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B & S Limited, Inc. v. Elephant & Castle International, Inc.

2006 WL 1360808 (N.J. Super. Ch. Div. 2006) (Unpublished)

FRANCHISES; ARBITRATION — A court analyzes enforceability of an arbitration provision in a franchise agreement.

A New Jersey company and a Canadian company entered into a franchise agreement and another company personally guaranteed the New Jersey company’s obligations under the agreement. The franchise agreement allowed the New Jersey company to develop, own, and operate one of the Canadian company’s restaurants to be located in a hotel.

A dispute arose between the parties regarding the New Jersey company’s failure to submit records of gross sales and to pay continuing fees as was required by the franchise agreement. The Canadian company filed a demand for arbitration, which stated that arbitration would take place in Minneapolis, Minnesota. The Canadian company sought monetary damages from the New Jersey company. In turn, the New Jersey company filed an order to show cause seeking to enjoin the arbitration proceedings in Minnesota.

In considering the New Jersey company’s request for preliminary injunctive relief, the Court stated that could issue preliminary relief if the movant demonstrated that: (1) an injunction is necessary to prevent imminent and irreparable harm; (2) the movant asserts a settled legal right supporting its claim; (3) the material facts are not controverted; and (4) in balancing the equities or hardships, if injunctive relief is denied then the hardship to the movant outweighs the hardship to the non-movant.

The first principle for granting preliminary relief requires that the movant, by clear and convincing evidence, show that an injunction is necessary to prevent imminent and irreparable harm. The New Jersey company claimed that arbitration in Minnesota would diminish its right to defend against the Canadian company’s allegations and its right to adequately assert counterclaims. The lower court found that the New Jersey company presented no evidence showing that it would be unable to defend the claims made by the Canadian company before an arbitrator in Minnesota. Furthermore, the Court found the New Jersey company failed to show that it would be unable to put on its case in Minnesota. The Court also stated that inconvenience alone was not sufficient to rise to the level of imminent and irreparable harm. Thus, the Court concluded the New Jersey company failed to show that it would suffer imminent and irreparable harm if the Canadian company was not enjoined from proceeding with arbitration in Minnesota.

The second principle for granting preliminary relief requires that the movant assert a settled legal right supporting its claim. The Court determined that this principle required it to engage in an extensive discussion to determine whether the arbitral forum selection clause in the franchise agreement was valid and enforceable and whether the arbitral forum selection clause and the arbitration clause were unconscionable. Following the Court’s review of the New Jersey Franchise Protection Act (NJFPA), the New Jersey Court’s decision in Kubis and the relevant case law discussing preemption by the Federal Arbitration Act (FAA), the Court held that the Kubis decision was not applicable to an arbitral forum selection clause in a franchise agreement governed by the FAA because of preemption. Accordingly, the Court found that the New Jersey company did not assert a settled legal right to its claim that the arbitral forum selection clause in the franchise agreement was presumptively invalid under the Kubis decision.

That conclusion notwithstanding, the Court determined that the arbitral forum selection clause could still be challenged under basic contract principles. The Court explained that in determining the validity of an agreement to arbitrate, federal courts should apply ordinary state-law principles that govern the formation of contracts. Further, general contract defenses such as fraud, duress, or unconscionability, grounded in state contract law, may operate to invalidate arbitration agreements. Unconscionability is recognized as a basis for invalidating a contract. Courts have described unconscionability as overreaching or imposition resulting from a bargaining disparity between the parties, or such patent unfairness in the contract that no reasonable person not acting under compulsion or out of necessity would accept its terms. When the issue of unconscionability is addressed, courts look at two factors, the unfairness in the formation of the contract (procedural unconscionability) and excessively disproportionate terms (substantive unconscionability). Procedural unconscionability can include a variety of inadequacies, such as age, literacy, lack of sophistication, hidden or unduly complex contract terms, bargaining tactics, and the particular setting existing during the contact formation process. A finding of substantive unconscionability suggests the exchange of obligations was so one-sided as to shock the court’s conscience. And, the burden of proving unconscionability is on the party asserting it.

The New Jersey company argued that the forum selection clause in the franchise agreement was unilaterally imposed upon it against its will and there were no concessions made by the Vancouver company for the inclusion of the clause. The New Jersey company further argued that the terms of the franchise agreement were the product of unequal bargaining power between the parties and violated public policy. In light of the guiding principles and the New Jersey company’s burden of proof, the Court found the New Jersey company failed to present sufficient evidence as to the disparate size between the New Jersey company and the Canadian company; the sophistication of the parties or the respective financial positions of the parties; that the New Jersey company was an unsophisticated entity; that the New Jersey company had limited financial means; or that unfair bargaining tactics were used. On the hand, the Court found that the evidence showed that both parties were represented by counsel during the negotiation and execution of the franchise agreement and that the pages of amendments to the franchise agreement showed that there was negotiation between the parties. Accordingly, the Court found that no aspect of procedural unconscionability was present.

In order to find substantive unconscionability, the Court was required to determine that the exchange of obligations was so one-sided that it shocks the conscience. The Court found that Minnesota was not so great a distance from New Jersey nor was the location the “home turf” of the Vancouver company. Accordingly, the Court concluded that requiring the New Jersey company to arbitrate its respective claims in Minnesota did not shock the conscience of the Court. Thus, the Court did not find substantive unconscionability.

The third principle for granting preliminary relief requires that the material facts be uncontroverted. The Court found that while the New Jersey company argued that it had unequal bargaining power in the negotiation of the franchise agreement, it submitted no competent proofs to support those assertions.

The fourth principle for granting preliminary relief requires that a court balance the equities or hardships. In balancing the equities here, the Court found them to be almost equal. The Court reasoned that neither party had its principle place of business in Minnesota, both parties were required to travel to the location, and both parties were required to expend monies to engage in the arbitration. Also, the New Jersey company did not show by clear and convincing evidence any great hardship in having to travel to Minnesota.

Accordingly, the Court denied the New Jersey company’s request to enjoin the Canadian company from proceeding with an arbitration against the New Jersey company.


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