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Franchise Law e-COMMUNIQUÉ - February 2018

Published: 02/08/2018

By Suhuyini Abudulai, Matthew R. Alter, Robyn Blumberg, Stefanie Holland, Christopher Horkins, Noah Leszcz, Alexandra Murphy, Colin Pendrith, Frank Robinson, Todd Robinson, Derek Ronde, Geoffrey B. Shaw, Stéphane Teasdale, Rebecca Valo, Larry M. Weinberg

In This Issue

  1. It’s That Time Of Year Again! Does Your Canadian Franchise Disclosure Document Need Annual Updating?
  2. Ontario Government Makes Changes to Ontario’s Franchise Legislation
  3. An AllStar Decision for Franchisors: Court of Appeal Restores Clarity and Commercial Sense to Disclosure Obligations in Long Awaited Raibex Appeal Decision
  4. Fast and Furious: Recent Canadian Legislation Changes That May Affect Franchisors and Franchisees
  5. Sweet Relief: British Columbia Court of Appeal Upholds Mutual Cancellation and Release Agreement Between Franchisor and Franchisee
  6. Arbitration Frustration: Narrowly Drafted ADR Clause Prevents Franchisor from Arbitrating Against Individual Franchisee Operators
  7. “Wave” The Deposit Goodbye: Franchisor Escapes Vicarious Liability After Franchisee Deposit Disappears
  8. Substance Over Form: The Ontario Court of Appeal Provides Guidance on Wishart Act Damages
  9. Ring the Alarm: Ontario Court Dismisses Franchisee Motion for Partial Summary Judgment
  10. Alberta Court Upholds Franchisee’s Obligation to Pay Fees Accrued During Overholding Period
  11. Ontario Court Weighs In On Franchise Disclosure and Rescission
  12. What We’re Up To: Winter and Spring 2018

It’s That Time Of Year Again! Does Your Canadian Franchise Disclosure Document Need Annual Updating?

By Larry M. Weinberg, Frank Robinson, Stéphane Teasdale, Rebecca Valo, Noah Leszcz

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 six 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 on a more frequent basis), 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, British Columbia, Manitoba, New Brunswick, Ontario and Prince Edward Island.

As discussed in this newsletter, there have been recent amendments to Ontario’s franchise disclosure legislation. Importantly, once certain provisions of the Arthur Wishart Act (Franchise Disclosure), 2000 come into force, franchisors will be permitted to enter into certain non-disclosure agreements with franchisees without providing franchise disclosure documents, and there will also be changes to the disclosure exemptions under the Act.

If you would like assistance updating your FDD or would like to discuss the changes to provincial legislation, please contact a member of our Franchise Law Group.

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Ontario Government Makes Changes to Ontario’s Franchise Legislation

By Derek Ronde

In November 2017, the Ontario Legislature passed The Cutting Unnecessary Red Tape Act, 2017 (the CURT Act), an omnibus piece of legislation designed to address issues in a number of provincial statutes. The CURT Act is relevant to Ontario’s franchise industry stakeholders because it contains various amendments to Ontario’s franchise legislation, the Arthur Wishart Act (Franchise Disclosure), 2000 (the Wishart Act). Cassels Brock discussed these proposed amendments in a previous newsletter.

As described below, some of the changes to the Wishart Act via the CURT Act are not in force yet, as the changes rely on regulations that have not yet been enacted by the Ontario Government.

The following changes to the Wishart Act have been made as part of the CURT Act:

Service Marks

The CURT Act removes the use of the term “service mark” from the Wishart Act because the term does not have legal significance in Canada. This amendment is a helpful housekeeping exercise. These changes are now in force.

The Definition of “Franchise”

In respect of the definition of “franchise,” the CURT Act provide recognition that the franchisor themselves may be a licensee, rather than an owner, of the intellectual property for the franchise. The amendment also provides that the right to exercise control, rather than the actual exercise of that control, may be sufficient for the purposes of characterizing a business as a franchise. The former change is a helpful housekeeping exercise, but the latter change in respect of the exercise of control will potentially increase the number of business arrangements that will fall under the ambit of this legislation.  The CURT Act also provides a helpful clarification to the single license exemption from franchise disclosure, clarifying that the relevant single licence must be granted for Canada in order to trigger the exemption. These changes are now in force.

The Circumstances Under Which A Disclosure Document Is Not Required (Non-Disclosure Agreements)

The CURT Act introduces changes to the circumstances under which a franchisor is required to deliver a disclosure document to a franchisee (as set out in paragraph 5 of the Wishart Act).

Specifically, a disclosure document does not have to provided prior to the signing of a franchise agreement or any other agreement relating to the franchise if the agreement only contain terms that (a) require any information or material that may be provided to a prospective franchisee be kept confidential, (b) prohibit the use of any information or material that may be provided to a prospective franchisee, or (c) designate a location, site or territory for a prospective franchisee. This addresses industry concerns regarding whether compelling a franchisee to sign a non-disclosure agreement prior to providing an FDD ran afoul of the Wishart Act’s statutory disclosure obligations.

However, there are qualifications to this exemption, namely that it does not apply to an agreement if the agreement contains terms that: (a) require the information to be kept confidential or prohibit the use of that information if the information (i) comes into the public domain other than as a result of a contravention of the agreement, (ii) is disclosed to any person other than as a result of a contravention of the agreement, or (iii) is disclosed with the consent of all parties to the agreement; or (b) prohibit the disclosure of information to an organization of franchisees, other franchisees of the same franchise system, or a franchisee’s professional advisors. As such, for the non-disclosure agreement to qualify for the disclosure exemption, it will have to be limited in scope.

Additionally, a disclosure document does not have to be provided upon the payment of a fully refundable deposit if the deposit (a) does not exceed a yet-to-be prescribed amount, (b) is refundable without any deductions, and (c) is given under an agreement that in no way binds the prospective franchisee to enter into a franchise agreement.

Similar changes apply to the requirements for delivering a statement of material change under section 5(5) of the Wishart Act.

These changes are not yet in force.

Statements of Material Change

The CURT Act provides that the contents of statements of material change will “contain the information that is prescribed.” No such prescription has yet been proposed by regulation, and the changes are not yet in force.

Disclosure Exemptions For Officers and Directors

The availability of the disclosure exemption under section 5(7)(b) of the Wishart Act has been expanded to include the grant of a franchise to a corporation that the former director or officer controls. However, the availability is limited to circumstances where (a) the franchisee has been an officer or director of the franchisor or franchisor’s associate for at least six months and is currently an officer or director, or (b) was an officer or director of the franchisor or franchisor’s associate for at least six months and not more than four months have passed since the franchisee was an officer or director. Although this is arguably a limitation of the exemption, it does provide a helpful bright-line test for franchisors to use in determining whether or not to disclose.

These changes are not in force yet.

Disclosure Exemptions for Fractional Franchise

The availability of the disclosure exemption under section 5(7)(e) in respect of fractional franchises has been clarified such that the calculation of anticipated sales has to be made in respect of the first year of operation. This amendment removes unnecessary ambiguity from the Wishart Act and brings it in line with the similar exemption in the other regulated provinces.

Disclosure Exemptions For De Minimis Investments and Large Investments

The CURT Act clarifies that the amount spent by the franchisee that is required to qualify for the de minimis investment exemption under section 5(7)(g)(i) of the Wishart Act is to be based on the “total initial investment, as described in the disclosure document.” The former language of the Wishart Act refers to a “total annual investment to acquire and operate the franchise.” Similar language has also been added for the large investment exemption under section 5(7)(h). These changes are not yet in force.

If you have any questions about these changes to the Wishart Act and their impact on your franchise system, please contact our Franchise Law Group.

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An AllStar Decision for Franchisors: Court of Appeal Restores Clarity and Commercial Sense to Disclosure Obligations in Long Awaited Raibex Appeal Decision

As addressed in Cassels Brock’s earlier Franchise E-Lert, on January 25, 2018, the Ontario Court of Appeal released the closely followed decision in Raibex Canada Ltd. v ASWR Franchising Corp. providing much needed clarity on the pre-contractual disclosure obligations imposed on franchisors under the Arthur Wishart Act (Franchise Disclosure), 2000. A copy of the article, which provides an analysis of the Court of Appeal’s decision, can be found here.

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Fast and Furious: Recent Canadian Legislation Changes That May Affect Franchisors and Franchisees

By Derek Ronde, Suhuyini Abudulai, Matthew R. Alter, Todd Robinson, Robyn Blumberg

There have been recent significant changes or proposed changes to Canadian legislation that may impact on franchisors and franchisees that operate in Ontario and Alberta.

  1. Alberta Consumer Protection - In January 2018, Alberta's Consumer Protection Legislation was significantly overhauled. The changes impact arbitration clauses in consumer agreements, the amendment of substantive terms in consumer transaction, high-cost credit products, auto sales and repairs, negative reviews, and ticket sales. We have issued a news release on these changes.
  2. Ontario Gift Cards - On January 19, 2018, the Ontario Ministry of Government and Consumer Services issued a consultation paper, seeking feedback on proposed changes to the gift card rules in the Consumer Protection Act (Ontario). Our discussion of these proposed changes can be found here.
  3. Ontario Construction Liens - On December 12, 2017, the Construction Lien Act Amendment Act, 2017 became law in Ontario. It implements substantive amendments to the current Construction Lien Act (Ontario) and the scheme for how construction projects will operate in Ontario. The most substantive amendments in the legislation will not come into force until a later date (anticipated in early 2018). This is a summary of the key amendments.

If you have any questions, please do not hesitate to contact Suhuyini Abudulai (regarding Consumer Protection and Gift Card issues) or Matthew Alter, Todd Robinson, and Robyn Blumberg (regarding Construction Liens issues). 

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Sweet Relief: British Columbia Court of Appeal Upholds Mutual Cancellation and Release Agreement Between Franchisor and Franchisee

By Colin Pendrith

Franchisors can be reassured by a recent decision of the British Columbia Court of Appeal (Dairy Queen Canada, Inc. v. M.Y. Sundae Inc.) that affirmed the use of Mutual Cancellation and Release Agreements as a means to resolve franchise disputes while protecting franchisors against future claims.

In a May 2017 newsletter, we reported on a decision of the British Columbia Supreme Court that endorsed the use of a Mutual Cancellation and Release agreement as a means of terminating a franchise agreement. In that case, Dairy Queen Canada, Inc. (Dairy Queen), the franchisor, presented the Mutual Cancellation and Release Agreement to a franchisee that was in default of various obligations under its franchise agreement. In lieu of immediate termination, the Mutual Cancellation and Release Agreement gave the franchisee the opportunity to continue to operate for six months, during which it could sell its business, provided that the franchisee complied with the franchise agreement during the six month period. Importantly, and as its title would suggest, the Mutual Cancellation and Release Agreement contained a release of the franchisee’s claims against the franchisor.

After signing the Mutual Cancellation and Release Agreement, the franchisee pursued claims against the franchisor for breach of contract, as well as various breaches of the Arthur Wishart Act (Franchise Disclosure), 2000 (the Wishart Act), including breach of the duty of good faith and fair dealing.

In the original decision, the Supreme Court of British Columbia upheld the Mutual Cancellation and Release Agreement and found that it was a complete bar to the franchisee’s claims. The Court rejected the franchisee’s arguments that the Mutual Cancellation and Release Agreement had been signed under duress or should be disregarded on grounds of unconscionability.

The franchisee appealed this decision to the Court of Appeal for British Columbia, which upheld the lower court’s decision.

As part of the appeal, the franchisee brought a motion to adduce fresh evidence from a hand-writing expert in support of a novel argument that the Mutual Cancellation and Release Agreement had not been signed at all. In dismissing the motion, the Court held that the proposed fresh evidence was "more than simply new evidence. This is a reversal of the entire case that [the franchisee] took to trial."

The Court also rejected the franchisee’s argument that the Mutual Cancellation and Release Agreement had been entered into under duress, and endorsed the trial judge’s finding that the offer to forbear enforcement in exchange for entering in the Mutual Cancellation and Release Agreement was nothing more than “legitimate commercial pressure.” The Court explained:

In this case, Dairy Queen was asserting a contractual right to terminate the franchise agreement for failure to abide by its terms. The Mutual Cancellation and Release was presented as an alternative to immediate closure to provide time for Mr. Richards to wind up the business in an orderly fashion. The trial judge concluded that:

… the Cancellation and Release is more generous on its face than the [Franchise] Agreement itself, allowing the franchisee time to recoup its investment through the sale of an operating franchise rather than immediate termination of the Agreement and an accompanying demand to cease and desist.

The trial judge appears to have accepted that the proposal of Dairy Queen to provide additional time to the appellants in return for the Mutual Cancellation and Release fell within the range of legitimate commercial pressure. I can see no error in this conclusion.

The Court of Appeal also rejected the franchisee’s argument that the timeline to review and sign the Mutual Cancellation and Release Agreement was insufficient and amounted to illegitimate pressure. Rather, the Court found that the ten-day period provided was ample time for the franchisee to explore its legal options. The Court explained:

[The franchisee] had known since April that Dairy Queen was taking the position that if he did not adhere to the standards required of the franchise, Dairy Queen could shut the business down. He had ample time to explore legal options before August 9. The trial judge determined that he had seen the document on July 31 and also that it was a document with which he was familiar. He could have refused to execute it, and defended any termination on the merits. This is not a case in which the demand was made without warning and without notice, leaving him with no option but to sign.

The Court of Appeal fully endorsed the trial decision below, holding that there was "no error in the trial judge’s thorough analysis and certainly no palpable and overriding error."

The Court’s decision confirms that mutual cancellation and release agreements can be valuable tools for franchisors looking to end unworkable franchise relationships while limiting their liability. In these circumstances, the agreement can also be beneficial to franchisees that would otherwise face immediate termination for breaches of the franchise agreement. Instead, the franchisee will hopefully be able to find a buyer and recoup some or all of its investment in the franchise. For these reasons, before effecting a termination, franchisors should consider whether a mutual cancellation and release agreement could provide a mutually beneficial way to end the relationship while (hopefully) avoiding conflict.

A copy of the trial decision is available here.

A copy of the appeal decision is available here.

Dairy Queen was represented by Colin Pendrith of Cassels Brock at the summary trial and on appeal.

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Arbitration Frustration: Narrowly Drafted ADR Clause Prevents Franchisor from Arbitrating Against Individual Franchisee Operators

By Christopher Horkins

The use of arbitration clauses in Canadian franchise agreements is increasingly common and, when carefully drafted, these agreements can provide many benefits to franchisors.

However, a recent decision of the Ontario Superior Court of Justice shows the unintended consequences of a poorly drafted arbitration clause. In Kanda Franchising Inc. and Kanda Franchising Leaseholds Inc. v. 1795517 Ontario Inc., the Court ordered that a franchisor’s claims against its corporate franchisee must be arbitrated pursuant to an arbitration provision in the franchise agreement, but declined to compel the individual operators of the franchise agreement to arbitrate along with the franchisee due to the strict, narrow language of the arbitration provision.1

In this case, following the breakdown of the relationship between Kanda, a franchisor of optical retail stores, and its franchisee in Richmond Hill, Ontario, the franchisor delivered a Notice to Arbitrate seeking damages for breach of contract and breach of the duty of good faith and fair dealing under section 3 of the Arthur Wishart Act (Franchise Disclosure), 2000 (the Wishart Act). The claim was brought against the corporate franchisee as well as the two individual owner-operators of the franchise agreement. In response, counsel for the franchisee parties agreed that the claims against the corporate franchisee were subject to the arbitration clause, but refused to consent to the arbitration of the claims against the individuals on the basis that they were not parties to the arbitration agreement. The franchisee parties also disagreed with the franchisor’s choice of arbitrator. The franchisor then brought an application to the Court seeking to appoint their preferred arbitrator and compel all of the franchisee parties to arbitration of the dispute.

After reviewing the relevant contractual language and the contra proferentem principle, which requires that contractual language be interpreted in favour of the non-authoring party of the contract, the Court sided with the franchisee parties, finding that the individual defendants were not parties to the franchise agreement and its arbitration provision and, therefore, could not be compelled to submit to arbitration. The only signing party to the franchise agreement on the franchisee side was the corporate defendant, and although the franchise agreement imposed express obligations on the individuals, this did not rise to the level of making them parties to the agreement. The Court also noted that the arbitration provision was not drafted to expressly include claims by and against shareholders, directors, and employees of the franchisee (as some arbitration clauses are). As such, the Court inferred that the franchisor had either chosen not to do so or was aware that the franchisee would not have accepted such a term. As a result, the Court ordered that only the dispute between the franchisor and corporate franchisee be submitted to arbitration, with the franchisor’s preferred arbitrator being appointed.

In Kanda, imprecise drafting led to the peculiar outcome that the franchisor’s claims against one defendant (the corporate franchisee) could be arbitrated, while its claims against the other defendants (the individuals) would have to proceed before the courts, if at all. Such a result could likely have been avoided through more careful drafting of the franchise agreement and its arbitration clause. Had the individuals been made guarantors to the franchise agreement and expressly subject to the arbitration provision, it seems likely that the Court would have allowed all of the franchisor’s claims to proceed by way of arbitration.

However, Kanda raises other questions with respect to the arbitrability of claims which are frequently made by franchisees against non-party “franchisor’s associates,” “agents” or “brokers” which courts have previously compelled to arbitration where the relevant franchise agreement contained an arbitration clause.2 Franchisors seeking to avail themselves of the benefits of arbitration clauses should be careful to draft them expansively, given the narrow and franchisee-friendly approach courts are likely to apply in resolving a dispute over the scope of the arbitration agreement.

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1 Kanda Franchising Inc. and Kanda Franchising Leaseholds Inc. v. 1795517 Ontario Inc., 2017 ONSC 7064 (CanLII), <http://canlii.ca/t/hp0lc> (Kanda)
2 See for example: Nazarinia Holdings Inc. v 2049080 Ontario Inc., 2010 ONCA 739, <http://canlii.ca/t/2d614>; MDG Kingston Inc. v MDG Computers Canada Inc., 2008 ONCA 656, <http://canlii.ca/t/20xf4>

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“Wave” The Deposit Goodbye: Franchisor Escapes Vicarious Liability After Franchisee Deposit Disappears

By Noah Leszcz

In a recent decision, (1738937 Alberta Ltd v Fair Waves Coffee Inc), the Alberta Court of Queen’s Bench has denied a claim that a franchisor was liable for the fraudulent actions of a master franchisee against a subfranchisee. This decision is a helpful reminder that a master franchisor can protect itself from vicarious liability for the acts of its master franchisee.

In this case1, in 2013, an Alberta couple, the Kerrs, were in search for a new business opportunity and began making inquiries about a Fair Waves coffee (Waves) franchise. They applied by fax to the Waves’ British Columbia head office, and Mr. Abrahim Alhusin, the master franchisee for Waves in Alberta, reached out to them.

Alhusin provided the Kerrs with a disclosure document, which they gave to their corporate lawyer for review. The lawyer conducted a corporate registry and personal property search on M&M Alberta Coffee Ltd dba Waves Coffee Alberta (M&M), the corporate entity that Mr. Alhusin was using to operate as master franchisee. The lawyer advised the Kerrs that M&M and Fair Waves Coffee Inc., the franchisor, were separate companies, and that “everything looked fine.”

The Kerrs then signed the franchise agreement with Mr. Alhusin, and paid M&M numerous fees, including $225,000 for a construction deposit. The store was set to open in October of 2013. However, that never happened, as Mr. Alhusin and the deposit vanished, leaving the Kerrs without a franchise and with almost $250,000 in losses.

Mr. Alhusin had been a trusted Vancouver Waves franchisee for many years, before signing the master franchise agreement with Waves for Alberta in 2009. Since that time, he had signed up nine Alberta franchisees, which were assigned to Waves after Alhusin’s disappearance.

The Kerr’s franchisee company, 1738937 Alberta Ltd., sued Waves and M&M in respect of its losses. The Kerrs argued that despite their franchise agreement being with M&M, the franchisor Waves should be vicariously liable because of: i) the language on the Waves website concerning franchise opportunities; ii) the franchisor’s receipt of the franchisee application; and iii) the supervisory powers and financial benefits detailed in the master franchise agreement.

The Kerrs’ argument was based on the concept of vicarious liability. Vicarious liability refers to one person being responsible for the wrongdoing of another because of the relationship between the parties. Commonly, this is seen when an employer is held liable for the misconduct of an employee. 

In this case, the Court ruled that neither Mr. Alhusin nor M&M were employees of the franchisor, and they were in fact independent contractors. Justice Topolniski writes:

Fair Waves had no control over how Mr. Alhusin marketed, sold, or monitored his franchisees, who he hired, and in certain circumstances, how he priced product. Subject to the payment of new store and transfer fees, and royalties, Fair Waves did not bear any financial responsibility for or assume risks concerning M&M’s operations. In other words, Fair Waves and M&M are separate businesses. They lack the kind of inter-relationship and control that is found in an employment structure.

Failing the employer-employee threshold, the Court turned to an analysis of whether Mr. Alhusin and M&M were ostensible or apparent agents of the franchisor, which is another means by which a person or entity can be found liable vicariously. In order to be found liable vicariously as an agent, the Kerrs needed to assert that Mr. Alhusin and M&M were agents of the franchisor, acting with apparent authority, and that the Kerrs relied on an express or implied unequivocal representation by the franchisor that it had authorized Mr. Alhusin or M&M to act on its behalf. This representation must be determined to have been reasonable, and further, that the loss suffered was attributable to that representation.

The Kerrs asserted at trial that the following facts amounted to a reasonable representation: i) the franchisee application on the franchisor’s website, along with the franchisor’s receipt of the application, and subsequent communication; ii) the Waves promotional materials available on the franchisor’s website; iii) the disclosure document which disclosed the relationship between the master franchisee and the franchisor; and iv) Mr. Alhusin’s comments that the franchisor and master franchisee were “one big family,” and that “we all work together as one.”

The Court ruled that while some of these facts “may have lulled an unsophisticated, vulnerable customer” into thinking that the franchisor had authorized the master franchisee to speak on its behalf, the Kerrs were not unsophisticated in the “language of franchises,” having operated a different franchise for many years. While the Court was sympathetic to the plight of the Kerrs’, Justice Topolniski ruled that they had opportunities to discover that Mr. Alhusin and M&M “were not, in any fashion, agents” of the franchisor. In coming to this decision, the courts relied on the fact that the Kerrs had assistance from corporate counsel, and were presented with multiple opportunities to discover the nature of the relationship between master franchisee and franchisor, and they instead chose to rest on their assumptions.

The takeway from this decision is that franchisors should govern themselves carefully when dealing with master franchisees and subfranchisees to avoid the implications of vicarious liability. This can be done both contractually in the master franchise agreement, which can include appropriate disclaimers in the master franchisee’s disclosure document and subfranchise agreement, and in practice by limiting interactions between the franchisor and subfranchisees. Franchisors can exercise their rights to review the subfranchise agreement and corresponding disclosure document while being mindful not to unnecessarily meddle in the affairs of their master franchisees as they pertain to their relationships with subfranchisees.

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1 1738937 Alberta Ltd v Fair Waves Coffee Inc (Waves Coffee House), 2017 ABQB 714, <http://canlii.ca/t/hnvf3>

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Substance Over Form: The Ontario Court of Appeal Provides Guidance on Wishart Act Damages

By Stefanie Holland

A recent decision of the Ontario Court of Appeal has provided franchisors and franchisees with further guidance on how to calculate statutory rescission damages under section 6 of Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 (the Wishart Act).1  

The case, 2122994 Ontario Inc. v. Lettieri, was an appeal from a judgment of the Ontario Superior Court of Justice2 upholding the decision of the trial judge and dismissing the franchisor’s attempt to challenge the franchisee’s rescission claim, including the categorization of rescission losses.3  The franchisor appealed on the grounds that the trial judge erred in failing to permit it to cross-examine the franchisee about the arrangement she had with TD Bank, which was said to have loaned her the money to pay for certain leasehold improvements made to the franchise premises.

In upholding the trial judgment, the Ontario Court of Appeal rejected the franchisor’s argument and stated that whatever the arrangements were between TD Bank and its customer were irrelevant to any issues as between the franchisor and the franchisee. The only relevant fact in determining losses is the amount the franchisee paid to the franchisor.

The Court of Appeal held that language of the Wishart Act is clear - on rescission, the franchisor is required to “refund to the franchisee any money received from or on behalf of the franchisee, other than money for inventory, supplies or equipment.” The source of the franchisee’s funding was found to be irrelevant to her claim against the franchisor.

The franchisee had initially categorized these losses as “supplies and equipment” under subsection 6(6)(c) of the Wishart Act. Despite this, the Court of Appeal stated that the trial judge correctly categorized the leasehold improvements made to the property as “money received from or on behalf of the franchisor other than money for inventory, supplies or equipment,” under subsection 6(6)(a) of the Wishart Act. Without any evidence of prejudice to the franchisor, the Court held that it was immaterial how the leasehold improvements were categorized under the Wishart Act. The objection was simply one of “empty formalism.”

The takeaway from this decision is that the manner in which a franchisee may categorize damage amounts under the Wishart Act may not be of much, if any, significance when determining whether the franchisor is required to refund these monies to the franchisee. The Court of Appeal has indicated that it will take a flexible rather than a rigid approach in calculating Wishart Act rescission damages. As such, litigants should be focused on the substance of rescission damages claims rather than their arbitrary classification under the different section 6(6) heads of damage.

_________________________________

1 2002, S.O. 2000, c.3. 38
2 2122994 Ontario Inc. v. Lettieri, 2016 ONSC 6209, <
http://canlii.ca/t/gv1m9>
3 2122994 Ontario Inc. v. Lettieri, 2017 ONCA 830, <
http://canlii.ca/t/hms31>

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Ring the Alarm: Ontario Court Dismisses Franchisee Motion for Partial Summary Judgment

By Alexandra Murphy

In Hepburn v. AlarmForce,1 the Ontario Superior Court of Justice considered the question of what constitutes a material change under the Arthur Wishart Act (Franchise Disclosure), 2000 (the Wishart Act). The Court dismissed the plaintiff franchisee’s motion for partial summary judgment, concluding that there were genuine issues requiring a trial, in part due to the insufficiency of the evidentiary record.

In this case, the franchisee (115) entered into a franchise agreement with AlarmForce in 1995 for the right to operate an AlarmForce franchise in Southwestern Ontario for a period of ten years (the 1995 Agreement). The 1995 Agreement included a right of renewal.

In March, 2005, the 1995 Agreement was up for renewal and 115 provided notice of its intention to renew the agreement. After 115 requested a renewal agreement, AlarmForce advised that it would provide the document “in due course.” The renewal agreement was provided to 115 in August, 2007, more than two years after the franchisee requested the renewal agreement (the 2007 Agreement).

Upon receipt of the 2007 Agreement, counsel for 115 noted a number of changes between the renewal agreement and the 1995 Agreement, and took the position that AlarmForce was required to provide a disclosure document since the differences between the agreements constituted a material change. The 2007 Agreement was never signed and the parties entered into a stand-off. Communication between the parties in the subsequent years was limited to occasional and unsuccessful offers by AlarmForce to purchase the franchise, until December, 2014, at which point AlarmForce provided notice of termination effective December, 2015.

Following completion of the pleadings, 115 brought a motion for partial summary judgement, seeking declarations from the Court that AlarmForce breached the Wishart Act by failing to provide a disclosure document and breached its duty of good faith and fair dealings.

With regards to the disclosure document, the central issue was whether AlarmForce was required to provide 115 with disclosure as a result of material differences between the 1995 Agreement and the 2007 Agreement. The Court found that the appropriate approach was a context-driven analysis, and noted that this required more information than a direct comparison of the two agreements; consideration of the surrounding circumstances was necessary. Since the Court found that the affidavit evidence put forward by the parties contained unsubstantiated assertions of fact, the Court determined that the evidentiary record was insufficient for it to make a finding regarding the issue of material change.

The Court also considered whether AlarmForce breached its duty of good faith and fair dealings. 115 submitted that AlarmForce had failed to properly support the franchisee. In particular, 115 alleged that AlarmForce had provided unequal levels of advertising, corporate support and product opportunities between its corporate territories and 115. The Court, drawing from its conclusions regarding disclosure, found that the issue required a context-driven analysis which the evidentiary record could not support. Accordingly, the Court determined that there was a genuine issue requiring a trial.

In dismissing the plaintiff’s motion for partial summary judgment, the Court determined that it could not “fairly and justly adjudicate the issues” based on the evidentiary record. The decision is a useful reminder that parties must put their “best evidentiary foot forward,” particularly on motions for summary judgment.  
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1 Hepburn v. AlarmForce, 2017 ONSC 6012, <http://canlii.ca/t/h6ktq>

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Alberta Court Upholds Franchisee’s Obligation to Pay Fees Accrued During Overholding Period

By Rebecca Valo

The Alberta Court of Queen’s Bench recently granted summary judgment to a franchisor in a claim for unpaid rent and other charges during an overholding period, following the expiry of a sublease and franchise agreement (the governing agreements).1 The plaintiff, TDL Group Corp. (TDL), was both the sub-lessor and the franchisor.

In this case, the defendant franchisee, MRMA Holdings Ltd. (MRMA), operated a Tim Horton’s franchise for approximately 10 years. Following the expiry of the governing agreements, MRMA continued to operate its store for a period of 12 weeks. TDL claimed that during this time, MRMA accumulated $97,613 owing in unpaid rent, and $92,888 owing for supplies and services provided by TDL. TDL successfully sought summary judgment for payment of these charges in full.

While MRMA conceded an additional amount that was owed for rent and other charges prior to expiration of the governing agreements, it disputed the amounts TDL claimed were owing during the overholding period, asserting that TDL’s only claim was based on unjust enrichment, and that there was insufficient evidence to quantify that claim.

With respect to the amounts owed for rent, the Court granted summary judgment for the full amount claimed, on the basis that there were specific provisions in the sublease agreement that provided for the continuation of payments during an overholding period. While there was no similar provision in the franchise agreement, TDL successfully argued that there was an implied contract, obligating MRMA to pay for the relevant charges on same basis as it had during the term of the franchise agreement. The Court agreed, relying on case law indicating that when parties carry on as usual after the end of a fixed term contract, the provisions of that contract should continue to apply.

MRMA, in its defense, claimed that it had not merely carried on as usual but had expressly attempted to address the question of compensation during the overholding period, and was ignored by TDL. The Court rejected this distinction and held that since MRMA was contractually bound to pay rent as an overholding tenant, and had given no indication of its intent not to pay for other charges as it always had, it was be reasonable to conclude that MRMA was in agreement to pay ongoing charges as it had for the previous 10 years. Furthermore, the Court held that the franchise agreement and sublease were commercially intertwined and that it would be unreasonable to believe that the parties were not implicitly operating under both agreements during the overholding period. The Court further rejected MRMA’s other claims for lack of consideration in the implied contract and for equitable set-off between the claims.

This decision may have positive implications for franchisors on an ongoing basis, as it demonstrates a Court’s willingness to imply the continuation of a contract in an overholding situation, even absent express overholding provisions. However, given that the sublease in fact contained an overholding provision, and that the court found the sublease and franchise agreement to be intertwined, it is uncertain whether a franchise relationship that entirely lacks such a provision would be similarly interpreted by the courts. It is, therefore, still best practice for franchisors to routinely include express overholding provisions in their franchise and related agreements.

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1 TDL Group Corp v MRMA Holdings Ltd, 2017 ABQB 713, <http://canlii.ca/t/hnx39>

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Ontario Court Weighs In On Franchise Disclosure and Rescission

By Christopher Horkins, Derek Ronde

In a recent decision, Giroux v. 1073355 Ontario Limited o/a Schooley Mitchell Telecom Consultants,1 the Ontario Superior Court of Justice granted summary judgment to a franchisee seeking statutory rescission of its franchise agreement under Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 (the Wishart Act). Although the decision is fairly straightforward, as rescission was granted due to the failure of the franchisor to provide financial statements prepared in accordance with generally accepted accounting principles (GAAP), the decision did provide some helpful guidance on various rescission-related legal issues in Ontario.

The issues addressed in the decision are as follows:

  • If a defendant franchisor intends on arguing that its financial statements were prepared in accordance with GAAP, the franchisor should provide evidence as to the accounting standard that was used to compile the financial statements.
  • The delivery of a second disclosure document to correct issues with an initial disclosure document does not necessarily contravene section 5 of the Wishart Act and its requirement to provide one disclosure document at one time.
  • Ontario courts will take a critical view of what constitutes a “material fact” for the purposes of rescission claims. In this case, the court held that information on financing arrangements, the failure to identify an individual as a “franchisor’s associate,” the existence of a 1998 Provincial Offences Act charge against the franchisor’s associate, and the ownership history of the franchisor system were not material facts and did not have to be disclosed by the franchisor.

The Schooley Mitchell case is a reminder to franchisors of their obligations to provide current and adequate financial disclosure to prospective franchisees, but also a helpful guide to what constitutes material information for the purposes of franchise disclosure.

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1 Giroux et al. v. 1073355 Ont. Ltd. et al, 2018 ONSC 143, <http://canlii.ca/t/hplh5> (Schooley Mitchell)

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What We’re Up To: Winter and Spring 2018

What We’ve Done

  1. New Partners!: In January 2018, three litigators and members of the Franchise Law Group were admitted into the partnership at Cassels Brock. Welcome Stefanie Holland, Eric Mayzel and Colin Pendrith!
  2. Thought Leadership: Stéphane Teasdale's article on the importance of due diligence in international transactions was recently published by Franchising World and Larry Weinberg's article on "The Joint-Employer Problem for Franchising" was published by Who's Who Legal.
  3. Rising Star: In November 2017, Frank Robinson was named a 2017 Lexpert "Rising Star." The "Rising Stars: Leading Lawyers Under 40" awards pay tribute to the rising stars and future leaders of the Canadian legal community. Frank was honoured for his work on behalf of some of the most well-known franchising companies in the market. Congratulations Frank!
  4. Who's Who: Partners Larry Weinberg, Geoff Shaw, Stéphane Teasdale, Derek Ronde and Frank Robinson were all recognized as leaders in the area of franchise law by UK-based Who's Who Legal. In addition, the organization named Larry Weinberg a 2018 "Thought Leader." Thought Leaders obtained the highest number of nominations from peers, corporate counsel and other market sources during the publication's most recent research cycle.
  5. Recognized Leaders: In addition, Larry Weinberg, Geoff Shaw, Stéphane Teasdale, Derek Ronde and Frank Robinson were also ranked as leaders in their field by Chambers Canada 2018. As a team, the Cassels Brock Franchise Group earned a Tier 1 rating from the prestigious publication, the highest possible ranking, and Chambers noted that clients declare the advice received from our team as "proactive and innovative."
  6. Larry Weinberg spoke on a panel entitled “Fundamentals of Franchising – Canada” at the ABA Forum on Franchising in Palm Desert, California on October 18-20, 2017. This workshop was organized to coincide with the publication of the 2nd edition of the ABA Forum’s book Fundamentals of Franchising – Canada that Larry Weinberg co-edited. Stéphane Teasdale and Geoff Shaw are also co-authors of chapters of this book. Frank Robinson, Stéphane Teasdale, Geoff Shaw, Derek Ronde, Rebecca Valo and Stefanie Holland also attended the Forum.
  7. Rebecca Valo spoke at the CFA Trade Show on October 22, 2017 in Toronto, Ontario on “The Legal Aspects of Becoming a Franchisee.”
  8. Larry Weinberg spoke on the legal aspects of starting to franchise as part of the CFA’s How to Franchise Your Business seminar on October 26, 2017, in Toronto, Ontario.
  9. Larry Weinberg spoke on a panel called Advice on Disclosure of All Material Facts at the OBA 17th Annual Franchise Law Conference on November 16, 2017 in Toronto, Ontario.
  10. Derek Ronde spoke at the OBA 17th Annual Franchise Law Conference on November 16, 2017 in Toronto, Ontario on a panel called “Show Me the Money: Enforcement Options For Franchise Litigation.”
  11. Larry Weinberg was appointed to a multi-year term as an Associate Editor of the ABA Forum on Franchising’s prestigious Franchise Law Journal.

Upcoming

  1. Larry Weinberg, Geoff Shaw, Derek Ronde and Frank Robinson are attending the International Franchise Association’s Annual Convention in Phoenix, Arizona from February 10-13, 2018.
  2. Cassels Brock is hosting the Ontario Bar Association Franchise Section’s annual Breakfast Social on February 28, 2018.
  3. Cassels Brock lawyers will be attending the Canadian Franchise Association’s Annual Convention in Ottawa, Ontario on April 22-24, 2018.
  4. Stéphane Teasdale will be speaking at the IFA Legal Symposium in Washington, D.C., on May 6-8, 2018 on international franchising issues. Larry Weinberg, Geoff Shaw, Derek Ronde and Frank Robinson will also be attending.
  5. Larry Weinberg is co-chairing the IFA/IBA Joint Conference in Washington, DC on May 8-9, 2018

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