Subshop Arbitration venue unenforceable

Submitted by Fayaz on Wed, 02/18/2009 - 8:20am.

 

News Sponsored by: 12/02/2009 Enforcing US arbitral awards in Germany against local franchisees
 
In a recent decision the German Court of appeal refused to enforce a US arbitration award against a German franchisee. The Court felt it was unreasonable to force the franchisee to travel to New York to attend the arbitration.
 
The franchisor was a Dutch subsidiary of the World's # 1 Subshop franchise(name edited). The franchise agreement was subject to Liechtenstein Law and contained a New York arbitration clause. When a dispute over the payment of franchise fees arose the franchisor obtained a US arbitration award for payment.
The German Court refused to enforce the arbitral award as it unreasonably favoured the franchisor. The Court based its decision on the principle of reasonableness applicable in Liechtenstein law. Liechtenstein has a reasonableness test when it comes to reviewing standard form contracts. Standard term contracts which are unreasonable are invalid. The Court concluded that an obligation on a German franchisee to attend an oral hearing in New York is not justifiable when the place of performance of the franchise agreement is Germany, especially since the franchisor had a network of consultants for its German franchisees and engaged a German lawyer for its German affairs on a permanent basis.
The lesson to be learnt for franchisors
US Franchisors should be careful when they choose the governing law of their franchise agreements in Europe. Any jurisdiction which applies a reasonableness test may open up the door for a review of the franchise agreement.
If arbitration is chosen as the dispute resolution mechanism, franchisors should not choose a venue out of mere convenience, but consider if a venue closer to the franchisee's place of business (such as London or Zurich) would be acceptable.

Unedited version, except where noted

fayaz@mrfranchiseman.com,   949-253-4610, or 800-401-6424

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