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Fourth Circuit Vacates Award Because Franchisor Failed to Provide Proper Notice of Arbitration Proceeding
Posted in Arbitration

In Choice Hotels Int’l, Inc. v. SM Property Management, LLC, 2008 WL 518807 (4th Cir. Feb. 28, 2008), the franchisor had sought in federal court to confirm an arbitration award that it obtained by default against one of its franchisees. In response, the franchisee moved to vacate the arbitration award on the ground that it did not receive proper notice of the arbitration proceeding because no notice was ever sent to the franchisee’s designated representative, as required by the franchise agreement. The federal district court vacated the arbitration award upon determining that the franchisor failed to serve the franchisee with the arbitration demand at the correct address and, thus, failed to properly notify the franchisee of the arbitration.

On appeal, the franchisor argued that the district court lacked authority to second guess the arbitrator’s finding that the franchisee had been properly notified of the arbitration proceeding. The Fourth Circuit rejected the franchisor’s argument and affirmed the district court on the grounds that: (1) there was no evidence to suggest that the arbitrator ever was asked to resolve the issue of whether the franchisee’s designated representative was served, as required by the franchise agreement; (2) there was no evidence suggesting that the franchisee had received notice of the arbitration proceeding until after the arbitration award had been issued; and (3) the franchisor had explicitly acknowledged, through its past conduct, that it was aware of the name and address of the franchisee’s designated representative.

Ultimately, the Fourth Circuit determined that the plain language of the franchise agreement required the franchisor to provide notice of the arbitration hearing to the franchisee’s designated representative. Because the franchisor failed to do so, the court determined that the franchisee had not received proper notice of the arbitration hearing, which was grounds for the federal courts to vacate the arbitration award.

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