Title: Jensen v. Quik International

State: illinois

Issuer: Illinois Supreme Court

Document:

Docket No. 97704-Agenda 32-September 2004.
ERIC JENSEN, Appellee, v. QUIK INTERNATIONAL et al., 							Appellants.
Opinion filed November 18, 2004.
	JUSTICE RARICK delivered the opinion of the court:
	Plaintiff, Eric Jensen, sought to rescind a franchise agreement
with Quik International (Quik) pursuant to section 26 of the Franchise
Disclosure Act of 1987 (Act) (815 ILCS 705/5 (West 2002)) on the
grounds that Quik was not registered as a franchise with the Illinois
Attorney General's office, as required by sections 5 and 10 of the Act.
Quik sought to stay the litigation in the circuit court of Cook County
and compel arbitration of Jensen's claim pursuant to an arbitration
clause in the franchise agreement. The appellate court held that
because compliance with the registration requirement of the Act was
a condition precedent to an enforceable contract, the franchise
agreement was not binding on Jensen, and he was not required to
submit his claim to arbitration. 345 Ill. App. 3d 713. For the following
reasons, we reverse the decisions of the circuit and appellate courts
and remand the cause to the circuit court for further proceedings not
inconsistent with this opinion.
	Jensen entered into a franchise agreement with Quik, a Nevada
franchisor, whereby Quik granted Jensen the right to operate a
franchise in Illinois. The franchise agreement contained an arbitration
clause, which provided that:
		"[A]ny controversy or claim arising out of or relating to this
Agreement or its breach, including without limitation, any
claim that this Agreement or any of its parts are invalid,
illegal or otherwise voidable or void, shall be submitted to
arbitration ***."
	Quik subsequently notified Jensen that it was in violation of the
Act because its registration as a franchise with the Illinois Attorney
General's office had expired at the time it entered into the franchise
agreement with Jensen. The notice also informed Jensen of his rights
under the Act, including the right to sue for damages and/or rescission
of the franchise agreement.
	Jensen filed a complaint against Quik, its president, and its chief
executive officer, seeking damages and rescission of the franchise
agreement. Count I alleged that Quik had violated sections 5 and 10
of the Act by failing to register as a franchise in Illinois. Count II
alleged that Quik violated section 6 of the Act by making incomplete
and misleading disclosures. Count III alleged a violation of the
Consumer Fraud and Deceptive Business Practices Act (815 ILCS
505/1 et seq. (West 2002)).
	Quik filed a motion to stay the litigation pending arbitration, then
filed an arbitration demand in Nevada pursuant to section 3 of the
Federal Arbitration Act (FAA) (9 U.S.C. §3 (2000)). Jensen filed a
cross-motion to stay arbitration pending the circuit court's ruling to
stay the litigation. The circuit court denied Quik's motion to stay and
granted Jensen's motion to stay arbitration. Quik appealed from both
orders pursuant to Rule 307(a)(1), arguing that even though Quik was
not registered as a franchisor, Jensen's claim had to be submitted to
arbitration because the Federal Arbitration Act governed the
agreement and required enforcement of the arbitration clause,
superceding state law.
	The appellate court affirmed, holding that the issue of whether
the parties had entered into an enforceable contract is not arbitrable
because the question of whether a contract existed is a question of law
for the court. 345 Ill. App. 3d 713. Quik appeals.
	Prior to addressing the merits of Quik's arguments, we set forth
the relevant provisions of the Act. Section 5 of the Act provides in
pertinent part:
			"It is unlawful for any person to offer or sell any franchise
required to be registered under this Act unless the franchise
has been registered under this Act or is exempt under this
Act." 815 ILCS 705/5(1) (West 2002).
Section 10 of the Act provides:
			"No franchisor may sell or offer to sell a franchise in this
State if (1) the franchisee is domiciled in this State or (2) the
offer of the franchise is made or accepted in this State and the
franchise business is or will be located in this State, unless the
franchisor has registered the franchise with the
Administrator[(1)] by filing such form of notification and
disclosure statement as required under Section 16." 815
ILCS 705/10 (West 2002).
Section 26 provides that:
			"Any person who offers, sells, terminates, or fails to renew
a franchise in violation of this Act shall be liable to the
franchisee who may sue for damages caused thereby. *** In
the case of a violation of section 5, 6 [fraudulent practices],
10, 11 [amendment of disclosure statement], or 15 [escrow
of franchise fees and surety bonds] of the Act, the franchisee
may also sue for rescission." 815 ILCS 705/26 (West 2002).
	Because Jensen was domiciled in Illinois, the offer was made in
Illinois, and Jensen operated the franchise business from his home in
Illinois, Quik was required by section 10 of the Act to be registered
with the Illinois Attorney General in order to enter into a franchise
agreement with Jensen. Because Quik was not registered with the
Attorney General's office at the time of the sale, as required by
sections 5 and 10, Jensen is entitled, pursuant to section 26, to sue for
damages and seek rescission of the franchise agreement. As noted
above, the franchise agreement provides that all claims, including
those that the agreement is illegal or otherwise invalid, must be
submitted to arbitration. The question becomes, then, whether Jensen
was entitled to pursue his statutory remedy of rescission in state court,
or whether he is required by the terms of the franchise agreement to
pursue it before an arbitrator. Jensen maintains, and the appellate
court found, that he can maintain his statutory claim for rescission in
state court because no enforceable contract, and therefore no
arbitration clause, existed as a result of Quik's failure to fulfill the
condition precedent of registration with the Attorney General's office.
	Quik argues that the FAA governs its motion to stay the litigation
because: (1) the motion was brought pursuant to section 3 of the
FAA; (2) the franchise agreement specifically provides that all issues
relating to arbitration or enforcement of the arbitration clause will be
governed by the FAA; and (3) as a contract "evidencing a transaction
involving commerce" (9 U.S.C. §2 (2000)), the FAA applies as a
matter of law. Citing Prima Paint Corp. v. Flood & Conklin Mfg.
Co., 388 U.S. 395, 404, 18 L. Ed. 2d 1270, 1277, 87 S. Ct. 1801,
1806 (1967), Quik contends that under the FAA a court may consider
only issues relating to the making and performance of the agreement
to arbitrate, not the enforceability or validity of the contract
containing the arbitration clause as a whole, and that questions
concerning the validity and enforceability of the contract are for the
arbitrator, not the courts, to decide. When presented with a motion to
stay litigation pending arbitration under section 3 of the FAA, the
court's inquiry is limited to whether an agreement to arbitrate exists
and whether it encompasses the issue in dispute. If the court finds that
an agreement to arbitrate exists and the issue presented is within the
scope of that agreement, a stay under section 3 of the FAA is
mandatory.
	Quik contends that there is no dispute that the arbitration
agreement exists or that it encompasses the claims alleged in Jensen's
complaint. Further, Jensen's complaint contains no allegations that the
arbitration provision, as opposed to the franchise agreement as a
whole, was procured through fraud, violated the Act, or is otherwise
invalid, void, or voidable. Thus, Quik maintains, the stay was
mandatory under section 3 of the FAA.
	Quik misapprehends the holding of the appellate court in this
case. The appellate court in the present case relied on its previous
decision in Barter Exchange, Inc. of Chicago v. Barter Exchange,
Inc., 238 Ill. App. 3d 187 (1992). In Barter Exchange, Illinois and
Kentucky franchisees sought to rescind their franchise agreements
because the defendant franchisor allowed its registration to expire
before the franchise agreements were executed. The court held that
Illinois and Kentucky laws requiring a franchisor to obtain a
registration to do business within the state must be deemed part of the
respective franchise agreements and that, as implied terms of the
contract, those laws established conditions precedent to the
effectiveness and enforceability of the contracts. Because the
franchisor failed to satisfy the condition precedent of registration, the
court held, the franchise contracts were not binding on the franchisees
and the contracts were subject to rescission. Rescission implicitly
invalidated the arbitration agreement and without an arbitration
agreement, the franchisees were not required to submit their claims to
arbitration. Barter Exchange, 238 Ill. App. 3d at 192-94.
	As in Barter Exchange, the gist of the appellate court's holding
in the present case is that because Quik failed to satisfy the condition
precedent of registration, there was no enforceable franchise
agreement and, therefore, no arbitration clause. In the absence of an
agreement to arbitrate, the FAA does not apply.
	As the appellate court in this case noted, other districts of the
appellate court have rejected Barter Exchange's "condition
precedent" analysis. In Cusamano v. Norrell Health Care, Inc., 239
Ill. App. 3d 648 (1992), the franchisee sued to rescind the franchise
agreement on the ground that the franchisor failed to provide her with
a disclosure statement, as required by section 5(2) of the Act. She also
alleged that the franchisor fraudulently induced her to sign the
franchise agreement by providing her with a commission statement
that grossly overestimated the amount of expected earnings. The
franchisor filed a motion to dismiss, arguing that the franchisee was
required to submit her claim to arbitration pursuant to an arbitration
clause in the franchise agreement. The trial court granted the motion
and the franchisee appealed, arguing that she could not submit her
claim to arbitration because a Georgia arbitrator would have no
authority to enforce Illinois statutory remedies.
	The appellate court held that the franchisee was required to
submit her statutory claim of precontractual material
misrepresentation to arbitration. In reaching its decision, the court in
Cusamano explicitly rejected Barter Exchange's holding that
compliance with the Act created a condition precedent to a franchise
contract. The Cusamano court reasoned that the remedy of rescission
presumes that a valid contract existed. The court held that because a
suit brought under the Act to rescind a franchise contract does not
challenge the existence of the contract, the question of rescission can
go to the arbitrator. The Act does not provide grounds on which a
plaintiff-franchisee can deny the existence of the contract, the court
stated; rather, it provides grounds on which a plaintiff-franchisee can
rescind the contract. When parties choose arbitration in their contract,
the party later seeking to avoid arbitration should not be allowed to do
so by merely alleging that no contract exists. The court concluded that
the result in Barter Exchange could effectively end arbitration of
contract disputes in Illinois because almost any plaintiff can find some
theory upon which to allege that no contract existed, thereby avoiding
arbitration.
	In Jacob v. C&M Video, Inc., 248 Ill. App. 3d 654 (1993),
franchisees of C&M filed suit alleging that C&M had committed
common law fraud, violated the disclosure provisions of the Act, and
breached the franchise agreements. C&M filed a motion to dismiss,
arguing that the franchisees were required to submit their claims to
arbitration pursuant to an arbitration clause in the franchise
agreement. The trial court denied the motion to dismiss, and C&M
appealed, arguing that enforcement of the arbitration clause would
deny them the protection of the Act. They relied on Barter Exchange.
The court in Jacob disagreed with the court's decision in Barter
Exchange that the question of whether a contract exists can only be
decided by the courts. Jacob, 248 Ill. App. 3d at 660.
	We agree with the conclusion reached by the courts in Cusamano
and Jacob. Both the language of the Act itself and public policy
considerations clearly compel rejection of Barter Exchange's holding
that registration is a condition precedent to an enforceable franchise
agreement. First, the nature of the remedy provided in section 26
demonstrates that the legislature did not intend registration to be a
condition precedent to an enforceable franchise agreement. The
legislature did not provide that franchise agreements entered into in
violation of sections 5 and 10 were invalid and unenforceable. Instead,
the legislature chose to provide franchisees with the remedy of
rescission. "Rescission" is defined as "[a] party's unilateral unmaking
of a contract for a legally sufficient reason." Blacks Law Dictionary
1332 (8th ed. 2004). As the court in Cusamano noted, rescission
presumes the existence of an otherwise valid and enforceable contract.
Had the legislature intended that a franchise agreement entered into
in violation of sections 5 and 10 be unenforceable, it could have easily
so provided.
	Further, section 26 provides that where a person offers, sells,
terminates or renews a franchise in violation of the Act, the franchisee
"may sue for damages caused thereby" and in the case of a violation
of section 5 or 10, "the franchisee may also sue for rescission."
(Emphasis added.) 815 ILCS 705/26 (West 2002). In other words,
section 26 gives the franchisee the option of seeking rescission of the
franchise agreement where the franchisor was in violation of sections
5 and 10 at the time the franchise agreement was executed. The
franchisee is not compelled to seek rescission, however, and it is
conceivable that he might not wish to rescind the agreement. The
franchisee may wish to retain the benefit of his bargain with the
franchisor notwithstanding the fact that the franchisor is not registered
with the Attorney General's office. To adopt the position taken by the
appellate court in Barter Exchange and in the present case would
deprive the franchisee of that option. (A franchisee's decision to forgo
rescission would not mean that there are no consequences for a
franchisor's failure to comply with the registration requirement of the
Act, however. In addition to the private civil actions provided for in
section 26, sections 22 and 24 provide the Attorney General with
various enforcement mechanisms, including the option of seeking
penalties of up to $50,000 per violation. 815 ILCS 705/22, 24 (West
2002). Further, section 25 provides that willful violations of sections
5 and 10 are Class 2 felonies subjecting the franchisor to mandatory
criminal prosecution. 815 ILCS 705/25 (West 2004).
	Section 26 also provides:
			"No franchisee may sue for rescission under this Section
26 who shall fail, within 30 days from the date of receipt
thereof, to accept an offer to return the consideration paid or
to repurchase the franchise purchased by such person." 815
ILCS 705/26 (West 2002).
Section 27 provides:
			"No action shall be maintained under Section 26 of this
Act *** unless brought before the expiration of 3 years after
the act or transaction constituting the violation upon which
it is based, the expiration of one year after the franchisee
becomes aware of the facts or circumstances reasonably
indicating that he may have a claim for relief in respect to
conduct governed by this Act, or 90 days after delivery to the
franchisee of a written notice disclosing a violation,
whichever shall first expire." 815 ILCS 705/27 (West 2002).
The time limits imposed by sections 26 and 27 on the franchisee's
right to seek rescission further demonstrate that registration is not a
condition precedent to an enforceable franchise agreement. If it were,
expiration of the time limits set forth in these sections could result in
a situation where a franchisee could not seek to rescind an
unenforceable agreement. We do not believe the legislature intended
such a patently absurd result.
	Public policy considerations also compel us to reject the holding
of Barter Exchange. Illinois public policy favors arbitration as a means
of resolving disputes. 710 ILCS 5/2(a) (West 2002). Indeed, section
4 of the Act permits arbitration in a forum outside of Illinois where the
franchise agreement so designates. 815 ILCS 705/4 (West 2002). The
holding in Barter Exchange would undermine this policy by allowing
the party seeking to avoid arbitration to do so by merely alleging that
no contract existed. As the court in Cusamano noted, almost any
plaintiff can find some theory or claim upon which to allege that no
contract existed, thereby avoiding arbitration. Cusamano, 239 Ill.
App. 3d at 654.
	We hold that the issue of whether Jensen is entitled to rescission
of the franchise agreement with Quik on the grounds that Quik was in
violation of sections 5 and 10 of the Act at the time the agreement
was entered into is arbitrable pursuant to the arbitration clause in the
franchise agreement.
	Quik also argues that the appellate court erred in affirming the
circuit court's grant of Jensen's motion to stay arbitration where
Jensen failed to establish his entitlement to such relief. Given our
disposition of Quik's prior argument, it is unnecessary to address this
issue.
	For the foregoing reasons, the judgments of the circuit and
appellate courts are reversed and the cause remanded to the circuit
court for further proceedings not inconsistent with this opinion.
Reversed and remanded.
1.            
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as the Illinois Attorney General.