STATE-DECISION, FRANCHISE-GUIDE 11,484, Mayur Rao v

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STATE-DECISION, FRANCHISE-GUIDE ¶11,484, Mayur Rao v. C.F.M.I., Inc., Abbas N. Dossaji, P.P.& K., Inc., and John P. Purcell., (Aug. 24, 1998)

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Mayur Rao v. C.F.M.I., Inc., Abbas N. Dossaji, P.P.& K., Inc., and John P. Purcell.

Illinois Circuit Court, Chancery Division, Cook County. No. 98 CH 03190. Dated August 24, 1998.

Illinois Franchise Disclosure Act

Arbitration Agreements--Enforceability--Rescission Action.--A franchisee was required to submit claims for rescission under the Illinois Franchise Disclosure Act, as well as other relief, to binding arbitration as provided for in the franchise agreement. Enforcing the arbitration provision would not deny the franchisee the protections of the Illinois statute, particularly since the arbitration would take place in Illinois and apply Illinois law. A suit for rescission did not challenge the existence of the contract and, therefore, could go to arbitration. Back reference: ¶1840.12.

REPORT OF PROCEEDINGS

[In full text]

The Court: Aren’t we here because there are issues of fact that have to be decided? Certainly sounds like that to me. And you have made allegations, and they have come back with their version, and we have some some facts that are in dispute.

So let me go to this. Plaintiff’s complaint in this cause seeks rescission of the parties’ franchise agreement pursuant to the Illinois Franchise Disclosure Act as well as other relief.

The Defendants have filed motions to compel arbitration because the franchise agreement entered into by the parties requires the parties to submit all disputes arising out of the agreement to binding arbitration.

The Plaintiff has filed his Memorandum in Opposition thereto, citing Barter Exchange v. Barter Exchange, a First District 1992 case for the proposition that the issue of whether the parties have entered into an enforceable contract is not arbitrable because the question of whether a contract existed is an issue of law determinable only by a Court. Barter Exchange at 192.

In Barter Exchange, as it is alleged here, the franchisor failed to properly register with the State of Illinois and according to the logic of the Court in Barter Exchange, this was failure to perform a condition precedent, rendering the contract unenforceable.

In reversing the Trial Court, the Barter Exchange Court held that to grant the defendant’s motion to compel arbitration, the Trial Court had effectively denied plaintiff’s the rescission to which they were statutorily entitled under the Franchise Disclosure Act. Barter Exchange at 193-194.

More recently, our Appellate Court has revisited the issue of arbitration clauses in the context of franchise agreements and the Franchise Disclosure Act. Some two months after the Barter Exchange opinion, the Fourth District of the Appellate Court decided Cusamono v. Norrell Health Care, Inc., 239 Il.Ap.3d 648, Fourth District, 1992.

In that case, the Fourth District discussed the reasoning employed by the First District of the Appellate Court in deciding Barter Exchange.

"The Franchise Disclosure Act does not provide grounds by which a plaintiff-franchisee can deny that a contract exists; instead, it provides grounds by which a plaintiff-franchisee can rescind the contract. (See Ill.Rev.Stat. 1991, Chapter 121 and a half, Paragraph 1726.) The remedy of rescission presumes that a valid contract exists; it does not negate that a contract ever existed. (See Felde v. Chrysler Credit Corporation, 1991, 219Il.Ap.3d 530.) (‘recession means the cancellation of contract and restoration of the parties to their initial status’)--emphasis there. Accordingly, we respectfully disagree with the decision of the First District Appellate Court that compliance with the Act is a condition precedent to a franchise agreement. Instead, we hold that because a suit brought under the Act to rescind a franchise contract does not challenge the existence of the contract, the question of rescission can go to arbitration." Cusamano at 653.

After addressing the Barter Exchange Court’s concerns about an arbitrator in a foreign jurisdiction resolving a dispute arising out of a foreign corporation’s failure to comply with an Illinois law enacted for the purpose of protecting Illinois residents (Barter Exchange at 194-195) and looking to federal law for guidance, the Court remanded with directions to stay the Circuit Court proceedings until the parties have arbitrated their disputes. Cusamano at 658.

Then in 1993, the Fifth District of the Illinois Appellate Court decided Jacob v. C and M Video, 248Il.Ap.3d 654, Fifth District, 1993. In that case the franchisee filed suit alleging a violation of the Franchise Disclosure Act and the franchisors filed a motion to dismiss on the basis that the arbitration provision in the franchise agreements required the parties to submit to arbitration. The plaintiff-franchisees cited Barter Exchange for the proposition that enforcement of the parties’ arbitration clause would deny them protection of the Franchise Disclosure Act. In remanding to the Trial Court for an order compelling arbitration, the Court reasoned:

"At the outset we note that Barter Exchange is distinguishable because the choice-of-law provision in this franchise agreement provides for Illinois. As for the Court’s decision in Barter Exchange that the question of the existence of a contract is always for a Court to decide, we disagree. The question of the existence of a contract is a question of contract application and interpretation for the arbitrator, not the Court, and the Court should not deprive the party seeking arbitration of the arbitrator’s skilled judgment by attempting to resolve the ambiguity. Donaldson, Lufkin & Jenrette Futures, Inc. v. Barr, 1988, 124Il.2d 435, 448. As set forth in Cusamano--we have previously cited that--the arbitrator can provide the relief plaintiffs request, and if the arbitrator does not address a particular issue, plaintiffs can then file suit." Jacob at 660-661."

Here, we have a question as to whether or not provisions of the Franchise Act apply, and those are questions that are questions of fact that someone has to decide.

In an effort to adhere to the trend of the various Districts of the Illinois Appellate Court and because the choice-of-law provisions contained in the instant parties’ franchise agreement provide for the arbitration to take place in Chicago, Illinois and apply Illinois law, making these facts distinguishable from those of Barter Exchange, it is the ruling of this Court that the parties submit their dispute to binding arbitration as provided in their agreement and that all proceedings in this cause are stayed pending the outcome of the pending arbitration.