News & Events

Tennessee Business Court Requires Arbitration of Franchise Agreement Disputes Notwithstanding Provision for Application of Tennessee Law

The Tennessee Business Court, in For Senior Help, LLC v. Medex Patient Transport, LLC, Case No. 16-0553-BC, decided January 5, 2017, stayed litigation and compelled arbitration of the disputes arising under the parties’ franchise agreement, including the franchisee’s claim that the agreement by it was fraudulently induced.  The franchise agreement provided a choice of law provision that Tennessee law would apply to the governance and construction of the agreement and that “[t]he Federal Arbitration Act shall govern all matters subject to arbitration.”  The agreement also contained a provision for use of Commercial Arbitration Rules of the American Arbitration Association, all pursuant to the Federal Arbitration Act.  Before the Business Court, the parties agreed that all disputes, except the claim of the agreement’s fraudulent inducement, had to be arbitrated.

The franchisee asserted, correctly, that, under Tennessee law, the fraudulent inducement issues would be resolved by the Court.  The franchisor asserted, correctly, that under the FAA, the fraudulent inducement claim would be resolved by the arbitrator.

The Business Court rejected the franchisee’s argument that, under Tennessee law, the fraudulent inducement claim was not “subject to arbitration” and therefore the FAA specification would be ineffective to control the result.  The Court looked to the federal common law to determine the arbitrability of the dispute, specifically noting the principles that 1) under federal law, the arbitrator decides contract validity issues, and 2) fraudulent inducement is a contract validity issue.  The Court noted the specific “delegation” language of the franchise agreement referring “all disputes arising out of or relating to the Agreement… shall be settled by binding arbitration,” and cited federal case law with nearly identical “delegation” provisions, to sustain the holding that the fraudulent inducement argument had been effectively delegated to the arbitrator.

Given its decision requiring arbitration, the Court did not rule on the franchisor’s argument that the franchisee had waived its right to litigate the fraudulent inducement claim by its prayer for relief in the complaint . . . “for judgment in its favor of (and) against Defendant . . . On Count One (Intentional Misrepresentation/Fraud/ Fraud in the Inducement) of its Complaint in an amount to be proven at arbitration.”

One wonders if there would have even been an argument had the franchise agreement’s drafters written the delegation provision to provide that the “FAA will govern the resolution of all disputes between the parties” rather than “all matters subject to arbitration.”

 

Authored by William R. O'Bryan, Jr.