Case of the Day: Subway International v. Bletas

The case of the day is Subway International B.V. v. Bletas (D. Conn. 2012). Subway, a Netherlands LLC, is a franchisor of Subway sandwich shops. It entered into a franchise agreement with Panayota and John Bletas that gave the Bletases the right to operate a Subway shop in Greece in return for royalties and advertising fees paid from gross sales. The franchise agreement had an arbitration agreement requiring arbitration of disputes in New York under the UNCITRAL Rules.

Subway demanded arbitration, asserting that the Bletases had failed to pay royalties. The tribunal awarded more than € 8,000 to Subway and determined that the franchise agreement was terminated. The Bletases brought an action in New York Supreme Court seeking to vacate the award, but the action was dismissed on grounds of insufficient service of process. Subway then sought to confirm the award in Connecticut.

Bletas argued against confirmation on the grounds that a Subway witness had perjured herself at the hearing, that the award violated public policy, and that the award was barred by res judicata. The judge correctly rejected the perjury argument, noting that an award could be vacated for fraud only if the fraud could not have been discovered during the hearing. Bletas could have challenged the veracity of the testimony at the hearing.

Bletas’s public policy argument focused on the award’s failure to require withholding of taxes on the payment Bletas was to make to Subway. But the judge held, again correctly in my view, that the arbitrator’s silence as to taxes did not forbid the parties from withholding taxes, and thus there was no violation of public policy.

Finally, Bletas argued res judicata, pointing to an earlier arbitral award involving a different restaurant franchised exclusively to Ms. Bletas rather than to both Bletases, as in today’s case. The judge held that there was no res judicata because the arbitration agreement forbids franchisees from consolidating disputes in a single proceeding. I don’t think this point is strong, but the judge reached the right conclusion, because, as she goes on to note, the parties had expressly agreed that any award “will have a binding effect only on the actual dispute arbitrated, and will not have any collateral effect on any other dispute whatsoever, whether in litigation, arbitration, or other dispute resolution proceeding.”

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