Subway Franchise Systems of Canada, ULC v. Subway Developments 2000 Inc.

Background

Subway Developments 2000, Inc. began an arbitration against Subway Franchise Systems of Canada, ULC concerning claims that Subway wrongfully terminated two development-agent agreements. The arbitration was still ongoing when Subway asked the court to set aside an arbitrator’s order.

Section 18 of the agreements required Subway to pay Developments 50% of the amount otherwise due between the effective date of termination and the arbitrator’s decision. It also addressed possible final damages: if the termination was wrongful, Subway would pay the remaining 50% and reinstate Developments; if the termination was proper, Developments would return the interim payments.

After Subway stopped sending one interim payment directly to Developments and instead placed it in its lawyers’ trust account, Developments raised the issue with the arbitrator. The arbitrator ordered Subway to resume making the payments directly to Developments, provide supporting documents, and turn over payments previously placed with its lawyers. The arbitrator later imposed sanctions for noncompliance and denied Subway’s request to pause the payment order.

Issues and Arguments

Subway argued under section 10(a)(4) of the Federal Arbitration Act that the arbitrator exceeded her authority. Subway contended that section 18 limited the arbitrator’s authority to deciding whether the termination was valid, whether Developments should be reinstated, and damages. According to Subway, requiring interim payments was equitable relief that the agreement did not authorize. Subway also argued that the payment obligation applied only to an arbitration completed through an expedited process.

Developments moved to dismiss Subway’s petition, arguing that the arbitrator’s order was not final enough for court review. Alternatively, Developments asked the court to confirm the order.

Finality

The court held that the order was final for purposes of judicial review and confirmation, even though it did not resolve the entire arbitration. The order conclusively determined who would possess and control the disputed money during the arbitration. The court also found that there would be no later opportunity to challenge this payment decision after the arbitration ended.

The court compared the order to other interim arbitration orders that were treated as final because they required immediate payment or determined temporary responsibility for money, even without deciding ultimate liability. An interim order need not decide the ultimate merits of the arbitration to be reviewable.

Authority Under the Agreement

The court denied Subway’s challenge to the arbitrator’s authority. Section 18 applied to “any dispute” concerning termination and expressly described the interim-payment procedure. The dispute over whether Subway had to continue making those payments arose from the termination and therefore fell within the arbitration provision.

The court also concluded that the arbitrator’s order enforced, rather than contradicted, the agreement’s plain terms. The agreement required Subway to pay Developments 50% of the amount otherwise due from termination until the arbitrator’s decision. The arbitrator’s order directed Subway to resume those payments directly to Developments.

The court rejected Subway’s argument that the payment obligation was limited to arbitrations completed within 60 days. The agreement required the parties to use their “best efforts” to finish within 60 days, but it did not make completion within that period a condition of the payment obligation. The court also noted that the record did not show Subway had sought a faster arbitration process than the one it received.

The court did not need to rely on the arbitrator’s alternative conclusion that Subway waived its authority objection by failing to raise it in writing earlier, because Subway had not shown that the arbitrator exceeded her authority under the agreement’s terms. The court applied the highly deferential standard governing review of arbitration awards and held that the arbitrator had at least a permissible contractual basis for her decision.

Confirmation and Disposition

Because the court found no basis to set aside the order, it held that confirmation was required. The court’s conclusion was that the arbitrator acted within her authority in enforcing the interim-payment requirement.

The court’s final order was: the petition to vacate or modify the arbitration order was DENIED; Developments’ motion to dismiss the petition was DENIED; and Developments’ petition to confirm the arbitration order was GRANTED. The clerk was directed to terminate the motion and close the case.