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In a dramatic about face, a New Jersey federal district court has reconsidered and granted a hotel franchisor’s motion to confirm, citing the parties'adoption of AAA rules in their agreement as evidence that arbitrability questions were reserved for the arbitrator.
In Bapu Corp. v. Choice Hotels Intern., Inc., NO. 07-CV-5938(WJM), 2008 WL 4192056 (D. N.J. Sept. 8, 2008), Bapu and its president Patel entered into a franchise contract with Choice. The contract required that Bapu make certain renovations to its property to comply with the terms of the contract. The contract also contained an arbitration agreement and a three-year contractual limitation on bringing arbitrable claims.
After Bapu failed to make the promised renovations, and Choice’s efforts to unilaterally extend the time in which to make the renovations failed, Choice sent a notice terminating the franchise contract and demanded arbitration of its claims against Bapu and Patel. Bapu opposed, arguing that the three-year limitation on claims had expired. The arbitrator refused to consider Bapu’s challenge during preliminary proceedings, but eventually entered an award in favor of Choice.
Bapu then filed suit to vacate the arbitration award, while Choice moved to dismiss the suit and confirm the award. The Court initially granted Bapu’s motion to vacate, holding that Choice failed to bring its claims for failure to complete the renovations within three years as required by the parties'agreement. Choice moved for reconsideration, urging that the time limitation issue was arbitrable under the parties'agreement.
Upon reconsideration, the Court agreed that the language of the agreement clearly reserved the question of time limitations for the arbitrator. Specifically, the Court noted that the agreement adopted the Commercial Arbitration Rules of the American Arbitration Association (AAA), in which Rule R-7 provides that "[t]he arbitrator shall have the power to rule on his or her objections with respect to the existence, scope or validity of the arbitration agreement." Therefore, "scope" or "arbitrability" was exclusively reserved to the arbitrator and the Court held the prior substitution of its judgment for the arbitrator’s was improper.
Among other challenges to the award’s validity, Bapu alleged that Choice improperly served Bapu with notice of the demand for arbitration at an unrelated corporation in Georgia, instead of at its place of business in New Jersey. Bapu alleged that this failure of notice constituted procurement by fraud and warranted vacatur.
The Court disagreed, noting that there was no evidence of fraud, only of "an honest mistake in serving a company in Georgia with the same name." Because Patel, the president of Bapu, was effectively and properly served with the demand, and therefore suffered no prejudice, the Court found no justification to vacate based on fraud.
After quickly disposing of Bapu’s other allegations challenging the award’s validity, the Court granted Choice’s motion to reconsider, confirmed the award, and dismissed Bapu’s motion to vacate.
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