limitation period during the mediation pursuant to ss. 11 and 22 of the Limitations Act, 2002.

Draft Clauses Suggested By Various Arbitral Bodies

ADR Canada:

Arbitration Clause

All disputes arising out of or in connection with this agreement, or in respect of any legal relationship associated with or derived from this agreement, shall be arbitrated and finally resolved, pursuant to the National Arbitration Rules of the ADR Institute of Canada, Inc. [the Simplified Arbitration Rules of the ADR Institute of Canada, Inc.]. The place of arbitration shall be [specify City and Province of Canada]. The language of the arbitration shall be English or French [specify language].

Mediation Clause

All disputes arising out of or in connection with this agreement, or in respect of any legal relationship associated with or derived from this agreement, shall be mediated pursuant to the National Mediation Rules of the ADR Institute of Canada, Inc. The place of mediation shall be [specify City and Province of Canada]. The language of the mediation shall be English or French [specify language].

Chartered Institute of Arbitrators:

“The parties shall attempt to resolve any dispute arising out of or relating to this contract through negotiations between senior executives of the parties, who have authority to settle the same. If the matter is not resolved by negotiation within 30 days of receipt of a written ‘invitation to negotiate’, the parties will attempt to resolve the dispute in good faith through an agreed Alternative Dispute Resolution (ADR) procedure, or in default of agreement, through an ADR procedure as recommended to the parties by the President or the Vice President, for the time being, of the Chartered Institute of Arbitrators. If the matter has not been resolved by an ADR procedure within 60 days of the initiation of that procedure, or if any party will not participate in an ADR procedure, the dispute may be referred to arbitration by any party. The seat of the arbitration shall be England and Wales. The arbitration shall be governed by both the Arbitration Act 1996 and Rules as agreed between the parties. Should the parties be unable to agree on an arbitrator or arbitrators, or be unable to agree on the Rules for Arbitration, any party may, upon giving written notice to other parties, apply to the President or the Vice President, for the time being, of the Chartered Institute of Arbitrators for the appointment of an Arbitrator or Arbitrators and for any decision on rules that may be necessary. Nothing in this clause shall be construed as prohibiting a party or its affiliate from applying to a court for interim injunctive relief.”

Suggested Arbitration Clause

“Any dispute or difference arising out of or in connection with this contract shall be determined by the appointment of a single arbitrator to be agreed between the parties, or failing agreement within fourteen days, after either party has given to the other a written request to concur in the appointment of an arbitrator, by an arbitrator to be appointed by the President or a Vice President of the Chartered Institute of Arbitrators. “

Suggested Mediation clause

“Any dispute or difference arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to mediation in accordance with The Chartered Institute of Arbitrators’ Mediation Rules current at the time when the request for mediation is made under Rule 3 of those Mediation Rules”.

[In international contracts, it is usually worth adding provisions relating to the law governing the mediation, the language(s) of the mediation as well as the place for any mediation.]

ADR Chambers:

Model Arbitration Clause:

Any dispute, controversy or claim arising out of or relating to this contract including any question regarding its existence, interpretation, validity, breach or termination or the business relationship created by it shall be referred to and finally resolved by arbitration under the ADR Chambers Arbitration Rules. The place of the arbitration shall be _____.

The Parties may wish to consider adding one or all of the following options:

  1. 1. There shall be ________ arbitrators (1 or 3). [If 3, state whether each party may nominate an arbitrator and how the third arbitrator is to be selected.] (See Rule 5.4.)
  2. 2. The language of the arbitration shall be_________________.
  3. 3. The Arbitral Tribunal must select its award from one of the final offers made by each of the Parties, in its entirety and without modification. The Arbitral Tribunal need not provide detailed reasons for its award.
  4. 4. An oral hearing need not be held. (See Rule 9.4.)
  5. 5. There will be no appeal from the decision of the Arbitral Tribunal on questions of fact, law, or mixed fact and law.

Parties may also wish to decide what Rules will apply with respect to pre-hearing disclosure of documents and examinations for discovery, especially where Parties from more than one country or province are involved.”

ICC: Arbitration:

All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.”

The ICC also says: “The parties may also wish to stipulate in the arbitration clause:

  • the law governing the contract;
  • the number of arbitrators;
  • the place of arbitration; and/or
  • the language of the arbitration.”

ICDR:

Model ICDR Arbitration Clause:

“Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be determined by arbitration administered by the International Centre for Dispute Resolution in accordance with its International Arbitration Rules.”

The parties should consider adding: “The number of arbitrators shall be (one or three)”; “The place of arbitration shall be [city, (province or state), country]”; “The language(s) of the arbitration shall be ___.”

The ICDR Model Stand-Alone Mediation Clause:

“In the event of any controversy or claim arising out of or relating to this contract, or a breach thereof, the parties hereto agree first to try and settle the dispute by mediation, administered by the International Centre for Dispute Resolution under its Mediation Rules, before resorting to arbitration, litigation or some other dispute resolution procedure.”

The parties should consider adding: “The number of mediators shall be (one or two)”; “The place of mediation shall be [city, (province or state), country]”; “The language(s) of the mediation shall be ___.”

For Mediation And Arbitration Rules Of Procedure And Draft Clauses See:

 

Thomas G. Heintzman O.C., Q.C., FCIArb June 16, 2013

www.heintzmanadr.com

www.constructionlawcanada.com