Legal Issues

INTERNATIONAL ARBITRATION
CASE SUMMARY

Introduction
The case was instituted by spouses George and Miriam Nicola and their company, George and Miriam Nicola Pty Limited before the Federal Court of Australia against Ideal Image Development Corporation Incorporated (Ideal) and its officer, John Pace, on the basis of Ideals breach of the Franchise Agreement entered into between the parties. They claim that Ideal did not perform its obligations to them as franchisees. Ideal sought an application to stay the proceedings in accordance with the arbitration clause of the Franchise Agreement and pursuant to Section 7(2) of the International Arbitration Act of 1974 governing the enforcement of foreign arbitration agreements. Ideal Image likewise based its application on clause 40 of the Franchise Agreement which states that the Franchise Agreement and the franchise right granted in the said Agreement shall be governed by and construed under the laws of the State of Florida, save to the extent that the same is governed by federal law. The spouses Nicola, on the other hand, opposed the application to stay the proceedings, raising the arguments that the matter complained of falls outside the ambit of the arbitration clause as the issues involve competition laws, the same is impressed with public interest and may not be the subject of arbitration, and the absence of mediation proceedings between the parties precludes the conduct of arbitration, among others.

The Court ruled in favor of staying the proceedings in view mainly of the arbitration clause and exclusive jurisdiction clauses of the Franchise Agreement. In holding that the certain matters complained of by the Nicolas are proper subjects of arbitration, the Court held that in the context of the reach of arbitration clauses, the phrase arising out of or relating to has been construed by the Florida Supreme Court to be broad terms encompassing virtually all of the disputes between the contracting parties. The Court, speaking through Justice Perram, further explained that

Little illumination is obtained by considering whether the claims relate to Ideals business as franchisor. The question, as a matter of the text of clause 31(a), is simply whether a particular claim relates to the franchisees operation of the franchised business. That question is not to be answered at a theoretical level - it is to be answered by looking at the claims which are, in fact, made and comparing them with the operation of the franchisees business to see if there is a rational nexus.

The Court then clarified that the said nexus is satisfied by the relationship between the parties as franchisor and franchisee. The Court held that the usage of said words in the clause of the Franchise Agreement operated essentially as if it referred to any claim arising out of the agreement. As the alleged non-performance of obligations as franchisor constitutes a claim which relates to the franchisees operation of the business, then clause 31 of the Franchise Agreement is controlling, and hence, the proceedings need to be held in abeyance for purposes of bringing the grievances involving the franchisors non-performance of its obligations to arbitration. The Court failed to see how the Nicolas can say that their claims are not related to their operation of the franchised business. A perusal of the complaints of the Nicolas would show that each of the claims relates to deficiencies in Ideals support for the Nicolas in their operation of the franchise. For instance, the spouses Nicola complained of deficiencies in the computer software provided to them by Ideal, and Ideals failure to effectively advertise the franchised business. The Court found it hard to understand how majority of the claims of the spouses Nicola are not related to the franchised business when the losses which they are claiming, in a real sense, are losses to the franchised business and it is thus difficult to understand how the said losses could be said not to relate to the operation of the franchised business. The Court ruled that although the said claims of the Nicolas do not arise out of the operation of the franchised business, the same relates to the operation of the business, in which case, the claims still fall within clause 31 of the Franchise Agreement.

It is noteworthy, however, that not all of the claims of the Nicolas were found by the court as proper subjects of arbitration. For instance, the claim as regards the termination restraints imposed by the Franchise Agreement was found by the court to be outside the coverage of the arbitration clause. The Court held that the only nexus between the post termination restraints imposed by the contract and the operation by the Nicolas of the franchised business is that the parties are the same and that they have in common their previous agreement. This being the case, the Court held that the said claim may not be arbitrated. In the same light, the Court likewise held that the claim of the Nicolas to set aside the Franchise Agreement is not capable of settlement within the meaning of Section 7(2)(a) of the IAA and hence, not subject to arbitration.

As regards the said claims of the Nicolas which do not relate to the franchisees operation of the franchise business, and are outside the coverage of the arbitration clause, the Court said that clause 40 of the Franchise Agreement shall govern, in which case, staying the proceedings is still in order regardless of the fact that the said matters are not proper subjects of arbitration. Clause 40 of the Franchise Agreement provides that

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 ... Franchisee irrevocably submits to the jurisdiction of such courts and waives any objection Franchisee may have to either the jurisdiction or venue of such court.

According to the Court, the effect of clause 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 thus, proceedings before the Federal Court of Australia must be stayed. As parties to the Franchise Agreement, spouses Nicola have consented to the exclusive jurisdiction of the court in Florida in relation to matters that do not fall within the arbitration clause of the Franchise Agreement, and thus, they are bound to respect the said jurisdiction. The Court explained further that the principles governing the grants of a stay of proceedings which are commenced in defiance of an exclusive jurisdiction clause are well established, and quoted Justice Brandon, to wit

(1) Where plaintiffs sue in England in breach of an agreement to refer disputes to a foreign court, and the defendants apply for a stay, the English court, assuming the claim to be otherwise within its jurisdiction, is not bound to grant a stay but has a discretion whether to do so or not. (2) The discretion should be exercised by granting a stay unless strong cause for not doing so is shown. (3) The burden of proving such strong cause is on the plaintiffs. (4) In exercising its discretion the court should take into account all the circumstances of the particular case.

Based on the foregoing, the Court ordered that the proceedings should be held in abeyance in view of the deference due the courts in Florida. The Court likewise rejected any principle which would require the presentation of evidence showing that the courts of Florida are capable of exercising jurisdiction under the TPA. Following the aforementioned ruling of Justice Brandon, the Nicolas would need to establish by clear evidence that their claim was not recognizable before the courts of Florida. Unfortunately, for the spouses Nicola, that evidentiary onus has not been discharged, and hence, staying of the proceedings is in order.

The Court, in ruling in favor of the stay of the proceedings, likewise discussed the importance of public interest in determining whether the dispute between the parties may be the subject of arbitration. As an example, the Court stated that suits concerning competition law have frequently been cited as examples of claims unsuitable, by reason of public policy, for arbitration. The Court, citing Comandate Marine Corp vs. Pan Australia Shipping Pty Ltd, said that The types of disputes which national laws may see as not arbitrable and which were the subject of discussion leading up to both the New York Convention and the Model Law are disputes such as those concerning intellectual property, anti-trust and competition disputes, securities transactions and insolvency. The guidelines laid down in the said case likewise establish how the Federal Court is supportive of the arbitration process as a means of putting an end to international commercial disputes in an amicable and peaceful manner. The Court then discussed the claims of the Nicolas and whether the ruling in Comandate finds application. In their application, the competition laws identified by the Nicolas were laws prescribing industry standards and laws prescribing unconscionable or misleading conduct in trade and commerce, which the Court found to be anti-competition laws. The Court, however, failed to agree with the Nicolas that the same is impressed with public interest so as not to be subject to arbitration. The Court held that the issues lacked the element of broad public interest in the outcome to warrant the conclusion that only the local national courts should be involved in their resolution.

In view of the foregoing, the Court ruled that the claims of the Nicolas 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 clause 31(a). It follows, therefore, that the proceedings before the Federal Court of Australia need to be stayed to render effective the said ruling of the Court.

Background Information
On or about 1 September 2004, the Nicolas and Ideal entered into a Franchise Agreement whereby Ideal agreed to grant the Nicolas the exclusive right to conduct the franchised business under the name Ideal Image. The said Agreement concerned the operation of business involving technologically advanced lasers for hair and skin removal, and also for botox application and injection therapy in certain parts of Sydney. It was unfortunate, however, that the Nicolas were not happy with their relationship with Ideal as franchisees. They had grievances as regards the non-performance of Ideal of its obligations under the Franchise Agreement. According to the Nicolas, they were provided with inadequate or non-existent assistance Ideal did not own relevant intellectual property in Australia, and that they were informed that an Ideal franchise would have certain qualities which Ideal did not have. The spouses likewise claimed that Ideals failure to properly advertise the franchise had an impact on the smooth running of the business and, its profitability. They claimed entitlements to restitution of franchise fees paid to Ideal and for damages for breach of contract pursuant to section 52 of the Trade Practices Act of 1974 also, for unconscionable conduct contrary to section 51AC of the said Act and infringement of the Franchisors Code of Conduct which is contrary to the requirements of the Trade Practices Act. The spouses put forward their claim in view of the amount of money that they spent pursuant to the Franchise Agreement.  The Nicolas contend that they paid franchise fees, purchased laser machines and spent substantial money in such amount in excess of US402,900 for the commencement and operation of the franchised business. They also argued that they suffered substantial amount of losses in carrying on the business. Additionally, the Nicolas also sought relief in relation to certain restraints on their ability to compete imposed by the Franchise Agreement. The Nicolas likewise alleged that the consideration for the Franchise Agreement failed either in whole or in part as royalties paid by them were incorrectly calculated by reference to revenue from which GST had not yet been deducted.

On the basis of the foregoing grievances of the Nicolas, they instituted an action before the Federal Court of Australia against Ideal. In response thereto, Ideal sought to stay the proceedings before the said Court in view of Clauses 31 and 40 of the Franchise Agreement. Clause 31 of the Franchise Agreement, or the arbitration clause, to wit

a) Except as provided in this Agreement, Ideal Image Development Corporation and Franchisee agree that any claim, controversy or dispute arising out of or relating to Franchisees operation of the Franchised business under this Agreement including, without limitation, those occurring subsequent to the termination or expiration of this Agreement, which cannot be amicably settled shall be referred to Arbitration in accordance with the Rules of the American Arbitration Association (AAA), as amended (and specifically including the optional rules). If such Rules are in any way contrary to or in conflict with this Agreement, the terms of this Agreement shall control. The Arbitrator shall apply the Federal Rules of Civil Procedure and the Federal Rules of Evidence to the extent possible while, in their discretion, still effecting the arbitration goal of streamlined administrative procedure. The parties hereto expressly agree that there will be no punitive damages awarded with respect to any Arbitration, regardless of each partys respective right to such damages under the choice of law provision herein. Only claims, controversies or disputes involving Franchisee and no claims for or on behalf of any other franchisee, franchisor or supplier may be brought by Franchisee hereunder. The law of the State of Florida shall govern the construction and interpretation of this Agreement in Arbitration.

b) The Arbitration proceedings shall be conducted before a single Arbitrator, selected in accordance with AAA Rules, and shall be a member of the bar of the State of Florida has been actively engaged in the practice of law for at least five (5) years. Prior to the commencement of hearings, the Arbitrator shall provide an oath of undertaking of impartiality.

c) Arbitration shall take place at Ideal Image Development Corporations principal place of business in Tampa, Florida. The award of the Arbitrator shall be final and judgment upon the award rendered in Arbitration may be entered in any Court having jurisdiction thereof. The costs and expenses of Arbitration, including compensation and expenses of the Arbitrators, shall be borne by the parties as the Arbitrator determines.

d) Any party to this Agreement may bring an action, including a summary or expedited proceeding to compel Arbitration of any such dispute or controversy, in a court of competent jurisdiction in the State of Florida and, further, may seek provisional or ancillary remedies including temporary or injunctive relief in connection with such dispute or controversy, without providing or posting any bond or security regardless of any legal requirements to do so, provided that the dispute or controversy is ultimately resolved through binding Arbitration conducted in accordance with the terms and conditions of this Agreement.

e) In proceeding with Arbitration and in making determinations hereunder, the Arbitrator shall not extend, modify or suspend any terms of this Agreement or the reasonable standards of business performance and operation established by Ideal Image Development Corporation in good faith. Notice of or request to or demand for arbitration shall not stay, postpone or rescind
the effectiveness of any termination of this Agreement.

It was advanced by Ideal that as the matters raised by the spouses Nicola as complaints necessarily relates to their performance of the franchised business, then the matter is a proper subject for arbitration, and that the Nicolas are bound to respect the provisions of the Franchise Agreement especially clause 31 which embodies the agreement of the parties to subject disputes to arbitration.

As regards matters that are not covered by clause 31, or those which are not proper subjects of arbitration, the application for the stay of the proceedings was based on clause 40 of the Franchise Agreement. Under the said clause of the Franchise Agreement between the Nicolas and Ideal,

Except to the extent governed by federal law, this Agreement and the franchise right granted herein shall be governed by and construed in accordance with the laws of the State of Florida. If, however, any provision, or portion hereof in any way contravenes the laws of any state or jurisdiction where this Agreement is to be performed, such provision, or portion thereof, shall be deemed to be modified to the extent necessary to conform to such laws, and still be consistent with the parties intent as evidenced herein. 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 provided, however, with respect to any action which includes injunctive relief, Ideal Image Development Corporation may bring such action in any court in any state which has jurisdiction. Franchisee irrevocably submits to the jurisdiction of such courts and waives any objection Franchisee may have to either the jurisdiction or venue of such court.

It was thus argued by Ideal that even if the matters in dispute fall outside the ambit of clause 31, the Federal Court of Australia will still have to stay the proceedings since under clause 40 of the Franchise Agreement, the parties agreed that disputes arising pursuant to the Franchise Agreement, but are not proper subjects of arbitration, shall be brought to courts of Florida.

Presentation of Arguments

George and Miriam Nicola

Matters complained of are outside the coverage of clause 31 of the Franchise Agreement

The spouses Nicola argued that the matters complained of are not covered by Clause 31 of the Franchise Agreement as said matters do not relate to the franchisees operation of the franchised business. According to the Nicolas, the suggested approach to interpreting the clause ignored the critical words the franchisees operation of the franchised business, leaving them merely as meaningless surplusage. The Nicolas added that it was Ideals misconduct which was the subject of their claim and not their own conduct. So viewed, that conduct could not be said to arise from the franchisees operation of the franchised business and could not, therefore, be within the terms of clause 31(a) of the Franchise Agreement. In view of the same, spouses Nicola posited that their grievances do not constitute matters which are cognizable by the arbitrator, and hence, there is no substantial ground for the Court to stay the proceedings. It was the view of the Nicolas that since their claim arises out of or relates to the operation of Ideals business as a franchisor, it cannot also relate to the operation of the franchisees business. The Court, however, did not accept this argument of the Nicolas as the same assumes that because the claim presented by the spouses arises out of or relates to the operation of Ideals business as a franchisor that it cannot at the same time relate to the operation of the franchisees business.

The Nicolas likewise argued that under Rule 43 of the rules of the American Arbitration Association (AAA), the relief that the arbitrator may award in arbitration is limited to those reliefs which fall within the ambit of the Franchise Agreement between the parties. Under clause 31 of the Franchise Agreement, the arbitrator is enjoined from extending, modifying or suspending the operation of the Franchise Agreement. Pursuant to the same, the Nicolas posited that since their 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. The Nicolas also submitted that their pleading attacked the arbitration clause itself pursuant to the TPA, and in view of the same, the issues raised may not be brought before arbitration proceedings.

Grievances involving competition laws are not proper subjects of arbitration

To further buttress their claim that their grievances are not proper subjects of arbitration, the Nicolas pointed out that 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. The Nicolas supported the same by raising an established principle which renders disputes involving issues of public policy as matters that are not proper subjects of arbitration as said issues affect not only the parties to the case, but the public and the society as well. The competition laws identified by the Nicolas were laws prescribing industry standards and laws prescribing unconscionable or misleading conduct in trade and commerce. The Nicolas claim that since portions of their complaints are based on competition laws, the proceedings should not be stayed in view of the public interest involved in the resolution of the said issues raised by them.

The exclusive jurisdiction clause of the Franchise Agreement finds no application in the issues raised

As regards the grant of exclusive jurisdiction to the courts of Florida in respect of matters which are not brought before the arbitrator, the Nicolas argued that orthodox doctrine is that there is no common law basis for a stay of proceedings based on an exclusive jurisdiction clause. The Nicolas suggested that the Court should not stay their proceedings if there was a doubt that the courts of Florida could take cognizance of the issues. According to the spouses Nicola, if Ideal had failed to prove the contents of the law of Florida, then the law of Australia was to apply. The Nicolas also added that 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, the application for the stay of the proceedings should be refused.

It is the view of spouses Nicola that the clause on exclusive jurisdiction only finds application in cases involving matters which are not proper subjects of arbitration in view of some rule of law preventing arbitration or by some rule of public policy preventing arbitration. In this regard, the Nicolas asserted that since their claims are not capable of being subjects of arbitration proceedings in view of the fact that these claims falls outside the coverage of Clause 31 of the Franchise Agreement, Clause 40 on exclusive jurisdiction may not be applied, and there is no justification to stay the proceedings before the Federal Court of Australia. In refuting the claim of spouses Nicola, the Court found it more natural, and more consonant with the language of the clause to proceed upon the assumption that the claims referred to in clause 40 represent the universe of all claims with which the agreement could be concerned.

Mediation is a necessary precondition to the conduct of arbitration

The Nicolas also submitted that the matter could not be referred to arbitration absent any mediation conducted between the parties. The Nicolas posited that the conduct of a mediation proceeding between them and Ideal is a condition precedent before arbitration may proceed. They claim that the dispute should not be sent to arbitration unless there was first mediation between Ideal and the Nicolas as the arbitration clause of the Franchise Agreement required that the parties had been unable amicably to settle the dispute as condition precedent of its operation. As the parties have not yet been subjected to any conciliation or mediation proceedings, it was the stance of the Nicolas that the arbitration advanced by Ideal may not proceed.

Ideal Image Development Corporation Incorporated

Spouses Nicola are bound by their contract to arbitrate under Clause 31 of the Franchise Agreement

Ideal argued that since the grievances presented by the Nicolas are matters that relate to the franchisees operation of the franchised business, then said grievances are proper subjects of arbitration in accordance with Clause 31 of the Franchise Agreement. Ideal took the position that by consenting to clause 31 of the Agreement, the Nicolas are bound by their contract to arbitrate in the event of disputes which involve matters that fall within the scope of clause 31. As the acts complained of relates to the operation of the franchised business, then the dispute is subject to arbitration in accordance with the Franchise Agreement. To support its claim, Ideal also presented evidence from an expert about the laws of Florida in order to establish how clause 31 should be interpreted. Ideal presented Mr. Michael Gerard Murphy Esquire who is a lawyer in Florida. Mr. Murphy was asked to state what the law of Florida was in relation to the correct construction and interpretation of clause 31 of the Franchise Agreement. The Court found the expert testimony of Mr. Murphy useful in determining the sources of Florida law which may be used in understanding the arbitration clause of the Franchise Agreement.

Even if the complaints of the Nicolas are directly attributed to the acts of the franchisor, the same is still in relation to the business operations of the franchisees since everything which relates to the operation of the franchised business necessarily relates to the operation of the franchisees. In view of the same, the court proceedings need to be stayed and the dispute should be brought before the arbitrator.

Issues raised by the Nicolas are not tainted with public importance

As regards the contention of the Nicolas that their grievances are tainted with public importance and hence, should not be brought to arbitration, Ideal claimed that whilst there exists a principle that matters involving public interest are not proper subjects of arbitration, the said principle cannot be applied to the case at bar since the grievances raised by the Nicolas do not have that kind of quality. In relation thereto, the Court held that even if the Nicolas raised issues involving competition laws, the same is not sufficient to say that the matter affects public interest since the said issue so raised are not concerned with abuses or control of market power.

Spouses Nicola are bound by their agreement to be subject to the jurisdiction of the courts of Florida

Ideal also posited that even if the present proceedings were not required to be submitted to arbitration, the Nicolas had agreed by Clause 40 that any dispute that could not be referred to arbitration was required to be resolved by the court of Florida. As a party to the Franchise Agreement, the spouses Nicola are bound by its provision which mandates that matters falling outside of the arbitration clause of the Franchise Agreement shall fall under the exclusive jurisdiction of the courts of Florida. It is the stance of Ideal that to the extent that proceedings were not able to be arbitrated pursuant to clause 31 then the parties had agreed to the exclusive jurisdiction of the courts of Florida, with the result that the proceedings should be stayed in any event. According to Ideal, as the spouses Nicola are bound by clause 40 of the Franchise Agreement, they have committed themselves to the jurisdiction of the Florida courts and thus, their institution of the proceedings before the Federal Court of Australia is an abuse of process which ought, as a matter of discretion, to be stayed.

Spouses Nicola have already waived their right to avail of mediation prior to the conduct of arbitration

In respect of the issue on mediation, Ideal admitted that mediation between the parties is a condition precedent before the commencement of arbitration proceedings to thresh out the dispute. It is admitted that conciliation is a precondition for the conduct of arbitration to exhaust all chances of amicable settlement between the parties. It argued, however, that the Nicolas were already deemed to have waived their right to mediation as they already instituted their action before the courts prior to mediation.

Conclusion
The case of Nicola vs. Ideal Image Development Corporation Incorporated is significant in light of guidelines set by the Court in respect of international arbitration. Justice Perram, through the said case, clarified that in interpreting arbitration clauses referring to matters which may be proper subjects of arbitration, the use of the words arising out of and relating to the business of the franchisee indicates only that there needs to be some rational connection or nexus between the claim and the business in question. In line with the same, the Court added that the need for said nexus is satisfied by the relationship between the contracting parties. Hence, in interpreting arbitration clauses in contracts, the ruling of the Court renders assistance in interpreting the use of the foregoing, and more importantly, in determining which subjects may properly be brought by the parties to arbitration.

It is likewise worthy to point out that the Court made clear pronouncements as regards arbitration clauses and exclusive jurisdiction clauses in contracts. As most contracts involve the performance of duties and obligations in different regions and jurisdictions, this ruling of the Court will help the parties in the proper administration and enforcement of contracts entered into. In this case, the Court highlighted the fact that arbitration clauses should be observed by the parties to the contract as they have consented to the same when they executed the contract.   In line with the ruling of the Court, when the parties to the contract agree, in addition to resort to arbitration, on the exclusivity of venue in case of dispute between the said parties, the said clause on exclusive jurisdiction shall govern in respect of matters that do not fall under the arbitration clause of the contract. The Court added that in the presence of exclusive jurisdiction clauses in contracts, strong cause needs to be shown by the party opposing the stay of the proceedings. As the parties freely entered into the contract, they are bound by the provisions of the contract, including the provision on the exclusivity of the venue. The ruling of the Court does not only provide guidelines to be followed in respect of parties to contracts but to judicial bodies that may be faced with disputes similar to the one presented in the case of Nicola vs. Ideal Image. In this regard, proper deference will be accorded to the body before which the dispute must be brought and the importance of international arbitration as a tool for amicably settling disputes will be recognized.