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Ellis v. Subway Franchise Systems of Canada Ltd.
Statutes, Regulations and Rules Cited: Arbitration Act, S.O. 1991, c. 17, s. 7. Courts of Justice Act, R.S.O. 1990, c. C-43, s. 106. Counsel:
E. MacDONALD J.:— 1. Nature of Application 1 In this application, Lori Ann Ellis, a Subway sandwich shop franchisee and sublesee, seeks: (1) a stay of arbitration proceedings in Bridgeport, Connecticut, under s. 106 of the Courts of Justice Act, R.S.O. 1990, c. C-43; (2) a declaration that Ontario is the more appropriate forum for any such arbitration; (3) an order declaring an arbitration clause in her franchise agreement is unenforceable, principally on the basis that it is unconscionable; and (4) an interim and interlocutory injunction preventing the franchisor from terminating the franchise agreement and sublease with her. 2 In response, the parent franchisors, Subway Franchise Systems of Canada, Ltd. ("Subway Franchisor") and Subway Franchise Restaurants of Canada, Ltd. ("Subway Lessor") have brought a motion for a permanent stay or dismissal of Ms. Ellis's application or, in the alternative, an order for a temporary stay or dismissal of the application and directing the parties to proceed to arbitration in Connecticut, pursuant to the provisions of the franchise agreement between the parties. The motion of Subway Franchisor and Subway Lessor (together, the "Subway Parties") is brought pursuant to s. 7 of the Arbitration Act, 1991, S.O. 1991, c. 17. 2. Background a. The Parties 3 Ms. Ellis commenced operating a Subway sandwich shop at 4545 Kingston Road, Scarborough, Ontario, pursuant to a franchise agreement and sublease with Subway, dated May 25, 1994 (the "Franchise Agreement"). 4 Subway Franchisor is a Canadian corporation that is the Canadian franchisor of the Subway trade-mark, trade-name, and sandwich shops. Subway Lessor subleases all the Canadian Subway stores to franchisees. The Subway Parties are commonly owned by and operate under a licence from the parent Florida corporation, Doctor's Associates Inc. 5 Richard A. Dice is the Connecticut-based arbitrator appointed pursuant to the terms of Franchise Agreement. 6 After operating that franchise for about six months, Ms. Ellis entered into a second franchise agreement with Subway Franchisor and a sublease with Subway Lessor for a second sandwich shop located at the Malvern Town Centre in Scarborough, Ontario. She no longer operates this store. This second franchise agreement is not in issue. She operated both stores successfully from 1994 to 1997. Her difficulties began when a Subway inspector (Mr. Parent) noticed that the Kingston Road store was not in compliance with the Franchise Agreement. During the week of September 27th, 1999, Ms. Ellis listed her first Subway store franchise for sale. It has not yet sold. b. Breach of the Franchise Agreement & Operations Manual 7 The Subway Parties have alleged that Ms. Ellis's franchise has failed to comply with the Franchise Agreement and the Subway operations manual. 8 The Franchise Agreement requires Ms. Ellis as franchisee to pay a certain royalty of her franchise's gross sales to Subway Franchisor. The Subway Parties take the position that Ms. Ellis is in breach of the Franchise Agreement for failure to pay royalties, among other things. 9 From September, 1998 to March, 2000, Subway Franchisor alleges that Ms. Ellis has failed to report her sales on a weekly basis, as required by clause 5(f) of the Franchise Agreement, which states, in part:
As a result, of this alleged breach, Subway Franchisor claims it has had to estimate Ms. Ellis's gross sales since that time. 10 All Subway franchises are required to comply with this operations manual in order to preserve the established Subway goodwill and trade-mark. The Franchise Agreement, clauses 5(b) and (g) state, in part:
11 The evidence is that Subway representatives conducted inspections of Ms. Ellis's franchise and found several violations of the operations manual and Franchise Agreement. For example, the Subway representative discovered loaves of mouldy bread and fermenting chicken salad in the store, which was found to be generally unclean and in some state of disrepair. In addition, the Scarborough Board of Health cited the store with a cease and desist order for a temperature violation found in relation to its sandwich unit. c. Chronology of Events Leading up to this Application 12 On about December 29, 1998, Subway Franchisor sent Ms. Ellis a letter stating that she was in default of the original Franchise Agreement, for failure to pay royalties and the other operations manual and Franchise Agreement breaches. The letter gave Ms. Ellis ten days to cure her default, which she failed to do. When the ten days had elapsed, Subway Franchisor sent Ms. Ellis a further letter, on about February 19, 1999. On March 19, 1999, Subway Franchisor sent Ms. Ellis a third letter stating that if the default was not cured within seven days, Subway Franchisor would file a demand for arbitration to the American Arbitration Association (the "AAA"), pursuant to clause 10(c) of the Franchise Agreement This arbitration clause provides, in part, as follows:
Ms. Ellis continued to be in default. Subway Franchisor filed this demand with the AAA. Ms. Ellis denies that she received this demand. I do not believe her on this point. In any event, she retained Janice Younker as counsel. 13 On June 24, 1999, the AAA sent letters to Subway Franchisor and Ms. Ellis, acknowledging Subway Franchisor's demand for arbitration and enclosing a copy of the AAA Commercial Rules. This letter advised Ms. Ellis that she had fifteen days to respond to Subway Franchisor's claim, failing which she would be deemed to deny it. The letter also advised the parties that the arbitration would be held in Bridgeport, Connecticut. On July 9, the AAA provided the parties with a list of potential arbitrators, giving the parties fifteen days to respond as to the potential unacceptability of the arbitrators. Ms. Ellis received but did not respond to this letter. 14 On July 30, 1999, the AAA advised the parties by fax and ordinary mail that Richard Dice had been appointed as arbitrator. I find that Ms. Ellis received this letter but did not respond to it. 15 The AAA sent a letter, dated September 3, 1999, to the parties via fax and mail, confirming that the arbitration was scheduled for September 14, 1999. Ms. Ellis admits that she received this confirmation. 16 On about September 7, 1999, Subway Franchisor provided a copy of its Demand to Ms. Ellis's counsel, Janice Younker, at her request. 17 On September 10, 1999, Ms. Younker wrote to the AAA, advising them that she would not be available for the scheduled arbitration date of September 14th. Ms. Younker also alleged that Ms. Ellis had not received sufficient notice of the arbitration because she maintained she had not received the demand. The AAA did not grant an adjournment. 18 On the day of the hearing, Ms. Younker did not attend the arbitration but called the AAA headquarters that morning and advised Mr. Dice that Ms. Ellis had not received Subway Franchisor's demand. Mr. Dice told Ms. Younker that he had received proof of service of the Demand and the Notice of Hearing, and he determined that Ms. Ellis had received appropriate notice, and that the arbitration ought to proceed; however, he did adjourn the matter for thirty days. 19 On September 24, 1999, the AAA faxed confirmation of the new arbitration date, October 14th, to the parties. 20 On October 4, 1999, Dice confirmed his authority to rule on his own jurisdiction in a letter to the AAA, which was made available to the parties. In a letter dated October 6th and forwarded to the parties, Dice advised the AAA that he intended to bifurcate the October 14th hearing and to deal first with the issues of jurisdiction and notice, leaving any substantive issues to a later date. 21 In a letter dated October 5, 1999 and sent via fax and ordinary mail, Ms. Younker requested a further adjournment of the arbitration proceedings. She alleged bias against Mr. Dice on the basis of the manner in which he dealt with the issue of notice. The parties gave written submissions to the AAA on the issue of whether Mr. Dice ought to continue to hear the arbitration. In a letter to the parties dated October 7th, the AAA confirmed that the October 14th hearing with Mr. Dice would proceed. 22 On October 12, 1999, the AAA received a letter from Ms. Younker, dated October 11, 1999, objecting to Connecticut as the forum for the arbitration. Ms. Younker took the position that the arbitration hearing should be stayed and that Toronto is the proper forum for the arbitration. By now, Ms. Ellis had failed in her attempt to disqualify Mr. Dice. Eleni Lappa, the case administrator for the AAA, replied to Ms. Younker via a fax dated October 12, 1999, stating that the AAA had determined that Bridgeport, Connecticut was the appropriate forum for the arbitration hearing, pursuant to the Franchise Agreement and Rule 11 of the Commercial Arbitration Rules of the AAA. It was then that Ms. Ellis retained Mr. Sterns and commenced this application. 3. Legal Issues to be Determined 23 Principally, there are two main issues before the court in this application. They are:
24 For the reasons set out below, I find that Ms. Ellis's application cannot succeed. 4. Analysis a. Ms. Ellis's Application and Position 25 Ms. Ellis has brought this application for a stay of the arbitration proceedings in Connecticut, pursuant to s. 106 of the Courts of Justice Act, which states, in part, that "A court ... on motion by any person, whether or not a party, may stay any proceeding in the court on such terms as are considered just." 26 Ms. Ellis bases her request for a stay of the Connecticut arbitration proceedings on the grounds that the Franchise Agreement in general, and the arbitration clause in particular, are so unconscionable that this Court should grant Ms. Ellis relief from it. Mr. Sterns says that the arbitration agreement is a denial of justice. He argues that the agreement itself is unconscionable. The costs to Ms. Ellis of attending in Bridgeport are said to be far in excess of the value of the franchise. The theme of Mr. Sterns's argument was that the arbitration clause is a "block to justice" and that arbitration should not become a "safe harbour" for unfairness in the Franchise Agreement. b. The Subway Parties' Motion and Position 27 In response to Ms. Ellis's application, the Subway Parties have brought their own motion for an order permanently staying or dismissing Ms. Ellis's application, or, in the alternative, temporarily staying or adjourning the proceedings and directing the parties to proceed to arbitration in Connecticut, as pursuant to the Franchise Agreement arbitration clause, 10(c). 28 The Subway Parties base their argument for a stay or dismissal of Ms. Ellis's application, and an order directing the parties to return to arbitration, principally on the grounds that the Franchise Agreement in general, and the arbitration clause in particular, are not unconscionable, but remain valid and binding on the parties. 29 The Subway Parties further submit that the AAA has jurisdiction over this matter pursuant to the Franchise Agreement, clause 10(c), and that Connecticut is thus the proper forum for hearing the arbitration. 30 I agree with these submissions. c. Unconscionability of the Franchise Agreement 31 Generally, a contract is binding that was intended to be binding. In Fraser Jewellers (1982) Ltd. v. Dominion Electric Protection Co. (1997), 34 O.R. (3d) 1 ( C.A.), Robins J.A. for the Ontario Court of Appeal stated that:
32 A party to a contract will be relieved from his or her obligations under the contract if the contract is found to be unconscionable. However, equity may intervene on the basis of unconscionability if a stronger party takes undue advantage of, or exerts undue influence over, a weaker party, owing to their marked inequality of bargaining power: S.M. Waddams, The Law of Contracts, 3rd ed. (Toronto: Canada Law Book Inc., 1993) at 344, paras 508, 511; Slator v. Nolan (1876), 11 I.R. Eq. 367, Sullivan M.R. Mere inequality of bargaining power absent an abuse of that inequality does not amount to unconscionability: Fraser Jewellers, supra. Waddams (at 345, para 511) refers to the following statement of Leach V.C. from Wood v. Abrey (1818), 3 Madd. 417 at 423, 56 E.R. 558, Leach V.C.:
33 The proper test for unconscionability was laid down by Schroeder J.A. for the Ontario Court of Appeal in Mundinger v. Mundinger (1968), 3 D.L.R. (3d) 338 at 341-2, [1969] 1 O.R. 606 (C.A.), aff'd (1970), 14 D.L.R. (3d) 256n (S.C.C.):
34 The above passages from Mundinger were adopted as a correct statement of the law by the Ontario Court of Appeal in Rosen v. Rosen (1994), 18 O.R. (3d) 641 ( C.A.), per Grange J.A. I agree with the submissions of Mr. Pepper that the law on unconscionability is that before one gets off the ground, one must have evidence of fraud, duress or some abuse of inequality of bargaining power. 35 Mr. Sterns relied heavily on the Nova Scotia Court of Appeal's decision in Atlas Supply Co. of Canada Ltd. v. Yarmouth Equipment Ltd. (1991), 37 C.P.R. (3d) 38 (N.S.C.A.). However, this case may be distinguished on the basis that in Atlas, the Court found an abuse of power which rendered the contract unconscionable. In Atlas, the stronger contracting party had induced the weaker party to bargain by providing the weaker party with flawed projections and withholding information which, had the weaker party known about it, "would have dissuaded any but the foolhardy to enter into the agreement" (page 91). Such facts are not in evidence in this application. 36 I note as well that a substantially similar Subway Franchise Agreement has been considered in four judgments of the United States Court of Appeals, 2nd Circuit: Doctor's Associates Inc. v. Stuart (1996), 85 F. 3d 975 (U.S.C.A., 2nd Cir.); Doctor's Associates Inc. v. Jabush (1996), 89 F. 3d 109 (U.S.C.A., 2nd Cir.); Doctor's Associates Inc. v. Distajo (1997), 107 F. 3d 126 (U.S.C.A., 2nd Cir.), cert. Denied (1997), 522 U.S. 948 (U.S.S.C.); Doctor's Associates Inc. v. Hamilton (1998), 150 F. 3d 157 (U.S.C.A., 2nd Cir.), cert. denied (1999), 525 U.S. 1103 (U.S.S.C.). Notwithstanding that the American test is much broader than the Canadian (see Chitty on Contracts, 28th ed., v. 1, at pages 7-085), all four American courts rejected the argument that the Subway franchise agreement was unconscionable. 37 In each of these American cases, many of the same issues were raised which have been raised in this case. In Stuart, as in this case, the franchisee had notice, through the offering circular, of the arbitration agreement prior to entering into the franchise agreement. Likewise, in that case, the Court stated that the franchisees were "business people," not "vulnerable customers or helpless workers"; as such the franchisees were not "forced to swallow unpalatable terms" but chose to do so, with their eyes wide open. In Hamilton, the franchisee raised the high costs of arbitration, including the costs of travel from the New Jersey franchise store to Connecticut. In both Hamilton and Stuart, the franchisee argued that the AAA was biased in favour of Subway (Doctor's Associates Inc.) because the AAA relied on the franchisor for repeat business. In both these cases, the 2nd Circuit court rejected these submissions for the same reasons, that the onerous provisions of the franchise agreements were clear on their face and the franchisee was free to investigate before entering into the agreement, and thus it was not unconscionable to hold the franchisee to the terms of the franchise agreement. 38 Finally, Mr. Sterns drew the Court's attention to media coverage suggesting that the Subway franchise agreement is unconscionable. In particular, Mr. Sterns referred to two news articles: (1) Richard Behar's article "Why Subway is `The Biggest Problem in Franchising'" in Fortune (March 16, 1998) 126; and (2) "Subway Bites" in The Financial Post (November 25, 1995) 6. The content of these articles cannot influence the Court. 39 Ms. Ellis does not make out a case for unconscionability. Therefore, she cannot not be relieved from their bargain. Although it could be said that there was inequality of bargaining power between the parties, the Subway Parties did not take undue advantage of it, nor did they exert undue influence over Ms. Ellis. Although Ms. Ellis was only a "small business" person and Subway is a large international corporation, and although the Franchise Agreement contains onerous terms for Ms. Ellis, such is the nature of franchise relationships. To a degree, each party takes advantage of the other. Ms. Ellis takes advantage of the Subway Parties' goodwill, trade-marks and infrastructure, and the Subway Parties take advantage of Ms. Ellis's personal investment and hard work. The advantage in such a franchise agreement is thus mutual, rather than unilateral, unequal, or undue. Equally, part of the consideration for the Franchise Agreement is the element of mutual advantage. The onerous terms of the Franchise Agreement are necessary in order to ensure that the franchisee does not erode the franchisor's goodwill. The contract's terms provide the franchisee with certainty and predictability. The American Subway (Doctor's Associates Inc.) cases, which deal with substantially identical Subway franchise agreements, arbitration clauses, and arguments, also support these conclusions, for essentially the same reasons. Therefore, the defence of unconscionability must fail and the Franchise Agreement must stand. d. Invalidity of the Franchise Agreement 40 It is the position of the Subway Parties that this Court should stay the proceeding, pursuant to s. 7 of the Arbitration Act, because the Franchise Agreement's arbitration clause is valid. The Franchise Agreement provides, at clause 10(c), that Ontario arbitration legislation applies to all proceedings arising out of the Agreement or a breach of it. Section 7 of the Arbitration Act provides, in part, as follows:
41 This provision of the Arbitration Act was considered by Blair J. in Deluce Holdings Inc. v. Air Canada et al. (1992), 12 O.R. (3d) 131 at 148 (Gen.Div.). Justice Blair explained the operation of section 7 as follows:
See also Ontario Hydro v. Denison Mines Ltd., online: Quicklaw [1992] O.J. No. 2948 (Gen.Div.), Blair J. (unreported). 42 I have already concluded that the Franchise Agreement is not invalid for unconscionability. Mr. Sterns has argued that the Franchise Agreement should also be found to be invalid for want of consideration. I do not agree. Part of the consideration is the mutual covenant to submit to arbitration. Although the bargain struck between the parties was an onerous one, there was mutuality of intention and of consideration. Ms. Ellis does not deny that she read the Franchise Agreement and understood it prior to entering into the bargain. She may have thought that the arbitration clause was unfair when she agreed to it on a "take it or leave it" basis. Her ex post facto dissatisfaction with the terms of the bargain she has struck does not invalidate that bargain nor make it unconscionable. 43 Therefore, the Franchise Agreement binds the parties. e. Forum Non Conveniens 44 In view of my conclusions on the issue of the validity and enforceability of the contract, and the defence of unconscionability, it is unnecessary to consider the argument that Connecticut is not the appropriate forum for the arbitration. 45 The arbitration clause 10(c) is clear on its face: Bridgeport, Connecticut is the only forum available for an arbitration arising from a dispute about the Franchise Agreement. f. Remedies 46 In view of my conclusions, the remedy available to the parties is arbitration by the AAA in Connecticut, pursuant to the terms of the Franchise Agreement generally and the arbitration clause 10(c) in particular. 5. Disposition 47 Ms. Ellis's application is dismissed. An order shall go directing the parties to proceed to arbitration in Bridgeport, Connecticut, under the provisions of the Franchise Agreement. 48 I have endorsed the record accordingly. Counsel may speak to me about costs at a time convenient to them and to the Court. E. MacDONALD J. |
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