By Kate Byers, Carly Cohen, Danielle DiPardo, 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
Sweet Success: Supreme Court of Canada Denies Dairy Queen Franchisee’s Leave Application
The Supreme Court of Canada has dismissed a former Dairy Queen franchisees’ application for leave to appeal a decision affirming the franchisor’s enforcement of a Mutual Cancellation and Release Agreement. The successful franchisor in this case was represented by the Cassels Brock franchise litigation team.
The saga arises out of a franchisee’s lengthy history of failing to meet its obligations under its franchise agreement. The franchisee was noted in default when the franchisor, Dairy Queen Canada Inc. (Dairy Queen), determined that it had repeatedly failed to meet certain system standards.
Dairy Queen subsequently terminated the franchisee after it failed to remedy the defaults and the parties entered into a Mutual Cancellation and Release Agreement. The agreement suspended what would otherwise be an immediate right to termination for a 6-month period, during which time the franchisee was permitted to continue operating the franchise and market it for sale. At the conclusion of the 6-months, the agreement would automatically terminate.
When the franchisee became delinquent in remitting its monthly reports and royalties, the franchisor accelerated the termination of the Mutual Cancellation and Release Agreement. The franchisee refused to stop operating and litigation ensued.
Summary Trial and Appeal Decision
Following a three day summary trial, the Supreme Court of British Columbia granted judgment in favour of Dairy Queen for breach of contract and passing-off. The Court also dismissed the franchisee’s counterclaim for over $1million in damages for breach of contract and various breaches of the Arthur Wishart Act (Franchise Disclosure), 2000 (the Wishart Act), including breach of the duty of good faith.
In dismissing the franchisee’s claim in its entirety, the Court upheld the Mutual Cancellation and Release Agreement, finding that it acted as a complete bar to the claims asserted in the counterclaim. The Court rejected the franchisee’s arguments that the agreement had been signed under duress or should be disregarded on the grounds of unconscionability.
The summary trial decision was upheld on appeal. The Court of Appeal of British Columbia found no error in the trial judge's determination that the Mutual Cancellation and Release Agreement had been entered into without duress and agreed that Dairy Queen's offer to forbear enforcement in exchange for entering into the agreement was nothing more than "legitimate commercial pressure."
Denial of Franchisee’s Leave Application to the Supreme Court of Canada
In the third chapter of this saga, the franchisee sought leave to appeal on the following grounds, amongst others:
The Supreme Court of Canada refused to grant leave, with costs.
Key Take-Away Principle
With this matter now at an end, the final word is out on Mutual Cancellation and Release Agreements: they are an enforceable and efficient means of bringing franchise relationships to conclusion in a mutually beneficial manner. These agreements also can serve as a complete defence to a franchisee’s subsequent claims that the termination of the franchise agreement was improper, especially in circumstances where the agreement automatically terminates at a set date. Franchisors should consider using Mutual Cancellation and Release Agreements in order to bring acrimonious franchise relationships to a firm conclusion.
Dairy Queen was represented by Cassels Brock lawyers Colin Pendrith, Geoff Shaw and Carly Cohen of Cassels Brock on this matter.
Franchise Law 101: What You Need To Know
The success of franchising in Canada can be seen in the many nationwide and international chains that have used franchising as a method of expanding their business. However, there are a number of important facts and considerations for you to take into account as you begin the process of complying with franchise laws in Canada.
The Statutory Framework
While Canada has no franchise legislation at the federal level, six out of the 13 Canadian provinces and territories have enacted standalone franchise legislation (the “franchise statutes”). These provinces are Alberta, British Columbia, Manitoba, New Brunswick, Ontario, and Prince Edward Island. There are four key common features to all of these statutes, namely:
The franchise statutes require that every person who is to sign a franchise agreement must receive pre-sale disclosure, including any guarantor or similar person. Specifically, with limited exception, an FDD must be delivered where the franchise is to be wholly or partly operated in any of the provinces with a franchise law. A franchisor must provide a prospective franchisee with an FDD no less than 14 days before the payment of any monies or the signing of the franchise agreement, or any agreement relating to the franchise. This disclosure obligation exists in the case of most renewals, extensions or transfers of a franchise agreement and, in most cases, the transfer or sale of the assets or ownership of a franchised business.
Failure to Comply With Disclosure Obligations
Careful attention must be given to the assembly, delivery and maintenance of an FDD, as courts have found that a “materially deficient” FDD can amount to no disclosure at all in some cases. In particular, an FDD prepared in accordance with U.S. laws is not a compliant Canadian FDD. The consequences for failing to comply with these disclosure requirements can be drastic. A franchisee may rescind the franchise agreement without obligation or penalty:
Updating Your FDD Regularly
At least annually, if not more often, franchisors should perform a thorough review of the generic FDD to ensure that its contents are accurate and up to date. As the law requires that the FDD contain all material facts, any new material facts that occur in the operation of the franchise or the franchise system should be immediately reflected in an updated FDD as changes occur.
Ongoing Disclosure Obligations – Statement of Material Change
Franchisors ought to be mindful that they have the ongoing obligation to provide FDD recipients with notice of any material changes that arise. That is done with a prescribed form of "statement of material change" disclosing any "material changes" that occur after the FDD has been given to the prospective franchisee but prior to the signing of a franchise agreement.
These considerations are only a high level and general overview of the requirements for franchising in Canada. However, with the assistance of professionals that regularly operate within this area, franchising can be a quick and effective way to expand your business and enter new markets. If you would like to learn more or are seeking assistance with franchising related matters in Canada, please contact a member of our Franchise Law Group.
Guidance from the Supreme Court of Canada On Relational Contracts and the Duty of Good Faith
In the recent decision of Churchill Falls (Labrador) Corp. v. Hydro Québec,1 the Supreme Court of Canada engaged in a discussion regarding franchise law in a non-franchise context.
The Issue Before The Supreme Court of Canada
The core issue before the Court was whether the general duty of good faith under Quebec law could give rise to an obligation to renegotiate a long-term contract to reflect or restore the “equilibrium” of the initial agreement. Specifically, the Supreme Court considered whether the contract at issue - which required Hydro-Québec to purchase electricity from a hydro-electric plant owned by Churchill Falls (Labrador) Corp. (CFL) over a 65 year period - was a “relational contract” giving rise to a higher standard of good faith. The dispute arose because the purchase price for electricity set in the contract was well below current market price.
The Supreme Court of Canada’s Analysis
In conducting its analysis, the majority of the Supreme Court considered other categories of “relationship contracts” that have been recognized at law, including franchise relationships.
The Supreme Court referred to the franchise decision of Dunkin’ Brands Canada Ltd. v. Bertico Inc., in which the Quebec Court of Appeal explained that the relational nature of a franchise agreement was apparent from the fact that its terms were not stipulated. In rejecting CFL’s argument that its contract ought to be defined as a relational contract due to its long-term nature and interdependence of the parties, the Supreme Court reasoned that the more a contract defines the obligations of the parties, the less likely that contract is to be a relational contract.
Having determined that the agreement with Hydro-Québec was not a relational contract, the Supreme Court distinguished the Quebec Court of Appeal’s franchise decision in Provigo Distribution inc. v. Supermarché A.R.G. Inc. In that decision, which did involve a relational contract, the Quebec Court of Appeal held that a franchisor had breached its duty of fair dealing by failing to provide its franchisees with the tools they needed in order to prevent, or at least minimize, economic losses flowing from the franchisor’s decision to change marketing structures for its products. The Supreme Court noted that in the Provigo decision, the franchisor had taken the initiative of changing its marketing structures, which had disrupted the contractual equilibrium. By comparison, Hydro Québec was not responsible for disrupting the contractual equilibrium and therefore had no duty to cooperate with CFL to mitigate the effects.
Key Take-Away Principle
While the Supreme Court noted that in rare cases, “an exceptional duty to make slight changes to a contract has been held to exist,” it gave little guidance beyond this and ultimately concluded that neither good faith nor equity can provide a legal basis for requiring that the initial equilibrium of a contract be modified.
Accordingly, this decision serves as confirmation from Canada’s highest Court that franchise agreements may be seen as relational agreements, and as a result, subject to a higher degree of good faith under Quebec’s civil law.
1 2018 SCC 46
The Midas Touch: Ontario Court Relies on Franchise Case to Apply Ontario Employment Legislation to California Employment Case
In McMichael v The New Zealand & Australian Lamb Company, the plaintiff, a former VP of operations at a lamb processing facility owned by the defendant in Los Angeles, sued the defendant for wrongful dismissal and moved for summary judgment. Although employed in the United States by an American company, the plaintiff chose to bring his action in Ontario, in reliance upon on Ontario’s employment laws, on the basis that his employment agreement was expressly governed by Ontario law.1
From a franchising perspective, the case is interesting for its reliance on the Ontario Court of Appeal’s 2010 decision in Landsbridge Auto Corp. v Midas, which held that Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 (the Wishart Act) could be applied to franchises located outside of Ontario if the franchise agreement contained a valid choice of law provision in favour of Ontario law.2
The Midas Principle
Midas arose from a franchisee class action on behalf of franchisees of Midas Canada Inc.
While the class proceeding was ongoing, several of the franchisees’ agreements came up for renewal and Midas, in accordance with standard industry practice, requested a full and final release as a condition of the renewal. The release would have required the franchisees to release their claims as class members. At issue was whether, and to what extent, the non-waiver and right of association provisions under sections 11 and 4 of the Wishart Act precluded Midas from requiring such a release, including from franchisees operating outside of Ontario.
For the non-Ontario franchisees, the issue before the Court was whether a choice of law provision selecting Ontario law meant that the franchisees received the full benefit of the Wishart Act, notwithstanding that the Act expressly applied to franchises “operated wholly or partly in Ontario.” Despite prior Superior Court case law finding otherwise,3 the Court of Appeal held that the choice of Ontario law reflected an intention by the parties to have Ontario law apply “as if the business of the franchise was operated in Ontario.” As long as that choice is “bona fide and legal, and there is no reason for avoiding the choice on the ground of public policy,” then the law will govern the contract.
The Application of the Midas Principle Outside of Franchising in This Case
In this case, similarly, the plaintiff sought to benefit from the provisions under Ontario’s Employment Standards Act on the basis of a choice of law provision. The defendant opposed this because section 3(1) of that Act provided that, like the Wishart Act, the Act only applied to employment performed in Ontario or as a continuation of work performed in Ontario. Following the same logic as the Court of Appeal in Midas, the Court held that the Employment Standards Act did apply to the plaintiff’s employment notwithstanding that he was employed by a US company and performed all of his work in California.
Key Take-Away Principle
This case highlights the importance, in franchising and otherwise, of careful drafting when it comes to choice of law provisions. Parties should be careful to ensure that they are not accidentally adopting the application of onerous provisions in the law of other jurisdictions by way of a contractual provision. Courts will generally not decline to apply such laws on the basis that the statutes purport to only apply to activity within their territorial jurisdiction.
1 McMichael v The New Zealand & Australian Lamb Company, 2018 ONSC 5422, <http://canlii.ca/t/hv6ph>
2 Landsbridge Auto Corp. v. Midas Canada Inc., 2010 ONCA 478
3 See: Nazarinia Holdings Inc. v 2049080 Ontario Inc., 2010 ONSC 1766, <http://canlii.ca/t/28vkw>
What We’re Up To - Winter 2018
Larry Weinberg attended the International Bar Association (IBA) Annual Conference in Rome, Italy from October 7-12, 2018, and chaired the franchise law programs at the conference. Larry is the current Co-chair of the IBA’s International Franchising Committee.
Larry Weinberg, Geoff Shaw, Frank Robinson, Derek Ronde, Noah Leszcz, and Carly Cohen attended the American Bar Association Forum on Franchising in Nashville, TN on October 10-12, 2018. Frank Robinson hosted the International Division breakfast session on the EU General Data Protection Regulation.
Larry Weinberg spoke on “The Legal Aspects of Purchasing A Franchise” at the Canadian Franchise Association Trade Show held on October 12-14, 2018, in Toronto.
Larry Weinberg spoke at the Canadian Franchise Association “How To Franchise Your Business” Seminar on October 18, 2018, in Toronto.
Frank Robinson and Larry Weinberg have been appointed to the Canadian Franchise Association task force on franchising in the newly legalized cannabis industry. Read Frank's recent blog post “Is Franchising the Answer for Cannabis Retail in Ontario?” here.
Larry Weinberg and Frank Robinson attended the Franchise Times Restaurant Finance and Development Conference on November 12-14, 2018, in Las Vegas, NV. Larry moderated a panel on “Expansion From and To the US and Canada – Exploiting the Opportunities While Appreciating the Differences.”
Derek Ronde spoke on rescission issues at the Ontario Bar Association (OBA) 18th Annual Franchise Law Conference on November 13, 2018, in Toronto. Colin Pendrith hosted a roundtable on “#MeToo – What Does It Mean For Franchisors?”
Frank Robinson was interviewed on November 22, 2018 on BNN Bloomberg’s Bloomberg Markets for a segment titled “Why franchising could be the answer to cannabis retail in Ontario.”
Frank Robinson is scheduled to speak at the May 2019 IFA Legal Symposium in Washington, D.C. on a panel discussing Franchising in the Cannabis Industry in both the US and Canada.
Larry Weinberg is scheduled to speak at the May 2019 IFA Legal Symposium in Washington, D.C. on a panel discussing The Basics of International Franchising.
Larry Weinberg is scheduled to moderate a panel at the May 2019 IBA/IFA Joint Conference on International Franchising in Washington, D.C. entitled Choosing and Working with Local Counsel.