By Kate Byers, Carly Cohen, Stefanie Holland, Christopher Horkins, Noah Leszcz, Jessica L. Lewis, Eric Mayzel, Alexandra Murphy, Tegan O'Brien, Colin Pendrith, Frank Robinson, Derek Ronde, Geoffrey B. Shaw, Sam Sokoloff, Brenda C. Swick, Stéphane Teasdale, Larry M. Weinberg
In This Issue
Act Now to Take Advantage of New Opportunities to Import US Dairy and Poultry Under New Trade Deal
Last week, the US, Canada, and Mexico finally reached an agreement in principle to replace the North American Free Trade Agreement (NAFTA). After much lengthy and intense negotiation, the text of the United States-Mexico-Canada Agreement (USMCA), the new tri-party trade deal, has been released.
There is an implementation process required under Canadian law before the USMCA comes into effect in Canada. The agreement still must be signed, ratified, and implemented by each country. Under Article 34.5, the USMCA will come into force on the first day of the third month following the final party completing its implementation procedures under its domestic law.
As those in the restaurant industry (including franchisors and franchisees) know, there is very limited opportunity to import US dairy, poultry and egg products into Canada because of Canada’s restrictive supply management system.1 However, the USCMA offers new opportunities to increase imports of these lower priced US products duty-free - opening up avenues for cost savings up and down the supply chain.
Restaurant industry participants should also be taking this opportunity to review their sourcing strategies to take advantage of the other opportunities to import additional quantities of these supply managed products, under Canada’s other new trade agreements, in particular, the Canada EU Comprehensive Trade Agreement (CETA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
Act Now to Ensure Access to US Imports
To take advantage of this new access to additional (duty free) US imports, restaurant industry participants should consider the following steps:
Increased Import Quotas for US Ingredients
The following sets out the increases in quotas for most of the US imports over the first six years of the agreement. Starting in the seventh year the quota for each US product will increase 1% a year for the subsequent 13 years.
Up until new there has been a very small quota for US milk. Under the first year of the agreement, the quota for US milk will increase to 8,333 metric tonnes (MT); in year two, 16,677; in year three, 25,000; the fourth 33,333; then 41,667 in the fifth year and 50,000 MT in the sixth year. Up to 85% of this new quota will be allocated to further processing.
Under the first year of the agreement, the quota for US cream alone will increase to 1,750 MT; in year two, 3,500; in year three, 5,250; the fourth 7000; then 8,750 in the fifth year and 10,500 MT in the sixth year. Up to 85% of this new quota will be allocated to further processing.
Products of Natural Milk Constituents
Under the first year of the agreement, the quota for imports of US natural milk constituents will increase to 460 MT; in year two, 920; in year three, 1,380; the fourth 1,840; then 2,300 in the fifth year and 2,760 MT in the sixth year.
Ice-Cream and Ice-Cream Mixes
Under the first year of the agreement, the quota for imports of US ice-cream and ice-cream mixes will increase to 115 MT; in year two, 230; in year three, 345; the fourth 460; then 575 in the fifth year and 690 MT in the sixth year.
Skim Milk Powder
Under the first year of the agreement, the quota for US skim milk powder will increase to 1,250 MT; in year two, 2,500; in year three, 3,750; the fourth 5000; then 6,250 in the fifth year and 7,500 tonnes in the sixth year. Up to 85% of this new quota will be allocated to further processing in year 1 but this percentage will be reduced over the following five years.
Butter, Cream Powder
Under the first year of the agreement, the quota for US butter will increase to 750MT; in year two, 1,500; in year three, 2,250; the fourth 3,000; then 3,750 in the fifth year and 4,500 MTin the sixth year. Up to 85% of this new quota will be allocated to further processing.
Cheeses for Industrial Use
Under the first year of the agreement, the quota for US industrial cheeses will increase to 1,042 MT; in year two, 2,083; in year three, 3,125; the fourth 4,167; then 5,280 in the fifth year and 6,250 MT in the sixth year.
Cheese of All Types
Under the first year of the agreement, the quota for US cheeses will increase to 1,042 MT; in year two, 2,083; in year three, 3,125; the fourth 4,167; then 5,280 in the fifth year and 6,250 MT in the sixth year.
Yogurt and Buttermilk
Under the first year of the agreement, the quota for US yogurt will increase to 689 MT; in year two, 1,378; in year three, 2,068; the fourth 2,757; then 3,446 in the fifth year and 4,135 MT in the sixth year.
Under the first year of the agreement, the quota for US whey powder will increase to 689 MT; in year two, 1,378; in year three, 2,068; the fourth 2,757; then 3,446 in the fifth year and 4,135 MT in the sixth year. Import quotas on certain US whey powders will be eliminated by year 10.
Under the first year of the agreement, the quota for US concentrated milk will increase to 115 MT; in year two, 460; in year three, 690; the fourth 920; then 1,150 in the fifth year and 1,380 MT in the sixth year.
Under the first year of the agreement, the quota for US milk powders will increase to 115 MT; in year two, 230; in year three, 345; the fourth 460; then 575 in the fifth year and 690 MT in the sixth year.
Under the first year of the agreement, the quota for US powdered buttermilk will increase to 87 MT; in year two, 113; in year three, 260; the fourth 347; then 433 in the fifth year and 520 MT in the sixth year.
Up until new there has been a very small quota for US poultry. Under the first year of the agreement, the quota for US chicken will increase to 47,000 MT; in year two, 49,000; in year three, 51,000; the fourth 53,000; then 55000 in the fifth year and 57,000 MT in the sixth year. Products covered by the poultry quota include: whole chickens, cuts and offal; poultry fat; sausages, plus prepared or preserved check meat and liver.
Improved Access To Competitive Sources of Ultrafiltered Milk
Under the USMCA, Canada has also agreed to eliminate its Class 6 and 7 milk categories and associated pricing schedules for skim milk, skim milk proteins and other components and ultrafiltered/diafiltered milk, within six months after the agreement comes into effect. Canada had created the Class 7 pricing agreement in order to restrict cheaper US imports of these ingredients into Canada by allowing Canadian dairy processors to buy these ingredients at the cheaper world market price rather than the higher supply managed price. American producers, particularly of ultrafiltered milk, which is not subject to import quotas, argued that the world price reference undercut them from shipping to the Canadian market. Importers of these ingredients will now continue to have access to the cheaper US imports of ultrafiltered milk and other ingredients.
Sticky Fingers: Unclean Hands and Weak Case Undermine Dairy Queen Franchisee’s Injunction
Following a two-day urgent application in the Supreme Court of British Columbia, Dairy Queen Canada Inc. (Dairy Queen) successfully defended a franchisee’s injunction to prevent Dairy Queen from enforcing the termination of a franchise agreement pursuant to a Mutual Cancellation and Release Agreement between the parties. A copy of the decision can be found here.
In dismissing the franchisee’s injunction, the Court held that the Mutual Cancellation and Release Agreement presented a strong defence to the franchisee’s claims, which included claims for relief forfeiture and breaches of the duty of good faith under the Franchises Act. This conclusion built upon the decision of Dairy Queen Canada Inc. v. M.Y. Sundae Inc.,1 a 2017 summary trial decision that found a similar agreement to be enforceable and a complete defence to the franchisee’s claims in that action.
This decision affirms the efficacy of Mutual Cancellation and Release Agreements as a means of bringing floundering franchise relationships to a conclusion.
The franchisee was operating a Dairy Queen in West Vancouver under a franchise agreement of indefinite duration that was made in 1999. Amongst other things, the franchise agreement required the franchisee to modernize the store at least every 10 years, maintain current master brand logo standards and provide financial documentation to the franchisor.
Over the course of the franchise relationship, the franchisee had difficulties complying with various obligations under the franchise agreement. As the Court explained: “It is probably fair to say that the plaintiffs have not been model franchisees.”
The Defaults and Mutual Cancellation and Release
Following a series of extensions and negotiations, in particular concerning the modernization of the store, the franchisee was noted in default for three separate breaches of the franchise agreement. These defaults, which were issued in June and September, 2017, included the failure to complete the modernization by the prescribed deadline, to update its master brand logo, and to deliver certain financial documents requested by the franchisor, including annual profit and loss statements.
After the franchisee failed to cure these defaults within the allotted time periods, as a final opportunity to avoid immediate termination, Dairy Queen offered to enter into a Mutual Cancellation and Release Agreement.
This agreement was offered to the franchisee on October 16, 2017, and signed on November 28, 2017. In lieu of immediate termination, it provided the franchisee with an opportunity to continue operating if it cured all defaults by an extended deadline of December 31, 2017. In the event that the defaults were not fully cured by the year-end deadline, the franchisee would be granted an additional six months to sell the business assets. If the franchisee did not sell the assets by June 30, 2018, the Franchise Agreement would be automatically cancelled and terminated as of June 30, 2018.
The franchisee had not cured the defaults by the year-end deadline and the franchise agreement was set to automatically terminate on June 30, 2018.
The Franchisee Launches an Injunction
On June 12, 2018, the franchisee commenced litigation to enjoin Dairy Queen from enforcing termination under the Mutual Cancellation and Release and sought a declaration that the franchise agreement remained in full force and effect.
The franchisee asserted that the duty of good faith and fair dealing precluded Dairy Queen from terminating the franchise agreement because the franchisee had substantially completed the modernization by the year-end deadline. The franchisee also argued that it should be granted relief against forfeiture of the franchise agreement pursuant to s. 2 of the Law and Equity Act.2
An injunction hearing was scheduled for June 25, 2018. In response, Dairy Queen brought a cross-application for a quia timet, injunction restraining the franchisee from continuing to operate beyond the June 30, 2018 termination date.
The Interlocutory Injunction
The Court made instructive comments concerning each element of the well-known RJR-MacDonald test for an interlocutory injunction, specifically that:
(a) Serious Issue to be Tried
In considering the first stage of the injunction test, the Court was critical of the strength of the franchisee’s claims. At the outset, the Court focused on the recent decision of Dairy Queen Canada Inc. v. M.Y. Sundae Inc.3, which considered a similar Mutual Cancellation and Release. In that case, the agreement was approved and enforced by the Supreme Court of British Columbia. Because the franchisee did not raise any questions of duress or otherwise challenge the enforceability of the Mutual Cancellation and Release Agreement, the Court agreed that the M.Y. Sundae Inc. provided “formidable defences” to the franchisee’s claim.
In considering the franchisee’s claim for relief from forfeiture, Dairy Queen argued that relief from forfeiture is unavailable in a situation where a termination occurs automatically by mutual agreement (rather than a unilateral termination for a breach). The Court agreed, finding the automatic termination mechanism under the Mutual Cancellation and Release to be “akin to an option that automatically expires on a specified deadline or a failure to comply with conditions precedent to the exercise of such an option”. The Court concluded that, in such circumstances, relief from forfeiture is, indeed, unavailable.
In its analysis of the claim for breach of the duty of good faith and fair dealing, the Court focused on the fact that the duty is limited to the “performance or enforcement” of a franchise agreement. In this case, Dairy Queen was “not exercising any right under the Mutual Cancellation and Release Agreement, nor is it engaging in any unfair dealing or bad faith behaviour by refusing further extensions after a mutually stipulated termination has occurred.”
This finding that there was no performance or enforcement was premised on the fact that the termination was automatic and by mutual agreement. As such the agreement did not require Dairy Queen to perform or enforce the agreement in order to effect the termination. In such circumstances, the duty of good faith and fair dealing was inapplicable.
The Court concluded that if the threshold requirement was a strong prima facie case, then the franchisee would surely not meet this standard. Even applying the lower threshold of whether the plaintiffs’ claim is neither vexatious nor frivolous, the Court explained that the franchisee “barely scrapes across that threshold.”
(b) Irreparable Harm
While the Court acknowledged that putting a party out of business and terminating a means of livelihood can amount to irreparable harm. The Court also noted Dairy Queen’s argument that “the plaintiffs had earlier agreed to sell their franchise for $250,000 which, although the transaction did not come to fruition, confirms that the value of the business can be quantified and that any purported losses suffered by the plaintiffs are compensable in damages.”
In response to the franchisee’s arguments that its losses would be difficult to quantify (and were therefore “irreparable”), the Court confirmed that an unquantifiable loss is not the same as a loss that is difficult to assess, as follows:
When considering the nature of irreparable harm sufficient to sustain an injunction, the court will bear in mind that unquantifiable loss is not necessarily the same as loss that is difficult to assess. The court regularly conducts complicated and challenging assessments of financial loss in a variety of commercial, breach of contract and tort cases, including losses based on uncertain future events, fluctuating market conditions, and various other contingencies. This includes situations where the aggrieved party has been put out of business or rendered unemployable as a result of catastrophic events such as wrongful receiverships, destruction of property or serious personal injury.
(c) Balance of Convenience
The Court considered various factors in assessing the balance of convenience, including whether the franchisee was coming to court with “clean hands.” In holding that “the submissions that the applicants do not have the requisite clean hands seems well founded.” The Court considered several factors including:
The Court was not convinced that the balance of convenience favoured the granting of the injunction in favour of the franchisee.
Dairy Queen’s Cross-Application for a Quia Timet Injunction
The Court refused to grant Dairy Queen’s cross-application for an injunction at the time of the hearing. The Court was not convinced that there is a high probability that the plaintiffs would continue to operate as a Dairy Queen retail store in breach of the Mutual Cancellation and Release Agreement. However, the Court left it open for Dairy Queen to reapply at a later date should the circumstances warrant.
Where a franchisor has the right to unilaterally terminate a franchise agreement due to a franchisee’s breach, franchisors should consider whether offering a mutual cancellation and release agreement would provide a better means of winding down a troubled franchise relationship. These agreements are versatile and can be used to craft mutually beneficial outcomes for both the franchisor and the franchisee exiting the system. In this respect, offering a mutual cancellation and release agreement can be demonstrative of the franchisor’s good faith towards the franchisee.
It may be helpful for the termination under the mutual cancellation and release agreement to occur automatically, rather than as a result of the franchisor exercising a discretionary right. In the case of an automatic termination, it will be more difficult for the franchisee to argue that either the duty of good faith and fair dealing or relief from forfeiture stand in the way of the termination.
Dairy Queen was represented at the hearing by Colin Pendrith and Carly Cohen, with support from franchise litigators Geoff Shaw and Danielle DiPardo, as well as Jessica Lewis of Cassels Brock’s Vancouver office.
If you have any questions concerning the Dairy Queen decision please contact Colin Pendrith, Carly Cohen, Geoffrey B. Shaw, Danielle DiPardo, Jessica L. Lewis or any other member of the Cassels Brock Franchise Litigation Group.
Ontario Court Finds Franchisee Personally Liable for $1.7 Million Dollar Costs Award in Failed Class Action
On May 29, 2018, the Ontario Superior Court of Justice released a decision in Pet Valu Canada Inc. v. Rodger, 2018 ONSC 3353, which held that the individual officer, director, shareholder, and guarantor of the representative plaintiff in a $100 million class action commenced against Pet Valu Canada Inc. (Pet Valu) in 2009 was personally liable for the significant costs awards which Pet Valu had been awarded after defeating the class action. These costs awards totalled in excess of $1.7 million. A summary of the decision can be found here.
Supreme Court of Canada Grants Leave to Appeal Quebec Court’s Ruling that Franchisees Can Be Employees
By Kate Byers
On May 18, 2018, the Supreme Court of Canada (the SCC) granted leave to appeal the judgment of the Quebec Court of Appeal (the QCCA) in Comité paritaire de l'entretien d'édifices publics de la région de Québec c. Modern Concept d'entretien inc.1
The case involves the question of whether a certain franchisee was an employee or an independent contractor for the purposes of the Act respecting collective agreement decrees (the Act). The lower court had determined that the franchisee was an independent contractor, and not entitled to the protections of the Act. A 2-1 majority of the QCCA overturned that ruling and held that the franchisee was an employee, and therefore protected by the Act.
The implication of the QCCA’s ruling is that the franchise system’s franchisees are entitled to receive a minimum wage for the hours worked on behalf of the franchisor, as well as to be provided with the other minimum conditions of employment required by the Act. The franchisor sought and received leave to appeal that judgment to the SCC.
While the memoranda of law filed by the parties in respect to the SCC leave application are currently subject to a sealing order, the fact that leave was granted means that a panel of three members of the SCC has been persuaded that the issues in the litigation are of national importance. Though the QCCA decision is in reference to a particular Quebec statute, and to the relationship between a particular franchisee and franchisor, the ultimate SCC decision may address larger questions pertaining to the issue of when a franchisee’s relationship with its franchisor crosses the line from an independent contractor to an employee in the context of legislation governing labour and employment more generally, and thereby may have ramifications for franchisors across Canada.
The respondent franchisor is a subsidiary of GDI Services aux immeubles inc. (GDI), which performs housekeeping work for commercial clients such as hotel and retail chains. GDI is a ‘professional employer’ within the meaning of the Act, but the franchisor’s business is specifically concerned with the management of its network of franchises. Franchisees actually carry out the work covered by the Act on behalf of GDI.
The franchise system operates on the basis of a “tripartite” contractual relationship between the franchisor, franchisee, and client. Under this model, the franchisor enters a maintenance agreement with a client for the completion of housekeeping services. The franchisor then assigns this contract to a franchisee (with the client’s consent). The franchisee is not involved in negotiating the terms of the maintenance agreement with the client whom it ultimately services. In addition, the franchisor remains bound to the agreement after it assigns it to a franchisee.
The appellant franchisee, Mr. Bourke, was party to a franchise agreement with the respondent dated January 1, 2014 (the Franchise Agreement), pursuant to which he acquired five maintenance contracts to provide housekeeping services to certain clients (the Maintenance Contracts). Over the course of January through May 2014, Mr Bourke and his wife had completed 409.7 hours in the execution of the Maintenance Contracts. By May 2014, Mr. Bourke was dissatisfied with his profitability and terminated the Franchise Agreement.
The lawsuit was brought as a result of an intervention by Committee paritaire de l'entretien d'édifices publics de la région de Québec (the Committee), who contended that the franchisee was an employee within the meeting of the Act and entitled to the minimum wages and other protections set by the Decree respecting building service employees in the Québec region (the Decree). The Committee claimed compensation for unpaid wages and annual leave for the period of January through May 2014.
The QCCA’s analysis focused on the distinction between “artisans” (considered an employee under the Act) and “independent contractors” (who, as the name belies, are not considered to be employees and are not subject to the protection of the Act or the Decree). While the Court de Québec had ruled that Mr. Bourque was an independent contractor, the QCCA panel held that the lower court judge had erred in failing to understand that the franchisor’s assignments to the franchisee were what is described in civil law as “imperfect assignments.” In other words, the transferring franchisor remained bound by the maintenance contracts. The majority concluded that as a result of the risk the franchisor assumed as part of this arrangement, it also retained significant power of control over the franchisee’s execution of the maintenance contracts, remuneration in respect of the contracts, and the ability to surrender them. Accordingly, Mr. Bourque was an artisan and subject to the protections of the Act.
The dissenting judge agreed that the Franchise Agreement was an imperfect assignment, but was of the opinion that the imperfect nature of the transfer did not transform a business contract into a work contract. The dissenting judge viewed Mr. Bourque as having assumed risks in order to obtain compensation that would benefit both he and the franchisor, and as being free to arrange his work in a manner that suited him, in the manner of an independent contractor.
It is important to note that in coming to their decision, the QCCA majority specifically noted the franchise system was not representative of a typical franchise model. Indeed, many of the provisions of the Franchise Agreement were far from typical. For example:
Coupled with the recent decision of the Ontario Labour Relations Board in Canada Bread Company Limited,3 this decision is a warning sign to any franchisors who operate franchise systems with tight operational controls. These systems may expose them to liability under labour and employment legislation.
While the GDI system is not a typical franchise system, franchisors who (a) organize customer accounts on the part of their franchisees, (b) remain liable to those customers even as their franchisees provide their services, (c) receive payments directly from customers and deposit amounts to their franchisees directly, or (d) otherwise shoulder significant amounts of risk on their franchisees’ behalf, should be mindful that they could attract liability under labour and employment statutes. The primary consideration is the degree of control exerted by the franchisor over the franchisee’s business and the degree of risk assumed by them. Franchisors seeking to defend similar allegations should ensure that they can demonstrate that their franchisees have the flexibility to exert control over their own businesses and have assumed risk in respect of their business initiatives.
The SCC will hopefully provide clarity on this area of the law, and this upcoming decision will be the first time in many years that the SCC will have addressed issues relating to franchising.
Cassels Brock will continue to monitor developments in this case.
Bad Optics: Ontario Court Denies Injunction to Franchisor Seeking to End Royalty Strike
In 10313033 Canada Inc. v 2418973 Ontario Inc. et al. (Laurier Optical), the Ontario Superior Court of Justice confirmed that, while a franchisor seeking to end a royalty strike within its franchise system may be able to obtain an injunction compelling the striking franchisees to pay royalties while litigation is pending, such a request will be denied if the franchisor does not lead evidence that the withholding of royalties will have an irreparable financial impact on the franchise system.1
Background to the Case: The Royalty Strike by Franchisees
The case arose from a dispute between a majority group of “Laurier Optical” franchisees and their franchisor, 10313033 Canada Inc. (103 Canada). 103 Canada had purchased the assets of the previous franchisor through a court supervised restructuring process under the Companies’ Creditors Arrangements Act (CCAA). Following this acquisition, a majority group of franchisees raised concerns with 103 Canada, alleging that the new franchisor had failed to respect its obligations under the franchise agreements and raised questions over the continued enforceability of the franchise agreements and leases assigned to 103 Canada pursuant to the CCAA vesting order. 103 Canada attempted to assuage these concerns through a proposed marketing campaign but was unsuccessful.
The franchisees sought to commence an arbitration over the dispute and began to withhold royalties and other fees owed under their franchise agreements in protest. The franchisees commenced an application seeking the appointment of an arbitrator and 103 Canada simultaneously commenced an action seeking, among other things, an interlocutory injunction compelling the franchisees’ compliance with the terms of their agreements including with respect to the payment of royalties and fees.
The Court’s Decision: No Evidence of Financial Harm, No Injunction
Canadian courts have previously granted injunctions compelling franchisees to comply with the terms of their franchise agreements in the face of “royalty strikes” that threaten to put the franchisor out of business. In 2010, the Court granted such an injunction in Bark & Fitz Inc. v 2139138 Ontario Inc., even though the franchisor in that case had not met all of its obligations to its franchisees.2 In Cash Converters Canada Inc. v 1167430 Ontario Inc., an earlier decision not cited in Laurier Optical, the Court granted a similar injunction finding that a royalty strike by franchisees was directed at pushing the franchisor into bankruptcy and taking over the system.3
In applying the well established RJR-Macdonald test, the Court was satisfied that 103 Canada, like the franchisor in Bark & Fitz, had met the first stage of establishing a “serious issue to be tried”. However, unlike the franchisor in Bark & Fitz, the Court found that 103 Canada failed to lead sufficient financial evidence demonstrating that the ongoing royalty strike would result in “irreparable harm” sufficient to justify and injunction. While the Court noted that “as a matter of simple logic” the continued royalty strike by a majority of Laurier Optical franchisees could have “a severe, and possibly fatal, impact on the franchisor,” the Court was unable to reach such a conclusion based on the bald statements advanced by the franchisor’s principal that 103 Canada would be unable to meet its financial obligations if royalties continued to go unpaid. Having failed to establish irreparable harm, the Court held that the franchisor’s injunction request should be denied. The Court did note, however, that it would be open for the franchisor to apply again with better evidence of irreparable harm.
With respect to the franchisee’s application to appoint an arbitrator, the court agreed that the dispute should be submitted to arbitration and stayed the franchisor’s court action in favour of arbitration.
This decision confirms that franchisors can successfully obtain an injunction compelling franchisees to comply with the terms of their franchise agreements in the face of collective action by franchisees to withhold of royalties. Meeting the injunction test in such circumstances, however, will require detailed supporting documents showing the irreparable financial harm that would result if the royalty strike continues. Absent such evidence, the court will not intervene at an early stage with injunctive relief.
Time to Face the Facts: Raibex Appeal Decision Provides Support to Dismiss Summary Judgment Motion Where Potential Material Facts in Dispute
On May 14, 2018, in 1680690 Ontario Inc. v. Print Three Franchising Corporation,1 the Ontario Superior Court of Justice dismissed a motion for summary judgment in a statutory rescission case on the basis that the evidentiary record did not provide the Court with the necessary evidence to fairly and justly adjudicate the issue. Specifically, the franchisee plaintiffs were seeking (a) a declaration that the franchise agreement was validly rescinded under the provisions of the Arthur Wishart Act (Franchise Disclosure), 20002 and (b) payment for rescission damages for the alleged failure to meet disclosure obligations by the defendant franchisor, Print Three.
In making its decision, the Court relied heavily on the Ontario Court of Appeal’s recent decision in Raibex Canada Ltd. v. ASWR Franchising Corp.3 in drawing the conclusion that the facts of this case are “very important” for the Court’s determination of “whether the plaintiffs have been deprived of an opportunity to make an informed decision on their purchase”. Because there were potential material facts in dispute, the Court was unable to resolve the conflicts to arrive at a fair and just decision.
The Court relied on the Court of Appeal’s analysis in Raibex of the applicable provisions of the Wishart Act, which she said provides the court a “framework of analysis that is of great assistance to the determination of this action” [emphasis added]. The Court highlighted the importance of a facts-based analysis in determining whether disclosure was adequate under the provisions of the Wishart Act.
Raibex provides a helpful precedent for franchisors in that it establishes that any judicial determination regarding rescission should focus on the specific facts of the case before the court. This facts-based analysis is critical in determining whether a disclosure document provided a prospective franchisee with material facts sufficient to make an informed investment decision. The decision in Print Three indicates that Ontario courts are taking heed of the Raibex precedent, particularly in cases where the franchisee is seeking summary judgment on a limited factual record rather than a trial.
If you have any questions concerning the Raibex decision or its application on summary judgment motions relating to disclosure obligations, please contact Geoffrey B. Shaw, Christopher Horkins, Danielle DiPardo, or any other member of the Cassels Brock Franchise Litigation Group.
Ontario Decision Confirms That Substance of an Agreement, Not its Title, Will Determine Whether a Franchise Relationship Exists
On August 27, 2018, in Fyfe v. Stephens (Dial A Bottle),1 the Ontario Superior Court of Justice granted partial summary judgment and awarded damages to franchisee plaintiffs, depsite the defendant franchisor's claim that it did not enter into a franchise agreement with the plaintiffs.
The parties entered into an agreement to operate a liquor-delivery business using the defendants’ trademark “Dial A Bottle.” The parties signed a document titled “Exclusivity Agreement,” which explicitly stated “this is not the purchase of a franchise.” The plaintiffs, however, argued that the relationship between the parties was effectively a franchise relationship and applied for rescission on the basis of non-disclosure pursuant to the Arthur Wishart Act (Franchise Disclosure), 2000.2 The plaintiffs further argued that the defendant made “misleading” representations about the business opportunity enticing the plaintiffs to enter into the agreement.
In determining whether a franchise relationship existed between the parties, the Court noted that where the elements of an agreement meet the requirements of the definitions contained in the Wishart Act, including, “franchise,” “franchise agreement,” “franchisee,” “franchise system,” and “franchisor,” then the agreement will be a franchise agreement and treated as such in law.
The defendant argued that the Exclusivity Agreement was not a franchise agreement as it explicitly indicated that “this is not the purchase of a franchise” and the parties did not intend for the agreement to be a franchise agreement. The Court was not persuaded by this argument and cited Chavdarova v. The Staffing Exchange3 and 1706228 Ontario Ltd. v. Grill It Up Holdings Inc.4 as authority that the Court must examine the substance of a relationship to determine whether there is a franchise relationship.
In doing so, the Court held that the relationship between the parties in Dial A Bottle was a franchise relationship and the agreement between them was a franchise agreement for the following reasons:
As such, the Court held that the franchisor should have disclosed pending administrative actions and that the plaintiffs would not have entered into the agreement had they been made aware of such violations, which resulted in set-up and operational costs being incurred by the plaintiffs.
Ultimately the Court awarded judgment for rescission, loss of income and moving expenses and left it open for the plaintiffs to claim for damages on a trial of the issue of damages.
Dial A Bottle represents the courts willingness to look behind the surface of an agreement to fully understand the substance of a relationship between parties. Going forward, it is imperative to look at the operation of a business relationship and be sure to provide disclosure where necessary. Parties cannot avoid the operation of the Wishart Act by simply labelling an agreement something other than a franchise agreement. If a franchisor-franchisee relationship is found to exist, the franchisor may be on the hook for more than just rescission if it did not comply with the Wishart Act.
Ontario Court of Appeal Allows Appeal on Rescission Decision
In a previous newsletter, we discussed the Ontario Superior Court of Justice’s decision in 2212886 Ontario v Obsidian Group, wherein the Court granted the franchisee’s motion for partial summary judgment for a declaration that the franchise agreement was properly rescinded pursuant to the Arthur Wishart Act (Franchise Disclosure), 20001. (A copy of our discussion can be found here.)
As an update to this case, the Ontario Court of Appeal reversed the lower court decision, finding that the motion judge erred in granting summary judgement for the plaintiff franchisee by making crucial findings of fact on an inadequate paper record without the benefit of oral evidence.
The franchisee’s rescission claim hinged on a factual dispute as to whether an earnings projection was presented to the franchisee without providing a hard copy. The evidence before the motion judge consisted of contradictory affidavit evidence by the parties, an inadequate paper record, and inconsistent evidence by the franchisee. This raised credibility issues and, according to the Court of Appeal, the “obvious need for oral evidence.” As such, the Court of Appeal determined that the motion judge erred by granting summary judgement on the evidence before him.
The Court of Appeal also considered the two-year window for a franchisee to bring a rescission claim pursuant to s. 6(2) of the Wishart Act. The Court of Appeal did not interfere with the motion judge’s ruling that the franchisee’s rescission rights ran from the execution of the replacement agreement, rather that the date of the first franchise agreement executed by the parties.
Ontario courts may closely scrutinize summary judgment decisions in rescission cases to determine whether the parties have actually established the evidentiary record to enable a finding of summary judgment. This appears to reflect a growing trend towards a more conservative approach to summary judgment than what had been anticipated following the Supreme Court of Canada’s decision in Hyrniak v. Mauldin.2
1 S.O. 2000, c. 3 (the “Wishart Act”).
Ambiguity and Other “Grave” Concerns in Arbitration Agreements: The Ontario Superior Court of Justice Examines Arbitration In The Franchise Context
By Eric Mayzel
In a recent decision, Graves v. Correactology Health Care Group Inc.,1 the Ontario Superior Court of Justice dismissed a motion to stay a franchise dispute action in favour of arbitration, and provided an analysis of the required scope and ambit of arbitration provisions in Ontario franchise agreements.
The three plaintiffs were students in the Correactology Practitioner Program (Program) at the Canadian Institute of Correactology (the Institute).
The students were advised that upon completing the Program they would be required to complete licensing examinations to become accredited by the Canadian Association of Correactology Practitioners (the Association). They would also be required to enter into a Licence Agreement with Correactology Health Care Group Inc. (CHCG) to operate a “correactology center.” Notably, the Program was not registered under the Private Career Colleges Act, 2005 (PCCA).
Each student signed an Enrollment Agreement with the Institute, a Licence Agreement (on behalf of a company to be incorporated) with CHGC, and a Confidentiality Agreement with CHGC.
In the course of preparing a business plan for the Program, the students consulted a lawyer. Upon learning of this, the defendants abruptly suspended the Program and expelled the students on the basis that they had breached the Confidentiality Agreement.
The plaintiffs subsequently commenced the action, alleging fraudulent misrepresentation, conspiracy, restraint of trade, and breach of contract. The plaintiffs further alleged that the Program is a sham and an unregistered private career college, and that the Licence Agreement is a franchise agreement that did not comply with the requirements of the Arthur Wishart Act (Franchise Disclosure), 20003.
The defendants were the Institute, the Association, CHCG, and individual directors of CHCG and/or the Association. They brought a motion to stay the action in favour of arbitration, based on arbitration clauses in the Enrollment Agreement and Licence Agreement. The Court dismissed the motion for the reasons set out below.
No Clear Intention to Refer All Disputes to Arbitration
The Enrollment Agreement and the Licence Agreement contained broad arbitration clauses. However, they also contained contradictory jurisdiction clauses. The Enrollment Agreement required parties to submit to the exclusive jurisdiction of the courts of Ontario, and the Licence Agreement required parties to bring any actions in the Superior Court of Justice in Sudbury.
The inconsistency between the arbitration and jurisdiction clauses rendered the agreements ambiguous. The Court resolved the ambiguity in favour of the plaintiffs based on principles of statutory interpretation. It held that the Enrollment Agreement was a contract of adhesion and applied the principle of contra proferentum to interpret the agreement in favour of the plaintiffs. With respect to the Licence Agreement, the Court observed that the enforcement of the arbitration clause would have rendered the jurisdiction clause redundant, which is to be avoided.
For those reasons, the Court held that neither the Enrollment Agreement nor the Licence Agreement reflected a clear intention to refer all disputes to arbitration.
The Dispute Exceeded the Scope of the Arbitration Clauses
The Court noted that it is preferable for an arbitrator to determine his or her jurisdiction and whether a dispute falls within the scope of an arbitration clause. However, a court may determine those issues if the challenge involves a pure question of law or a question of mixed fact and law, where only a superficial consideration of the documentary evidence is required.
The Court determined that the dispute exceeded the scope of the arbitration clauses. The plaintiffs advanced broad claims of fraud, misrepresentation, and breaches of the Wishart Act and the PCCA. Those claims were only “tangentially related to” the Enrollment Agreement and the Licence Agreement.
The Court cautioned that a party cannot simply allege fraud to avoid the application of an arbitration clause. Whether an allegation of fraud prevents the application of an arbitration clause will be a matter of interpretation in each case. In this case, the allegations were significant, bringing into question the legality of the defendants’ system as a whole.
The Court also distinguished between an agreement that may be rescinded from one that is void ab initio because it is illegal. An arbitration clause within an agreement that is void ab initio will not apply because it was never validly agreed to. If proven, the plaintiffs’ allegations of fraud and allegation would have meant that the agreements, and the arbitration clauses, were void ab initio.
The Court further noted that the dispute arose when the defendants accused the plaintiffs of breaching their Confidentiality Agreements. However, because the Confidentiality Agreements did not contain an arbitration clause, a dispute over the disclosure of confidential information would not be subject to arbitration.
The Refusal to Grant a Stay or a Partial Stay
(a) Invalidity of the Arbitration Clause is a Serious Issue
Pursuant to section 7(2) of the Arbitration Act, 1991,4 a court may refuse to stay an action in favour of arbitration where, among other things, the arbitration agreement is invalid. A court may exercise that discretion if it makes a “prima facie determination that invalidity is a serious issue.”
The invalidity of the arbitration clauses was a serious issue in this case. The plaintiffs’ evidence suggested that the Institute was effectively operating as a private career college without being registered under the PCCA. Similarly, the Association purported to certify qualifying graduates as “correactology practitioners,” which is not a regulated profession under the Regulated Health Professions Act, 1991.5 Thus, the Court noted that, even if the defendants’ business was not found to be a “sham,” there would still remain a serious concern regarding the validity of the business. As a result, the court made a prima facie determination that the invalidity of the arbitration clauses was a serious issue.
(b) Partial Stay Not Reasonable Because the Claims are Closely Intertwined and Not All Parties Are Bound by the Arbitration Clauses
Pursuant to section 7(5) of the Arbitration Act, 1991, where an action involves claims that are subject to arbitration and claims that are not, the court may grant a partial stay, but only where it is reasonable to separate the matters.
In this case, the Court determined that it was not reasonable to separate any matters that may have been subject to the arbitration clauses from those that were not, because the allegations of fraud were closely intertwined with all other issues.
In addition, the individual defendants and the Association were not parties to the Enrollment Agreement or the Licence Agreement. As a result, they were not entitled to invoke the arbitration clauses within those agreements to seek a stay of the action as against them. The Court declined to exercise its discretion to grant a partial stay of the action, so as to permit the action to continue as against only them and not the other defendants. The Court held that a partial stay would not be reasonable because the claims against all defendants involved similar facts and issues. In such circumstances, “a court should... its exercise discretion to allow the entire matter to proceed in the one forum of the court.”
The decision provides an important reminder to drafters of commercial agreements to ensure consistency amongst dispute resolution provisions, including arbitration clauses and jurisdiction clauses. Ambiguities resulting from any inconsistencies may preclude the drafter from relying on an arbitration clause.
The decision also highlights the need for parties to carefully consider the appropriate forum in which to pursue or defend claims that may be subject to an arbitration agreement. Parties ought to consider, among other things, the scope of the arbitration agreement, the parties involved in the dispute, and whether serious concerns may be raised regarding the validity of the arbitration agreement.
Distributorship or Franchise? The Significance of Control and Assistance in Determining The Application of Franchise Legislation
A recent lower court decision in Manitoba (found here) provides further guidance in determining whether a business arrangement is actually a franchise for the purposes of franchise disclosure legislation in that province. In Diduck v. Simpson,1 the plaintiff signed a distribution agreement with a master distributor and paid an initial fee. The plaintiff received exclusive sales territory and was required to attend training sessions. The business relationship was not successful, and the plaintiff purported to rescind the distribution agreement on the grounds that he had not been provided with the necessary disclosure document as required under the Manitoba Franchises Act (Manitoba Act). The plaintiff subsequently brought a motion for summary judgment claiming that it was a “franchise agreement.” The defendant also sought summary judgment, arguing that the plaintiff’s claim for negligent misrepresentation must fail, as any representations made were merely “sales talk” and projections.
The Distributor Agreement Was Not A Franchise Agreement
In determining whether the distributor agreement was a franchise agreement, the Court considered the three elements of the definition of a “franchise” under the Manitoba Act.
The Court found that the first two elements of the definition, which are similar to those in Ontario’s Arthur Wishart Act (Franchise Disclosure), 20002, were satisfied. The plaintiff was required to make an up-front payment and purchase $2,400 worth of inventory or make a payment of $2,400. The plaintiff was also granted the right to sell or distribute the defendant’s goods, which were substantially associated with the defendant’s trademark, trade name, logo or advertising.
It was the third element of the definition, however, on which the Court focused much of its discussion. Under this element, the franchisor must exercise significant control over, or offer significant assistance in, the franchisee’s method of operation, including building design and furnishings, locations, business organization, marketing strategies or training. Unlike Ontario’s Wishart Act, however, the Manitoba Act requires that the significant control or assistance take place “under a business plan.” In this case, the Court found that the information and advice provided to the plaintiff did not amount to “significant assistance” as contemplated by the Manitoba Act. The information provided to the plaintiff included projections of profit based on anticipated sales and statements of opinion – not statements of fact. These were insufficient to form a claim for negligent misrepresentation. In any event, the requirement of a business plan was absent.
Manitoba courts have demonstrated that they will closely scrutinize the relationship between the contractual parties in determining whether it constitutes a franchise relationship for the purposes of statutory disclosure obligations. Franchisors and distributors should understand the differences between provincial legislative schemes when deciding whether or not to provide franchise disclosure.
Ontario Court Rejects ‘Audacious’ Attempt by Franchisee to Escape Loan Obligation
By Derek Ronde
In a recent decision of the Ontario Superior Court of Justice, Royal Bank of Canada v. Everest Group Inc.1, the Court rejected a novel and creative franchise-related argument by a former franchisee (Everest) and its guarantors (collectively, the Guarantors) who were seeking to avoid payment under their loan obligations to their bank, Royal Bank of Canada (RBC).
In this case, the Guarantors operated a Paramount Fine Food restaurant franchise in Toronto. The business was financed through a loan from RBC that was guaranteed by the Guarantors. The restaurant operated for approximately one year but was unprofitable. The Guarantors delivered a statutory notice of rescission to the franchisor, Paramount, under the Arthur Wishart Act (Franchise Disclosure), 20002, seeking rescission of the franchise agreement and statutory damages of almost $3 million. In response to the notice of rescission, the franchisor took back the restaurant and the Guarantors ceased operating the business. RBC learned of this, and took the position that the Guarantors were in breach of their loan agreement, which dictated (among other things) that it was a breach of the agreement if Everest ceased operations. RBC sought summary judgment on its loan and the guarantees.
The Guarantors took the unique position that although Everest was not longer running the restaurant, it was not in breach of the loan agreement. The Guarantors instead argued that Everest did not cease to carry on business; rather, instead of a restaurant operation, Everest’s actual business was recovering its financial investment in the restaurant by way of its Wishart Act rescission claim.
In flatly rejecting the Guarantors’ argument, the Court commented on the “audacity and originality” of it. Nevertheless, the Court held that Everest was in breach of the loan agreement and that there was no basis for reading the Guarantors’ strained interpretation into the standard terms of the loan agreement, commenting, “There is nothing subjectively or objectively unreasonable in the bank declining to await the far from certain outcome of proceedings between the franchisor and franchisee before enforcing the rights that it contracted for…” The Court found that the Guarantors were in breach of their agreements, and granted RBC summary judgment on its loans and the guarantees.
The takeaway from this case is likely limited to the unique circumstances faced by the parties and the “Hail Mary” argument made by franchisee counsel in an attempt to forestall judgment by RBC. Ontario courts appear willing to take a commercially sensible approach to loan agreements that supports the business efficacy of the transaction. This is likely helpful in the long term, as it ensures ongoing access to credit facilities by franchise parties.
What We’re Up To - Fall/Winter 2018
Derek Ronde organized an Ad Hoc Defence Counsel Group of Toronto law firms for the purposes of providing feedback to the Law Commission of Ontario (LCO) on proposed amendments to Ontario’s class action legislation. A copy of the submission can be found here.
Larry Weinberg attended the International Franchise Association summer board meetings in South Carolina in June 2018. Larry is past Chair of the IFA Supplier Forum Board.
Chris Horkins co-chaired the Canadian Franchise Association (CFA) Law Day on September 27, 2018 in Toronto. Frank Robinson spoke on the issue of franchising in the cannabis industry, while Noah Leszcz hosted a roundtable on disclosure issues. Larry Weinberg, Derek Ronde, Geoff Shaw, Carly Cohen and Sam Sokoloff also attended on behalf of Cassels Brock.
Frank Robinson has been appointed to the Canadian Franchise Association task force on cannabis. Read his recent blog post “Is Franchising the Answer for Cannabis Retail in Ontario?” here.
Larry Weinberg is attending the International Bar Association (IBA) Annual Conference in Rome, Italy from October 7-12, 2018, and chairing the franchise law programs at the conference. Larry is current Co-chair of the IBA’s International Franchising Committee.
Larry Weinberg, Geoff Shaw, Frank Robinson, Derek Ronde, Noah Leszcz, and Carly Cohen are attending the American Bar Association (ABA) Forum on Franchising in Nashville, TN on October 10-12, 2018. Frank Robinson is hosting the International Division breakfast session on the EU General Data Protection Regulation (GDPR).
Larry Weinberg is speaking on “The Legal Aspects of Purchasing A Franchise” at the Canadian Franchise Association (CFA) Trade Show on October 12-14, 2018, in Toronto.
Larry Weinberg is speaking at the Canadian Franchise Association “How To Franchise Your Business” Seminar on October 18, 2018, in Toronto.
Larry Weinberg and Frank Robinson are attending the Franchise Times Restaurant Finance and Development Conference on November 12-14, 2018, in Las Vegas, NV. Larry is moderating a panel on “Expansion From and To the US and Canada – Exploiting the Opportunities While Appreciating the Differences.”
Derek Ronde is speaking on rescission issues at the Ontario Bar Association (OBA) 18th Annual Franchise Law Conference on November 13, 2018, in Toronto. Colin Pendrith is hosting a roundtable on “#MeToo – What Does It Mean For Franchisors?”