The Franchise Memorandum

A federal court in New York recently ruled that an interim arbitration order was final and granted a developer’s petition to confirm the order which required the franchisor to make payments to the developer while the arbitration was ongoing. Subway Franchise Sys. of Canada, ULC v. Subway Devs. 2000, Inc., 2024 WL 3090480 (S.D.N.Y. June 21, 2024). Subway Developments (Developments) filed an arbitration against Subway Franchise System of Canada (Subway), alleging Subway’s wrongful termination of two development-agent agreements between the parties. The operative agreements required Subway to pay Developments fifty percent of what Developments would otherwise be owed between the date of termination and the date of the arbitrator’s decision. Subway sent the fifty percent payments to Developments until June 2023. At a hearing in October 2023, the arbitrator ordered Subway to continue the interim payments to Developments. A later order memorializing the decision ruled that Subway was to pay Developments until the conclusion of the arbitration. A subsequent order in April 2024 declared sanctions would be imposed if Subway failed to comply with the prior order. Subway petitioned to vacate or modify the arbitration order, arguing the arbitrator’s order exceeded her authority and must be vacated pursuant to the Federal Arbitration Act (FAA). Developments argued that the court should dismiss Subway’s petition because the arbitrator’s order was not a final award subject to review or, alternatively, confirm the order. The case was governed by the New York Convention and Federal Arbitration Act because it involved an arbitration in the United States with two parties having their principal place of business outside the United States.

The court determined that the arbitration order was final for the purpose of judicial review. Under the FAA, the court does not have jurisdiction to review an arbitration ruling that is not final. Although an arbitration award must usually resolve all issues submitted to arbitration to be final, an order may be final if there will be no way to challenge the order at the end of the arbitration. The court explained that an interim order can be final even when the order is not based on the merits of the dispute. Because the challenged order was similar to a prejudgment-security order by determining temporary control over the money that would be used to secure any potential judgment, the court concluded the order was final even though the arbitration for the contract dispute was ongoing. The court concluded that Subway did not meet its high burden of showing the arbitrator acted outside the scope of her contractually delegated authority, and that the arbitrator’s order fell within the purview of the arbitration agreement because the fifty percent interim payment clause was located in the arbitration clause, which stated the arbitrator will decide issues relating to the validity of the termination, requests for reinstatement, and damages. Further, the arbitration clause applied to the dispute over the interim payments because the provision explicitly stated it “shall apply to the resolution of any dispute between the parties regarding the termination of this Agreement by the Company.” The court found it reasonable to conclude the placement, context, terms, and lack of limiting language in the agreement regarding development payments provided the arbitrator with authority to enforce the interim-payment obligation. Therefore, the court confirmed the interim order.

*Natalie Kay is a Summer Associate for Lathrop GPM who contributed to the writing of this post.