Subway International B.V. v. Subway Russia Franchising Company, LLC

Background

Subway Russia had been the exclusive developer of the Subway restaurant chain in Russia since 1993 under a series of master franchise agreements with Subway International B.V. (SIBV). The agreement allowed automatic two-year renewals if Subway Russia gave timely notice and was not in default of any provision or obligation when it gave notice or afterward. The agreement included requirements concerning restaurant development, maintaining at least as many Russian restaurants as the fast-food chain with the most restaurants in Russia, and minimum average weekly sales per restaurant.

The parties’ agreement expired on October 19, 2020. Subway Russia was not complying with the restaurant-count and sales requirements. During negotiations in 2019, SIBV proposed changes to those requirements and proposed different terms for a new agreement. Subway Russia later claimed that these proposals were binding offers that it accepted in a July 31, 2020 letter. SIBV disputed that the proposals were binding and argued that they had been withdrawn before Subway Russia’s purported acceptance.

Arbitration and Earlier Court Proceedings

The parties’ agreement required disputes to be arbitrated in New York under American Arbitration Association rules. In the initial arbitration award, the arbitrator found that Subway Russia was in default of the restaurant-count and sales requirements and therefore did not have a right to automatically renew the agreement. The arbitrator did not fully resolve Subway Russia’s separate argument that the parties had formed a new agreement through the 2019 proposals and the July 2020 acceptance.

In a prior related proceeding, this Court partially vacated the initial award insofar as it addressed the offer-and-acceptance issue and remanded that issue to the arbitrator. The Court did not require reconsideration of the arbitrator’s findings that Subway Russia was in default and had no automatic right to renew.

After a seven-day evidentiary hearing, the arbitrator issued a further award in favor of SIBV. She found that the 2019 proposals were preliminary negotiations that the parties intended to incorporate into a later, formal amended agreement, rather than offers to create binding contracts immediately. She also found that, even if the proposals had been binding offers, SIBV’s later conduct—including default notices and communications stating that the parties remained far apart—revoked them before Subway Russia’s July 31, 2020 letter. The further award was incorporated into a final award dated September 8, 2023.

The Court’s Review of the Awards

The court explained that the Federal Arbitration Act strongly favors enforcing arbitration awards and permits vacatur only on limited grounds. Relevant grounds include evident partiality by an arbitrator, the arbitrator exceeding her authority, or the arbitrator failing to make a mutual, final, and definite award. The court also noted that an award may be overturned for “manifest disregard of the law” only when the arbitrator knew a clearly applicable legal rule and deliberately refused to apply it. Factual findings are not overturned merely because a party disagrees with them.

Subway Russia’s Procedural Arguments

The court rejected Subway Russia’s argument that SIBV’s petition to confirm was untimely. The court held that its earlier order had remanded only the offer-and-acceptance issue and had left the other parts of the initial award available for confirmation.

The court also rejected the argument that the arbitrator failed to decide whether SIBV had the right to terminate or not renew the agreement. The court explained that the initial award treated SIBV’s October 14, 2020 notice as expressing its decision not to permit automatic renewal because of Subway Russia’s outstanding defaults, rather than as an immediate termination. The agreement therefore expired on October 19, 2020, and the arbitrator’s findings resolved Subway Russia’s claim that SIBV had wrongfully terminated it.

Authority, Contract Formation, and Partiality

The court rejected Subway Russia’s argument that the arbitrator exceeded her authority by applying the renewal provision and finding that Subway Russia was in default. The arbitrator had applied the agreement’s express language and concluded that the defaults defeated automatic renewal.

The court also held that the question whether SIBV had revoked any offer was sufficiently connected to Subway Russia’s offer-and-acceptance claim to be decided by the arbitrator. In any event, the arbitrator had independently found that the proposals were not intended to be binding offers.

The court found that Subway Russia had not shown evident partiality. The court explained that unfavorable rulings, without objective evidence of bias, generally do not establish that an arbitrator was partial. The court also rejected challenges based on the arbitrator’s treatment of testimony, her factual findings, and her reliance on the parties’ past practice of signing formal written agreements.

The court found that the arbitrator had reasonable grounds for concluding that no binding agreement was formed. The master franchise agreement contained an integration clause requiring amendments to be in a signed writing. The proposals left material issues unresolved, including aspects of restaurant development. The agreement was also a complex business contract that the parties’ prior dealings showed was ordinarily finalized in a formal written document. The court further noted that Subway Russia did not adequately challenge the arbitrator’s alternative findings that SIBV had revoked the proposals and that the proposed restaurant-growth requirement was too vague to enforce.

The court rejected Subway Russia’s discovery-related arguments as waived or unsupported and found no fundamental unfairness. It also rejected the argument that the American Arbitration Association committed a procedural error by allowing the same arbitrator to handle the remanded issue.

Disposition

Judge Jed S. Rakoff granted SIBV’s petition to confirm the First Award and Second Award and denied Subway Russia’s cross-petition to vacate. The Clerk was directed to enter final judgment and close the case.