A 2011 decision from the Saskatchewan Court of Queen's Bench suggests that a franchisor may risk inadvertently waiving its ability to enforce an arbitral decision terminating a franchisee if that franchisor's post-termination conduct re-affirms the franchise relationship.
In Subway Franchise Systems of Canada Ltd. v. Laich, the franchisor, Subway, sought to terminate a Saskatchewan franchisee due to breaches of the parties' franchise agreement. Subway's franchise agreement also required that all disputes be resolved by arbitration to be held in Bridgeport, Connecticut. Accordingly, an arbitration was held in Connecticut. The arbitrator ultimately decided in favour of Subway, upheld the franchisee's termination and ordered the franchisee to pay the costs of the arbitration along with damages of $250 for each day she continued to operate her restaurant after the arbitral award.
Despite the arbitral award, the franchisee's restaurant remained open. This prompted Subway to bring an application in the Saskatchewan court to recognize and enforce the award. Saskatchewan, like Ontario, has adopted both the UNCITRAL Model Law and the UN New York Convention on the recognition and enforcement of international arbitral awards through provincial legislation. This statutory regime is deferential and generally favours the recognition and enforcement of awards, unless they fit into a narrowly construed set of exceptions.
In this case, while the court found no deficiencies in the arbitration process or the award itself, it declined to recognize and enforce the award under the umbrella exception contained in Article 36(1)(a)(i) of the New York Convention, finding that enforcement would be "contrary to the public policy" of Saskatchewan.
The court found that Subway had, by its actions, waived the termination by continuing to work with and support the franchisee in a profitable partnership. In the six months between the arbitral award and Subway's application for recognition and enforcement in Saskatchewan, Subway and the franchisee had continued to operate normally under the terms of the franchise agreement. The franchisee had even received an automatically generated letter from Subway congratulating her on record-breaking sales and a "job well done." The letter went on to say, "we hope the great sales trend and momentum continues." Further, since the franchisee had continued to pay all remittances and royalties to Subway after the award, the court found that enforcing the $250 per day damages award would result in a double recovery by Subway contrary to the public policy and law of Saskatchewan.
Following this decision, franchisors operating in Canada should take care to ensure that their interactions with terminated franchisees are not out of step with the decision to terminate, as even an inadvertent acknowledgement that the franchise relationship still lives on may be construed as waiving the termination.
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