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Franchise Law e-COMMUNIQUÉ - February 2016

Published: 02/19/2016

By Carly Cohen, Stefanie Holland, Christopher Horkins, Eric Mayzel, Colin Pendrith, Frank Robinson, Derek Ronde, Geoffrey B. Shaw, Rebecca Valo, Larry M. Weinberg

In This Issue

  1. A New Year or New Fiscal Year - Your Canadian Franchise Disclosure Document Needs Updating!
  2. Court of Appeal Dismisses Pet Valu Class Action and Puts a Leash on the Duty of Good Faith and Fair Dealing
  3. Update: “Saab Story” Has A Plot Twist: Ontario Court of Appeal Overturns Dealer Litigation Jurisdiction Ruling Due To Reasonable Apprehension of Bias
  4. Franchisee’s Summary Judgment Motion Spoiled After Court Finds Spoliation of Evidence
  5. Dakin Care of Business: What Not To Do When Managing Franchise Transfers and Disclosure
  6. What We’re Up To (Spring and Summer 2016)

A New Year or New Fiscal Year - Your Canadian Franchise Disclosure Document Needs Updating!

By Larry M. Weinberg, Frank Robinson, Rebecca Valo

Whether it is a new calendar year and/or a new fiscal year, franchisors should now be considering updates to their Canadian franchise disclosure document (FDD). If you plan to offer franchises in any of the five Canadian provinces requiring disclosure, or will have renewals or resales coming up, you need to ensure that your FDD complies with the requirements of each applicable provincial franchise law, and that the contents of your FDD are consistently accurate and up-to-date.  That includes updating of all prescribed disclosure items (some of which require updating every new calendar year, some on the change of a franchisor’s fiscal year, and others which require more frequent updating), and ensuring the FDD always includes all material facts.

A relatively small amount of effort by counsel and the franchisor can yield a form of FDD that can greatly minimize your risk of a claim based on non-compliance.

While franchisors should frequently turn their minds to updating and maintaining their Canadian FDDs, the start of a new calendar year marks a time when franchisors should begin the process of updating the contents of their franchise documentation and/or ensuring such documentation is compliant with the existing franchise laws.

Remember that the provinces now with a franchise law are Alberta, Manitoba, New Brunswick, Ontario and Prince Edward Island. The province of British Columbia will soon have a franchise law, but as it is not yet in force, you do not need to update now your FDD for compliance with that franchise law.

If you would like assistance updating your FDD, please contact a member of our Franchise Law Group.

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Court of Appeal Dismisses Pet Valu Class Action and Puts a Leash on the Duty of Good Faith and Fair Dealing

By Geoffrey B. Shaw, Derek Ronde, Eric Mayzel

In January 2016, lawyers from Cassels Brock, on behalf of its client Pet Valu Canada Inc. succeeded before the Ontario Court of Appeal in obtaining the final dismissal of a $100 million class action brought against Pet Valu by its former franchisee. The Court of Appeal’s decision concludes over six years of litigation and represents an across-the-board victory by Pet Valu in defence of all of the claims raised by the plaintiff ex-franchisee. A copy of Cassels Brock’s summary of this decision can be found here.

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Update: “Saab Story” Has A Plot Twist: Ontario Court of Appeal Overturns Dealer Litigation Jurisdiction Ruling Due To Reasonable Apprehension of Bias

By Christopher Horkins

Last year, a group of Saab dealers commenced a group action in Ontario against IFS Vehicle Distributors ULC (IFS ULC), the Canadian distributor of Saab vehicles, and other defendants seeking damages for breach of contract and statutory remedies under the Arthur Wishart Act.  The defendants brought a motion to dismiss the action on the basis that Ontario lacked jurisdiction or, alternatively, was not the convenient forum. The defendants suggested that the plaintiffs ought to have brought separate actions in each of their respective provinces or, alternatively, as a group in California. This motion was unsuccessful. A complete summary of the decision can be found in our last e-Communiqué.

IFS ULC appealed the motion decision, arguing, among other issues, that the motions judge’s statements and conduct gave rise to a reasonable apprehension of bias. The Court of Appeal reviewed the motions judge’s endorsements and ultimately concluded that his actions did give rise to a reasonable apprehension of bias against IFS ULC. The Court of Appeal found that the motions judge made unwarranted negative comments about IFS ULC’s counsel, their position, and their arguments and arbitrarily curtailed argument during the hearing of the motion. Further, the Court of Appeal found the motions judge “went beyond reflecting the reasoning process and entered the fray as an advocate for his actions and decisions.” The Ontario Court of Appeal set aside the Superior Court decision and ordered that the motion be heard anew before a different justice of the Superior Court.

The Ontario Court of Appeal’s decision can be viewed here.

As such, the jurisdiction issue raised in the case remains a live issue. Cassels Brock is monitoring developments in this litigation.

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Franchisee’s Summary Judgment Motion Spoiled After Court Finds Spoliation of Evidence

By Carly Cohen

In the case of Treats International Franchise Corporation v. 2247383 Ontario Inc., an Ontario court has dismissed a summary judgment motion for rescission against a franchisor commenced by former franchisees and its principals. The decision highlighted the need for parties to franchise litigation to preserve their documents or potentially face adverse judicial consequences.

The plaintiff in the action was a franchisor that grants franchises for its coffee and baked goods concept commonly known as “Treats.” The franchisor commenced an action against the defendant franchisees and its principals for arrears of rent and damages owing after the franchisees abandoned the premises and claimed rescission of their franchise agreement.

The defendants brought a motion for summary judgment seeking damages as a consequence of the rescission and a declaration that the franchise agreement was validly rescinded.

Just days before the issuance of the statement of defence and counterclaim, an individual defendant (as principal of the franchisee) made an assignment in bankruptcy. Pursuant to section 71 Bankruptcy and Insolvency Act, an action commenced by an undischarged bankruptcy is a nullity.

Accordingly, the Court held that the statement of defence and counterclaim were a nullity. The Court declined to exercise any discretion it had to cure the nullity given the defendants’ admission of spoliation: the affidavit evidence indicated that financial records of the franchisee had been intentionally destroyed. As a result, the defendants’ motion for summary judgment was dismissed. A copy of the decision can be found here.

Though this is an extreme case, franchisors are reminded to take the necessary steps to maintain their records, which can both preserve and protect against claims for rescission.

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Dakin Care of Business: What Not To Do When Managing Franchise Transfers and Disclosure

By Christopher Horkins

A recent case from the Ontario Court of Appeal, 2256306 Ontario Inc. v. Dakin News Systems Inc. (Dakin), demonstrates some of the pitfalls that franchisors can face when navigating the treacherous waters of franchise transfers and disclosure.

Background to the Case

In the summer of 2010, the franchise agreement between Dakin News Systems Inc. (Dakin) and its franchisee, Mr. Khalife, expired. There was no formal renewal of the franchise agreement. Rather, Khalife continued to operate the news kiosk franchise on a month-to-month basis after the expiration. In February of 2011, Khalife sold the assets of the franchised business to a third party, Mr. Reda, who had previously acted as the manager of the news kiosk. In response to an inquiry from the lawyer jointly retained to act for Reda and Khalife on the sale, Dakin requested a $10,000 transfer fee and indicated that they had a right of approval. Dakin’s request was ignored and Reda and Khalife proceed to close the sale. Reda took over the franchise and began paying royalties to Dakin.

During a site visit to the franchise one year later, Dakin learned that the transfer had in fact occurred without its approval and demanded payment of the $10,000 transfer fee. Dakin also sent a new franchise agreement to Reda. Eventually, in October of 2012, Reda signed the new franchise agreement but did not pay the transfer fee. No disclosure document was provided. After a dispute with the landlord for the franchise in February of 2013, Reda sought to rescind the franchise agreement.

Dakin resisted the rescission, arguing that two statutory exemptions to the disclosure requirements under the Arthur Wishart Act applied: (i) under section 5(7)(a)(iv) where the grant of the franchise is not affected by or through the franchisor, (ii) under 5(7)(g)(ii) where the grant of the franchise is not valid for longer than one year and no non-refundable franchise fee is payable.

Summary Judgment Motions and Appeal

Both parties brought competing summary judgment motions. At first instance, the Ontario Superior Court of Justice found that neither of these exemptions applied and the plaintiff was successful in obtaining an order for rescission. Dakin’s cross-motion was dismissed.

Dakin appealed, arguing that they were denied a fair hearing by the motion judge because they were not heard on the franchisee’s cross-motion. The Court of Appeal dismissed this argument, finding that the motion and cross-motion were intrinsically connected and all of the relevant material was before the court when Dakin’s motion was argued.

The Court of Appeal also noted that, having requested that Reda enter into a new franchise agreement, Dakin could not rely on s. 5(7)(a)(iv) of the Arthur Wishart Act by arguing that they were not involved in the sale and that a franchise agreement was already in place. Further, by requiring the franchisee to pay a transfer fee, Dakin could not argue that they were exempt under s. 5(7)(g)(ii) of the Act on the basis that no non-refundable franchise fee was paid. By requiring the payment of the transfer fee, Dakin was precluded from relying on this exemption, irrespective of the fact it was never paid. Ultimately, the Court of Appeal upheld the lower court’s decision granting an order for rescission.

Key Take-Away Principles

More than anything, Dakin provides franchisors with a helpful guide for “what not to do” when managing transfers within their systems. Franchisors should be careful to monitor any proposed transfers by franchisees to new buyers and carefully exercise their rights of approval. Erring on the side of disclosure is always preferable to relying haphazardly on the exemptions under the Arthur Wishart Act, which, as demonstrated in Dakin and countless other cases, are routinely construed narrowly by courts against franchisors’ interests. Franchisors are well advised to consult with their legal advisors in dealing with any proposed transfer within their system.

The Ontario Court of Appeal’s decision in 2256306 Ontario Inc. v. Dakin News Systems Inc. can be found here and the Superior Court decision can be found here.

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What We’re Up To (Spring and Summer 2016)

(a)  What We’ve Done

  1. Larry Weinberg, Geoff Shaw, Derek Ronde, Frank Robinson, Eric Mayzel and Colin Pendrith attended the 38th ABA Forum on Franchising in New Orleans, October 14-16, 2015.
  2. Larry Weinberg moderated and spoke on international franchise expansion at the half-day “International Franchising 201” intensive program at the 38th ABA Forum on Franchising  in New Orleans, October 14-16, 2015.
  3. Larry Weinberg spoke at the CFA Franchise Show on October 25, 2015, in Toronto, Ontario on “The Legal Aspects of Acquiring a Franchise.”
  4. Larry Weinberg moderated a full day seminar for the CFA called “How to Franchise Your Business” on October 28, 2015, in Toronto.
  5. Geoff Shaw spoke at the OBA Franchise Law Conference in Toronto, Ontario on November 17, 2015, on the topic of “Drafting, Litigating and Defending Financial Performance Representations in Disclosure Documents.”
  6. Derek Ronde spoke at the OBA Franchise Law Conference in Toronto, Ontario on November 17, 2015, on the topic of “Hitting the Moving Target: The Ongoing Evolution of Good Faith and Fair Dealing in Franchising.”
  7. Frank Robinson facilitated a roundtable discussion at the OBA Franchise Law Conference in Toronto, Ontario on November 17, 2015, on the topic of mergers and acquisitions in the franchise industry entitled “Private Equity and Franchising.”
  8. Geoff Shaw is teaching Franchise Law at Queens University Law School in Kingston Ontario in January and February 2016.
  9. Frank Robinson co-chaired the CFA’s annual Law Day on January 28, 2016, at the Old Mill in Toronto.
  10. Chris Horkins provided the Legal & Legislative Update at the CFA’s Law Day on January 28, 2016, in Toronto.
  11. Larry Weinberg and Gary Steinhart attended the Capital Roundtable on “Private Equity Investing in Franchise Companies” on January 28, 2016.
  12. Frank Robinson spoke at the OBA Annual Institute on February 3, 3016 on the topic of “Your First Franchise Client.”

(b) Upcoming

  1. Larry Weinberg, Geoff Shaw and Derek Ronde are attending the IFA’s Annual Conference in San Antonio, Texas on February 20-23, 2016.
  2. Larry Weinberg is teaching a course on Franchising at the University of Western Ontario’s law school in February to April 2016.
  3. Frank Robinson is speaking at the CFA Franchise Show on February 22, 2016, in Toronto, Ontario on “The Legal Aspects of Acquiring a Franchise.”
  4. Larry Weinberg is speaking at the 2016 Canadian Restaurant Investment Summit on March 1-2, 2016 in Toronto. 
  5. Larry Weinberg be moderating and speaking on the legal aspects of franchising a business at the "How to Franchise Your Business" seminar presented by the Canadian Franchise Association being held on March 3, 2016.
  6. Derek Ronde is co-chairing the Ontario Bar Association Franchise Section Dinner Program on Franchise Renewals on April 6, 2016, in Toronto, Ontario.
  7. Frank Robinson is facilitating a roundtable discussion at the CFA Annual Convention Law in Ottawa, Ontario, on April 17 and 19, 2016, on the topic of “Mergers and Acquisitions in Franchising: Getting the Deal Done from A to Z.”
  8. Larry Weinberg, Geoff Shaw, Derek Ronde, and Frank Robinson will be attending the 2016 Canadian Franchise Association National Convention in Ottawa, Ontario on April 17-19, 2016.
  9. Frank Robinson is speaking at the IFA Legal Symposium in Washington, DC, on May 15 and 16, 2016, on the topic of “Next Level International Franchising.”
  10. Geoff Shaw will be speaking at the IFA Legal Symposium on the topic “Litigation – How to Benefit from Forensic Accounting in Franchising” on May 16 and 17, 2016, in Washington DC.

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