FFranchising: Connecticut Supreme Court Rejects Claim Preclusion (Web)

In LaSalla v. Doctor's Associates Inc., SC 17483, 2006 WL 1529075 (Conn. June 13, 2006)(available at http://www.jud.state.ct.us/external/supapp/Cases/AROcr/CR278/278CR70.pdf), Connecticut's Supreme Court held that an arbitration panel did not violate public policy when it declined to apply claim preclusion principles in an arbitration that involved the same parties and the same contract provision involved in an earlier arbitration.

The Court also held that the panels' award of prejudgment interest was not in manifest disregard of the law.

In February 1986, Doctor's Associates Inc., a franchiser of Subway sandwich stores, entered into a development agent agreement with plaintiff Michael J. LaSalla that included an arbitration clause. According to the agreement, LaSalla became the “development agent” for Subway shops in northwestern Florida in return for one third of the royalties and transfer fees that Doctor's Associates received from stores located in the area.

The royalties and fees, however, were subject to a modifier which reflected the previously established Subway stores already in LaSalla's area, decreasing the costs paid by Doctor's Associates to LaSalla.

In 1998, an arbitration panel ruled in favor of LaSalla granting him damages and making determinations on the modifier mentioned in the parties' agreement. Then, in November 2002, LaSalla initiated a second arbitration proceeding to enforce the agreement and the 1998 arbitration award, leading to the current case before the Connecticut Supreme Court.

In a second arbitral award, the panel used a different calculation regarding the modifier. Doctor's Associates argues that LaSalla's demand for a second arbitration should be dismissed on grounds of claim preclusion.

More specifically, Doctor's Associates argued that the panel's recalculation of the modifier in the second arbitration "violates the explicit, well-defined and dominant policy of claim preclusion, and the corresponding explicit, well-defined and dominant policy of finality and binding nature of arbitration proceedings."

The Court, in a unanimous opinion written by Senior Associate Justice David M. Borden relies heavily on its decision in Stratford v. Int’l Assn. of Firefighters, AFL-CIO, Local 998, 728 A.2d 1063 (1999), where it held that "'as a matter of public policy, arbitrators are not required to give collateral estoppel effect to prior arbitral awards,' even where the prior award involves 'the interpretation of the same provision of a contract between the same parties.'"

The Court concludes that the decision of whether to apply the doctrines of issue and claim preclusion to the first arbitral award should be left up to the arbitrators. The tribunal, according to the opinion, should exercise its independent judgment--the same independent judgment that the parties bargained for in their consensual agreement. It is an arbitrator, not a review court, that determines the scope of the contractual language, "final and binding."

The Court reasons that the parties were free to include a clause in their contract that bound the arbitrator to precedent, but that in the absence of such a clause, the arbitrator should "be given the maximum opportunity to render correct and just decisions" in a system, such as arbitration, where judicial review is limited.

The Court also relies on another distinguishing characteristic of arbitration: It often is used in disputes between parties with business relationships. Applying the doctrine of claim preclusion to the current scenario would have forced the parties to bring up every possible claim in the first arbitration, including touchy claims that might have been solved amicably later, and could have damaged the business relationship between the parties if they were brought up in the contentious arbitral setting.

Doctor's Associates also contended that the panel's recalculation of the modifier "manifestly disregarded the law requiring that full force and effect be given to arbitral awards."

In light of Stratford, the Court supported the reasoning used by the arbitration panel and didn't apply the manifest disregard standard to the modifier’s recalculation.

The Court upholds the arbitrators' modification, and provides some possible reasoning that the arbitrators could have used regarding their prejudgment interest award in the second arbitration.

In concluding that the panel's prejudgment interest award wasn’t in manifest disregard of the law, the Court points out that the panel could have reasoned that Doctor's Associates' “withholding of damages [was] wrongful, and the plaintiff’s claim for money damages as reasonably timely,” together with the fact that Doctor's Associates had use of money during the period of time at issue here.

Finally, in keeping in line with the arbitrators’ independence theme, the court does not preclude the arbitrators from allowing LaSalla to raise a claim for damages in the second arbitration, even though he failed to take advantage of his opportunity to do so in the first arbitration.

–John Ousley, CPR Intern