Court upholds arbitration decision and allows franchisee to rescind franchise agreement

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In a case which impacts at least three areas of the law – arbitration awards in general, arbitration awards in relation to franchise agreements and impact of a merger clause in an agreement – the Federal District Court, Middle District of Tennessee, in the recent case of Altruist, LLC v. Medex Patient Transport, LLC, upheld an arbitration award which allowed a franchisee to rescind its franchise agreement.  

Because the right to review an arbitration award is often very limited by statutory law, the franchisor was forced to challenge the award by asserting the arbitrator exceeded his authority as being manifestly unjust.  

Interestingly, the statutory scheme outlined in the Federal Arbitration Act (and which is followed by the vast majority of states via state statutory schemes relating to enforcement or vacation of arbitration awards) does not provide for the right to vacate an award as being manifestly unjust.  Rather, this right arises under case law, including case law of the United States Supreme Court. Generally, an award is manifestly unjust and should be vacated when the arbitrator’s award is contrary to an established defined legal principle and the arbitrator refused to apply that principle. 

In the context of Altruist, the court found that the arbitrator’s award of rescinding franchise agreement because the franchisor had an incomplete disclosure statement was consistent with established defined legal principles. As such, the court refused to apply the manifestly unjust doctrine to vacate the award.

The franchisor also attempted to assert the award was manifestly unjust because the franchise agreement’s merger clause barred any FDD omissions once the franchise agreement was executed.  In rejecting that position, the court stated the arbitrator acted properly because under Tennessee law a fraud in the inducement claim is not always barred when the documents contain a merger clause. Of course, this finding could vary from state to state depending on the law of a particular state.  Thus, if the case was brought in a different state where the law barred fraud in the inducement claims when contracts contained a merger clause, the award in Altruist might have been manifestly unjust. 

The Altruist ruling is a great example of several concepts.  Frist, litigation or arbitration has risks and rewards for both sides.  Parties to litigation or arbitration can never predict the outcome of the process. Second, because arbitration awards may have limited right of review, you may wish to carefully consider whether arbitration or litigation is the preferred dispute resolution route.  Third, because arbitration awards may have limited right of review careful drafting of the arbitration clause is a must.

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