By Kate Byers
In Chavdarova v The Staffing Exchange, the Ontario Court of Appeal examined the issue of what constitutes a franchise relationship for the purposes of statutory disclosure obligations under the Arthur Wishart Act (Franchise Disclosure), 2000 (the Wishart Act).
In this case, the appellant, The Staffing Exchange (TSE), appealed the decision by the Ontario Superior Court of Justice granting summary judgment on a statutory rescission claim under the Wishart Act to the plaintiff Chavdarova, a licensee of the defendant, on the ground that TSE was a franchisor pursuant to the Wishart Act.
TSE was a business recruitment company which licensed proprietary software used to connect applicants with employment by virtue of a brokerage licence agreement and a certificate and training agreement. Licensees such as Chavdarova were required to pay a $29,500.00 certification and training fee as a condition to the agreements. The motion judge had agreed with the respondent that this fee constituted a franchise fee.
Partway through the parties’ relationship, TSE sent a ‘notice of default’ indicating that Chavdarova’s conduct was non-compliant with the processes taught during training. It subsequently terminated the agreement. Several months later, Chavdarova purported to rescind the agreement on the basis she was a franchisee and had never received a franchise disclosure document, as required by the Wishart Act.
The Court of Appeal unanimously agreed that the motion judge had correctly found that the parties’ relationship was that of a franchisor and franchisee, and that Chavdarova was therefore entitled to rescind her contract with TSE on the basis of the failure to deliver a disclosure document.
In upholding the motion judge’s decision, the Court of Appeal agreed that the expansive definition of ‘franchise agreement’ under the Wishart Act means that courts should review the substance of the relationship between the parties in order to determine whether they have a franchise relationship, regardless of whether the agreement governing their relationship is characterized as a franchise agreement. In so doing, the Court agreed that so long as the relationship has the following three characteristics, a franchise relationship exists:
(i) Payment of money as a condition of commencing operations, or in the course of operating the business;
The decision reinforces the broad, remedial nature of the Wishart Act, as well as the willingness of courts to look past technical legal arguments relating to the nature of the relationship in favour of a more purposive approach. Companies who license out the use of their proprietary business system and marks should consider whether they might be operating a franchise system in the eyes of the law, and further should examine their obligations to provide disclosure documents in Ontario and other Canadian disclosure jurisdictions.