Patience is good advice as demonstrated by the case of Subway Developments 2000 v. Subway Franchise Systems of Canada, (S.D.N.Y. Jun. 9, 2025) 2025 WL 163602. This analysis was first published in the Legal Intelligencer by Craig Tractenberg.
The U.S. District Court for the Southern District of New York was petitioned to enter judgment and confirm a “partial final award,” but the district court held that such a petition was improper and premature, and therefore dismissed the case. The actual “partial final award” sought to be confirmed ironically was a decision by an arbitrator that the defendant Subway Franchise Systems of Canada LLC prematurely issued a notice of termination to the plaintiff Subway Development. In both instances, the parties were held to have “jumped the gun.”
History of the Dispute as Explained in the Partial Final Award
The claimant in the arbitration is Subway Developments 2000 Inc. (Developments). Developments was, at all relevant times, a development agent representing the respondent franchisor for over 800 of the respondent’s sandwich and salad shops (stores) in Canada. The respondent in the arbitration is Subway Franchise Systems of Canada, ULC (Subway), which operates and franchises sandwich and salad shops in Canada under the trade name of “Subway.” The parties have two amended and restated development agent agreements (the DAAs). Under the DAAs, developments essentially paid approximately $11 million to Subway and became the development agent responsible for all activities involved in the development and servicing of Developments’ stores.
Stress arose between the parties when Subway proposed a draft addendum provided for many changes to the extant DAAs. While initially, Developments thought that the new addendum would affect it only at the expiration of their current agreements, including renewals, an April 17 email vitiated that expectation. Subway stated that the new agreement would govern those agreements entered “as a renewal following the expiration of a prior agreement” and that it expected most developers in North America to eventually sign the addendum. The addendum impacted or provided, among other “key changes”: Developments’ disclosure to Subway annually or periodically signed and certified financial statements, as well as organizational charts and staff rosters; Subway’s right to implement on its own or through a third party, Store evaluations and other support functions then performed by Developments and its staff; Developments’ compensation would be offset by an estimated $100 per evaluation plus an estimated fee of not more than 10% of the actual cost of the evaluations; and when the evaluations were implemented in each territory, an “operations score and audit grade” from A to F would be calculated for each store and each territory. A grade of F in four consecutive quarters with no improvement by the following quarter could result in termination of the relevant DAA. Some of the changes proposed by the addendum were implemented as Subway policy before the proposed addenda was executed.
The Dispute Over Termination
On Aug.15, 2022, Subway served a notice of material defaults on Aug. 4, 2022, terminating a contractual relationship that began in 2008. That notice had demanded retraction of a July 29, 2022, email sent by Developments to the approximately 800 Subway stores to which Developments acted as a Subway representative.
As summarized by the arbitrator as follows:
Developments stated in the July email that: “there were too many unknowns” related to the REV program for Developments to accept it in its territories; a forced introduction of REV by Subway was contrary to its DAAs with Subway; and until Developments was satisfied that REV was in the best interest of the franchisees in its territories, it would not agree to the REV implementation. That email also referenced commencement of a legal proceeding for a determination as to whether the REV program could be introduced absent DA consent. …
The notice of material defaults cited: Developments’ refusal to implement REV on Oct. 1; Developments’ misuse of Subway trademarks in its July email; Developments’ refusal to develop and service the restaurants in compliance with Subway’s policies, i.e., REV; Developments’ conducting itself “in a manner likely to materially impair” the reputation of Subway’s business, emphasizing that Subway, not Developments, had the “‘sole discretion’ to modify any aspect of its business.”
Determinations by the Arbitrator
The DAAs contained a 90-day cure period but Subway stated in the notice of termination that the damage to its reputation was incurable. Subway had also stated that it would forebear in termination if the email was retracted within five days, which Developments refused to do. The DAAs also prohibited termination except for material defaults.
The arbitrator after hearing concluded that this protest email by Developments was not a material default as it did not go to the essence of the contracts, required both under the language of the contracts and under the law of Alberta, Canada, which applied to the case. As evidence of the lack of materiality, the arbitrator cited the failure of Subway to prove reputational harm from the email and conduct by Developments. Moreover, the arbitrator held that even for a material default, Developments should have been granted a 90-day cure period, rather than the shorter retraction period communicated by Subway. Under the dispute resolution clause of the DAAs, Subway treated Developments as disputing termination and paid the reduced contractual payments under the DAAs during the pendency of the arbitration when it wrote it letter to Developments confirming the termination.
The parties as part of their procedural order agreed that the case would not be bifurcated in order to eliminate overlapping evidence and testimony. Nevertheless, the arbitrator’s decision decided the merits of the termination but not the quantum; accordingly, it was only a partial relief, which the arbitrator characterized as a “partial final award.” Developments petitioned the district court to confirm this award and Subway opposed confirmation.
The District Court Refused to Confirm the Partial Final Award
The district court concluded that confirmation was governed under the New York Convention as it was an international arbitration between two parties located outside of the United States, even though the arbitration was conducted in New York. Further, the court determined that the US Federal Arbitration Act would also apply because it was conducted in the United States.
The issue for the district court was whether it had the power to confirm the award as it was not a final adjudication of the parties dispute. The parties had not agreed to bifurcate the arbitration, and held that the power of the courts in this instance was to confirm only final awards. As little question existed that the award was not a final adjudication of the dispute as required, the court dismissed the petition to confirm the “partial final award.”
Is This the Right Outcome?
With respect to the arbitrator’s decision that the termination was improper, that is a close call. Developments was insubordinate and took a public approach intended to embarrass Subway. It impaired implementation of the REVs program. Additional damage could have been suffered by Subway if it did not act quickly and decisively. Subway itself send out a curative email, but the damage had already been done. The arbitrator apparently weighed the consequences of termination against the harm to Subway to determine materiality, with the scales tipping to Developments’ side. The arbitrator expected more patience from Subway and a business resolution.
The label “partial final award” appears to be manufactured to allow confirmation where normally a partial arbitration decision cannot be confirmed. Sometimes, interim relief granted by an arbitrator can be structured to be confirmed and enforced by a district court before a plenary decision on the merits if the interim relief prevents elimination of the subject matter of the arbitration. But here, the arbitrator has the ability to adjust the quantum and relief awarded the parties at the conclusion of the dispute. The New York Convention and the FAA are clear about only final awards being confirmed and not interim decisions. The district court expected more patience as well, but from Developments.