By Kate Byers, Carly Cohen, Stefanie Holland, Christopher Horkins, Noah Leszcz, Jessica Lipton, Eric Mayzel, Alexandra Murphy, Colin Pendrith, Frank Robinson, Derek Ronde, Geoffrey B. Shaw, Rebecca Valo, Larry M. Weinberg
In This Issue
British Columbia’s Franchises Act: New Disclosure Requirements
Last month we discussed the release of the regulations that accompany British Columbia’s new Franchises Act, S.B.C. 2015, c. 35 (the Act). The Act will come into force on February 1, 2017, after which franchisors that wish to renew, transfer or grant new franchises in that province will be required to comply.
An in-depth analysis of the new regulations provides insight into how the Act will impact franchise disclosure practices in British Columbia. As expected, the majority of the disclosure requirements imposed by the regulation are similar to requirements found in the regulations of the other five provincial franchise statutes. However, there are certain different requirements of which franchisors franchising in British Columbia must be cognizant.
The first category of changes relates to the contents of the franchise disclosure document. Franchisors will have to include new information not previously required by the other five statutes, including a specific form of certificate for the province. Also, additional information is required regarding existing collective advertising funds, such as the frequency of contributions to the fund. Further requirements imposed by the regulations mandate the inclusion of additional information on the dispute resolution processes, such as any restrictions surrounding venue.
Nevertheless, with some appropriate changes, a single Canada wide franchise disclosure document that will be compliant with the requirements of all six regulated provinces can be prepared and used.
In addition to new obligations in respect of the contents of the franchise disclosure document, franchisors must also be aware of the new requirements regarding delivery of disclosure documents. The regulations contain a new requirement that disclosure documents delivered by way of courier contain a method for tracking and confirmation of receipt of the delivery.
Statements of material change and notices of rescission both contain new delivery requirements which mirror the requirements for disclosure documents.
We encourage all of our clients to contact us to assist in updating their franchise disclosure documents in advance of the date the Act comes into force, namely February 1, 2017.
In particular, those franchisors who regularly plan to update their Canadian disclosure documents later in the calendar year should consider accelerating their update to make sure they have a fully compliant disclosure document in time.
Just Not Ready? Raibex Decision Makes Post-Agreement Location Selection a Fatal Error
We recently wrote about the Ontario Superior Court's decision in Raibex v ASWR Franchising Corp., a summary judgment decision in a rescission case where the franchisor's failure to include a copy of the head lease and development costs specific to the location was found to be a fatal deficiency in the disclosure document, despite the fact that the location was expressly to be determined after the franchise agreement was signed.
The decision introduces unheard of new disclosure obligations, including the concept that disclosure may be "premature" if a franchisor does not yet know all potentially material facts about the franchise to be granted or those facts do not exist. In Raibex, the Court suggested that a franchisor in such a situation is "not yet ready" to disclose and "must wait" before delivering a disclosure document. This decision has potentially drastic impact for franchisors in Ontario, many of whom follow the longstanding and common practice, long thought to be Wishart Act1 compliant, of selecting a location after the franchise agreement is signed following a location selection process set out in the agreement. The decision does not distinguish between situations where the franchisor sub-leases the location and where franchisees enter into leases directly, nor does it account for the impact of this new principle on multi-unit or area development arrangements, causing further confusion. The decision appears to stand squarely at odds with other cases, including the recently released Active Tire case summarized in this edition of our newsletter.
As we reported in our previous piece, the franchisor has commenced an appeal of the decision. All franchisors should stay closely tuned to this space for updates on the appeal, given the potential impact on their business. In the meantime, franchisors are cautioned to consider the impact of the Raibex case when disclosing to prospective new franchisees.
1 (Franchise Disclosure), 2000, S.O. 2000, c.3.
Ontario Court Focuses on Franchisee’s Ability To Make An “Informed Decision” In Denying Rescission Claim
In Mendoza v. Active Tire & Auto Centre Inc., Justice Dow of the Ontario Superior Court of Justice appears to have put a new gloss on the test for rescission under section 6(2) of the Wishart Act. Specifically, the Court overlooked certain deficiencies in the franchise disclosure document and focussed on whether the franchisee made an “informed decision” to enter into the franchise agreement.
The franchisee retained a broker to assist in obtaining a franchise in or around January 2015. Negotiations with the franchisor began in January 2015, culminating in the signing of a franchise agreement that was effective June 1, 2015.
During negotiations, the franchisee was provided with various documents at different times, including a disclosure statement, signed by the franchisor’s Franchisee Development Manager, but not by the officers or directors identified in the franchise disclosure document.
On August 31, 2015, the franchisee served a notice of rescission, alleging five key deficiencies in the franchise disclosure document, as follows:
Justice Dow acknowledged that there were deficiencies in the disclosure document, and in particular, referred to the absence of a second officer or director’s signature on the disclosure certificate and to the incomplete financial statements. Despite these noted deficiencies, the Court concluded that the franchisee has made an “informed decision” to enter into the franchise.
In reaching this conclusion, the Court appears to have placed significant reliance on the “extensive nature of the material” provided by the franchisor to the franchisee during the negotiations, as well as the franchisee’s refusal to answer questions about the misleading or deficient portions of the 175 page disclosure document.
The Court ultimately concluded that the “disclosure document provided was not in full compliance with the Wishart Act but the deficiencies were not significant or misleading. As a result, my conclusion is rescission is not available to Mendoza under Section 6(2).”
Justice Dow’s decision appears to depart from a strictly objective analysis of the disclosure document for compliance with the Wishart Act and its regulations, and instead, shifts the focus to whether the franchisee made an “informed decision”. This analysis contrasts with prior jurisprudence, which has held that deficiencies, such as the failure to deliver a single disclosure document, the failure to provide financial statements in accordance with the Wishart Act and the failure to provide a certificate signed by two directors, are “fatal deficiencies” that entitle the franchisee to rescission under section 6(2). Yet it is a welcome decision for franchisors in Ontario being held to too high a standard when determining Wishart Act compliance.
This decision will likely generate significant discussion in Ontario franchising circles, and Cassels Brock will continue to monitor the decision to see if its findings are upheld if it is appealed.
Never-Ending Saab Stories: The Ontario Superior Court of Justice Revisits Jurisdictional Issues for International Franchisors
In Stuart Budd & Sons Limited v. IFS Vehicle Distributors ULC2 (Budd), the Ontario Superior Court of Justice revisited an attempt by defendant automotive companies to dismiss a claim against it by a national group of dealers on the grounds that Ontario courts did not have jurisdiction over the dispute. Back in 2015, the Ontario Superior Court of Justice found in favour of the dealers on the very same motion (a copy of our summary of that decision can be found here). However, the Ontario Court of Appeal overturned the decision and sent it back to the Ontario Superior Court of Justice to be reconsidered (a copy of the Court of Appeal’s decision can be found here). On the second go-round, the Ontario Superior Court of Justice confirmed its earlier decision that Ontario was an appropriate forum to hear the dispute.
The case involves motion brought by the defendants for an order dismissing the plaintiffs’ statement of claim for a lack of jurisdiction. The plaintiffs had sued the defendants for a declaration that they validly rescinded their Saab Dealer Sales and Service Agreements pursuant to Ontario’s franchise legislation, the Wishart Act. They also sought compensation or damages pursuant to section 7(1) of the Act and alternatively, damages for a breach of contract.
By way of background, in 2010, the defendant, International Fleet Sales Inc. (IFS), a California company, was recruited by Saab Automobile AB to assist with the importation and distribution of vehicles and parts from Sweden and the US into Canada. The defendant, IFS Vehicle Distributors ULC (IFS ULC), was subsequently incorporated in British Columbia and registered to do business in Ontario. IFS then recruited the plaintiffs to become dealers. The plaintiffs were dealers spread across Canada with three located in Ontario, two in Quebec and one each in Alberta, Nova Scotia and British Columbia. The parties entered into dealership agreements, each of which designated that Ontario law be applied to the contract.
The issue before the Court on this motion was whether there is a real and substantial connection between the plaintiffs’ claim and the Province of Ontario and if so, whether the Court should decline its jurisdiction and find that California, as argued by the defendants, was the more appropriate forum.
A Real and Substantial Connection to the Province of Ontario
In finding a real and substantial connection to Ontario, the Court looked to one of the presumptive connecting factors, which, unless rebutted, will entitle it to assume jurisdiction over the claim. One of these factors is whether IFS ULC carried on business in Ontario. The Court concluded that it did carry on an active business in Ontario and further, failed to satisfy its burden of rebutting this factor.
The Court Should Not Decline Its Jurisdiction
After concluding that it had proper jurisdiction over this litigation, the Court turned to IFS ULC to establish that there was another forum, which was more appropriate. The Court rejected its position that California was the more appropriate forum and based this on several factors, including the fact that three of the plaintiffs reside in Ontario and the remaining five plaintiffs reside within Canada. The Court also noted that the plaintiffs’ claims were all connected by the contractual provision in the dealership agreements as agreed upon between the parties selecting the application of Ontario law.
This decision calls into light jurisdictional issues that international franchisors may face when litigation occurs within a Canadian franchise system that spans over multiple provinces. Perhaps most significant for franchisors, this decision highlights the importance of choice of law provisions in franchise agreements. Even where there are agreements signed and dealerships located in different provinces, once the presumptive connecting factor has been established and not rebutted, a Court will assume jurisdiction over all aspects of the case. Franchisors and their lawyers ought to be mindful of this decision when drafting agreements and contemplating potential litigation.
2 2016 ONSC 2980.
Back to the Future: Ontario Courts Decline To Uphold Tenant’s Interpretation of a 25 Year Old Restrictive Covenant In Lease
The recent Ontario Superior Court of Justice decision in 1575573 Ontario Inc. v Armaiti Inc. illustrates the importance of using specific language when drafting use clauses and restrictive covenants or risk losing the ability to enforce such clauses years down the road.
In this case, Armaiti Inc. (the Landlord) acquired a commercial plaza in 2008 and assumed a lease with 1575573 Ontario Inc, operating as Wimpy’s Diner (Wimpy’s). This lease had been assigned and extended several times, having been initially executed in 1976. The initial lease contained a use clause permitting the tenant to operate as a “Restaurant or Snack Bar.” In an extension of the lease dated July 1, 1991, a restrictive covenant was inserted which provided that: “no restaurant of a similar nature as to menu and eat-in facilities shall be permitted in the Plaza.”
The then-tenant was the Corner Restaurant, the menu of which is not known today. However, from previous agreements it was inferred that the Corner Restaurant had table service, a liquor licence and served eggs, omelettes and pancakes.
Years later, the Landlord entered into negotiations for a lease with Tim Hortons in the plaza. Wimpy’s took the position that the restrictive covenant prohibited the Landlord from entering into a lease with Tim Hortons. The analysis of whether the restriction applied to prevent the tenancy therefore involved determining whether Tim Hortons is similar in nature to the tenant. Moreover, the more difficult issue faced by the Court was determining to which tenant Tim Hortons should be compared – Wimpy’s or the Corner Restaurant. A static interpretation would have the court compare the business to Corner Restaurant, limiting the scope of the comparison to the tenant’s business in 1991, whereas a dynamic interpretation would evolve the scope of the comparison to Wimpy’s current business.
As a basis for the analysis, the usual and ordinary meaning of the words was examined having regard to the context of the clause. The clause clearly did not prohibit all restaurants, just those with similar menus and eat-in facilities. Public policy against restraint of trade supported the less restrictive approach, as a less restrictive interpretation constrains the scope of the business restricted by the covenant.
All that is known about Corner Restaurant, aside from a few menu items, was that it operated as a “Restaurant or Snack Bar,” which left the tenant or its successor the freedom to alter the “nature as to menu and eat-in facilities” of its business. In allowing this flexibility to the tenant, the landlord would effectively have consented to the tenant having the unilateral authority to expand the restrictive covenant by changing its menu and eat-in facilities so that no “similar” restaurant was permitted. The commercially sensible interpretation was then that the landlord and tenant had only intended to restrict the landlord’s ability to enter into tenancy agreements with restaurants carrying on business similar in nature as to menu and eat-in facilities to the business contemplated by the parties at the time, which was the tenant’s business in 1991 as the Corner Restaurant.
In applying this static interpretation, the Court compared Tim Hortons’ business with that of the Corner Restaurant. The Court found that the Corner Restaurant was eat-in, table service, had a liquor license, and primarily served eggs, omelettes and pancakes. The Court therefore determined that as a primarily take-out operation, with no table service, no alcohol or full meals on plates served, Tim Hortons could not be of a similar nature as to menu and eat-in facilities to the Corner Restaurant. The Court went even further as to say that even by a comparison of Wimpy’s to Tim Hortons, the nature of the restaurant would still not have been similar enough to be captured by the restriction.
In addition to highlighting the importance of careful and intentional drafting, the decision indicates that where there is ambiguity in use clauses and restrictive covenants the Court will seek the most commercially sensible interpretation. If you are seeking to challenge or enforce a lease’s restrictive covenant, make sure that it is carefully examined to determine whether it is in fact enforceable.
Delivered From Liability: Ontario Human Rights Tribunal Finds Franchisor Not Vicariously Liable for Acts of Franchisee
In Sprague v. MBEC Communications Inc., the Human Rights Tribunal of Ontario denied a claim that MBEC Communications was vicariously liable for the discriminatory acts of its franchisee. The decision provides further insight into the decision-making process of Canadian courts and tribunals in respect of attributing conduct of franchisees to franchisors.
In this case, the applicant, Sprague, filed a human rights application alleging discrimination on the part of MBEC, the franchisor for the UPS Store in Canada, for the actions of a franchisee.
The application related to an incident where the applicant, accompanied by his certified service dog, attended a UPS Store in Toronto. The franchisee refused the applicant and his dog entry on the basis that pets were prohibited in the store, despite the fact that the dog was clearly identified as a service dog and the applicant presented documentation of the dog’s certification.
Following the incident, the applicant contacted MBEC to complain. MBEC took a number of steps to prevent future incidents, including:
At issue was whether, pursuant to s. 46.3(1) of the Human Rights Code, MBEC was deemed liable for the acts of the franchisee. In determining deemed liability, the Tribunal considered whether the franchisor had a sufficient degree of control over the day-to-day operations of the franchisee to conclude that the franchisee was not the direct service provider.
In this case, the franchise agreement provided that the franchisee would hire all employees and be exclusively responsible for the terms of their employment and compensation. The franchisee was also responsible for managing the employer-employee relationship, rent payments, accounting services, equipment leases, royalty payments, advertising fees, business licenses, tax filings and payments, compliance with municipal requirements, store profitability and the manner in which the franchisee runs and operates its business.
Even though the franchise agreement allowed MBEC to maintain a certain level of control over operations of its franchisee’s businesses, such control was determined to be necessary and limited to the purpose of maintaining the brand, the franchise system and the quality of the products and services provided. This did not give MBEC substantial control over the day-to-day operations of the franchisee’s business.
Accordingly, the applicant failed to establish that MBEC exercised substantial control over the day-to-day operations of the Store and as a result, s. 46.3(1) of the Code was not applicable.
This decision provides helpful insight with respect to the level of involvement a franchisor must have in the day-to-day operations to be deemed liable for the discriminatory acts of its franchisees. Additionally, even though the franchisor in this case had rigorous training programs and policies, it did not give rise to a finding that the franchisor exercised the requisite level of control over the franchisee.
Ontario Human Rights Tribunal Denies Claim By Franchisee Against Franchisor
In Zhao v. Pizza Nova Take Out Ltd., the Human Rights Tribunal of Ontario denied a claim that Pizza Nova discriminated against the applicant and forced him to sell his business. The decision demonstrated that the Human Rights Tribunal will address claims by franchisees against franchisors, but will seriously scrutinize the allegations made while considering the unique context of the franchise relationship.
In this case, the applicant, Yang Zhao, brought an application against Pizza Nova alleging that the franchisor had forced him to sell his business. The applicant claimed that Pizza Nova’s actions constituted discrimination on the basis of ancestry, place of origin, ethnic origin and age and were a breach of the Human Rights Code. While Pizza Nova denied that it discriminated against the applicant, the franchisor did acknowledge that it suggested Zhao sell his business given the ongoing problems with the operation of the applicant’s store.
The Tribunal thoroughly canvassed the evidence put forward by the parties and ultimately found that Pizza Nova did not force its franchisee to sell its store and that any encouragement to sell on the part of Pizza Nova was reasonable considering the operational issues with the franchisee’s business. The Tribunal concluded that Zhao did not establish that he was subjected to discrimination by Pizza Nova.
The decision is a useful reminder that although franchising may appear to be a strictly commercial matter, the franchisor-franchisee relationship is still governed by human rights legislation, and as such, franchisors may be subject to claims in this area.
Supreme Court of Canada Delivers the Final Word on Pet Valu Class Action
As set out in our e-Communiqué of October 2016, the Supreme Court of Canada recently denied an application for leave to appeal brought by the plaintiff in the Pet Valu class action, bringing an end to the longstanding litigation.
The class action was certified in 2011, claiming damages of $100 million dollars from the franchisor. In October 2014, Pet Valu obtained summary judgment dismissing the majority of the common issues, which focused on its contractual obligation to share volume rebates with franchisees. In January 2016, the Ontario Court of Appeal dismissed all remaining common issues, which related to the statutory duty of good faith and fair dealing under section 3 of the Wishart Act. Ruling in Pet Valu’s favour, the Court made important findings regarding the scope, content and limitations of that duty. On October 6, 2016, the Supreme Court of Canada denied the plaintiff’s application for leave to appeal that decision, delivering a final word on the Pet Valu class action. As a result, the Court of Appeal decision remains a leading appellate statement on the duty of good faith and fair dealing under section 3 the Wishart Act.
Cassels Brock acted for the successful defendant, Pet Valu, in the litigation.
The Table Is Set: Ontario’s Healthy Menu Choices Act Regulations
On January 1, 2017, the Healthy Menu Choices Act (the Act) comes into force in Ontario, obligating food service chains with 20 or more locations in Ontario to post caloric content for most food and drink items. We published articles on the Act in April 2016, October 2015, and May 2015, discussing the contents, requirements, and exemptions under the Act and its accompanying regulations. Recently, the Ontario Ministry of Health and Long Term Care amended and finalized the regulations.
The Act applies to regulated food service premises (RFSPs) with 20 or more locations. RFSPs are defined as any food premise where meals or meal portions are prepared for immediate consumption or sold or served in a form that will permit immediate consumption on the premises or elsewhere. The finalized regulations clarify what types of food premises are required to comply with the Act, including two new exemptions:
a. Deli meats and cheeses that are normally sold by weight and that are not part of another standard food item
The finalized regulations also amended its definition of menu, excluding billboard, radio, and television advertisements from that definition and therefore from the requirement to post caloric content. Also, as a result of the new definition of menu, online menus, menu applications, advertisements and promotional flyers are exempt from the requirement to post caloric content if: (i) they do not list prices for standard food items, (ii) they do not list standard food items that a person can order for delivery or takeaway ordering and do not provide a method to place an order.
Further, a more detailed contextual statement has been added to the regulations for implementation in 2018. As of January 1, 2017, the less detailed statement may read: “The average adult requires approximately 2,000 to 2,400 calories per day; however, individual calorie needs may vary” in English or “L’adulte moyen a besoin d’environ 2 000 à 2 400 calories par jour; cependant, les besoins individuels en calories peuvent varier” in French.
As of January 1, 2018, the more detailed statement will be required. The statement must read: “Adults and youth (ages 13 and older) need an average of 2,000 calories a day, and children (ages 4 to 12) need an average of 1,500 calories a day. However, individual needs vary” in English or “Les adultes et les jeunes (13 ans et plus) ont besoin, en moyenne, de 2 000 calories par jour et les enfants (4 à 12 ans) ont besoin, en moyenne, de 1 500 calories par jour. Cependant, les besoins individuels varient” in French.
It should be noted that the more detailed contextual statement that will be required in 2018 is permissible for use in 2017.
Cassels Brock Contributes To Response To The Ontario Government’s Changing Workplaces Review Interim Report
As noted in our previous e-Communique, on July 27, 2016, the Special Advisors for the Ontario Ministry of Labour’s Changing Workplaces Review released their Interim Report discussing policy options on how to possibly amend the Labour Relations Act, 1995 (LRA) and the Employment Standards Act, 2000 (ESA), which may have significant implications for franchisors and franchisees.
Stakeholder submissions on the Interim Report were due on October 14, 2016. Larry Weinberg, as Chair of the Legal and Legislative Committee of the Canadian Franchise Association (CFA), participated in the drafting of the CFA’s submissions in response to the Interim Report.
The International Franchise Association also made submissions in response to the Interim Report.
Cassels Brock will provide further updates as this process develops. The Final Report of the Special Advisors is expected in February or March 2017.
What We’re Up To (Fall and Winter 2016/2017)
(a) What We’ve Done