SDNY Confirms Arbitration Order, Holding Order Was Final and Arbitrator Did Not Exceed Authority

In Subway Franchise Systems of Canada ULC v. Subway Developments 2000 Inc., the U.S. District Court for the Southern District of New York addressed whether an arbitrator exceeded her authority when ordering that one of the parties to the arbitration must continue making interim payments during the pendency of the arbitration, and whether the arbitrator’s order was final and subject to appeal.

The underlying arbitration involved claims brought by Subway Developments 2000 Inc. against Subway Franchise Systems of Canada ULC alleging that Subway Franchise wrongfully terminated two development-agent agreements between the parties. The development-agent agreements included a mandatory arbitration provision that covered disputes regarding the termination of the agreements. The agreements further provided that any arbitration initiated under the agreements is limited to a determination by the arbitrator of the validity of the termination of the agreement by Subway Franchise, potential reinstatement of Subway Development if the termination is found to be invalid, and for a determination of damages. The agreements also included a provision requiring Subway Franchise to make 50% of the periodic payments due to Subway Development during the pendency of the arbitration until the arbitrator issued a decision. Subway Franchise initially took the position that it was excused from making the required payments but later made the payments either directly to Subway Developments or to Subway Franchise’s attorney trust account. Subway Developments objected and brought the matter to the arbitrator’s attention. After a hearing, the arbitrator issued an order requiring Subway Franchise to resume making the payments required under the development-agent agreements directly to Subway Developments during the pendency of the arbitration. Three months later, the arbitrator entered another order imposing sanctions if Subway Franchise failed to comply with the prior order and denying Subway Franchise’s motion to stay the order.

Subway Franchise then filed a petition in the district court seeking to vacate the arbitrator’s order, contending that the arbitrator exceeded her authority by compelling it to make interim payments directly to Subway Developments during the pendency of the arbitration. Subway Developments opposed the petition, arguing that the arbitrator’s order was not final and thus not subject to appeal, or in the alternative, to confirm the arbitrator’s order. In reviewing the petition, the court noted that the case is governed by the New York Convention since both parties to the proceeding maintained their principal place of business outside the United States and that the domestic provisions of the Federal Arbitration Act (FAA) also applied since the arbitration was being conducted in the United States. The court then addressed whether the arbitrator’s order was final and subject to appeal, concluding that since the order “determines temporary control over the money that would be used to secure any potential judgment” the order is “final for the purpose of judicial review.” The court then addressed Subway Franchise’s petition to vacate the order under section 10(a)(4) of the FAA, which allows a party to seek to vacate an arbitration award when the arbitrator “exceeded her powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.” After a thorough review of applicable case law and the record submitted, the court concluded that Subway Franchise “fails to meet the high standard to demonstrate that the arbitrator exceeded her authority here” and denied Subway Franchise’s petition to vacate the order. The court then addressed Subway Developments’ petition to confirm the arbitration order, concluding that it must confirm the arbitration order under the New York Convention since no grounds exist to vacate the award.

Subway Franchise Systems of Canada, ULC v. Subway Developments 2000, Inc., No. 1:24-cv-00593 (S.D.N.Y. June 21, 2024).