Canada – Franchisor Addresses Uber Arbitration Agreement Flaws to Obtain Stay of Proceedings

This article was first published on Arbitration Matters, here.

In Kang v Advanced Fresh Concepts Franchise Corp., 2021 BCPC 262, Small Claims Court Judge S. Archer granted a motion to stay an action in favour of arbitration under either section 8 of the International Commercial Arbitration Act, R.S.B.C. 1996 c.233 or, in the alternative, section 7 of the B.C. Arbitration Act, S.B.C. 2020, c.2. Judge Archer concluded that the international Act applied because the parties, at the time of their agreement, had their places of business in different countries, but that it didn’t matter because the test for a stay was essentially the same. Moreover, she distinguished the facts from those in Uber Technologies Inc. v Heller, 2020 SCC 16; the arbitration agreement was not unconscionable because the income earned by the claimant franchisee was “significant” as compared with the cost to commence an arbitration under the ICDR Rules.

The defendant AFC was a franchisor incorporated in California, which was in the business of granting licences to franchisees across North America to use its distinct system for developing and operating food service counters in grocery stores. Claimant Kang and AFC entered into a Franchise Agreement dated March 29, 2019, pursuant to which Kang was granted the right to operate in B.C. a full-time service food counter using the AFC system and trademarked packaging.

On November 11, 2020, AFC sent Kang a letter terminating the Franchise Agreement on the ground of material breach, effective November 12 – the following day. Kang sued in Small Claims Court in July, 2021. AFC defended the action, asserting that the dispute was subject to the arbitration agreement contained in the Franchise Agreement. Therefore, on August 23, 2021, AFC sought a stay of the action, relying upon Rule 16(6)(o) of the B.C. Small Claims Rules, which provide that, after a hearing, a judge may make “any other order that a judge has the power to make and notice of which is served upon another party” and s. 2 of the B.C. Small Claims Act, which provides that a judge may make any order to give effect to the purpose of the Rules, which is to have claims “resolved and to have enforcement proceedings concluded in a just, speedy, inexpensive, and simple manner”.

The arbitration agreement was very detailed and took up two full pages of the Franchise Agreement, dealing with matters such as the number of arbitrators to be appointed based upon the amount of alleged damages, parties’ discovery rights, a schedule for submissions, pre-award costs, injunctive/provisional remedies, and fees and costs. Judge Archer quoted portions of the arbitration clause, which provided that it, “would be conduced under the International  Dispute Resolutions Procedures of the American Arbitration Association…, applied by ICDR Canada, which allows for arbitrations to be conducted in BC”. An excerpt of the arbitration clause was also quoted:

“Any dispute that arises out of or relates directly or indirectly to the Franchise Agreement, including, without limitation, any claimed breach of the Agreement or any claim that any part of this Agreement … is invalid, illegal, unenforceable, voidable or void, or any dispute that arises out of or relates directly or indirectly out of the relationship of the parties hereto shall be resolved by arbitration in accordance with the International Dispute Resolution Procedures of the American Arbitration Association….

The arbitration provision shall…remain in effect after and regardless of expiration or termination of this Agreement…

Subject to the requirements of the laws of the province where the Franchise is located, arbitration shall occur in Los Angeles, California…

The preliminary issue before Judge Archer was whether the B.C. domestic or international Act applied. She found that that the International Commercial Arbitration Actapplied because the arbitration was international – at the time of the agreement, the parties had their places of business in different countries. She applied  paragraph 27 of McHenry Software Inc v. ARAS 360 Incorporated, 2018 BCSC 586, citing paragraph 40 of United Mexican States v. Metalclad Corp., 2001 BCSC 664, the Arbitration Act, which stated:

“[40] In the definition of “arbitration agreement” in the [Arbitration Act], an agreement to which the [ICAA] applies is specifically excluded. This means that it is first necessary to consider whether the [ICAA] applies to the arbitration agreement in this case. If it is found to apply, its provisions will govern and the [Arbitration Act] need not be considered. If the [ICAA] is not found to apply, the provisions of the [Arbitration Act] will govern by default.”

However, Judge Archer found that, even if she was wrong, the test for a stay would be the same:

“[30]The International Commercial Arbitration Act and the Arbitration Act both contain provisions directing a court to stay the legal proceedings to arbitration in certain circumstances. The differences in the wording of the relevant sections in the two Acts is very slight and, as described in Pixhug Media Inc. v. Steeves2017 BCSC 2171 at para 42, citing Nanaimo (City) v. Millennium Nanaimo Properties Ltd.2010 BCSC 1703 at para 12, the test for a stay of proceedings under both statues is the same.”

She found that AFC had a low threshold to meet to satisfy the requirements of a stay. Here, it was “arguable” that the issues raised in the Claimant’s action constituted matters to be submitted to arbitration. The Claimant’s complaints related to AFC’s manner of carrying out the Franchise Agreement and the termination, which Judge Archer found fell within the matters the parties agreed to submit to arbitration.

Further, there was no basis for a finding that the arbitration agreement itself was “null and void, inoperative, or incapable of being performed”, which would defeat AFC’s stay motion. In particular, the arbitration clause did not violate  Section 12 of the Franchises Act, which prohibits any provision of a franchise agreement from purporting to “restrict the application of the law of British Columbia or to restrict jurisdiction or venue to a forum outside British Columbia”. Judge Archer did not consider whether this language addressed the parties’ choice of seat and appears to have accepted AFC’s submission that the Franchise Agreement showed a clear intention of the parties to resolve any disputes by way of arbitration in British Columbia, under the laws of British Columbia, despite the fact that the arbitration agreement called for the arbitration to “occur” in Los Angeles, California.

Also, the arbitration clause was not unconscionable or “inoperative or incapable of being performed”. AFC argued that this matter could be distinguished from that in Uber Technologies Inc. v Heller, 2020 SCC 16. It adduced evidence as to the costs associated with an arbitration under the ICDR Canada Rules – an initial filing fee of $750 and a final fee of $800 for example. Judge Archer concluded that the “value of the transactions between the franchisor and franchisee appeared to be “significant”. Therefore, the facts of this case were very different from those in the Uber case and the arbitration clause was not unconscionable.

She therefore granted the stay.

Editor’s notes:

First, the decision indicates that the Claimant did not appear on the application and it does not seem that he filed any material to respond to the stay application. Therefore, there is no information on what facts or arguments the Claimant relied upon (if at any) as to whether the arbitration clause was unconscionable. AFC clearly argued the application on the basis that it would have to address the various problems with the arbitration clause identified by the Supreme Court of Canada in the Uber case, presumably because it was a contract of adhesion.

Second, in Uber, the parties disagreed throughout the proceedings on what arbitration statute applied (on the issue of whether the dispute was “commercial”). The Ontario Court of Appeal found, as did Judge Archer in this case, that it made little difference to the outcome. While this may be true in some cases, it is wise for the parties to address and for the court to make a determination on the applicable statute in every case. The outcome of that decision will have a critical impact on whether the parties have any rights of appeal. This case serves as a reminder of the importance of going back to first principles every time.

Third, for a refresher on Uber, see Case Notes” Ontario – determination of exceptions to mandatory stay are for court to make and not arbitrator – #148 and Supreme Court – courts should not refer jurisdiction challenge to arbitrator if real prospect that challenge might never be resolved – #344.

author

Lisa C. Munro

Lisa Munro is a partner at Lerners LLP, whose practice is limited to work as an arbitrator in domestic and international commercial arbitrations (both ad hoc and under institutional rules). She brings to this role more than 25 years of experience as counsel in commercial/business litigation and both international and…

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