Legal Issues

The case here being discussed is about Dr. George Nicola, his wife Dr. Miriam Nicola and their company George  Miriam Nicola Pty Ltd, versus Ideal Image Development Corp Inc (Ideal) and its officer Mr. Pace. The firm Ideal has been registered as a business in Florida. As per the Nicolas application, Ideal is primarily a franchisor of technologically advanced lasers for hair and skin removal, Botox application and injection therapy. Nicolas claims that on 1st September 2004, they signed an agreement to franchise the business operations of Ideal in Sydney as per the name Ideal Image.

Now the Nicolas complains that the terms and conditions of their agreement were violated by Ideal. The Nicolas claims that Ideal provided them with insufficient assistance and did not possess the quality and standards as agreed upon. Furthermore, Ideal did not have sufficient access to the intellectual property in Australia. Hence, the Nicolas claims that the franchising agreement done with Ideal lies void. And now Nicolas claim that they are entitled to restitution of franchise fees they paid to Ideal and are demanding for the damages they incurred as a result of the breach of contract by Ideal. This demand has been made under Section 52 of Trade Practices Act 1974 (Cth) and 51 AC of the Act. The Nicolas also seek to vary the agreement pursuant to the Independent Contractors Act 2006 (Cth).

Then on 3rd December 2008, the court granted on Ideals request granted permission to resolve this issue outside of jurisdiction and conditionally sought a permanent stay of proceedings. The stay was taken on basis of Arbitration, Enforcement of Foreign Arbitration Agreements and Governing Laws.

As per the franchisee agreement between the two parties any dispute which could not be settled amicably shall be resolved by referring to arbitration with reference from the Rules of the American Arbitration Association. However, as per the agreement both the parties agreed that no punitive damages shall be awarded in any arbitration. Furthermore, the arbitration proceedings shall be conducted by an impartial Arbitrator who must have been actively engaged in practice of law for past five years in Florida State.

The hearings for this arbitration process shall be conducted at Ideals principal place of business in Tampa, Florida. The Arbitrators award shall be final and judgment can be rendered in any court having the jurisdiction to do so. The expenses of hiring the Arbitrators and their fees charged shall be borne by the parties as the Arbitrator defines. The arbitrator shall not be able to extend, modify or suspend the terms of the agreement taken place between the parties in good faith.

Another matter related here is that of Enforcement of Foreign Arbitration agreements. On getting an application of any party to the agreement.  The court can issue an order to stay the proceedings if necessary can refer the parties to arbitration in respect of that matter. The third matter of concern to the Franchise agreement is with respect to the governing law. The governing law here shall be in accordance with the laws of State of Florida. But if any provision contravenes with laws of any state where this agreement has to be performed then that provision shall be modified to the extent necessary to conform to those laws.

Hence, consequently, by virtue of the first two matters Ideal submitted an application to the court that it is bound to stay the Nicolas proceedings. As per Ideals claims the Nicolas are bound by the exclusive jurisdiction of the law of Florida. And the current proceedings are an abuse of process which thus has to be stayed. Thus, the application gave rise to nine other issues.

The first issue was that the agreement clause was to be interpreted by an expert in accordance with the law of Florida. However, Nicolas objection was that such an experts evidence was inadmissible in this case. The second issue was to the proper construction of the cl 31(a) with respect to arbitration. The Nicolas denied Ideals application that their allegations met the description in cl 31(a). The third issue was to the proper characterization of the claims. The fourth issue was about the authority of the arbitrator. The Nicolas claimed that the effect of the cl 31(e) was to prevent the arbitrator from making any orders that would set aside the agreement itself. Ideal however denied that cl 31(e) had that effect.

The fifth issue was pertaining to the role of public policy. Nicolas submitted that the resolution of their proceedings raised important issues touching upon the public interest. They said that in foreign parts litigation was proving to be unsuitable for arbitration. The sixth issue was to the jurisdiction of the Courts of Florida. The Nicolas submitted that cl 40 was not being properly understood. The seventh issue was that Ideal denied that Nicolass claim that arbitrator was not to resolve this issue.

The eighth issue was the third applicant and the second respondents were nonparties to the agreement. The ninth issue was about mediation. Nicolas claim arbitration should not be done unless there was mediation as the arbitration clause. Ideal however replied that Nicolas had waived this point by commencing the present proceedings.

The first issue thus was to identify the content of the law of Florida. Here Ideal took assistance form Mr Michael Gerard Murphy Esquire. He is a law expert in Florida Bar since 1998. And is also the litigation partner with Greenberg Traurig which is a United States firm with more than 1,800 attorneys. His major area of practice is construction law which includes mediation as well. He has been a advocate of stay motions to induce arbitration and is recognizable with the top cases in Florida addressing the span of arbitration clause. Thus, as per Mr. Murphys opinion, the laws of the State of Florida apply here in this case and that nothing can stop an arbitrator from determining this issue. In accordance with the law of any directions by the parties involved.

But there are flaws in Mr. Murphys advice been given. He has identified the laws of state of Florida that are applicable. But he did not clarify their standing in the operations part. His opinion gets inadmissible if these cases are referred. Neilson v Overseas Projects Corporation of Victoria Ltd (2005) 223 CLR 331 at 371 120 per Gummow and Hayne JJ United States Trust Co of New York v Australia  New Zealand Banking Group Ltd (1995) 37 NSWLR 131 at 136 per Sheller JA Allstate Life Insurance Co v Australia  New Zealand Banking Group Ltd (No. 6) (1996) 64 FCR 79 at 82 per Lindgren J Stern v National Australia Bank Ltd (2000) 171 ALR 192 at 52 per Hill, OConnor and Moore JJ. The opinion fails on the ground that he has failed to expose his process of reasoning. The approach used by him does not expose the difference between the wordings of clauses in the cases he says are relevant and in the wording of cl 31(a). Further, the material presented by Mr. Murphy cannot be all considered valid as all cases are not relevant to the issue under discussion.

So if Ideal failed to prove the contents of the law of Florida then the law of Australia was to be applied to this case. The second case as submitted by Nicolas was of Ideals misconduct in the construction of the cl 31(a). The phrases arising out of or relating to the agreement seems to be taken a different meaning for both the parties. For Nicolas, the meaning is that nothing which relates to the operation of Ideals business can also relate to the operation of their business. Where as for Ideal, everything which relates to the operation of its business also relates to the operation of the Nicolas.

The third issue is pertaining to the characterization of the claims. Nicolass first claim is a series of allegations which it has against Ideal on breaching the terms of the agreement. Each of the claims relates to the deficiencies in Ideals support for the Nicolas in their operation of the franchise. There are allegations to deficiencies in the computer software which was provided by Ideal to Nicolas and also Ideals failure to properly advertise the franchised business. These allegations are so because they have affected the conduct of the operations that were being carried out by Nicolas.

All this had an impact on the smooth running of the business and also on its profitability. These claims do not cease to relate to the operation of the franchised business. Thus, all the claims for the breach of contract are caught by cl 31(a). Further, the Nicolas claim that the royalties paid by them were incorrectly calculated by reference to revenue from which GST had not yet been deducted.

They contend that on its proper construction the agreement provided only for payments of royalty by reference to revenue after the deduction of GST.  In both cases it is apparent that the payments relate to the operation of the franchised business. Franchise fees were paid by the Nicolas as an integral part of their business of operating their franchise, as were the royalties. The question of whether and, if so, to what extent those moneys are recoverable are claims which relate to the operation of the franchised business. They are, accordingly, within the terms of cl 31(a).

The Nicolas alleges that Ideal entered into another franchise agreement with them for the operation of other clinics in return for certain fees. The amended statement of claim refers to this additional agreement as a collateral agreement. The Nicolas complain that Ideal failed to obtain from them certain signed documents which were made legally necessary by the provisions of the Franchising Code of Conduct which was itself made compulsory by the strictures of the TPA. The Nicolas paid Ideal US200,000 towards various fees due under this collateral agreement.

Apparently, the clinics did not proceed and Ideal charged the Nicolas US72,975.16 for back royalties, which included withholding tax.

Consequently, they claim to be entitled to recover the US200,000 for their wasted expenditure on an additional clinic at Double Bay and also to recover from Ideal past and future trading losses at the same clinic. Ideal however pointed out that the first and second applicants were granted license to open and operate a second clinic operating the franchised business within the territory referred to in paragraph 17 hereof, without payment of any further franchise or system fee and upon the terms of the Agreement and the franchise fee and Comprehensive System Fee for the clinic. They were granted license to open and operate three more Ideal franchise clinics severally in additional territories in the Sydney and Melbourne Metropolitan areas.

The pleading by Ideal shows that the collateral agreement was just that collateral. So, the claims made under the collateral agreement are claims for the recovery of moneys paid under the agreement which relate to the conduct of the franchise business. So conclusively, all the claims made here are amenable to arbitration as per the cl 31 (a).

The fourth issue is about the authority of the arbitrator.  The arbitrator shall not extend, modify or suspend any terms of the Agreement as per the cl 31(a). The arbitrator could not exercise a power to set aside or to vary the agreement itself. Since the Nicolas claims for relief included claims for orders setting aside or varying the agreement, it followed that the arbitrator would not be able to deal with those parts of their claims. Ideal submitted the words extend, modify or suspend were not apt to describe the relief sought by the Nicolas.

Ideal submitted that cl 31(e) was directed towards preventing the arbitrator from making interim determinations which would have the effect of extending, modifying, or suspending the operation of the agreement or which would have the effect of amending the standard of the performance required by the franchisee. Ideal also pointed to AAA Rule 7 which confers on the arbitrator a power to determine the validity of the agreement that allows the arbitrator to set aside or vary the agreement. Hence, the Nicolas claims to set aside or vary the agreement cannot be determined under the arbitration clause and hence cannot be described as being claims which are capable of settlement.

Next, the Nicolas submits that those parts of their case which depend upon issues of competition law are not suitable for arbitration and hence should not be the subject of a stay. This involved the invocation of an established principle which keeps from arbitration certain categories of dispute involving issues of public policy or affecting a broader range of persons than the parties to the arbitration. Suits concerning competition law have frequently been cited as examples of claims unsuitable, by reason of public policy, for arbitration.

Next, all claims which, as a matter of law or public policy cannot be submitted to arbitration in accordance with Paragraph 31 shall be brought within the State of Florida in the judicial district in which Ideal Image Development Corporation has its principal place of business.

Thus, it can be concluded, therefore, that the effect of cl 40 is to require all claims between the parties that are not subject to arbitration - in this case those parts of the claims relating to the setting aside of the agreement and the post termination restraint issues - to be determined by the courts of Florida and not by Australian courts. As an alternative submission, Nicolas submitted that this Court would not stay their proceedings if there was a doubt that the courts of Florida could entertain them. Since there is no evidence about the law of Florida on this issue, and since it was less than self-evident that the courts of Florida did have jurisdiction under the TPA (or the ICA), the stay should be refused.

Next the second argument also stands rejected. Much of this part of the Nicolas argument proceeded as if what was involved was not an exclusive jurisdiction clause. But this case is concerned with such a clause and the consequence is that strong cause by the party resisting the stay must be shown otherwise the stay will be imposed. Cases concerned with non-exclusive jurisdiction clauses have no particular relevance in that context.  Hence, on this issue, the Nicolas themselves would need to establish by clear evidence that their claim was not recognizable before the courts of Florida.

The Nicolas made an additional submission that their pleading directly attacked the arbitration clause. The claims to set aside the agreement are not, in fact, within the authority of the arbitrator means that such claims are within the exclusive jurisdiction of the courts of Florida. In those circumstances, the question does not arise. In the eighth issue, the Nicolas next submitted that only they, and not their company, were parties to the agreement. That has the consequence, so they submit that the claim brought by their company George and Miriam Nicola Pty Ltd is within the jurisdiction of this Court and should be permitted to proceed.

Ideal submitted that this was not so because the dispute with the company was part of the same matter as the matter which existed between the Nicolas and Ideal. It pointed to the fact that the companys role in the pleading was essentially only that of a nominee. Lastly, the Nicolas submitted that the matter could not be sent to arbitration until there had been mediation. The Nicolas commenced proceedings in this Court, which is inconsistent with any entitlement to invoke the mediation clause.

The effect of this decision is that the first and second applicants claims to set aside and vary the agreement, together with the matter involving the post termination restraints, must be heard in the court of Florida, but the balance should be arbitrated pursuant to cl 31(a). It follows, therefore, that the whole of their proceedings should be stayed. And the third applicants claim also stays until further order. Hence, Ideal did not oppose the imposition of the following conditions on the stay of the Nicolas proceedings.

The proceedings are stayed upon condition that such stay may be terminated upon application by the Applicants in the event that the First Respondent does not do all things reasonably necessary to be done on its part to have the matters referred to arbitration being determined in accordance with the arbitration agreement between the parties with reasonable expedition. And the parties are to bring in short minutes of order giving effect to these reasons within 7 days. Finally the applicants should pay the first respondents costs of the motion.