CFA LAW DAY, SEPTEMBER 26, 2017

THE LAST WORD ON FRANCHISE LAW: LESSONS FOR BUSINESSES ARISING FROM CANADIAN APPELLATE COURT DECISIONS

PRESENTERS: JENNIFER DOLMAN, OSLER, HOSKIN & HARCOURT LLP AND JEAN-MARC LECLERC, SOTOS LLP1

Summary of Ontario Court of Appeal cases addressing the Arthur Wishart Act

Case Name Facts Issues/Finding Topics 1 Trillium Motor

World Ltd. v General Motors of Canada Limited, 2017 ONCA 545

Franchisor GMCL had a plan to reduce its dealership network in Canada during financial crisis. It delivered non-renewal wind down agreements (“WDAs”) to 240 dealers offering to provide payment in exchange for a release of all claims, including claims under the AWA. The WDAs stated that dealers were required to respond within 6 days and obtain a certificate of independent legal advice. A class action brought on behalf of franchisees claimed that the WDAs breached common law and statutory obligations to class members. GMCL contended that it had complied with the AWA, and that the proceedings were barred by the releases in the WDA. The trial judge held that GMCL had acted honestly, fairly, and consistent with the AWA. The judge further held that the releases in the WDA barred the class action. However, the judge held that a

Issue(s): (1) Was the waiver and release in the WDA void and unenforceable under s. 3 and s. 11 which proscribe a duty of good faith and fairness and restrict the waiver of franchisees’ rights and franchisors’ obligations? (2) Did the trial judge err in giving effect to the release by severing 5(c)? Held: Appeal dismissed. (1) The Court found that GMCL had complied with its s. 3 obligations, stating that s. 3(3) states that the duty of good faith requires the franchisor to act “in good faith and in accordance with reasonable commercial standards.” GMCL’s decision to downsize was rational and made under intense time pressure, and its actions were fair under the circumstances. Thus, the release was consistent with s. 3. The Court also noted that s. 11, which renders void any purported waiver or release of rights under the AWA imposed on the franchisee by the franchisor, did not render the release unenforceable. The Court pointed to the ONSC decision in 1518628

Waiver of rights (s. 11) Fair dealing (s. 3) Right of Association (s. 4)

1 The presenters acknowledge the help of Graham Buitenhuis, Articling Student-at-Law, Osler, Hoskin & Harcourt LLP who assisted with the Ontario summaries, and

Alexander Dos Reis, Articling Student–at-Law, Sotos LLP who assisted with the Alberta and Quebec summaries.

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Case Name Facts Issues/Finding Topics covenant not to sue GMCL and requiring the dealers to opt out of any class proceedings violated the franchisees’ s. 4 right of association and thus held that this provision (clause 5(c) ), was unenforceable. The franchisees appealed.

Ontario Inc. v. Tutor Time Learning Centres LLC for the proposition that “a voluntarily-negotiated settlement of existing statutory claims, entered into with the benefit of legal advice, in settlement of a dispute for existing and known breaches of the Act is not caught by s. 11.” The release met the above requirements, and thus the release was enforceable. (2) The Court held that there was no palpable and overriding error in the trial judge’s finding that clause 5(c) of the WDA was void but severable for violating franchisees’ s. 4 rights to association, including their right to collective action to protect their rights under the AWA.

2 Mendoza v Active Tire & Auto Inc., 2017 ONCA 471

Franchisee entered into franchise agreement with franchisor. Franchisee provided notice of rescission under s. 6(2) alleging deficient disclosure (only one officer signed the certificate, the most recent financial statements were not provided on time and the franchisor failed to deliver all documents at one time). The trial judge held that while the disclosure was deficient, the deficiencies were not significant or misleading, and the franchisee was thus able to make an informed decision about entering into the franchise agreement. Thus, the judge held that disclosure had been made. The Franchisee appealed.

Issue(s): Was the franchisee entitled to rescission for lack of disclosure? Held: Appeal allowed. The Court confirmed that the test for rescission under section 6(2) of the AWA, as stated by the ONCA in 6792341 Canada Inc. v. Dollar It Ltd, is whether the disclosure document was “materially deficient.” Where a disclosure document is materially deficient, no disclosure has been made under the AWA. The Court firmly rejected the lower courts subjective approach to the adequacy of disclosure, one that looked to whether the franchisee had made an “informed decision” instead of objectively assessing whether the disclosure document was materially deficient. While the Court noted that the franchisee was an experienced purchaser, it explained that there were

Disclosure (s. 5); Rescission (s. 6(2))

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Case Name Facts Issues/Finding Topics a number of material deficiencies in the franchisor’s purported disclosure. First, the franchisor failed to provide a disclosure certificate signed by two officers or directors. This requirement is important because it gives the franchisee recourse against the signatories in case of any misrepresentation in the documents. Second, the franchisor failed to provide its most recent financial statements within the timeframe required under the AWA and its regulations. Finally, the franchisor had provided information to the franchisee in a piecemeal fashion, rather than in a single disclosure document as required. The Court concluded that in light of these significant deficiencies, the franchisee had not received a disclosure document within the meaning of the AWA. The Court also emphasized that even when franchisees have not studied the contents of the disclosure document, they are nevertheless entitled to rely on it. The Court stressed that a franchisor’s disclosure obligations are not contingent on how a particular franchisee happened to act or react upon receipt of a disclosure document.

3 Addison Chevrolet Buick GMC Limited v General Motors of Canada Limited, 2016 ONCA 324

As a result of GM restructuring, GM sent letters to the franchisee dealers stating that they would not be closing should they agree to certain conditions. Franchisee’s signed sales and service agreements, which GM USA was not party to. The Franchisee’s alleged that GM US and GMCL breached their duty to act fairly and in good faith under the AWA and at

Issue(s): (1) Was it plain and obvious that GM US was not a franchisor’s associate under the AWA? (2) Was it plain and obvious that GM US could never owe a duty of good faith under the AWA or common law as a franchisor’s associate? Held: Appeal allowed. (1) the Court found that the claims as pleaded asserted that GM US exercised control over the franchisees through its control of GMCL. Moreover, the franchisees owed GM US

Fair Dealing (s. 3) Definition of “franchisor's associate” (s. 1)

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Case Name Facts Issues/Finding Topics common law. They allege that GM US and GMCL preferred their own profit to the dealers’ interests through changes in vehicle offerings, pricing, and a lack of financial help. Also, the appellants alleged that GM US financially assisted US dealers, yet ignored its duty to the GTA dealers. GM US brought a motion to strike on the grounds that it was not a franchisor and thus owed no duty of good faith under the AWA. The Court struck both the claim. Franchisee’s appealed.

continuing financial obligations. Thus, it was not plain and obvious that GM USA was not a franchisor's associate under s. 1. (2) The Court rejected the trial judge’s decision that even if GM US was a franchisor’s associate, it could never owe a duty of good faith to the franchisee as it was not a party to any franchise agreement. The Court stated that it is not plain and obvious that a parent company with significant control of the market and terms of the franchise agreement will never be considered a party to the franchise agreement. Moreover, the Court held that there is little appellate authority on the scope of s. 3, and the existing case law is unsettled. Thus, the Court held that it was inappropriate to decide the case on a motion to strike. The Court also stated that it was not plain and obvious that GM US could not owe a common law duty to act in good faith despite the lack of a contractual relationship. The court said that “whether the level of control alleged and the special obligations owed in the context of a franchise relationship could open the door for the imposition of a common law duty is an novel argument that should be explored at trial.”

4 MEDIchair LP v DME Medequip Inc., 2016 ONCA 168

Franchisees were subject to restrictive covenant in the franchise agreement that prohibited them from operating any similar business within a 30-mile radius for 18 months. The franchisor was sold to Centric. Centric

Issue(s): (1) Did the franchisor have a legitimate interest that entitled it to protection by the restrictive covenant? (2) Was the franchisee entitled to a franchise disclosure document under the AWA? Held: Appeal allowed. (1) The Court found that a

Restrictive covenants in franchise agreements; Competition Disclosure (s. 5)

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Case Name Facts Issues/Finding Topics also bought a group of 24 other stores similar to MEDIchair stores. One operated within the protected territory, and competed with a MEDIchair store. Franchisees chose not to renew franchise agreement when it expired, but instead continued to operate their business under a different name at the same location. Franchisor brought an application to enforce the covenant and was successful at trial. The franchisees appealed.

franchisor was not entitled to enforce a restrictive covenant where there was clear evidence it had no intention of operating within the protected geographic area. It stated that by deciding not to operate in the area in question, the franchisor had acknowledged that there was no legitimate or proprietary interest within the defined scope of the covenant. (2) The Court also looked at whether the application judge erred by holding that MEDIchair, the original franchisor, was required under the AWA to provide the appellants with a franchise disclosure document when they originally purchased the franchise. The Court upheld the trial judge’s finding that disclosure was not required under the exemption in 5(7)(a)(iv), as the franchisor was not deeply involved in the sale of the franchise, but had merely approved the sale and accepted a transfer fee. The Court rejected the franchisee’s additional argument that, having provided partial disclosure, the franchisor was thereby required to provide full disclosure in compliance with s. 5

5 2256306 Ontario Inc. v Dakin News Systems Inc., 2016 ONCA 74

Plaintiff franchisee operated a news kiosk under the Dakin News franchise system. In 2011, plaintiffs purchased news kiosk from third party. The franchise agreement had expired in 2010, but the franchisee had continued to operate the business on a month to month basis. The franchisor notified the parties that it required $10,000 transfer fee and would need to approve the transfer of the franchise. However, the sale closed without payment of the fee or the

Issues: Was the franchisee entitled to disclosure? Held: Appeal dismissed. The Court of Appeal affirmed that the franchisee has the right to rescind its franchise agreement for lack of disclosure. The franchisor had required the new franchisee to execute a new franchise agreement after it had purchased and operated the business. Thus, the franchisor was precluded from arguing that a franchise agreement was already in place, thereby exempting it from the disclosure requirement

Disclosure (s. (7)) Rescission s. 6

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Case Name Facts Issues/Finding Topics franchisor’s approval. The new franchisor took over the kiosk and paid royalties to defendant. After discovering that the new franchisee had taken over the business, the franchisor required the new franchisee to execute a franchise agreement, but did not provide any disclosure document. The franchisee sought to rescind the franchise agreement for lack of disclosure and brought a motion for summary judgment. The franchisor argued it was exempt from the disclosure requirements under s. 5(7)(a). The motions judge allowed the motion. The franchisor appealed.

under the exception in 5(7)(a)(iv).

6 1250264 Ontario Inc. v Pet Valu Canada Inc., 2016 ONCA 24

Pet Valu franchisees brought a class action against franchisor. As part of that class action, the motions judge held that the franchisor had breached s. 3 of the act by representing to franchisees that it received “significant volume discounts” and had breached that representation. The franchisor appealed.

Issue(s): While there were a number of issues relating to class actions on appeal, the chief franchise question on appeal was the following: Did the motion judge err in holding that the franchisor breached s. 3 of the AWA? Held: Appeal allowed. The Court found that even if the franchisor had breached a representation that it received significant volume discounts, there was no breach of s. 3. If the information about volume discounts was relevant, it ought to have been disclosed prior to the execution of the franchise agreement under the disclosure requirements in s. 5. The court stressed that s. 3 imposes a duty of fair dealing in the performance and enforcement of the franchise agreement. As the non-disclosure did not

Disclosure (s. 5) Fair Dealing (s. 3)

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Case Name Facts Issues/Finding Topics adversely affect the franchisees once they were franchisees, there was no breach of the duty of good faith. Moreover, the Court restated the holding in Spina v Shoppers Drug Mart Inc, where the ONSC stated that s. 3 does not require the disclosure of information necessary for franchisees to verify compliance with the franchise agreement. This case clarifies and narrows the scope of the duty of good faith and fair dealing imposed on franchisors under s. 3 of the Act.

7 Caffé Demetre Franchising Corp. v 2249027 Ontario Inc., 2015 ONCA 258

Franchisees claimed rescission of the franchise agreement for non-disclosure for failing to disclose ongoing litigation by the franchisor against a competing business. The franchisor brought a motion for partial summary judgment to dismiss the rescission claim. The motions judge granted the motion. The Franchisees appealed.

Issue(s): Did failing to disclose the litigation against a competing business render the disclosure materially deficient? Held: Appeal dismissed. The Court noted that neither the AWA nor its regulations require all ongoing litigation to be disclosed. All litigation against a franchisor based on unfair or deceptive practices or violating a law regulating franchises or businesses must be disclosed under s. 2 of the regulations. However, the Court held that whether other types of litigation are material, and therefore must be disclosed, is a question of fact determined on a case by case basis. The Court found that the litigation in this case was not material as “it was a protective measure taken by the franchisor at the request of and for the benefit of the franchisees, did not constitute a potential liability that might attach to the franchise system and would not financially impact” the franchisee. Moreover, the Court ruled that even if this omission did amount to a deficiency, this would fall well short of the type of deficiency that would

Disclosure (s. 5) Rescission (s. 6)

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Case Name Facts Issues/Finding Topics render the document no disclosure at all under s. 6(2).

8 2240802 Ontario Inc. v Springdale Pizza Depot Ltd., 2015 ONCA 236

Franchisees claimed disclosure document was deficient and sought recession under s. 6(2). The motions judge granted rescission on a motion for partial summary judgment. The franchisor appealed.

Issue(s): were the disclosure materials sufficiently deficient that there was no disclosure under s. 6(2)? Held: Appeal dismissed. The Court held that the disclosure materials were so deficient that they amounted to no disclosure at all. First, the financial statements delivered were unaudited and contained qualifying language. This was found to be in clear violation of Section 3(1) of O Reg 581/00, which requires financial statements to be either audited or “prepared in accordance with generally accepted accounting principles that are at least equivalent to the review and reporting standards applicable to review engagements set out in the Canadian Institute of Chartered Accountants Handbook.” Thus, the financial statements were deficient under the AWA. The Court held that this deficiency alone was sufficient to ground a finding that no disclosure had been made within the meaning of s. 6(2). Second, the disclosure document included a certificate that was signed by only one officer of the franchisor in contravention of the requirements under the regulations. Finally, the franchisors had failed to disclose the fact that it was involved in litigation against another franchisee for rescission due to deficient

Disclosure (s. 5)

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Case Name Facts Issues/Finding Topics disclosure. This was found to be both the type of litigation that must be disclosed under s. 2(5) of the regulations as well as a material fact that ought to be disclosed under s. 5(4).

9 2176693 Ontario Ltd. v Cora Franchise Group Inc., 2015 ONCA 152

Franchisees brought a claim against the franchisor alleging various breaches of the AWA. In seeking to mitigate their damages, the franchisees sought to sell their franchise and assign the franchise agreement to third parties. However, the franchise agreement required a franchisee seeking to assign its rights to release the franchisor from all claims against the franchisor as a condition precedent to receiving consent for the transfer. The franchisees sought a declaration that the release requirement was void and unenforceable as it conflicted with s. 11 of the AWA, which prohibits the franchisor from forcing a franchisee to waive its rights under the Act. The application judge granted the declaration and found the release void and unenforceable. The franchisor appealed.

Issue(s): Was the release enforceable? Held: Appeal dismissed. The Court found that the release provision required the franchisee to provide a general release of all claims, including claims under the AWA contrary to s. 11. The Court found that the clause could not be severed or read down and enforced only to extent it was not in conflict with s. 11 of the AWA. The release in the agreement was general release, and included the release of rights under AWA; it was therefore caught by s. 11. The court found that the agreement was unenforceable, but not void, as the clause was not itself a release, but merely required the franchisee to execute a release on assignment of the contract. The Court also refused to read down the release. The Court held that the severance suggested by the franchisor was contrary to the policy behind s. 11, which serves to protect franchisees from abuse by more sophisticated franchisors. The Court held that enforcing the clause requiring a general release “raises the potential for abuse by franchisors.” It further stated that while the franchisees would receive a windfall in that they would not need to release their common law claims (which would be permitted under s. 11), the extent of the windfall was difficult to assess as common law and AWA claims relating to misrepresentation overlap significantly. The Court

Waiver (s. 11)

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Case Name Facts Issues/Finding Topics ruled that the potential windfall did not outweigh the potential for abuse by franchisors if the clause was enforced, thus it refused to sever the clause.

10 2147191 Ontario Inc. v Springdale Pizza Depot Ltd., 2015 ONCA 116

Franchisees accepted assignment of franchise business from existing franchisee. Defendant franchisors approved the transaction. The franchisee and the franchisor met several times before the agreement was signed and the franchisor required an acknowledgement of additional protection from the prospective franchisee. The franchisee purported to rescind franchise agreement for lack of disclosure. The motion judge granted rescission. The franchisor appealed.

Issue(s): was the franchisor exempt from disclosure under s. 5(7)(a)(iv) of the AWA? Held: Appeal dismissed. In a brief decision, the Court found that the franchisor was actively involved in the resale process between the former franchisee seller and new franchisee purchaser. The Court endorsed the lower court’s decision that by leading the parties to believe it would require a new franchise agreement, meeting the prospective franchisee on a number of occasions, and requiring extra consideration limiting the prospective franchisee’s rights, the franchisor could not claim to be passive in the sale. Thus, the franchisor was required to provide to the purchaser an adequate disclosure document and could not avail themselves of the resale exemption from disclosure provided in s. 5(7)(a)(iv) and s. 5(8) of the Act.

Disclosure (s. 5) Rescission (s. 6)

11 Vijh v Mediterranean Franchise Inc., 2013 ONCA 698

With franchisee's consent, the mandated disclosure document was delivered by email. Almost two years later, franchisee brought motion for partial summary judgment for rescission of the franchise agreement alleging that no disclosure had been provided within the meaning of s. 6(2). The motions judge dismissed the motion for summary judgment, holding that rescission under s. 6(2) is only available where there is no disclosure document or the document is materially deficient, not where there was merely

Issue(s): was the disclosure provided to the franchisee so deficient that there was no disclosure under s. 6(2)? Held: Appeal dismissed. In a very brief decision, the Court ruled that the question of whether franchisor provided a disclosure statement must be determined by examining the deficiencies, if any, in the material actually delivered. The court remitted the issue of whether the franchisor complied with the content requirements of the AWA to trial.

Disclosure (s. 5) Rescission (s. 6)

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Case Name Facts Issues/Finding Topics improper delivery. The franchisee appealed.

12 Zwaniga v Johnvince Foods Distribution LP, 2013 ONCA 271

The respondent, Johnvince Foods Distribution, entered a supply agreement with Revolution Food Technologies Inc “Revolution”) whereby the respondent would supply Planters products while Revolution would be granted a license to display such products. Revolution set up a vending machine program, selling the machines to distributors who were members of a buying group to purchase products through Revolution. The respondent brought a motion for summary judgment to dismiss the plaintiffs’’ proposed class action on the grounds that it was not a franchisor. For the purposes of the summary judgment motion, it was assumed, but not decided, that Revolution’s distributorship program had created a franchise relationship between the plaintiffs and Revolution. The motion was granted

Issue: Was the supplier a franchisor’s associate within the meaning of s 1(1) of the AWA? Held: Appeal dismissed. Respondent did not directly or indirectly control Revolution for the purpose of the definition of “franchisor’s associate” in the AWA. The provisions in the supply agreements merely protected supplier trademarks. A supplier, even an important one, is not a franchisor’s associate absent control.

Definition of franchisor’s associate (s. 1)

13 3574423 Canada Inc v Baton Rouge Restaurants Inc., 2013 ONCA 39

The franchisee owned a Baton Rouge franchise in the Eaton Centre. It had a right of first refusal over the next franchise in the Greater Toronto Area. After passing on a new franchise in Thorn Hill, the franchisee brought an action for damages claiming that the franchisor breached its duty of fair dealing under s. 3 of the AWA by providing inadequate disclosure about the new franchise by withholding the final lease and the size of the territory for the new location. The trial judge dismissed the

Issue(s): did the franchisor provide adequate disclosure about the new Thornhill franchise? Held: Appeal dismissed. The terms of the final lease were not materially different from those contained in the offer to lease. The changes were minor and would not have affected the appellant’s decision. Similarly, the size of the Thornhill territory was not unusual or inconsistent with other suburban locations. The Court further held that it was not a significant factor, otherwise the franchisee could easily have followed up on the

Fair dealing (s. 3)

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Case Name Facts Issues/Finding Topics action. The franchisee appealed. size of the territory. Seeking additional

information would have made commercial sense. The Court also noted that the extensive prior dealings between the parties informed the standard of fair dealing in this case.

14 2130489 Ontario Inc v Philthy McNasty’s (Enterprises) Inc., 2012 ONCA 381

Husband and wife franchisees entered into two separate franchise agreements with franchisor. The husband entered into the first agreement, while the wife entered into the second agreement two years later to secure a bank loan. The franchisor provided a disclosure document for the first agreement but not the second. The Franchisees served a Notice of Rescission of the second agreement on September 23, 2009, while the respondents denied liability and claimed that the notice was out of time. Franchisees commenced their application on November 29, 2010. The trial judge held that the second agreement was a franchise agreement, thus disclosure was required under the AWA. The trial judge further found that the application was not time barred. The franchisor appealed.

Issue(s): (1) was the second agreement a franchise agreement within the meaning of s. 1(b) of the AWA. (2) Was the application time barred by the limitations periods in the AWA and the Limitations Act? Held: Appeal dismissed. (1) The second agreement altered the relationship between the franchisee and franchisor as control of the corporate franchisee changed to the wife, and the wife became a guarantor of the corporate franchisee’s obligations under the second agreement. Thus, it was a franchise agreement triggering disclosure obligations. (2) The franchisee’s claim was not time barred because it only discovered the claim on November 3, 2009, when the franchisor delivered its letter denying liability. The court noted that a franchisee has no cause of action until either (a) the 60 day period for the franchisor to respond to a Notice of Rescission has expired or (b) when the franchisor communicates its refusal to pay compensation to the franchisee. Thus, the 2 year limitation period in the Limitations Act cannot begin to run until one of these events occurs.

Definition of Franchise Agreement (s. 1(1)) Disclosure and Rescission (ss. 5-6)

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15 TA & K Enterprises Inc v Suncor Energy Products Inc., 2011 ONCA 613

The franchisee entered into a retail franchise agreement (“RFA”) for a 1 year term with no franchise fee. The franchisor had not provided disclosure to the franchisee. The franchisee purported to rescind the agreement for lack of disclosure and commenced a proposed class action alleging the right to rescind and demanding a refund. Franchisor brought a motion for summary judgment on the ground that no disclosure document was required. The motion was allowed and the franchisee appealed.

Issue(s): (1) was the RFA valid for a term of over 1 year, thus making it ineligible for the exemption for disclosure under 5(7)(g)(ii)? (2) Did the royalties payable to the franchisor count as a franchise fee, thus making the RFA ineligible for the disclosure exemption? Held: Appeal dismissed. (1) The franchisor was exempt from disclosure under 5(7)(g)(ii). The Court rejected the franchisee’s arguments that the RFA was valid for a term of more than 1 year. Signing the RFA before it went into effect did not extend its term, as the relevant time period is the time during which the franchisee bears rights and obligations under the agreement. The confidentiality and indemnity provisions did not extend the term of the agreement, though the obligations extended beyond the one year term. Properly understood, the terms would continue only if the RFA had terminated or expired. The over holding provision in the RFA did not extend the term of the agreement as it merely created the possibility of a month-to-month tenancy after the RFA expired. Similarly, the franchisor’s letter informing the franchisee that, upon expiry of RFA, it would extend it month-to-month did not make the RFA valid beyond the 1 year term, as it created a new monthly agreement. (2) The RFA did not include a franchise fee. The court defined a franchise fee as “in the nature of a fee paid for the right to become a franchisee” and explicitly stated that royalties do not constitute a

Disclosure exemption: (s. 5(7)(g)(ii)) Meaning of “valid for a term longer than one year” and “franchise fee”

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Case Name Facts Issues/Finding Topics franchise fee.

16 2189205 Ontario Inc v Springdale Pizza Depot Ltd., 2011 ONCA 467

The franchisee contacted the franchisor to inquire about acquiring a franchise and was directed to an existing franchise available in Milton. The franchisee purchased the franchise, executing an Assignment of Franchise Agreement along with a number of related documents. Several months later, the franchisee served the franchisor with Notice of Rescission. The motion judge granted partial summary judgment, stating that the agreement was validly rescinded and that the franchisor was liable for damages. The franchisor appealed.

Issue(s): Was the franchisor exempt from the AWA’s disclosure obligations under the resale exemption? Held: Appeal dismissed. Court noted that under the AWA the disclosure exemption is not available where the grant of the franchise is “effected by or through the franchisor.” The Court noted that the franchisor directed the franchisee to the particular franchise, was involved in negotiations for the transfer, and required the franchisee to sign additional documents beyond those that were signed by the vendor of the franchise. The Court found that these various circumstances together supported the motion judge’s conclusion that the grant was effected by or through the franchisor. Thus, the exemption was not available.

Resale exemption for disclosure (ss. 5(7)(a)(iv) and 5(8)(a)). Meaning of grant “effected by or through a franchisor”

17 MBCO Summerhill Inc v MBCO Associates Ontario Inc., 2011 ONCA 236

Franchisee rescinded franchise agreement alleging deficient disclosure documents. Motion judge granted motion for summary judgment, holding that the disclosure documents were so deficient that it amounted to no disclosure at all. The judge further ruled that defendants Elian, who was directly involved in the grant of the franchise, and MBCO Rosedale, who had a sublease and other agreements (which were held to be franchise agreements) were franchisor’s associates and were thus also liable.

Issue(s): (1) was Elian a franchisor’s associate? (2) was MBCO Rosedale a franchisor’s associate? Held: Appeal allowed in part. (1) Elian was found to exercise significant control over the franchisor. Elian owned 50% of the shares of the franchisor, ran the franchisor’s day to day business in Ontario, and negotiated on behalf of the franchisor in franchise agreements. This was sufficient to ground a finding that Elian was a franchisor’s associate. (2) The Court held that the motion judge did not point to any evidence for finding that MBCO Rosedale exercised significant operational control over the franchisee. A bare sublease imposing an obligation to pay rent is not, without more,

Definition of franchisor’s associate (s. 1)

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Case Name Facts Issues/Finding Topics sufficient to show such control. The Court set this issue down for trial.

18 Salah v Timothy’s Coffees of the World Inc., 2010 ONCA 673

Franchisee operated a business in a shopping mall. The personal and corporate franchisee sued franchisor for breach of the franchise agreement and breach of the duty of good faith. The agreement stipulated, under “Schedule A” that if a new head lease was entered into with the mall, the franchise agreement would be renewed with a new sublease. Prior to the expiry of the head lease, the franchisor entered into a new lease on a different floor and signed an agreement with a new franchisee. Trial judge found that the franchisor breached its duty of good faith and awarded damages for breach of contract, breach of the duty of good faith, and mental distress. Franchisor appealed.

Issue(s): (1) Did the judge err in treating the corporate and personal franchisee as one entity, and in awarding damages to personal franchisee for breach of contract? (2) Was “Schedule A” limited to the same floor as the original lease or did it extend to the entire shopping centre? (3) Did franchisor owe a duty of good faith and did it breach that duty? (4) Did the trial judge err in awarding damages for breach of the duty of good faith and mental distress? Held: Appeal dismissed. (1) The assignment of the franchise agreement was designed to ensure that the personal franchisee was bound by the obligations under the agreement. The Court held that there was ample evidence supporting the proposition that the franchisor maintained a relationship with both the corporate and personal franchisee, and did not intend to “accept the corporation in the place of Mr. Salah [the personal franchisee] for all purposes.” Because the trial judge correctly treated the franchisees as one entity, it was entitled to award damages for the personal franchisee’s lost income. (2) The Court found that the trial judge reviewed all of the various agreements, and noted that the franchise agreement, in light the agreement itself and all the supporting agreements, was not ambiguous: it referred to the premises as the “Bayshore Shopping Centre.” The Court held that even if the head lease differed from the franchise agreement, resulting in some ambiguity, the

Duty of fair dealing (s. 3). Remedies available for breach. Interpreting the Franchise agreement

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Case Name Facts Issues/Finding Topics agreement must be interpreted contra proferentem against the franchisor. Thus, the renewal provision in Schedule A applied to the whole mall. (3) The Court held that since it had determined that Schedule A applied to the entire mall, the franchisor owed a duty of good faith under the AWA. The Court found that the franchisor had deliberately kept the franchisee in the dark regarding its intentions with the new lease. The franchisor’s deliberate withholding of vital information constituted breach of the duty of good faith under the AWA. (4) The court found that as the AWA is remedial legislation designed to remedy the power imbalance between franchisors and franchisees, damages must be available for breach of the duty of good faith. The Court noted that franchise relationship give rise to special considerations both regarding the obligations born by the parties and the remedies available for breach. The Court further held that there was no error by the trial judge in awarding damages for breach of good faith and mental distress on a merged basis.

19 Landsbridge Auto Corp v Midas Canada Inc., 2010 ONCA 478

Franchisee brought a proposed class action against franchisor for breach of its duty of fair dealing under the AWA. The representative plaintiff’s franchise agreement expired during the pendency of the class action proceedings. The renewal provision in the agreement required the franchisee to provide a release of all claims against the franchisor as a condition for renewing or transferring the agreements. The franchisee brought a motion for an

Issue(s): (1) Was the renewal and transfer provision void under s. 11 of the AWA? (2) Was the provision void under s. 4(4) of the AWA? (3) Did the AWA apply to agreements with businesses that operated outside of Ontario? Held: Appeal dismissed. (1) The Court held that the release requirement was clearly void under s. 11, which prohibits a franchisor from requiring a franchisee to waive its rights under the Act. Permitting franchisors to require class members to

Waiver of rights (s. 11); Rights of association (s. 4(4)); Choice of Law provisions and the application of the AWA

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Case Name Facts Issues/Finding Topics order preventing the franchisor from requiring a release to transfer or renew the agreement, and sought an order that the renewal provision (and its release requirement) was unenforceable to the extent of the common issues in the class action. The motion judge held that the release requirement was void for the purposes of the class proceeding. Franchisor appealed.

release their claims to take advantage of their other rights under the agreement is contrary to s. 11 and the spirit of the act, which aims to protect franchisees. (2) The Court agreed with the motion judge’s view that s. 4 encompassed franchisees’ right to participate in a class action and enforce their rights collectively against the franchisor. The Court held that since franchisees were required to release their claims as a condition to renewal, this provision defeated rights the franchisee would otherwise enjoy under the AWA. Thus, the provision was void. (3) The Court held that the motion judge was correct to apply the AWA to franchisees outside of Ontario due to the choice of law provision in the franchise agreement. As the law of Ontario was to apply to any dispute, the AWA applied.

20 6862829 Canada Ltd v Dollar It Ltd., 2010 ONCA 34

Franchisee cross-appealed against a lower court holding that Merali, who controlled both the landlord and the franchisor, was not a franchisor’s associated under s.1(1) of the AWA. Application judge refused to issue declaration that Merali was a franchisor’s associate and thus liable to pay damages to the franchisee. The Franchisee appealed.

Issue(s): Was Merali a franchisor’s associate within the meaning of s. 1(1) of the AWA? Held: Appeal allowed. In its brief decision, the Court noted that the application judge clearly found as a fact that the franchisor and the landlord were controlled by Merali. Thus, the application judge’s decision that Merali was not a franchisor’s associate was unreasonable. The Court held that as Merali was clearly a franchisor’s associate, it was therefore jointly and severally liable to pay damages under s. 6(6).

Definition of franchisor’s associate (s. 1)

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Case Name Facts Issues/Finding Topics 21 6792341

Canada Inc v Dollar It Ltd., 2009 ONCA 385

The franchisee entered into a franchise agreement after receiving a purported disclosure document. After 8 months, the franchisee sought rescission under 6(2) claiming that the franchisor had failed to make disclosure. The purported disclosure document was deficient in a number of ways and failed to comply with s.5 of the AWA. However, the application judge held that even if the document was deficient, which the judge did not accept, it would not be void ab initio, and thus there would not be “no disclosure document” as per the requirement of s. 6(2). As the franchisee had been provided with a disclosure document, the judge held that it was limited to a claim under s. 6(1), but its request for rescission was therefore out of time. The franchisee appealed.

Issue(s): (1) What is the consequence of tendering a deficient disclosure document? (2) Was the disclosure document deficient? Held: Appeal allowed. (1) The Court held that that application judge’s decision was antithetical to the purpose of the AWA: the protection of franchisees’ interests. The Court noted that disclosure under the act is mandatory, and the content of disclosure is mandated under s. 5(4) of the AWA. The purpose of disclosure is to permit the franchisee to make an informed decision. Where a purported disclosure document is so deficient as to fail to comply with the purpose and provisions of the AWA, it is as if there was no disclosure at all. Simply calling a document a disclosure document does not make it so. (2) The Court noted a number of serious deficiencies in the disclosure document. First, the franchisor certificate was not dated or signed. Signing the certificate is vital to ensure that, if there are inaccuracies, the franchisee has recourse against the signing parties. Failure to sign the certificate is enough, on its own, to render a purported disclosure document void. Second, the franchisor failed to provide any financial statements. Finally, the franchisor failed to provide the franchisee with the head lease despite the fact that the franchisee (without its knowledge), was taking obligations under it. These, amongst other deficiencies rendered the disclosure void, and the franchisee was permitted to rescind the contract.

Rescission, ss. 6(1) and 6(2) Disclosure (s. 5)

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Case Name Facts Issues/Finding Topics 22 4287975

Canada Inc v Imvescor Restaurant Inc., 2009 ONCA 308

The franchisee received a disclosure document prior to executing the franchise agreement. More than 6 months after the agreement was signed, the franchisee attempted to rescind the contract. The motions judge held that the franchisee was out of time under s. 6(1) and that the franchisee did not have the right to rescission under 6(2) as the franchisor had provided a disclosure document. The franchisee appealed.

Issue(s): (1) Was the franchisee entitled to rescind the agreement under s. 6(1)? (2) Was the franchisee entitled to rescind the agreement under s. 6(2)? Held: Appeal dismissed. (1) Under s. 6(1) a franchisee has a sixty day rescission period if either a franchisor fails to deliver a disclosure document within the required time periods under s. 5 or the contents of the disclosure documents did not the s. 5 requirements. No notice of rescission was provided within the 60 day window following the provision of the disclosure document. Indeed, the franchisee had the disclosure document for months before it signed the agreement, and thus had plenty of time to consider whether to enter into the agreement. Thus the franchisee was not entitled to rely on s. 6(1) (2) S. 6(2), on the other hand, provides a two year rescission period where the franchisor fails to deliver a disclosure document. This provision is only triggered when a document is not delivered at all, or was materially deficient, but not merely late. By contrast, s. 6(1) expressly deals with a franchisor’s failure to provide disclosure documents in accordance with the timing and content requirements of s. 5. There was disclosure in this case, thus the franchisee was unable to rely on s. 6(2). A fair interpretation of the Act must balance the rights of franchisees and franchisors.

Rescission, ss. 6(1) and 6(2) Disclosure (s. 5)

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Case Name Facts Issues/Finding Topics 23 Beer v Personal

Service Coffee Corp., 2005 CarswellOnt 3099 (CA)

The parties entered into two identical franchise agreements, and the franchisor admitted that it did not provide a disclosure document as required. The franchisee applied for rescission. On the day the rescission notice was served, the franchisee sent letters to its existing clients promising to continue service under another name. The franchisor cross-applied to prevent the franchisee from setting up a competing business. The application judge allowed the franchisee to rescind, but dismissed the franchisor’s application. The franchisor appealed.

Issue(s): (1) can the franchisee’s conduct affect its right to rescind for non-disclosure? (2) did the application judge err in dismissing the franchisor’s application? Held: Appeal allowed in part. (1) The Court found that the focus of the act is protecting the interests of franchisees by imposing significant disclosure requirements with stiff penalties for non-compliance. The right to rescind under s. 6(2) is not conditional, rather it is absolute. Thus, the franchisor may not escape its application by raising issues about the conduct of the franchisee. Franchisor’s must raise issues about the franchisee’s conduct under ss. 3 or 9 of the AWA. (2) The application judge erred in dismissing the franchisor’s application because there were disputed facts. Instead, the judge should have set the matter down for trial. The Court also rejected the franchisor’s argument that the application of s. 6(2) prevented a franchisor from making a claim under any other section of the AWA.

s. 6(2) rescission

24 1490664 Ontario Ltd v Dig This Garden Retailers Ltd., 2005 CarswellOnt 3097

The franchisor provided the franchisee with a number of financial and other documents at various times regarding a garden store franchise. Franchisor agreed that prior to signing the franchise agreement, the franchisee had received only approximately 70% of the information required under the Act. The Franchisee subsequently sought rescission on the grounds that the franchisor did not provide disclosure. The franchisee continued to run the business for three months after serving

Issue(s): (1) Did the trial judge err in finding that the franchisor provided no disclosure? (2) Did continuing to run the business affirm the franchise agreement, thus losing the right to rescission? Held: Appeal dismissed. (1) The Court held that to satisfy the disclosure requirements under s. 5 of the AWA, the franchisor must include all the prescribed information in one document delivered at one time. Further, the information must be accurate, clear, and concise. The disclosure was incomplete, and was admitted by the franchisor to amount to merely 70% of the required

Disclosure (s. 5) Rescission (s. 6)

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Case Name Facts Issues/Finding Topics notice of rescission. The trial judge granted rescission. The franchisor appealed.

information. As no disclosure compliant with the act was provided, the franchisee was entitled to rescission under s. 6(2). (2) The Court stressed that the right to statutory rescission is distinct from equitable rescission. As the franchise agreement was terminated five days after notice was sent in accordance with the AWA, there was no contract for the franchisee to affirm. The Court held that a franchisee may need to continue their business for a time to “achieve and orderly winding down.” This is because while the AWA may protect the franchisee from penalties or continuing obligations to the franchisor, it does not provide similar protections for obligations with third parties. Thus, continuing to run the business to mitigate losses was not a bar to rescission. The Court also addressed some ancillary issues. First, the court held that once s. 6(2) was been triggered, s. 6(6) requires the franchisor to pay compensation to the franchisee. Thus, the franchisee was entitled to damages under the Act. This in no way disentitled the franchisee to pursue damages under s. 7 of the AWA, which provides an action for damages for failing to comply with the disclosure obligations in s. 5. Second, the court held that two individuals who controlled 50% of the shares in Dig this Garden were franchisor’s associates under the AWA, as they exercised control over the franchisor and were directly involved in the granting the franchise to the franchisee.

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Summary of Alberta Court of Appeal cases addressing the Franchises Act

Case Name Facts Issues/Finding Topics 1 Ford Credit

Canada Ltd. v Welcome Ford Sales Ltd., 2011 ABCA 158, [2011] AJ No 592 (Alta CA)

Franchisee went into bankruptcy, still owing money to creditors. Trustee in bankruptcy sought court approval to sell the franchise to a third party. Franchisor disputed the trustee’s right to do this.

Held: Appeal dismissed. The sale is approved. (1) The franchisor argued that the franchisee “fundamentally breached” the dealership agreement before the trustee’s appointment. As such, the agreement came to an end and nothing remained for the trustee to assign. The Court responded that no fundamental breach occurred here. (2) Section 84.1 of the Bankruptcy and Insolvency Act overrides the innocent party’s common law unilateral right to accept a repudiation and end a contract.

Meaning of franchise/ franchise agreement (s. 1(1)). Duty of good faith and fair dealing (s. 7).

2 Mapleleaf Franchise Concepts, Inc. v Nassus Frameworks Ltd., 2010 ABCA 291, [2010] AJ No 1152 (Alta CA)

The franchise agreement expired. The franchisee continued to operate the business at the same premises. It removed signage and promotional materials which referred to the franchisor Here, the franchisee sought a stay pending appeal of an interim injunction which prohibited the franchisee from continuing its business at its current location. The franchisee argued it was entitled to operate the franchise because of the terms of the disclosure document. Specifically, the disclosure document contained a non-competition clause which prohibited the franchisee from opening a competing business within 3 km of another franchise in the system. The franchisor argued that the court should

Held: Application allowed. The stay on the injunction is granted. The facts satisfy the tripartite test for a stay: (1) the franchisee has raised a serious issue for appeal; (2) the injunction would result in irreparable harm to the franchisee’s business—it would cause the business’s death; (3) the balance of convenience favours granting the stay.

Restrictive covenants Disclosure (s. 4) Rescission (s. 13)

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Case Name Facts Issues/Finding Topics instead rely on the franchise agreement, which prohibited the franchisee from operating at the “designated premises” The franchisee responded that the franchisor cannot rely on terms contrary to those of the disclosure document.

3 Hi Hotel Limited Partnership v Holiday Hospitality Franchising Inc., 2007 ABQB 686 (Alta QB), aff’d 2008 ABCA 276, [2008] AJ No 892 (Alta CA)

The franchise disclosure document did not contained a signed and dated certificate of truth. “[A]t most there was a blank form of certificate”.

Held: Appeal allowed. The Alberta Court of Queen’s Bench and the Alberta Court of Appeal both found this to constitute a material deficiency, which gave the franchisee the right to rescind the Franchise Agreement within two years. “[T]he certificate is the linchpin of the substance of the disclosure” (para 61). “There is direct proof that the signature of a director on franchise disclosure papers matters” (para 69).

Disclosure (s. 4) Rescission (s. 13)

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Summary of Quebec Court of Appeal cases addressing the Quebec Civil Code as it Pertains to Franchise Law

Case Name Facts Issues/Finding Topics 1 Dunkin’ Brands

Canada Ltd. c Bertico inc, 2015 QCCA 624, [2015] QJ No 2996 (Que CA)

This is an appeal by the franchisor from the franchisees’ action for breach of franchise agreements, and the Superior Court’s order that the franchisor pay $16.4 million for breach of contract. Franchisor argued: the Superior Court judge erred in imposing on it “a new unintended obligation to protect and enhance the brand, outperform the competition and maintain indefinitely market share” and that “the judge wrongly characterized its contractual obligation as… guarantee[ing] the financial success of all Dunkin’ Donuts franchises” (para 6). Franchisees argued: the franchisor failed to protect and promote the Dunkin’ Donuts brand in Quebec as it was bound to do by contract when the franchise was faced with especially intense competition: primarily, Tim Horton’s. This caused them lost profits and the collapse of the Dunkin’ Donuts brand in Quebec. Specifically, the franchisor did not support or collaborate with the franchisees. It also failed to properly enforce standards, and this devalued the perception of the brand (paras 11, 13). The franchisor gave the franchisees money for renovations in exchange for a general

Appeal dismissed. The judge’s ruling did not impose a requirement on the franchisor to outperform the competition. Both parties committed themselves to supporting the brand (para 58). The franchisor had an implied obligation to support the brand and take reasonable measures to protect the franchisees from the market challenge presented by Tim Horton’s (paras 59, 65, 72). It had a duty to enforce its uniform standards of quality and cleanliness amongst its franchisees (para 77). The judge made some errors in calculating damages. Damages are thus reduced from $16 million to $10 million. He made some errors in calculating the relevant dates for lost profits. He was wrong to relieve the franchisees from having to pay royalties.

Duty of good faith and fair dealing

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Case Name Facts Issues/Finding Topics release (para 19).

2 *Uniprix inc c Gestion Gosselin et Berube inc, 2015 QCCA 1427 (Que CA)

Contract of affiliation between plaintiff (franchisee) and defendant (franchisor). The Contract was for 5 years, to be renewed automatically, unless the franchisee gave notice of its intention to leave. The franchisor had no ability to end the renewal cycle. After two automatic renewals, the franchisor notified the franchisee of its intention not to renew. The franchisee brought an action seeking that the franchisor remain bound by the Contract.

Held (Majority): While the renewal provisions could create perpetual obligations for the franchisor, perpetual obligations are enforceable in Quebec civil law. Article 1512 of the Civil Code of Quebec, is inapplicable to a contract of fixed duration. Held (Dissent – Chief Justice Hesler): In spite of the five-year term, the renewal provision rendered the Contract’s duration indeterminate. Therefore, either party could terminate the Contract on reasonable notice. Alternatively, the Chief Justice would have applied article 1512 of the Civil Code of Quebec, which allows the Court to fix a term that the parties omitted

Termination and right to renew.

3 *Billards Dooly’s inc c Enterprises Prebour ltee, 2014 QCCA 842 (Que CA)

The plaintiff franchisor brought an action for damages against the franchisee on the basis that the franchisee breached several agreements relating to the establishment of two franchises. The franchisee was unable to establish the franchises by the contractual deadline. So the parties entered into a new agreement to reaffirm their intention to continue with the two franchises The franchisee ultimately decided to terminate its relationship with the franchisor The franchisor appealed the Superior Court’s decision.

Held: Appeal allowed, in part. The Initial Agreements were still enforceable. As such, the franchisee owed the franchisor one years’ worth of royalties for one franchise, and ten years’ worth of royalties for the second franchisee. This was in addition to the portion of the franchise fees awarded by the Superior Court. The Court of Appeal capped its award at $250,000, because that was the amount the franchisor claimed in its Appeal Factum. However, it was prepared to award a higher amount.

Termination and right to renew.

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Case Name Facts Issues/Finding Topics 4 *140

Gréber Holding Inc c Distribution Stéréo Plus inc, 2014 QCCA 111, [2014] JQ no 310 (Que CA)

The appellant franchisees appealed the trial judge’s finding that the franchise agreement was not a contract of adhesion.

Held: Appeal dismissed with costs. Normally a franchise agreement is a contract of adhesion. Here, however, it was not. There are two elements of a contract of adhesion: (1) the terms are drafted by one party and imposed upon the other, and (2) the non-drafting party cannot freely negotiate the terms. Here, the franchisees did not establish the second element.

Meaning of franchise agreement.

5 Ben & Florenting Restaurants inc c 7255764 Canada Ltd, 2012 QCCA 1019, [2012] QJ No 5232 (Que CA)

Franchisor petitioner sought leave to appeal from an interlocutory judgment which held the petitioner to have filed improper proceedings. The franchise agreement contained a non-competition clause. According to the franchisor, when the franchise agreement ended, the franchisee continued carrying on business in violation of the non-competition clause. This motion arose in the context of this broader disputes, and a series of other motions brought by the franchisor.

Held: Motion for leave to appeal dismissed. The motion judge found that the franchisor was engaging in an abuse of process, and that its current motion and some of its previous motions were excessive, unreasonable, and undertaken in an effort to cause harm to the franchisees, and that their real purpose was to “burden the [franchisees] with expenses, with the eventual goal of running them out of business” (para 5). The franchisor responded that, of its previous 6 motions, 4 had succeeded. The motion judge did not err in her ruling “The fact that, in law, a person has a right to take proceedings does not insulate those proceedings from being characterized as abusive” (para 12).

* For the cases marked with a *, the summaries are taken from the Canadian Franchise Guide, 2nd Edition, Volume 2 by Osler, Hoskin & Harcourt LLP. This Guide also contains more detailed summaries of a number of other cases included in this chart.