ontario bar association franchise law conference annual … · 2014-12-01 · ontario bar...

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Ontario Bar Association Franchise Law Conference Annual Legal and Legislative Update

By

John Yiokaris and Derek Ronde1

1 The authors wish to thank Rory P. McGovern of Sotos LLP and Peter Reinitzer of Cassels Brock and Blackwell LLP for their contributions to this paper.

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Contents Breach of the Duty of Good Faith and Related Damages ............................................................................. 3

Body Shop Canada Ltd. v. Dawn Carson Enterprises Ltd. ......................................................................... 3

8150184 Canada Corp. v. Rotisseries Mom’s Express Ltd. ....................................................................... 5

Wrongful Termination of Franchise Agreements ......................................................................................... 6

ANC Business Solutions Inc. v. Virtualink Canada Ltd. .............................................................................. 6

Exemptions from Disclosure ......................................................................................................................... 8

2147191 Ontario Inc. v. Springdale Pizza Depot ....................................................................................... 8

Releases and s. 11 of the Act ...................................................................................................................... 10

2176693 Ontario Ltd. v. Cora Franchise Group Inc. ................................................................................ 10

Deficiencies in Disclosure ............................................................................................................................ 12

2240802 Ontario Inc. v. Springdale Pizza Depot ..................................................................................... 12

2337310 Ontario Inc. v. 2264145 Ontario Inc. ........................................................................................ 14

Caffe Demetre Franchising Corp. v. 2249027 Ontario Inc. ..................................................................... 16

Vijh v. Mediterranean Franchise Inc. ...................................................................................................... 18

Rescission Damages .................................................................................................................................... 19

2189205 Ontario Inc v. Springdale Pizza Depot Ltd. ............................................................................... 19

Definition of “Franchise Agreement” Under the Act .................................................................................. 20

MGDC Management Group Inc. v. Monroe Estate ................................................................................. 20

Class Actions ............................................................................................................................................... 22

1291079 Ontario Ltd. v. Sears Canada Inc. ............................................................................................. 22

2038724 Ontario Ltd. v. Quizno’s Canada Restaurant Corporation ....................................................... 24

Arbitration ................................................................................................................................................... 25

2296423 Ontario Ltd v. FOF Franchise Corp. .......................................................................................... 25

Silininkas v. Purrestore Management Services, Inc. o/a Puroclean Canada ........................................... 26

Franchisors and the Employer-Employee Relationship .............................................................................. 28

Lindsey v. McDonald’s Restaurants of Canada Limited .......................................................................... 28

Lake v. 1627325 Ontario Ltd. o/a Best Western Sword Motor Inn ........................................................ 29

Rescission (Non-Statutory) ......................................................................................................................... 30

Ma v. Nutriview Systems Inc. .................................................................................................................. 30

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Legislation ................................................................................................................................................... 32

British Columbia ...................................................................................................................................... 32

Breach of the Duty of Good Faith and Related Damages

Body Shop Canada Ltd. v. Dawn Carson Enterprises Ltd.2 Background

Body Shop Canada Ltd. (the “subfranchisor”) brought an action against Dawn Carson Enterprises Ltd. (the “subfranchisee”) for damages sustained as a result of the subfranchisee’s underpayment of rent to the landlord. In addition, the subfranchisee counterclaimed against the subfranchisor and third-party-claimed against an auditor for breach of the subfranchise agreement and tortuous interference.

The franchised business was a retail establishment for soaps, cosmetics and bath products. The subfranchisee operated a store in a mall in Halifax, Nova Scotia.3

The issue in this case arose when an auditor, on behalf of the Ontario Pension Board (the “OPB”) (the landlord of the Halifax Mall at which the franchised business was operating in), performed an audit of the rents paid by the subfranchisee. It found that the subfranchisee had under-reported its gross revenue during the audit period and as a consequence, did not pay the rent it owed to the landlord (the rent was based on a percentage of the tenant subfranchisee’s sales).4 Flowing from this, the OPB sued both the subfranchisor and the subfranchisee. The subfranchisor settled the lawsuit with OPB for $156,388. Thereafter, the subfranchisor terminated the subfranchise agreement, sued the subfranchisee on the sublease, and sued the subfranchisee’s principal on a guarantee that was signed when the subfranchise agreement was entered into.5

Key Issues and Highlights

In her defence, the subfranchisee claimed that she had reported her revenues in the way her accountant taught her in the 1980s. She further argued that the understatement resulted from her or her staff inadvertently double subtracting amounts in the calculation of revenue.

With regard to the explanation provided by the subfranchisee, Moir J. noted that “the calculation of gross revenue in a retail shop is not an esoteric exercise”.6 As such, there is little room for

2 2014 NSSC 239 [Body Shop]. 3 Ibid at paras 3-4. 4 Ibid at para 5. 5 Ibid at para 6. 6 Ibid at para 10.

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huge differences in revenues reported.7 Moir J. rejected all of the explanations provided in the subfranchisee’s defence.

Moir J. further noted that, despite provisions in the lease requiring an annual audit of the business, this was never done by the subfranchisee or was waived by the subfranchisor in the subfranchise agreement.8 In its sublease agreement with the subfranchisor, the subfranchisee promised the subfranchisor to pay the rent required to be paid by the subfranchisor to OPB in conformity with the method of calculation contained in the lease. Similarly, the subfranchisee obliged itself to observe “all other terms, covenants and conditions that the subfranchisor was subject to under the lease” and to indemnify the subfranchisor if they did not.9

After reviewing the methodology of the audit, Moir J. found that the subfranchisee and its principal drastically understated its gross revenues in the reports to the landlord and avoided paying rent that was due.10 The consequence of this default under the lease was that the termination of the sublease by the subfranchisor was justified.11

In addition to the above, Moir J. found that the subfranchisee “broke faith” with the subfranchisor and the landlord by under-reporting its revenues and underpaying rent. This activity established a justifiable reason for the subfranchisor to terminate the subfranchise agreement. In addition, the counterclaim and third party claims were dismissed.12

Practice Points

In keeping with Moir J.’s comment that “the calculation of gross revenue in a retail shop is not an esoteric exercise”, it is advisable for franchisees to establish and maintain accurate financial records. In this case, Ms. Carson, who was the principal of the subfranchisee and a guarantor under the sublease and franchise agreements, was faced with significant liability to the subfranchisor as a result of her underreporting of revenues.

From a franchisor’s perspective, if the franchise agreement permits it, establishing a practice of regularly auditing franchisees’ revenues may be advisable, particularly if underreporting can impact lease agreements with third parties. Moreover, a franchisor should ensure that its franchise agreements provide for, and the franchisor requires that, all franchisees install and use adequate point-of sale systems that will at least discourage franchisees from undertaking such action.

7 Ibid at paras 9-10. 8 Ibid at para 32. 9 Ibid at paras 35-37. 10 Ibid at para 88. 11 Ibid at para 103. 12 Ibid at paras 116-118.

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8150184 Canada Corp. v. Rotisseries Mom’s Express Ltd.13 Background

8150184 Canada Corp. (the “franchisee”) brought an action against Rotisseries Mom’s Express Ltd. (the “franchisor”) as well as two “franchisor’s associates” for losses and damages related to the rescission of its franchise agreement. At the time the franchise agreement was entered into, the franchisor had represented to the franchisee that it would incur around $150,000.00 in expenses related to commencing operation of the franchise which was scheduled to open in June 2012. It also represented to the franchisee that it could sell the operation in six months for $400,000. After the expenditures exceeded $226,000 and the franchise had still not opened by October 2012, the franchisee rescinded.14

After the franchisor failed to respond to a request to admit (see 8150184 Canada Corp. v. Rotisseries Mom’s Express Ltd.15) given to them by the franchisee, the franchisee moved for judgment under Rule 51.06(2) of the Rules of Civil Procedure16 based on the franchisor’s failure to respond to the request to admit facts. Mew. J. heard the motion and found that the facts deemed to be admitted supported the franchisee’s right to rescind under the Arthur Wishart Act (Franchise Disclosure), 200017 (the “Act”).18 Mew J. ruled that the franchisee was entitled to the amounts quantified therein in the amount of $152,314.44 with the balance of the claim proceeding to trial.19 The amounts left to trial were: claims for salaries of the franchisees principals as well as car and meal expenses, claims for loss of profits and damages under s. 3 of the Act.20

Flowing from the above, in this proceeding the franchisee sought to establish the following damages as it was found that the franchisor never provided a disclosure document:21

1. Motor vehicle/transportation expenses incurred by Ali Rasool, who was required to travel between his home in Markham and the restaurant location, while overseeing the set-up of the franchise operation between April to October 2012: $10,080.

2. Salary for Ali Rasool, project manager, to setup the operation: $35,000. 3. Salary for Juliana Swei, principal of 815: $5,000. 4. Cost of meals provided to suppliers, trades people and networking: $5,000. 5. Loss of profit while the restaurant was not operational: $113,803.

13 2014 ONSC 3256 [Mom’s Action]. 14 Ibid at para 2. 15 2014 ONSC 815. 16 RRO 1990 Reg. 194. 17 SO 2000, c 3. 18 Supra note 13 at para 3. 19 Ibid at para 15. 20 Ibid at paras 16-20. 21 Mom’s Action, supra note 13 at para 12.

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6. Damages for breach of duty of care for fair dealing by the defendants under s. 3 of the Act: $25,000.22

After providing testimony in respect of the above damages, the Court awarded all of the damages claimed with the exception of the cost of meals as there were no receipts or documentation provided by the franchisees to establish the damages.23 The Court also found that in this case, “loss of profit damages” was compensable under s. 7(1) of the Act as the loss of profits flowed from the franchisor’s misrepresentation that the restaurant would be open in June 2012. The Court accepted the pro forma projections provided by the franchisor to the plaintiff in this regard.

With respect to damages under s. 3, after reviewing the case law, O’Marra J. found a litany of deficiencies in the franchisor’s conduct including: failure to provide adequate architectural drawings, menus, signage and training; misrepresenting the franchisee’s ability to sell the franchise in six months; failure to provide support and guidance; failure to act in a commercially reasonable manner; and failure to provide accurate figures with respect to the costs of opening the operation. In light of the foregoing, O’Marra J. awarded the franchisee $25,000 in damages for breach of the duty under s. 3.24

Practice Points

This case provides additional commentary on the calculation of damages awards for Wishart Act claims. After the franchisor was deemed to admit several damaging allegations in the request to admit, O’Marra J. awarded the franchisee the maximum amount that previous judges had awarded for breaches of s. 3 of the Act. This case serves as a reminder to franchisors that schedules and cost estimates may be the subject of rescission or misrepresentation claims if they are not properly disclaimed or accurately conceived.

Wrongful Termination of Franchise Agreements

ANC Business Solutions Inc. v. Virtualink Canada Ltd.25 Background

ANC Business Solutions Inc. (the “franchisee”) brought an application for the reinstatement of its franchise as well as damages and other relief, arguing that the franchisor unlawfully terminated its franchise and breached the statutory obligation of fair dealing under s. 3 of the Act.

Virtualink (the “franchisor”) operates a franchise system whereby it rents out office space under the brand “Intelligent Office”. In connection with the system, the operators of the various

22 Ibid at para 7. 23 Ibid at para 17. 24 Ibid at para 30-31. 25 2014 ONSC 1619 [ANC].

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locations also provide technological support to clients that make use of the service.26 Approximately two years into the franchise relationship, a dispute arose in regards to a malfunction with the franchisee’s voicemail server, which was a crucial part of the operation of the business. Both the franchisee and the franchisor made efforts to have the server repaired although the franchisor argued that the franchisee was not responsive to the problem.27 After several weeks of the problem persisting, on October 30, 2013, the franchisor delivered a notice of default to the franchisee.28 Just over a week later, on the same day that the franchisee received a quote to replace the malfunctioning server, the franchisor terminated the franchise and the sublease alleging that the franchisee had failed to cure the default.29

The fallout from the actions of the franchisor was significant to the franchisee. When the franchisor took over the premises, it installed a new cloud system and removed the franchisee’s old phone system.30 The franchisor also hired the franchisee’s two employees who had access to all of the franchisee’s financial and confidential information.31 After learning of the termination of the franchise, the franchisee’s bank demanded the repayment of its loans and advised of its intention to enforce its security and to call the letter of credit it had extended.


The franchisee’s main arguments were that the franchisor breached s. 3 of the Act and that it wrongfully terminated the franchise. Perell J. of the Ontario Superior Court of Justice (the “OSCJ”) declined to deal with whether the franchisor breached s. 3 of the Act on an application.

With regard to the argument that the franchisor wrongfully terminated the franchise agreement, the franchisor argued that the malfunctioning voicemail and telecommunication system was an extremely serious default that undermined the Intelligent Office Brand.32 Perell J. rejected this argument finding that it was an “after-the-fact attempt by the franchisor to justify its own breach of the franchise agreement.”33

The franchisor also argued that a settlement agreement entered into by the parties in 2012 introduced a “one-strike policy” that entitled the franchisor to terminate the franchise in the manner in which it did.34 Perell J. found that the settlement agreement did not change the termination provisions in the franchise agreement or any associated agreement.35 As such, the 26 Ibid at para 7. 27 Ibid at para 22. 28 Ibid at para 25. 29 Ibid at para 27. 30 The franchisor required the franchisee to pay an additional $2,950 or $3,950 per month for the cloud system. 31 ANC, supra note 25 at para 31. 32 Ibid at para 44. 33 Ibid at para 51. 34 Ibid at para 43. 35 Ibid at para 46.

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franchisor was required to give 30 days’ notice to the franchisee before it terminated the franchise agreement. It did not.

In the end, Perell J. found that the franchisor breached the franchise agreement for failure to give proper notice of termination. It ordered that the franchisee be reinstated immediately and that the franchisee was entitled to damages for the franchisor’s breach of the franchise agreement.

Practice Points

Franchisors should ensure that they have proper contractual grounds to terminate franchise agreements, particularly where there is significant and legitimate dispute about the seriousness of the franchisee misconduct giving rise to the purported default. Further, franchisors should adhere to the termination provisions and processes set out in the applicable agreements. In this case, the judge’s finding of an improper termination resulted in a substantial damages award against the franchisor as well as reinstatement of the franchise.

Exemptions from Disclosure

2147191 Ontario Inc. v. Springdale Pizza Depot36 Background

The plaintiff, 2147191 Ontario Inc. (the “franchisee”) brought a motion for partial summary judgment seeking a declaration that it had validly rescinded its franchise agreement. In this case, the plaintiffs had been assigned the franchise from a former franchisee and argued that the defendant was obligated to provide disclosure to them. The defendant argued that they were not obliged to provide disclosure because the franchise was not purchased from them and as such the plaintiff had no right to terminate or rescind the agreement. As such, Myers J. had to deal with the disclosure exemptions under s. 5(7) and 5(8) of the Act and whether or not the franchisor could avail themselves of them.37


Myers J. started with an analysis of s. 5(7)(a)(iv) which provides that:

a franchisor is not required to make disclosure in connection with a resale of an existing franchise by an existing franchisee to a new franchisee as long as the grant of the franchise is not effected by or through the franchisor.38

The Court relied heavily on the Ontario Court of Appeal’s decision in 2189205 Ontario Inc. v. Springdale Pizza Depot Ltd.39(“Springdale Milton”) and made the following findings of fact with respect to the role the franchisor played in the assignment of the franchise:

36 2014 ONSC 3442. 37 Ibid at paras 1-6. 38 Ibid at para 7.

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(A) The agreement of purchase and sale between the plaintiffs and the former franchisee provided that it was conditional for ten days "for the Purchaser to obtain franchisor approval to the transfer". That is, although the franchise agreement put the burden of obtaining franchisor approval on the former franchisee, the defendants dealt directly with the plaintiffs for that purpose.

(B) The plaintiffs met the defendants three times prior to the signing of the franchise assignment. The meetings occurred either at the premises of the defendants or of other franchisees.

(C) The defendants required the plaintiffs to enter into the same form of Acknowledgement as was discussed by the Court of Appeal in Springdale Milton. In Springdale Milton, Karakatsanis J.A. wrote the following concerning the Acknowledgment:

The Acknowledgement included a signed statement by the respondents that they did not rely in any way on the representations by the franchisor about the sales figures of the business. I cannot agree with the appellants that this additional protection against recourse for the misrepresentation of financial figures was insignificant to the consent.

Myers J. took a purposive approach in his analysis. He found that the purpose of the disclosure requirement is to “redress the information disparity and power imbalance in franchise transactions.”40 In this case, Myers J. found that the defendant went beyond a mere passive role given that they had become engaged in the transaction and met with the purchaser/plaintiffs three times personally. They also provided the plaintiffs with an acknowledgment that not only limited their rights under s. 7 of the Act, but that also included a payment of money beyond the fee allowed in the Act.41 In light of the foregoing, Myers found that the franchisor “engaged in the transaction and brought its inherent power imbalance to bear upon the prospective franchisees.”42

Myers J. went on to note that a franchisor will be able to avail themselves of the disclosure exemption in the context of a franchise assignment when and only when it merely “passively exercises its consent rights and no more.”43 This may also include an assessment of the prospective assignee’s financial situation and operational fitness.

39 2011 ONCA 467. 40 Ibid at para 12. 41 Ibid at para 13. 42 Ibid at para 13. 43 Ibid at para 16.

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After the decision regarding the ability of the defendant to avail themselves of the disclosure exemption in the Act was rendered, the issue of the sufficiency of disclosure was straight forward. The document provided to the franchisee by the franchisor was materially deficient and did not include any of the following: the proposed assignment of the franchise agreement, the proposed general security agreement, the proposed sublease and head lease to the franchised premises, the acknowledgment, any reference to the judgment of Wilson J. in the other Springdale litigation, any location specific information, a list of current franchisees and their contact information.44 As a result, the Court upheld the validity of the plaintiff’s rescission and ordered damages in accordance with s. 6(6).45

Practice Points

When a franchisor is involved in the assignment of a franchise between franchisees, it cannot rely on the exemption from section 5 if its involvement goes beyond the passive exercise of its consent. This decision provides further jurisprudence regarding Ontario courts’ willingness to examine franchisor involvement in assignments in determining whether disclosure ought to have been made. The only fail-safe way to ensure franchisor protection in these circumstances is for the franchisor to always provide proper disclosure to the prospective franchisee in the event of an assignment.

Releases and s. 11 of the Act

2176693 Ontario Ltd. v. Cora Franchise Group Inc.46 Background

In this case, a franchisee sought a declaration pursuant to s. 11 of the Act that a section of its franchise agreement with the Cora Franchise Group (the “franchisor”) was void and unenforceable.47 Section 11 of the Act reads:

Any purported waiver or release by a franchisee of a right given under this Act or of an obligation or requirement imposed on a franchisor or franchisor’s associate by or under this Act is void.

The impugned section of the franchise agreement required the franchisee to release the franchisor from any claims it had against the franchisor before it could obtain consent to assign the franchise agreement:

22.6.4 Franchisee and its directors, officers and shareholders signing and delivering in favour of Franchisor and its directors, officers, shareholders

44 Ibid at para 22. 45 Ibid at para 29 and 30-32. 46 2014 ONSC 600. 47 Ibid at para 1.

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and employees, a general release in the form specified by the Franchisor of any claims against the Franchisor and its officers, directors, shareholders and employees.48

The franchisee had commenced litigation in respect of both of its franchised locations. Subsequently, the franchisee sought to sell one of its franchises to a third party and sought the franchisor’s consent. The franchisor required that the franchisee execute a release as contemplated by s. 22.6.4 of the franchise agreement. The franchisor provided a form of release that “excluded rights prescribed by the AWA.”49 The franchisee refused to sign the proposed release, arguing that it was contrary to s. 11 of the Act.50


The main issue was whether or not s. 22.6.4 of the franchise agreement and the purported release were void based on the application of s. 11 of the Act. The court found that the ordinary meaning of “general release…of any claims” was that it included rights under the Act. The franchisor argued that the release specifically excluded the release of rights under the Act and, as such, the provision did not run afoul of s. 11. Matheson J. rejected this approach as potentially open to abuse. Matheson J. then addressed whether or not s. 22.6.4 of the franchise agreement could be “read down” so as to comply with the Act. Matheson J. held that s. 11 does not contemplate the possibility that a court could “read down” a provision in a franchise agreement if it was in conflict with s. 11. In arguing that the provision could be “read down” the franchisor proposed that the court take the approach taken in Seidel v. Telus Communications Inc.51 which was a case about a provision that ran afoul of s. 3 of the Business Practices and Consumer Protection Act52 (the “BPCPA”). The issue in Seidel was whether or not the plaintiff was bound by an arbitration clause in a cell phone contract requiring her to arbitrate a dispute rather than sue. The plaintiff had a right of action under s. 172 of the BPCPA. The defendant argued the plaintiff ought to be bound by the arbitration clause. As noted by Matheson J. in reviewing Seidel:

The majority of the court held that to the extent that the arbitration clause purported to take away a right, benefit or protection conferred by the BPCPA, specifically access to the court under s. 172, it was invalid under s. 3. To that extent, Ms. Siedel retained her claim in court. The arbitration clause was enforceable for the other claims. The majority of the court was therefore prepared to essentially "read down" the arbitration clause.”53

In applying Seidel, Matheson J. declined to “read down” the impugned provision of the franchise agreement and decided that the most appropriate interpretation of the Act is the one that protects

48 Ibid at para 2. 49 Ibid at paras 8-10. 50 Ibid at para 8. 51 2011 SCC 15 [Seidel]. 52 SBC 2004 c. 2. 53 Seidel, supra note 51 at para 34.

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franchisees, which meant that the “general release” was void and unenforceable due to the operation of s. 11 of the Act.54 Notwithstanding the foregoing, Matheson J. did not rule out the approach in Seidel being appropriate in a franchise case, but did not identify the circumstances under which it would be applicable.55

Practice Points

The franchisor’s appeal of this decision was heard by the Ontario Court of Appeal on September 24, 2014. The Court reserved its decision, which should provide definitive guidance regarding the extent to which franchisors must specify within their franchise agreements that releases sought as part of renewals and assignments exclude the release of claims under the Act.

Deficiencies in Disclosure

2240802 Ontario Inc. v. Springdale Pizza Depot56 Background

In this proceeding, 2240802 Ontario Inc. (the “franchisee”) moved for partial summary judgement against Springdale Pizza Depot (the “franchisor”). Previously the franchisee had delivered a notice of rescission to the franchisor alleging that the franchisor had failed to comply with the requirements set out under s. 5 of the Act.57

The plaintiff argued that the disclosure document was so deficient that it did not amount to a disclosure document within the contemplation of s. 5 of the Act and the regulations pertaining thereto.58 In response, the franchisor took issue with the materiality of the deficiencies allegedly contained in the disclosure document and argued that the real issues in this case ought not to be decided in a summary judgment motion.59


After applying the full appreciation test from Combined Air Mechanical Services v. Flesch60 (which has now been replaced with the test in Hryniak v. Mauldin61) Greer J. granted the franchisee partial summary judgment. Greer J. found that the franchisee put its best foot forward

54 Ibid at paras 38-41. 55 Ibid at para 38. 56 2013 ONSC 7288 [Springdale]. 57 Ibid at paras 1-2. 58 Ibid at para 26. 59 Ibid at para 27. 60 2011 ONCA 764. 61 2014 SCC 7.

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on the motion and that there were too many significant deficiencies in the documentation received by the franchisee.

First, Greer J. decided that the “notice to reader” financial statements provided to the franchisee did not comply with the regulations under s. 5 of the Act. Greer J. also questioned the accuracy of the financial statements provided to the franchisee observing that the preparer of the financial statements did not carefully read either the statements prepared for it or the regulations under the Act.62

Secondly, Greer J. noted that the Certificate, which should have been signed by two directors or officers of the franchisor, was only signed by Mahil, the President of the franchisor.63 This deficiency has been held to be fatal in other franchise cases.64 Thirdly, Greer J. found that the documents given to the plaintiff were not presented as one single bound document.65

With regard to the franchisor’s obligation to provide information related to the state of the franchise system, Greer J. also found that the franchisor failed to disclose a list of names and contact information of former franchisees which had left the franchise system or were terminated. In addition, Greer J. found that the franchisor failed to disclose that it was involved in litigation with other franchisees.66

Another argument advanced by the defendant was that the franchise relationship was terminated on February 23, 2012 when it delivered a notice of termination to the franchisee—about one week after the franchisee delivered a notice of rescission to the franchisor.

Ultimately, Greer J. found that the deficiencies in the disclosure provided to the franchisee were major deficiencies. Her Honour specifically noted the “notice to reader” financial statements were inadequate to give the franchisee a true financial picture.67

With regard to the personal liability of Mahil and Khakh, the former who is the president of the franchisor and the latter who is the franchisor’s treasurer and secretary, Greer J. found that they were both “franchisor’s associates” within the meaning of s. 1(1) of the Act and as a result were jointly and severally liable with the corporate defendant for the franchisee’s rescission damages.68

Practice Points

This case affirms that franchise rescission cases may be appropriate cases for Ontario courts to determine on summary judgment. The Supreme Court of Canada’s decision in Hryniak v. 62 Springdale, supra note 56 at paras 40-42. 63 Ibid at para 44. 64 For example, see 1448244 Alberta Inc. v. Asian Concepts Franchising Corp., 2013 ABQB 221. 65 Springdale, supra note 56 at paras 46-47. 66 Ibid at para 48. 67 Ibid at para 63. 68 Ibid at paras 58-59.

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Mauldin69 has provided a clear pathway for franchise counsel to potentially address rescission claims in a quick and efficient manner.

In addition, this case adds to existing jurisprudence concerning the types of disclosure failures that collectively amount to non-disclosure for the purposes of section 6(2) of the Act. Franchisors and their counsel should ensure that the Act and its regulations are rigorously followed in respect of pre-contractual disclosure.

2337310 Ontario Inc. v. 2264145 Ontario Inc.70 Background

2337310 Ontario Inc. (the “franchisee”) brought a motion for partial summary judgment seeking a declaration that it had validly exercised its right to rescission under s. 6(2) of the Act and was entitled to damages in respect of the same.71 The defendant corporations 2264145 Ontario Inc. (“226”) and 1355565 Ontario Inc. (“135”) were the franchisors of “Delimark Cafes”, a franchise that caters breakfast and lunch for office buildings in the Greater Toronto Area.

The franchisee received a disclosure document that defined the franchisor as 135 and/or 226. Two of the directors or officers of 135 signed the certificate and included it with the disclosure document. Unaudited statements for 135 were similarly provided. No certificates or financial statements were provided for 226.72 The final franchise agreement that was entered into was between 226 as franchisor and 233 as franchisee. The sublease was appended but the head lease was never disclosed.73 About 18 months after the franchise had been in operation, the franchisee sought to rescind the agreement.


Stinson J. determined that the franchise agreement ultimately signed by the parties was between 226 as franchisor and 233 as franchisee. As such, the court considered the extent to which 226 complied with the Act rather than 135, despite the fact that many of the earlier agreements signed by the franchisee were with 135.74 Flowing from the determination that 226 was the franchisor, not 135, Stinson J. found that 226 had not complied with the Act in several significant ways.

First, 226 failed to disclose its financial statements and was unable to rely on an exemption from doing so under the Wishart Act, O. Reg. 581/00 (the “Regulations”).75

69 Supra note 61. 70 2014 ONSC 4370. 71 Ibid at para 2. 72 Ibid at para 8. 73 Ibid at para 13. 74 Ibid at para 23. 75 Ibid at para 28.

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Second, despite the fact that a lease did not come into effect until after the disclosure document was provided, Stinson J. found that the proposed sublease was an “agreement relating to the franchise to be signed by the prospective franchisee” under s. 5(4)(c) of the Act and as such, decided that it ought to be disclosed. Counsel for the defendant argued that the lease and sublease should not have come under the purview of the Act because neither document existed and that a party should not be expected to disclose something that does not yet exist. In rejecting this approach, Stinson J. notes:

“In my view, in the context of franchise disclosure requirements, it is no answer for a franchisor to explain non-compliance on the basis that a document or information did not exist or was unavailable at the time the disclosure statement was prepared. To accept that submission, would be to create a potentially large lacuna in the disclosure system: it would be easy for a franchisor to pare down its disclosure obligations on the basis that certain material or information was simply not available at the time the disclosure statement was prepared; this excuse could be used to respond to a broad range of complaints about non-disclosure. I therefore reject this approach.”76

Stinson J. went on to note that the remedy for the situation that the franchisor found itself in is to simply provide an updated disclosure statement when the material information (e.g. the lease and the sublease) come into existence, together with a statement of material change.77

Third, flowing from the determination that the franchise agreement was between 226 and 233, Stinson J. found that 226 had failed to provide the franchisor’s certificate. This is a fatal deficiency that the courts have dealt with in Sovereignty Investment Holdings Inc v. 9127-6907 Quebec Inc78and several other notable cases.79

In addition to the foregoing, the Court also found that the franchisor had failed to provide a comprehensive package of documents as part of the disclosure to the franchisee. The Court noted that in disclosing several agreements in piecemeal fashion after the disclosure document was provided (e.g. the agreement of purchase and sale, the franchise agreement, the amendments to the agreement of purchase and sale), the disclosure document was deficient.80 Stinson J. noted that disclosing these agreements in piecemeal fashion is “contrary to the spirit of the legislation, which requires the franchisor to disclose the contents of those agreements in the disclosure

76 Ibid at para 37. 77 Ibid at para 39-40. 78 54 BLR (4th) 277. 79 See Burnett Management Inc. v. Cuts Fitness for Men, 2012 ONSC 3358, 1448244 Alberta Inc. v. Asian Concepts Franchising Corp., 2013 ABQB 221, Apblouin Imports Ltd. v. Global Diaper Services Inc., 2013 ONSC 2592 and others. 80 Ibid at paras 43-45.

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document before they are signed.”81 The Court considered this error to be material and significant.

Ultimately, the franchisee was successful on its motion for partial summary judgment and was entitled to rescind its franchise agreement under s. 6(2) of the Act.82

Practice Points

In respect of agreements that ought to be included in a disclosure document given to a prospective franchisee, the Court decided that a piecemeal approach to disclosure is a significant and material disclosure deficiency by a franchisor. This case provides direction to franchisors that if any agreements are entered into or come into existence after the disclosure document is given to the franchisee (e.g. a lease) and which were not included in the disclosure document, the proper approach is to send a form of the agreement to the franchisee together with a material change statement. If there are several problems of this kind during the disclosure period or amendments are added to any of the agreements, a franchisor may want to consider re-disclosing to the franchisee after all of the forms of the various agreements have finally materialized.

Caffe Demetre Franchising Corp. v. 2249027 Ontario Inc.83 Background

Caffe Demetre Franchising Corp (the “franchisor”) brought a motion for partial summary judgment seeking to dismiss the portion of the defendant’s counterclaim which claimed rescission of the franchise agreement pursuant to s. 6(2) of the Act.

The franchisor operates a franchise specializing in desserts and ice cream.84 The defendant, 2249027 Ontario Inc. (the “franchisee”), purchased its franchise from a previous franchisee. At the time of the purchase, the franchisor delivered a disclosure document that technically complied with s. 5(4) of the Act. The only alleged deficiency identified by the franchisee was that the disclosure document omitted certain “material facts”.

About one year into the operation of the franchise, the franchisor undertook to inspect all of its franchised locations and determine whether or not any repairs or painting needed to be done. In connection with its inspections, the franchisor provided a list of deficiencies to the franchisee. The franchisee refused to cure any of the noted deficiencies.85 Shortly after this issue arose, the franchisor conducted an analysis of the franchisee’s error rates and after reviewing the data obtained, suspected that the franchisee was concealing cash sales by cancelling transactions at the point of sale. This was significant because the franchise fees that were payable to the franchisor were based on the sales of the franchisee. The franchisor requested further information

81 Ibid at para 48. 82 Ibid at para 50. 83 2014 ONSC 2133. 84 Ibid at para 2. 85 Ibid at para 6.

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from the franchisee in regard to this suspicion but its requests were refused. The franchisor then sent the franchisee three notices of default in December 2012, March 2013 and July 5, 2013 noting the following defaults:

“failure to take the required action to improve the condition and appearance of the location; failure to provide financial statements and tax returns within 90 days of fiscal year end, as required by the Franchise Agreement; and, understating gross sales through excessive error/correct key entries.”86


A notice of rescission was served on the franchisor on July 19, 2013 and a notice of termination was sent to the franchisee on August 2, 2013.87 The grounds for rescission, as appeared in the statement of defence and counterclaim, were as follows:

“The plaintiff failed to disclose that, at the time of the disclosure document, it was involved in litigation against Spin Dessert Ltd., which had owned the franchise prior to the owner who sold it to the defendants;

The plaintiff failed to disclose that it was contemplating the implementation of a modified "Tip Out Policy" that would be unilaterally imposed on all franchisees to their financial detriment;

The plaintiff failed to disclose that it was contemplating altering the franchisee ice cream manufacturing policy such that the owner principal would be directly responsible for preparing the ice cream;

The plaintiff failed to disclose that the franchise store would require extensive remodelling and renovations in excess of $50,000.”88

Heeney R.S.J. of the OSCJ noted that the franchisor failed to disclose the Spin Dessert litigation. However, Heeney R.S.J. found that the litigation did not represent a potential liability to the franchisees but was related to the franchisor acting to protect its intellectual property. Given that the litigation would not have a significant impact on the price to be paid by the franchisee, Heeney R.S.J. did not find that it constituted a “material fact”.89 His Honour further noted that the kind of litigation which the franchisor failed to disclose was only a content deficiency that would have given rise to a right of rescission under s. 6(1).90

With regard to the tip out policy, the franchisor sought to implement it to prohibit franchisees from taking a share of their employees’ tips. This was in contemplation of provincial legislation

86 Ibid at para 8. 87 Ibid at paras 9-10. 88 Ibid at para 12. 89 Ibid at para 26. 90 Ibid at para 41.

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that the NDP wanted to pass and was not contemplated at the time the disclosure document was delivered.

With regard to the ice cream manufacturing policy and the renovations, Heeney R.S.J. noted that both these issues arose after the disclosure document was delivered and as such could not possibly entitle the franchisee to rescission under s. 6(2).91

Ultimately, after applying the test from Hryniak v. Mauldin, Heeney dismissed the rescission counterclaim of the franchisees but allowed the franchisees to pursue their claims for misrepresentation, breach of fair dealing and breach of contract at trial.

Practice Points

Once again, this decision indicates that Ontario courts are willing to address rescission issues on a summary judgment basis based on the guidance provided by the Supreme Court of Canada in Hryniak.

This case advances the law on whether or not a failure to disclose litigation will allow a franchisee to always rescind pursuant to s. 6(2) of the Act. In this particular case, the litigation was not understood to be a “material fact” as it would not have affected the purchase price of the franchise. However, as was the case in 2240802 Ontario Inc. v. Springdale Pizza Depot,92 the litigation may have been more appropriately characterized as a “material fact” as it related to a rescission case in which the plaintiff alleged almost identical deficiencies in disclosure as were at issue in the styled proceeding.

Vijh v. Mediterranean Franchise Inc.93 Background

This was an appeal from the decision in Vijh v. Mediterranean Franchise Inc.94 in which the franchisee moved for partial summary judgment arguing that it had a right to rescind under s. 6(2) of the Act because the franchisor, with the consent of the franchisee, delivered its disclosure document by email.95 Section 5(2) of the Act requires that the disclosure document be delivered personally or by registered mail.96

On the partial summary judgment motion, Belobaba J. held that a franchisee had no right to rescind a franchise agreement under s. 6(2) of the Act simply because the disclosure document had been delivered to them by email rather than personally or by registered mail. The appeal of this decision was dismissed.

91 Ibid at paras 35 and 37. 92 2013 ONSC 7288. 93 2013 ONCA 698, 234 ACWS (3d) 101 [Vijh]. 94 2012 ONSC 3845. 95 Ibid at para 1. 96 Ibid at para 2.

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The franchisee argued that any breach of the Act that relates in any way to the disclosure document, including a breach of s. 5(2) would entitle a franchisee to rescission under s. 6(2).97 In support of this argument, the franchisee argued that s. 6(2) should be interpreted to mean, “the franchisee may rescind the franchise agreement even after almost two years if the franchisor never provided the disclosure document as required by the Act.” Thus, if the disclosure document was only provided by email, then the franchisee argued it ought to have a right to rescind under s. 6(2).

Belobaba J. rejected this interpretation given that there are two distinct rights of rescission in the Act. In finding that the franchisee was not entitled to rescission under s. 6(2), Belobaba J. relied on the Ontario Court of Appeal’s decision in 4287975 Canada Inc. v. Imvescor Restaurants Inc.98 where the Court held that not every breach of section 5 justifies rescission under section 6(2). Rather, “the two-year right of rescission is reserved for the more serious scenario in which no disclosure document is provided.”99

Practice Points

The decision to dismiss the franchisee’s appeal reinforces the decision of Belobaba J. and provides additional jurisprudence in respect of determining whether a deficiency in a disclosure document will entitle a franchisee to a rescission under s. 6(1) or s. 6(2). Although this case holds that a minor technical breach of section 5 of the Act may not be sufficient to allow the franchisee to rescind its franchise agreement under section 6(2), franchisors would be wise to deliver their disclosure document personally or by registered mail in order to avoid unnecessary disputes.

Rescission Damages

2189205 Ontario Inc v. Springdale Pizza Depot Ltd.100 Background

This was a motion for directions in relation to a prior proceeding in which Master R. A. Muir had ordered Springdale Pizza Depot Ltd, Ranjit Singh Mahil, and Dilawar Singh Khakh (the “Springdale Defendants”) to pay $226,871.37 under s. 6(6) of the Act to the plaintiffs for supplies and equipment.

The Springdale Defendants claimed that they were not obligated to pay compensation because the equipment was in very poor condition and that the plaintiffs were therefore “unable” to return

97 Ibid at para 5. 98 2009 ONCA 308. 99 Vijh, supra note 93 at para 6. 100 2014 ONSC 530.

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the equipment. The Springdale Defendants attributed the poor condition to its improper removal and storage by the plaintiffs who had stored the equipment in a barn in Caledon since 2009.101


The court held that section 6(6)(c) of the Act makes it mandatory that when a franchisee rescinds, the equipment be repurchased regardless of its condition.102 Furthermore, Master Muir found that the poor condition was caused in part by the Springdale Defendants’ decision to oppose the plaintiffs’ attempts to rescind the franchise agreement “at every step.”103 Master Muir stated that the Act is remedial, that the franchisee is entitled to be made whole, and that there is no duty on the franchisee to mitigate. Furthermore, the Springdale Defendants provided no evidence that the franchisee deliberately damaged the equipment.104

Master Muir found the plaintiffs to be entitled to the $226,871.37 and, upon receipt of payment, were to make the equipment available for pick-up by the Springdale Defendants.

Practice Points

The decision provides additional insight into whether there is an obligation on rescinding franchisees to mitigate damages and preserve equipment and inventory that are the subject of the rescission claim. Parties to a rescission claim may need to take steps to ensure that such assets are preserved and/or purchased by the franchisor during the litigation process.

Definition of “Franchise Agreement” Under the Act

MGDC Management Group Inc. v. Monroe Estate105 Background

MGDC Management Group Inc. (the “Applicant”) sought rescission under the Act of a license agreement entered into with the respondents that licensed the name “Marilyn Monroe” as a trade-marked name for use in the Applicant’s restaurants.106 The applicants argued that the license agreement was a franchise agreement and as such they were entitled to disclosure under the Act. In response, the respondents moved to dismiss the application arguing that the license agreement was not a franchise agreement.

101 Ibid at para 2. 102 Ibid at para 4. 103 Ibid. 104 Ibid. 105 2014 ONSC 4584 [Monroe Estate]. 106 Ibid at para 1.

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Key Issues & Highlights

In article 20(a) of the license agreement both parties—each of whom were sophisticated parties that negotiated the agreement with the assistance of their lawyers—agreed that franchise disclosure laws would not apply in respect of the agreement.107 Further, s. 2(3)5 of the Act provides that the Act does apply to:

An arrangement arising from an agreement between a licensor and a single licensee to license a specific trade-mark, service mark, trade name, logo or advertising or other commercial symbol where such licence is the only one of its general nature and type to be granted by the licensor with respect to that trade-mark, service mark, trade name, logo or advertising or other commercial symbol.108

The Court characterized the agreement as a grant of a “non-transferrable, non-assignable, non-divisible right and license to use the trade-mark "Marilyn Monroe". It is the only license of its general nature and type to be granted by the Respondents with respect to these properties anywhere in the world.”109 Flowing from this characterization, the Court determined that the essential character of the agreement was a trade-mark licensing agreement.110 As such, the Court held that the license agreement nestled cozily into s. 2(3)5 of the Act and that, as such, the Act did not apply.

In obiter, the Court noted that while trade-mark licenses may commonly be present in franchise agreements, there are other essential hallmarks of a franchise agreement that would need to be present in order to bring an agreement under the purview of the Act. For example, one hallmark the Court noted was “the exercise of significant control or significant assistance by the franchisor or the franchisee’s method of operating its business.”111

In the end, Morgan J. dismissed the application and awarded costs to the respondents.112

Practice Points

This decision indicates that a trade-mark license alone is insufficient to constitute being a “franchise agreement” for the purposes of the Act. Parties ought to examine the precise nature of their commercial relationship before seeking to rely on the statutory rights and obligations outlined in the legislation.

107 Ibid at para 4. 108 The Act, supra note 17 at s. 2(3)5. 109 Ibid at para 5. 110 Monroe Estate, supra note 105 at para 10. 111 Ibid at para 14. 112 Ibid at paras 18-21.

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Class Actions

1291079 Ontario Ltd. v. Sears Canada Inc.113 Background

This was a motion to certify a class action lawsuit against Sears Canada Inc. and Sears Roebuck and Co. (together “Sears”) on behalf of persons that had contracts with Sears to operate Sears Hometown Stores (the “Dealers”).114

The thrust of the plaintiff’s claim is that Sears has exploited its contractual relationships with the Dealers such that they cannot sustainably run their Hometown Store businesses. In the claim, the plaintiff alleges the following:

• That the Hometown Store Contracts are franchise agreements within the meaning of the Act and as such the Dealers were entitled to disclosure;115

• That Sears has concealed the economic reality of the Hometown Store program from prospective Dealers;116

• That the Hometown Store program is administered in a way that maximizes the profitability for Sears by downloading the costs associated with running the stores onto the Dealers;117

• That Sears has exercised its unilateral discretionary power under the contracts in bad faith and has failed to alter the agreements in a way that would increase compensation to the Dealers to a sustainable level;

• That Sears has reduced the average retail commission rates paid to the Dealers;118 • That Sears has competed with the Dealers within their exclusive market areas by selling

goods directly to customers who reside therein;119 • That Sears charges an unauthorized handling fee on goods purchased online or by

telephone and which are shipped to the Dealers’ stores; and120 • That Sears has breached its duty of good faith and statutory duty of fair dealing under the

Act to exercise their discretion in a manner which is fair and commercially reasonable.121

113 2014 ONSC 5190. 114 Ibid at para 3. 115 Ibid at para 7. 116 Ibid at para 10. 117 Ibid at para 9. 118 Ibid at para 15. 119 Ibid at para 11. 120 Ibid. 121 Ibid at para 12.

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The plaintiff claims damages pursuant to sections 3 and 7 of the Act. In the alternative, it claims damages for breach of contract including a breach of the duty of good faith and disgorgement of profits unreasonably retained as a result of Sears’ unjust enrichment.

Sears denies having a franchise relationship with the Dealers or that the Dealer commissions have been reduced. Sears further argues that direct sales have been part of Sears’ business for many years and that there is nothing in the Dealer agreements that would preclude this practice.122


With regard to section 5(1)(a) of the Class Proceedings Act, 1992123 (the “CPA”), Sears did not argue that the plaintiffs had failed to plead proper causes of action.124

With regard to section 5(1)(b) of the CPA, the plaintiff argued that the class ought to consist of “all corporations, partnerships and individuals carrying on business as a Sears Hometown Store under a Dealer Agreement with Sears at any time from July 5, 2011 to the date of sending of the notice of certification.”125 The defendants argued that the class definition should exclude all Dealers who entered into Dealer Agreements with knowledge of the action. Gray J. disagreed and found that the class definition as proposed by the plaintiff was satisfactory.126

With regard to sesction 5(1)(c), Sears argued that there was insufficient commonality amongst the proposed class members, noting that determining whether or not Sears’ conduct had a negative impact would require looking at the financial information and external factors that are specific to each Dealer. The Court held that, if the Act applied, there would be common issues as to whether or not Sears complied with the Act.127 While the Court agreed with Sears that there will be individual issues that must be determined, it did not find this to be fatal to the certification motion.128

With regard to section 5(1)(d) of the CPA, the Court found that the individual issues did not overwhelm the common issues and that a class proceeding was therefore the preferable method by which to proceed.129

Sears objected to having the plaintiff act as a class representative arguing that the plaintiff is essentially a shell company with no ability to satisfy a costs order.130 Relying on the Ontario 122 Ibid at para 26. 123 SO 1992, c 6. 124 Ibid at para 32-33. 125 Ibid at para 37. 126 Ibid at para 41. 127 Ibid at para 62. 128 Ibid at para 64. 129 Ibid at para 73. 130 Ibid at para 75.

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Court of Appeal in Pearson v. Inco131 Gray J. refused to disqualify the representative plaintiff in a class proceeding simply on the basis that it does not have the ability to pay costs.132

Ultimately, Gray J. certified the action as a class proceeding.133

Practice Points

The case, should it proceed to trial, will provide further jurisprudence on the issues of disclosure obligations under section 5 of the Act, the meaning of “franchise agreement”, and the content of the duty of good faith and fair dealing under section 3 of the Act.

2038724 Ontario Ltd. v. Quizno’s Canada Restaurant Corporation134 Background

A proposed settlement of the class action brought by Quiznos’ Canadian franchisees against a group of Quiznos franchisor entities (“Quiznos”) and Quiznos’ food and supply distributor Gordon Food Services was rejected recently by Perell J. on the basis that the release in the proposed settlement agreement (the “Settlement”) was overly broad.


Although the Settlement had the ostensible support of all parties and, after a thorough notice procedure, only two out of over 700 class members came forward with any objection, it became evident at the settlement approval hearing that the parties disagreed about the interpretation of the release. Perell J. found that it would be unfair to permit a release of “any and all claims, demands, actions, suits, causes of action, whether class, individual or otherwise in nature, including assigned claims, whether known or unknown, asserted or unasserted, regardless of the legal theory, existing now or arising in the future by any and all of the Plaintiffs or the Class Members, arising out of or relating to the purchase, sale, distribution, promotion or marketing of Supplies (as defined in the Statement of Claim)” and declined to approve the Settlement. This concern was highlighted by one of the two objecting class members who expressed concern that the Settlement would give Quiznos a license to subject his franchise to unfair pricing in perpetuity. While Perell J. found that it would be fair to release existing claims and “claims that are a continuation of the particular existing claims,” it would not be fair to categorically bar all future claims of the types identified in the proposed release.

Perell J. found no other issues with the proposed Settlement, which essentially provided for a release of claims in exchange for payment by the defendants in respect of disbursements incurred by class counsel over the course of the class action. Despite the lack of any direct payment to the Class Members, Perell J. found that “[w]ith the changes in competition law and the chilling effect of Fairview Donut Inc. v. The TDL Group Corp., supra, the Class Members have come to 131 (2006), 78 OR (3d) 641 (CA). 132 Ibid at para 83. 133 Ibid at para 87. 134 2014 ONSC 5812.

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their Dunkirk, and it is time to beat a strategic retreat from the litigation battlefield. But for the release, my opinion is that it would be fair and reasonable and in the best interests of the Class Members to approve the Settlement Agreement.”

Practice Points

The decision highlights a particularly unique challenge in settling franchise class actions, which are often based on claims arising from a system or course of conduct. Where claims are drafted broadly to cover conduct that exists and may continue into the future, such as a method of supplying products to franchisees, franchisor defendants will need comfort that the settlement covers future claims arising from that same system or course of conduct. Perell J.’s decision does not appear to make such a release impossible, but certainly highlights the challenge in crafting an appropriate release in such a scenario.

Arbitration

2296423 Ontario Ltd v. FOF Franchise Corp.135 Background

The franchisee, 2296423 Ontario Ltd. (“229”), entered into a franchise agreement with FOF Franchise Corp. (“FOF”) in 2011. Kuhnel guaranteed the sublease between Perfect Results Flower Corp. (“PRFC”) as sublandlord and 229 as subtenant but was not a party to the agreement.

In 2012, 229 purported to rescind the franchise agreement on the basis of materially deficient disclosure documents. 229 and Kuhnel commenced an action against FOF, PRFC, Wayne Watson, Judith Watson, and Dennis Leroy. Wayne and Judith Watson were being sued as franchisor associates for negligent misrepresentation. Dennis Leroy was being sued as a franchisor’s broker or agent for negligent misrepresentation. Only 229 and FOF were party to the franchise agreement.

The franchise agreement included an arbitration agreement. The defendants moved for a stay of proceedings and referral to arbitration.


The main issue was how the action should proceed given that only one of the defendants was privy to the arbitration agreement.

O’Marra J. noted that it had the discretion to stay proceedings with respect to matters dealt with in an arbitration agreement where some matters arise under the agreement and some do not.136

135 2014 ONSC 4038. 136 Ibid at para 16.

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O’Marra J. also noted that, where one of the parties to an action is not subject to an arbitration agreement and the claim involving the non-party to the arbitration clause and the claim sought to be submitted to arbitration both contain closely related facts and issues in dispute, a partial stay may not be reasonable.137 A party to an action that is not privy to the arbitration agreement has no right to invoke the arbitration agreement under the Act.138

O’Marra J. concluded that the Court should not permit the defendants that were not privy to the arbitration agreement to proceed by way of arbitration. He noted that permitting the franchisor and the franchisee to proceed by way of arbitration would potentially cause a delay in resolving the entire matter, require a duplication of resources, and create inconsistent findings. The Court refused to stay the action and dismissed the motion accordingly.

Practice Points

Arbitration agreements can save franchise parties time and money when resolving disputes but, as this case demonstrates, they can create difficulties when third parties are involved in the dispute. Arbitration provisions should be broadly drafted to ensure that all potential parties to common franchise-related lawsuits are subject to it.

Silininkas v. Purrestore Management Services, Inc. o/a Puroclean Canada139 Background

This case involved Purrestore Management Services, Inc. o/a Puroclean Canada (“Puroclean”), successfully resisting the appeal of an arbitral award by a former franchisee, Vid Silininkas (the “Franchisee”), to the Ontario Superior Court of Justice and having substantially all of the relief granted by the arbitrator enforced by the Court. The arbitration at issue arose from a franchise agreement between the parties for the operation of a “Puroclean” casualty cleaning and restoration franchise. After a dispute arose with respect to the franchisee’s non-payment of royalties, Puroclean exercised its right to terminate the agreement and commenced an arbitration, pursuant to the arbitration provision in the franchise agreement, to enforce the termination and compliance with the post-term non-competition covenant. The Franchisee brought a counterclaim in the arbitration seeking rescission of the franchise agreement. After the Franchisee withdrew from the arbitration process, the arbitrator granted judgment to the Franchisor. The Franchisee appealed this award.


The arbitral award was granted by Arbitrator Peter G. Cathcart, Q.C. of ADR Chambers (“Mr. Cathcart” or the “Arbitrator”) by way of a default judgment after the respondent Franchisee chose to withdraw from the arbitration after he lost a motion to have the arbitrator recuse himself for lack of qualifications. The arbitration agreement required that the arbitrator have at least “10

137 Ibid at para 18. 138 Ibid at para 20. 139 Unreported, 26 September 2014, Toronto CV-14-510567, CV-14-504344, CV-14-506122 (OSCJ).

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years of franchise experience.” Initially, Frank Zaid was appointed as the arbitrator pursuant to the court order obtained by Puroclean. The Franchisee opposed Mr. Zaid’s appointment on the basis that Mr. Zaid’s background meant that he was purportedly biased in favour of franchisors. Although Puroclean disputed the legitimacy of this challenge, it agreed to substitute Mr. Zaid in order to move the arbitration forward.140

After the other named arbitrators in the court order were found to be unavailable, Mr. Cathcart was appointed pursuant to the appointment procedure under the ADR Chambers Rules. The Franchisee then brought another challenge, this time alleging that the arbitrator had insufficient franchise experience to be qualified. After receiving submissions, Mr. Cathcart issued a jurisdictional order finding that he satisfied the 10 year requirement by virtue of his over 40 years of experience as a commercial lawyer, including advising clients on franchise agreements throughout and serving as a panel arbitrator in the National Automobile Dealership Arbitration Program (“NADAP”) which regularly deals with franchise law issues. Following this decision, the Franchisee completely withdrew from the arbitration process, causing it to grind to a halt. As a result, the Arbitrator invited the parties to make submissions with respect to what could be done to advance the proceeding. Puroclean made submissions but the respondent franchisee did not. The Arbitrator set a deadline by which the Franchisee was required to engage in the arbitration process, failing which a default judgment would issue. This ultimately resulted in a default judgment being issued in Puroclean’s favour, which included a declaration enforcing the termination of the Franchise agreement and an injunction enforcing the post-term restrictive covenants and obligations of the franchisee (the “Award”). After the Arbitrator made the Award, the Franchisee applied to the Court to have the Award set aside. Puroclean brought a counter-application to have the Award enforced, as well as a motion for an interim injunction to enforce the non-compete in the event the matter was sent back for further arbitration. The application came before the Honourable Justice Myers for a hearing on September 26, 2014. Myers J. found that, having failed to apply to court within ten days of the Arbitrator’s jurisdictional order, as required under the Arbitration Act, the Franchisee had waived his right to advance the issue of Mr. Cathcart’s qualifications after the final Award was made by the Arbitrator. Further, Myers J. found that, given the Franchisee’s conduct in withdrawing from the arbitration in an apparent attempt to frustrate the process, it was reasonable for the Arbitrator make a default judgment in favour of Puroclean on the basis of the pleadings alone, including awarding costs to Puroclean. Myers J. noted that although the Franchisee “complained mightily” of Mr. Cathcart’s alleged lack of experience, he had also objected to an “arbitrator who had more franchise law experience than perhaps anyone in the province” (Mr. Zaid), evidencing the fact that “there was plainly no satisfying Mr. Silininkas at all stages and in all steps of the arbitration”. Myers J. ordered that the Award be enforced and awarded $15,000 in costs to Puroclean, in addition to those costs already awarded by the Arbitrator.

140 The Franchisor had previously been compelled to move for the appointment of an arbitrator due to the Franchisee’s failure to engage in the arbitration process.

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Practice Points

The decision provides some support for the proposition that when a franchise party is engaged in arbitration with an unwilling counterparty, the Courts are ready and willing to enforce awards made in the context of transparent attempts to frustrate and delay the arbitral process.

Franchisors and the Employer-Employee Relationship

Lindsey v. McDonald’s Restaurants of Canada Limited141 Background

The applicant, Melanie Lindsey, alleged that Manna Foods Inc. (“Manna”) and McDonald’s Restaurants of Canada Limited (“MRCL”) discriminated against her because her employer’s policy requiring part-time employees to be available for midnight shifts had an adverse effect on her due to her child care obligations.

MRCL applied for an order removing it from the main application on the grounds that Manna, and not MRCL, was the employer. MRCL claimed that it does not participate in or control Manna’s daily operations and only provides operational support.


The Human Rights Tribunal (the “Tribunal”) found MRCL’s claims to provide an insufficient basis for removing it and that its application was premature. MRCL’s liability is based on whether it is legally responsible for the policies that Lindsey alleged were discriminatory and whether the franchise agreement, or Manna’s exercise of its obligations under that agreement, were a factor in any discrimination experienced by Lindsey. MRCL may also be liable if the discrimination can be connected to the “operational support” to which MRCL alluded.

The Tribunal explained that, for these issues to be adequately addressed, MRCL’s liability must be determined following evidence and argument at the hearing.

Practice Points

The Tribunal appeared to be reluctant to dismiss the applicant’s claim against the franchisor without any evidence as to the relationship between the franchisor and the applicant. The mere claim that MRCL was removed from its franchisee’s daily operations was insufficient to convince the Tribunal that MRCL could not have contributed to any alleged discrimination. A franchisor may have to provide clear and specific information regarding the relationship it has with its franchisees and their employees that addresses the alleged discrimination if it hopes to avoid being added as a party to a discrimination claim.

141 2014 HRTO 372 [McDonald’s].

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Lake v. 1627325 Ontario Ltd. o/a Best Western Sword Motor Inn142 Background

Angus Lake (“Lake”) alleged that his employer, Best Western Sword Motor Inn (the “Sword Motor Inn”) discriminated against him. He then requested to add Best Western International Inc. (“BWI”) as a corporate respondent on the basis that BWI is vicariously liable for Sword Motor Inn’s discrimination for failing to ensure that human rights training and awareness was provided to the hotel management.

Lake claimed that BWI was the franchisor of the Sword Motor Inn. BWI claimed that it did not have a franchisor-franchisee relationship between itself and its hotels or between itself and the owners of its hotels.


The Tribunal stated that the relevant section of the Human Rights Code is section 46.3(1), which states:

For the purposes of this Act, except subsection 2(2), subsection 5(2), section 7 and subsection 46.2(1), any act or thing done or omitted to be done in the course of his or her employment by an officer, official, employee or agent of a corporation, trade union, trade or occupational association, unincorporated association or employers’ organization shall be deemed to be an act or thing done or omitted to be done by the corporation, trade union, trade or occupational association, unincorporated association or employers’ organization.

Based on that section, the Tribunal concluded that BWI would be held vicariously liable if the owner and manager of the Sword Motor Inn was BWI’s employee.

The Tribunal also looked at KLB v. British Columbia,143 where the Supreme Court stated that a successful claim for vicarious liability requires demonstrating that the relationship between the tortfeasor and the person against whom liability is sought is sufficiently close as to make a claim for vicarious liability appropriate, and that plaintiffs must demonstrate that the tort is sufficiently connected to the tortfeasor’s assigned tasks that the tort can be regarded as a materialization of the risks created by the enterprise.

The Tribunal explained that “whether or not BWI is a franchisor is not determinative of the issue of potential legal liability.” The Tribunal emphasized that vicarious liability is based on the substance – not the form – of the relationship between the parties. The substance of the relationship is defined by the contract between the parties and the way in which the contract is implemented in practice.

The Tribunal found that the control exercised by BWI over Lake was with respect to standards and marketing issues, neither of which was related to the allegations of discrimination at issue. The allegations were related to employment issues over which BWI had no control. 142 2014 HRTO 73 [Best Western]. 143 2003 SCC 51, 2 SCR 403.

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Practice Points

Best Western provides a useful contrast to McDonald’s above. The Tribunal noted that the only method by which the franchisor could be found liable in this instance was through vicarious liability. Because BWI was able to provide sufficient evidence to show that its relationship with its hotel operator was such that it could not be found vicariously liable, the Tribunal was willing to exclude BWI from the discrimination suit.

Rescission (Non-Statutory)

Ma v. Nutriview Systems Inc.144 Background

A franchisee, Harry Ma (“Ma”), brought an action against a franchisor, Nutriview Systems Inc (“Nutriview”) and its principal Brian Thurston (“Thurston”) alleging fraud, misrepresentation, breach of contract, and breach of the Sale of Goods Act.145

Ma had entered into a franchise agreement with Nutriview to acquire the right to operate Nutriview’s vending machine business in several schools in exchange for approximately $435,000.

Prior to entering into the agreement, Thurston made several representations to Ma regarding the business. Thurston claimed that the vending machines would have interactive screens with corporate logos that would provide advertising revenue and that the level of product in each machine could be monitored remotely. Thurston also told Ma that he had a corporate sponsorship agreement with EA Sports and that he had deals with several food and beverage suppliers whereby he could obtain their products at lower rates. Thurston guaranteed Ma that, if Ma was dissatisfied with the business after a year, Thurston would purchase the business back for the full purchase price.

Ma signed the franchise agreement and subsequently encountered many problems running the vending machine business. He had difficulties obtaining products and was unable to deliver the level of sales he had promised to his school clients. After almost a year, Ma elected to sell the business back to Thurston. Thurston, however, declined to buy back the business and denied having had made any promise to that effect.

The franchise agreement with Nutriview did not incorporate any of the above representations into its terms. It did, however, contain an “entire agreement” clause which the franchisor and Thurston attempted to rely on to shield themselves from liability to the franchisee. Furthermore, Thurston discouraged Ma from obtaining legal advice prior to signing the franchise agreement.

144 2014 BCSC 725. 145 RSBC 1996, c 410 [Nutriview].

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The Court found that no cause of action arose out of Thurston’s advice to Ma not to obtain legal advice prior to signing the franchise agreement. Kelleher J. noted that the only possible cause of action that could arise from that bad advice would be negligent misrepresentation. Kelleher J. found, however, that Thurston did not owe Ma the requisite duty of care. “[T]he imposition of a duty of care on arm’s length negotiating parties does not extend to the protection of Mr. Ma’s legal and/or economic interests.”146

Kelleher J. discussed the nature of the relationship between franchisor and franchisee. He noted that courts have recognized a common law duty of good faith, but not a fiduciary duty, between a franchisor and a franchisee.147 This common law duty is one of “simple good faith”148 that “requires parties to deal honestly and reasonably with each other, but permits the parties to act in their own self-interest.”149

The Court noted that the “entire agreement” clause has the effect of excluding a party’s liability for misrepresentations that are not part of the written agreement with the exception of fraudulent misrepresentations.150 Many of the false representations that Thurston made to Ma did not amount to fraudulent misrepresentations. Kelleher J. explained that an unmet promise to perform in a particular way does not become fraud.151 The proper way to obtain damages resulting from an unfulfilled promise to perform is by advancing a breach of contract; however, Ma had couched his claims in terms of fraudulent misrepresentation.

Amongst Thurston’s misrepresentations, Kelleher J. found three to satisfy the criteria for fraudulent misrepresentation: (1) the existence of a sponsorship agreement, (2) the agreements with suppliers for preferred pricing, and (3) the buy back guarantee.

As a result, Ma was entitled to rescind the contract and obtain a refund of the $435,000 he paid for the franchise.

Practice Points

It is important for franchisors to remember that an “entire agreement” clause will not shield them from liability for any fraudulent misrepresentation that they have made to a prospective franchisee, even if the representation does not find its way into the franchise agreement.

146 Ibid at 169. 147 Ibid at 182. 148 Ibid at 184. 149 Ibid at 185. 150 Ibid at 178. 151 Ibid at 187.

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Legislation

British Columbia After months of consultation with industry stakeholders, the British Columbia Law Institute (“BCLI”) issued its Report on a Franchise Act for British Columbia (the “Report”) on March 31, 2014, which makes a recommendation to the Government of the Province of British Columbia to enact franchise legislation in that province. In the Report, the BCLI has recommended that British Columbia should enact franchise legislation similar to the legislation already in force in five other Canadian provinces: Alberta, Ontario, New Brunswick, Prince Edward Island, and Manitoba. The Report’s main recommendations are as follows:

• British Columbia should enact franchise legislation based generally on the franchise legislation already in force in other Canadian provinces;

• Disclosure documents should be valid if they are in substantial compliance with the legislation and regulations, and minor defects should not lead to a rescission right by franchisees;

• Fully refundable deposits prior to disclosure should be permissible, limited to an amount prescribed by regulation;

• Delivery of a disclosure document by electronic means such as e-mail, or delivery of a disclosure document in machine-readable form (such as a DVD disk), should be expressly permitted;

• A franchisee’s statutory right to sue for misrepresentation should extend to misleading statements made in a financial projection supplied by the franchisor before a franchise agreement is signed, unless the projection contains cautionary language similar to that required by securities legislation in forward-looking statements;

• “Wrap-Around” disclosure documents should be permissible; • The legislation should contain statutory language that forces all litigation concerning the

franchise (including arbitrations), whether statutory or otherwise, to take place in British Columbia in order to prevent the potential splitting of cases; and

• The statutory bar to waiving or releasing a right under the legislation should not prevent a waiver or release that is part of a post-dispute settlement.

Other more detailed recommendations as to the contents of a compliant disclosure document are also included in the Report.

On September 10, 2014, the Government of British Columbia launched a consultation on a proposed Franchises Act based on the Uniform Franchises Act which was developed by the Uniform Law Conference of Canada and the recommendations of the Report. The Government of British Columbia has issued an invitation to all stakeholders and members of the public to submit comment on the proposed act until December 10, 2014. Upon completion of the consultation, Ministry of Justice staff will review the comments and provide recommendations for proposed new legislation.

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