Can You Seek to Rescind a Franchise Agreement Through Arbitration ?
In Jensen v. Quik International, 213 Ill. 2d 119, 820 N.E.2d 462, 289 Ill. Dec. 686 (2004), the plaintiff sought to rescind a franchise agreement with the defendant on the grounds that the franchise agreement violated the Franchise Disclosure Act of 1987 (Franchise Act) (815 ILCS 705/5 (West 2002)), because the franchisor had failed to register with the Illinois Attorney General's office at the time of the sale. Jensen, 213 Ill. 2d at 121.
The defendant sought to stay any litigation on the agreement pending arbitration pursuant to the arbitration clause contained within the parties' agreement; the circuit court denied the motion. Jensen, 213 Ill. 2d at 121. the appellate court affirmed, holding that because compliance with the Franchise Act was a condition precedent to an enforceable contract, the parties agreement and the arbitration clause contained therein were not binding, as a contract could not exist if the Franchise Act had been violated. Jensen, 213 Ill. 2d at 124-25. the appellate court also found that the question of whether a contract existed was a question of law for the court. Jensen, 213 Ill. 2d at 122.
The supreme court disagreed.
In Jensen our supreme court concluded that registration, although required by the Franchise Act, was not a condition precedent to the enforcement of a franchise agreement. Jensen, 213 Ill. 2d at 126.
The Franchise Act provides that when a violation occurs, rescission and damages are available; however, the Franchise Act does not provide that agreements in violation of the Franchise Act are invalid or unenforceable. Jensen, 213 Ill. 2d at 126-27.
Moreover, our supreme court noted that rescission presumed the existence of an otherwise valid and enforceable contract. Jensen, 213 Ill. 2d at 127.
Therefore, because an action to rescind does not challenge a contract's existence, it can be presented to an arbitrator. Jensen, 213 Ill. 2d at 127.
Our supreme court also noted that the Franchise Act gave a franchisee the option of seeking rescission, but did not mandate that he do so. Jensen, 213 Ill. 2d at 127.
Finally, our supreme court noted, inter alia, that Illinois public policy favors arbitration as a means of resolving disputes and allowing a party to avoid arbitration, by merely alleging that no contract existed, undermined Illinois public policy. Jensen, 213 Ill. 2d at 128.