By Kate Byers, Carly Cohen, Stefanie Holland, Christopher Horkins, Noah Leszcz, Eric Mayzel, Alexandra Murphy, Colin Pendrith, Frank Robinson, Derek Ronde, Geoffrey B. Shaw, Sam Sokoloff, Stéphane Teasdale, Larry M. Weinberg
In This Issue
Cassels Brock Successful in Upholding Disclosure Exemption on Behalf of Hotel Brand Franchisor
On May 31, 2019, the Ontario Superior Court of Justice granted judgment in favour of Radisson Hotels Canada Inc., formerly known as Carlson Hotels Canada, Inc., (Radisson), by enforcing arbitration awards and dismissing its former licensees’ (the Former Licensees) application for leave to appeal/set aside the arbitration awards.
The decision is a welcome development for franchisors, as it confirms the application of an unlitigated large franchise transaction exemption under the Arthur Wishart Act (Franchise Disclosure) 2000, SO 2000 c 3 (the Wishart Act) and that section 7 of the Wishart Act does not apply when the underlying disclosure document was provided voluntarily, and therefore exempt from the Wishart Act’s disclosure requirements.
In September 2017, the Former Licensees commenced an arbitration against Radisson claiming over C$4 million in damages arising out of their purported rescission of the parties’ License Agreement for the operation of a Radisson branded hotel. The Former Licensees sought statutory rescission and damages in accordance with section 6, and damages for misrepresentation under section 7 of the Wishart Act.
In September 2018, the arbitrator granted Radisson summary judgment in respect of the claim for statutory rescission and related damages, concluding that Radisson was exempt from any obligation to provide disclosure pursuant to the investment exemption set out in section 5(7)(h) of the Wishart Act. The exemption stipulates that where a franchisee has invested more than C$5 million in acquiring and operating a hotel within the first year, the franchisor is exempt from the disclosure obligations of the Wishart Act. The arbitrator concluded that the Former Licensees had invested over C$8 million in the first year of operating the hotel.
The parties delivered further written submissions regarding the impact of the arbitration award on the Former Licensees’ claim for statutory misrepresentation, which was subsequently dismissed by the arbitrator. In December 2018, the arbitrator rendered a supplementary award concluding that a claim for statutory misrepresentation relating to a disclosure document cannot survive an applicable exemption under section 5(7) of the Wishart Act (the Supplementary Arbitration Award).
Former Licensees Denied Leave to Appeal
Following the dismissal of their section 7 misrepresentation claim, the Former Licensees sought leave from the Ontario Superior Court of Justice to appeal the Supplementary Arbitration Award. In turn, Radisson sought an order to enforce the arbitration awards.
The first issue that the Court considered was whether the Supplementary Arbitration Award could be appealed. The arbitration clause between the parties provided that the arbitrator’s decisions are “final, conclusive, and binding,” which the Court determined was an intention by the parties to exclude a right of appeal. As such, the Court found that the Former Licensees had no right to appeal.
The Court also considered whether it should grant leave to appeal. The sole question raised by the Former Licensees was whether a franchisee is entitled to statutory damages when a franchisor, that is exempt from its statutory disclosure obligations, voluntarily provides a disclosure document containing alleged misrepresentations. The Court found that the Former Licensees did not meet the threshold issue of proving that the matters at stake were of sufficient importance to the parties to warrant granting leave to appeal. In fact, the Court noted that the evidentiary record demonstrated that the Former Licensees continued to operate the hotel profitably.
Finally, the Court confirmed that even if leave to appeal were granted, the arbitrator’s awards were both reasonable and correct. Specifically, the Court confirmed that section 7 of the Wishart Act should not be broadened so as to capture voluntary disclosure that was found to be exempt pursuant to section 5. The Court noted that to broaden the application of section 7 would be contrary to the purposes of the Wishart Act. It would effectively extend statutory misrepresentation remedies beyond prospective franchisees with insufficient bargaining power, to the commercially sophisticated parties enumerated in, and specifically excluded by, section 5 of the Wishart Act.
Following its decision to deny the Former Licensees’ leave to appeal, the Court granted judgment and enforced the arbitration awards.
This decision provides a precedent for cases in which a franchisee is claiming statutory damages for alleged misrepresentations in a disclosure document that was not only voluntarily provided to the franchisee, but was also found to be exempt under section 5. Prior to this decision, there was little, if any, commentary by the courts regarding the application of the large investment exemption and the impact its application would have on a claim for statutory misrepresentation. The Court’s reasons further provide guidance as to the overall underlying purpose of the Wishart Act – specifically, that it is not intended to apply to commercially sophisticated prospective franchisees, captured by the section 5 exemptions.
Radisson was represented by Geoffrey B. Shaw, Stefanie Holland, and Alexandra Murphy of the Cassels Brock Franchise Law Group’s litigation team.
Got Mold? Got No Damages! The Alberta Court of Queen’s Bench Casts a Critical Eye on a Franchisee’s Rescission Damages Claim
A recent decision of the Alberta Court of Queen’s Bench provides support for the view that courts should carefully review the veracity of damages claims in franchise statutory rescission claims and that the onus of proving damages in such claims continues to rest with the rescinding franchisee.
In 1777453 Alberta Ltd. v. Got Mold Disaster Recovery Services Inc., 2019 ABQB 259 (Got Mold) a franchisee brought an action for recovery of its net losses arising out of a claim for statutory rescission under Alberta’s Franchises Act. The defendant consented to a finding of liability but claimed that plaintiff had suffered no “net loss,” which is the measure of damages for rescission under the Franchises Act. The issue of damages went to a separate hearing before the Court of Queen’s Bench.
Both parties filed significant evidence in respect of the damages issue and served expert reports regarding the damages claim. The experts provided opinions that differed by roughly $200,000. The court examined the qualifications, methodology, and conclusions of the experts as part of its analysis.
The disagreement between the parties focused on a series of expenses claimed by the plaintiff in arriving at its net loss calculation. The expenses included significant management fees incurred by the plaintiff’s operators, high fees for accounting services and advertising and promotion services, and various set-up expenses.
The Court’s Decision
The Court confirmed that the burden of proof remained on the plaintiff to demonstrate that it had a net loss from the acquisition, set up and operation of the franchise. The Court held that the term “net loss” meant the total sum of the franchisee’s wasted expenditures actually incurred in the acquisition, set up, and operation of the business. Interestingly, the Court also held that in calculating the net loss, the franchisee may, in certain circumstances, be required to account for profits made after the rescission of the agreement. This was relevant in the circumstances of this case because the franchisee continued to operate its business after rescission.
In calculating the net loss, the Court permitted the defendant to “normalize” or “rationalize” the plaintiff’s claim in order to prevent the franchisee from incurring expenses that “do not fall within the scope of the mischief” that the statutory rescission provision was aimed at remedying. In other words, the court was concerned with the franchisee’s claim accurately reflected the real profitability of the business. In that regard, the Court preferred the defendant’s expert’s view in respect of disallowing the management fee, accounting and advertising services, and set-up expense-related claims.
The Court also extended the time frame for the calculation of the net loss to include the post-rescission period, commenting “on the facts, [the franchisee] accepted training, materials, supplies and a methodology from Got Mold. [The franchisee] then used that education and those resources in continuing their business and earning a profit,” and stating, “It is important to note that [the franchisee] admitted that the equipment purchased while operating as a Got Mold franchise is now being used by [the franchisee’s new business].”
The Court held that the plaintiff was unable to prove any net losses and the action was dismissed.
Although the statutory rescission regime in Alberta is less detailed than those in other provinces (focusing on net loss rather than a standard four-part damages calculation), the decision in Got Mold provides general reassurance to franchisors that Canadian courts will view rescission damages claims with a critical eye, particularly where there are inflated expenses being claimed as part of net losses and the former franchisee continues to use franchise assets as part of a new business.
Clean Break – Supreme Court of Canada Finds a Quebec Janitorial Services Franchisee is Actually an Employee
In the recent Quebec decision of Modern Cleaning Concept Inc. v. Comité paritaire de l’entretien d’édifices publics de la région de Québec1, the Supreme Court of Canada considered whether an independent contractor relationship created by a franchise agreement was truly an employment relationship.
The franchisor, Modern Cleaning Concept Inc. (Modern Cleaning), operated a franchise system that provided cleaning services in public buildings in the Province of Québec. The system had a somewhat unusual “tripartite” business model, whereby the client would request the cleaning services, Modern Cleaning would guarantee the performance of the services, while the franchisees would perform the services.
Modern Cleaning entered into a franchise agreement with an individual franchisee which required the franchisee to exclusively perform cleaning services for Modern Cleaning. The agreement provided that the franchisee was an independent contractor, rather than an employee. Approximately five months into the franchise relationship, the franchisee terminated the agreement.
Legal Background and Committee Investigation
In the Province of Québec, a collective agreement, entitled the Decree respecting building service employees in the Québec region2 (the Decree) governs employers and employees engaged in various activities, including cleaning public buildings.3 The Decree sets out various minimum standards, including in relation to hours and wages.
The Act responding collective agreement decrees4 (the Act), provides that the Comité paritaire de l’entretien d’édifices publics de la région de Québec (the Committee) is responsible for ensuring compliance with the Decree.
Following the termination, the Committee commenced a proceeding on behalf of the franchisee, claiming unpaid wages and other benefits, on the basis that the franchisee was an employee, rather than an independent contractor, and therefore entitled to the minimum standards prescribed by the Decree.
The Courts’ Decisions
At trial, the Court found that the franchisee was an independent contractor, largely because he owned his business, had acted as a subcontractor prior to becoming a franchisee and had hoped to grow his business. Emphasis was placed on the franchisee’s intention to make a profit. The trial judge found that the franchisee was not an employee and not entitled to compensation pursuant to the Decree.
On appeal to the Court of Appeal for Québec, the majority held that the trial judge erred by failing to consider the tripartite contractual relationship between Modern Cleaning, the franchisee and the clients. In particular, the majority focused on the trial judge’s failure to recognize that Modern Cleaning remained contractually liable to the clients (and therefore bore the business risk). This factor was, in the Appellate Court’s view, indicative of an employment relationship. The Court of Appeal reversed the trial judge’s decision and ordered Modern Cleaning to compensate the franchisee under the Decree.
The Supreme Court of Canada upheld the Court of Appeal’s decision.
Abella J., writing for the majority of the Supreme Court, held that the relevant question is whether the franchisee assumed the “business risk and corresponding ability to make a profit that would qualify him as an independent contractor.” The Appellate Court was of the view that by “imperfectly assigning” cleaning contracts to franchisees, Modern Concept maintained a direct relationship with its clients that placed the business risk squarely on its shoulders.
The majority reiterated that a franchise agreement cannot be used to disguise the presence of a relationship between an “employee” and “professional employer,” as those terms are defined in the Act. It is the true nature of the relationship, rather than the words in the agreement, that determine whether an employment relationship exists.
Franchisors should be aware that the exercise of greater control over franchisees, and in particular, a franchisor’s assumption of the business risk and ability to make a profit, may lead to a finding that the franchisee is actually an employee. Because such a finding is likely to have system-wide implications, franchisors should consider their own business model before an issue arises.
A franchise lawyer with knowledge of employment principles can assist in navigating these issues and mitigating the risk that an employment relationship will be found.
To Seal or Not to Seal? That is the Question: Subway Decision Confirms That Courts are Willing to Grant a Sealing Order in the Face of Certain Commercial Harm
On April 26, 2019, the Superior Court of Justice released its decision in Subway Franchise Systems v. CBC,1 in which the Court granted a sealing order in favour of the plaintiff, Subway Franchise Systems. The order granted the request for a sealing order of six financial documents, which contained economically sensitive information about Subway’s business, and further denied the request for a sealing order in respect of four private contracts that conveyed information about Subway’s internal workings and corporate structure.
The defendant, Canadian Broadcasting Corporation, opposed the motion in the public interest on the basis that the 10 documents did not meet the test for a sealing order as set out by the Supreme Court of Canada,2 which determined that a sealing order should only be granted when:
On the other hand, the request for a sealing order for the four private contracts was denied. The Court held that the salutary effect for Subway of sealing the four private contracts would be minimal, while the deleterious effect of maintaining confidentiality in the face of deeply ingrained principal of open courts would be substantial.
A request for a sealing order bumps up against the principle of open courts which, as stated by the Supreme Court of Canada, is not to be lightly interfered with. The mixed results of this motion demonstrate that while courts will grant sealing orders where applicable, they will carefully scrutinize the facts of the particular case when applying the test of confidentiality for the purposes of obtaining such an order.
1 2019 ONSC 2584.
What We’re Up To: Summer and Fall 2019
Frank Robinson spoke at the May 2019 IFA Legal Symposium in Washington, DC on a panel discussing Franchising in the Cannabis Industry in both the US and Canada.
Larry Weinberg spoke at the May 2019 IFA Legal Symposium in Washington, DC on a panel discussing The Basics of International Franchising.
Larry Weinberg moderated a panel at the May 2019 IBA/IFA Joint Conference on International Franchising in Washington, DC titled Choosing and Working with Local Counsel.
Derek Ronde spoke at the OBA Franchise Law Section seminar entitled Best Practices in Prosecuting and Defending Rescission Claims on June 13, 2019.
Larry Weinberg spoke at the International Distribution Institute annual conference in Lake Como, Italy, taking place on June 14-15, 2019, on Other Typical Essential Legal Terms in Distribution Agreements.
Colin Pendrith spoke at the Canadian Public Relations Society National Conference in Edmonton, AB on Brand Protection - Where Law Meets Public Relations on June 17, 2019.
Larry Weinberg is scheduled to speak at the annual ABA Forum on Franchising in Denver, Colorado from October 16-18, 2019 on a topic entitled International Franchise Expansion: The “Toe in the Water” Approach
Frank Robinson is scheduled to speak at the annual ABA Forum on Franchising in Denver, Colorado from October 16-18, 2019 on a topic entitled Further Abroad: Beyond the Fundamentals of International Franchising.