Arbitration Provisions In Franchise Agreements: Key Drafting Considerations For Ontario Franchisors

When a franchise dispute arises, the forum and manner in which it is addressed can matter almost as much as the merits. Arbitration clauses are one of the most important yet often overlooked provisions in a franchise agreement. These provisions are not boilerplate terms to be copied from the last deal: they require deliberate choices about scope, procedure, and appeal rights, all made against the backdrop of the Arbitration Act, 1991 (Ontario) (the “Arbitration Act”) and the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Franchise Act”). 

Though a simple arbitration provision that refers all disputes between the franchisor and franchisee to arbitration under the Arbitration Act, 1991 (Ontario) is a valid and viable option, a more robust and thoughtful provision may be beneficial to the franchise, franchisee and system overall. Some key considerations are whether to include an arbitration provision, the scope of the provision, whether to refer to arbitral rules, the options for appointing arbitrators, the options for urgent relief and the finality of the award.

Arbitration Versus the Courts

The starting question is whether to include a mandatory arbitration provision at all. The flexibility of arbitration has benefits, particularly where there may be disputes that arise in the midst of a long-term franchise relationship. 

Ontario courts enforce arbitration agreements by exercising their authority under section 7 of the Arbitration Act to stay the proceedings on the motion of party to the arbitration agreement. The stay is mandatory, subject only to the narrow exceptions in section 7(2), such as an invalid arbitration agreement or undue delay by the moving party. Under the competence-competence principle, codified in section 17 of the Arbitration Act, the courts generally send that challenge to the arbitrator, who has the first opportunity to rule on his or her own jurisdiction. 

There are numerous advantages to arbitration for franchise systems. Arbitration is private, which matters to a franchisor that does not want a dispute with one franchisee to become a roadmap for the rest of the network. The parties can select a decision-maker with genuine franchise or commercial experience; the proceeding is significantly faster as the procedure is generally more streamlined than the court; and hearing dates are more readily available. For systems spanning multiple provinces or countries, arbitration also offers procedural consistency and easier cross-border enforcement, though regard must be had to any arbitration and franchise legislation in each province or country.

There are some disadvantages as well. The parties pay the arbitrator's fees and hearing costs. Strangers to the franchise agreement such as landlords and suppliers cannot be compelled to join the proceeding. Arbitration produces no binding precedent, so a franchisor that wins the same fight against one franchisee may have to fight it again against another without being able to rely on the reasoning and precedent from the first fight.

Two limits deserve emphasis in the franchise context. First, an arbitration clause cannot contract parties out of the Arthur Wishart Act. Section 11 voids any purported waiver of the rights it confers, so franchisee claims for rescission or misrepresentation remain available in arbitration. A well-drafted arbitration provision requires statutory claims to be decided in arbitration but cannot eliminate those statutory remedies. Second, the Supreme Court's decision in Uber Technologies Inc. v. Heller, 2020 SCC 16 (CanLII), [2020] 2 SCR 118, <https://canlii.ca/t/j8dvf> is a cautionary tale: a clause that effectively places dispute resolution out of the weaker party's reach may be struck down as unconscionable. An even-handed arbitration mechanism is a condition of enforceability, not just good practice.

Scope: All Disputes, or Only Certain Types of Disputes?

The next question is scope. A broad clause covering every dispute "arising out of or in connection with" the agreement has the virtues of simplicity and predictability. Narrow or hybrid clauses, by contrast, can lead to preliminary skirmishing: when some claims fall inside the clause and some outside. The parties end up litigating about where to litigate and may face a fragmented proceeding, with some claims in court and other claims in arbitration.

Depending on the dynamics of the franchise system, there are carve-outs or narrow provisions that franchisors may want to consider:

• Injunctive and equitable relief. Some franchisors want the ability to go directly to court to restrain trademark infringement, enforce post-termination non-competition and de-identification obligations, or protect confidential information. However, as discussed below, interim urgent relief may also be available in administered arbitration proceedings. 
• Debt collection. Franchisors may choose to exclude straightforward claims for unpaid royalties, or amounts within the Small Claims Court's monetary jurisdiction, where a full arbitration would be disproportionate. Franchisors may also refer these types of disputes to a simplified or expedited arbitration process. 
• Statutory claims. Conversely, arbitration can be exclusively reserved for statutory claims to protect privacy and address serious allegations efficiently, while leaving all other disputes to be determined in the appropriate court, whether it be a claim within the jurisdiction of the Small Claims Court or under the Simplified Procedure.
• Lease disputes. Where the franchisor or an affiliate is head tenant and subleases to the franchisee, thought should be given to how the arbitration clause and the lease's own dispute mechanism interact.

Whatever the choice, carve-outs and narrow provisions should be drafted with precision to avoid preliminary motions.

Should the Clause Refer to the Rules of an Arbitral Institution?

An arbitration can be ad hoc, governed only by the agreement and the Arbitration Act, or administered under the rules of an institution. For example, the provision can refer to the rules of the ADR Institute of Canada (ADRIC), the Vancouver International Arbitration Centre (VanIAC), the ICC, for international systems, or the ICDR, for cross-border systems. There are other regional providers as well such as ADR Chambers in Toronto that provide rules and administrative services.

Institutional rules supply a complete, tested procedural code, including how the arbitration is commenced, how arbitrators are appointed and challenged, how documents are exchanged, how fees are secured. The institution provides administrative support and, critically, acts as a default appointing authority if the parties cannot agree. The latter is critical to avoiding undue delay or a trip to court just to get the process started. Many modern rules also include machinery the Arbitration Act does not itself provide, such as emergency arbitrators and expedited tracks for smaller claims. The downside is administrative fees and added formality. Ad hoc arbitration can be leaner and less expensive if both parties cooperate. If they cannot agree on procedure, then impasses can cause delays and frequent case conferences. Counsel with little or no arbitration experience may default to the more cumbersome process under the Rules of Civil Procedure rather than adopting a more efficient process.

For most franchise systems, a recognized set of institutional rules — chosen deliberately, with any modifications spelled out — offers the best balance. Whatever rules are chosen, the clause should also specify the seat of arbitration (for Ontario systems, typically Ontario), the language of the proceeding, and the governing law. For national systems, care must be taken to ensure that the seat of the arbitration complies with the governing legislation.

Options for Appointing the Arbitrator(s)

The quality of an arbitration is largely a function of the quality of the arbitrator, so the appointment mechanism deserves real attention.

• One arbitrator or three? A sole arbitrator is significantly cheaper and easier to schedule, making it the sensible default for most franchisor–franchisee disputes. Three-member panels are generally reserved for very large or system-wide matters, although some clauses use a monetary threshold to decide between the two. While three-member panels are more costly, they can be assembled quickly if each party appoints an arbitrator and the two appointed select the third arbitrator. 
• How is the appointment made? Common mechanisms include agreement of the parties within a fixed period, failing which an institution (or the court under section 10 of the Arbitration Act) appoints. Another option is to select from a pre-agreed roster. Naming a specific individual is risky as people retire, develop conflicts, or become unavailable so any named arbitrator should be supplemented by a default mechanism.
• Qualifications. The clause can require particular attributes such as a commercial litigator or retired judge with franchise experience, but any such requirements should be realistic and flexible to not overly narrow the pool of eligible candidates.

Two cautions. The mechanism must be even-handed: a clause giving the franchisor effective control over who decides the dispute is precisely the kind of one-sided term that could be found unconscionable. Every step needs deadlines and defaults, so a recalcitrant party cannot delay the arbitration by stalling the appointment process. 

Addressing Urgent Relief

Franchise disputes often begin with an emergency: a terminated franchisee continues operating under the brand, a departing franchisee opens a competing business across the street, or confidential operating manuals walk out the door. The arbitration clause must be drafted to provide access to urgent relief.

Three complementary tools can be used:

• Section 8(1) of the Arbitration Act preserves the court's power to grant interim relief, including injunctions, in aid of an arbitration, and the clause should expressly confirm that seeking such relief does not waive the right to arbitrate. 
• Most major institutional rules now provide for an emergency arbitrator appointed within days, before the full tribunal is constituted.
• Once constituted, the tribunal itself can grant interim measures.

A sensible drafting approach combines these: an express preservation of court applications for injunctive and interim relief, layered on institutional rules with emergency-arbitrator provisions. Franchisors that rely heavily on post-termination covenants should take care in drafting this aspect of their arbitration provision.

Appeal Rights and Review of the Final Award

The finality of arbitration is for some parties the chief anxiety of proceeding by arbitration. Where there is an ongoing relationship, finality can be important to rebuilding the relationship post-dispute. However, franchisors may be anxious to have significant statutory remedies such as rescission claims subject to a final and binding award that cannot be appealed.

Under the Arbitration Act, an award may be appealed to the Superior Court on a question of law, but only with leave. Leave is granted sparingly. The parties can change that default in either direction. They can expand appeal rights by permitting appeals on questions of law without leave, or even on questions of fact or mixed fact and law, or an appellate arbitration before a second tribunal, which adds review while preserving confidentiality. Alternatively, parties can exclude appeals entirely, leaving only the non-waivable set-aside grounds in section 46 of the Arbitration Act for matters going to jurisdiction, procedural fairness, and the validity of the arbitration agreement.

Canadian courts have taken a strict approach to the language of these clauses: wording that the award is "final and binding" has been read as excluding appeals altogether. The safest course is to say expressly and unambiguously what is intended.

Which way should a franchisor lean? Finality maximizes speed and cost savings, and is the most common choice. Yet, a franchisor worried about an aberrant award rippling across hundreds of identical agreements may reasonably wish to preserve a right of appeal.

Conclusion

An arbitration clause in a franchise agreement is a system-design exercise, not boilerplate. The franchisor is choosing, years in advance, the forum, the decision-maker, the procedure, the emergency toolkit, and the finality of outcomes for every dispute across the network. Clauses drafted deliberately, with realistic mechanics and even-handed procedures, are routinely enforced and can be beneficial to enable franchisors and franchisees to have disputes determined effectively and efficiently.