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The Franchise Memorandum

Arbitration Award for Franchisor Vacated in Federal District Court
Posted in Arbitration

Choice Hotels International, Inc.'s arbitration award against a franchisee was recently vacated by the United States District Court for the District of New Jersey. In Bapu Corp. v. Choice Hotels Int'l, Inc., 2008 WL 2559306 (D.N.J. June 24, 2008), a hotel franchisee filed suit against Choice Hotels requesting relief from an arbitration award and relief under the franchise agreement.

Choice Hotels in 2006 had won an arbitration award of $142,560 in liquidated damages against the franchisee after the franchisee had been terminated for failing to make renovations to its hotel by a certain date in 2000, as required by the franchise agreement. In the interim, there had been various communications from Choice Hotels to notify the franchisee of its first failure to make renovations and to offer extensions. When the franchisee failed to act on these communications, Choice Hotels began the process of termination. Again, the franchisee did not respond to default notices, and, over six years after the initial default, Choice Hotels ultimately sent a "Notice of Termination."

The district court granted the franchisee's motion to vacate the arbitration award, finding that the arbitrator lacked jurisdiction over the dispute because Choice Hotels' claims were barred by the three-year statute of limitations clause in the franchise agreement. The court found that contractual time limits in which to commence arbitration are generally enforceable. In this case, the court found that Choice Hotels failed to initiate arbitration within three years from the date that the franchisee first missed its deadline to renovate its hotel. The court did not agree with Choice Hotels' argument that the franchisee was not in default until it sent the franchisee a final "Notice of Termination" because the franchisee's failure to renovate by the initial deadline constituted a material breach of the franchise agreement.

This case is a powerful reminder to franchisors not to sit on their rights when franchisees default under the franchise agreement.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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