Volume 1 • Number 1 March 2004 - Legal Information ... · Franchise Law/Case Digests by Ben V....

In This Issue:

Message from the Editor ............1

Franchise Consulting LawThe U.S. Invasion: A Look at Some U.S.Franchisors Coming to Canada, byJoseph Y. Adler........................................... 2

Franchise ConsultingFranchise Expansion, by Lee Sampson ......... 5

Franchise AccountingEarnings Claims and the Arthur Wishart Act, byW. David Sanderson and Arthur Trebilcock.... 6

Legislation Update .........................9

Franchise Law/Case Digestsby Ben V. HanukaShelanu v. Print Three Franchising: The MostImportant Franchise Decision in Canada in 2003,.................................................................. 11

Ahmed v. 3 For 1 Pizza & Wings (Canada)

Ltd., [2004] O.J. No. 144 (S.C.J.) (QL).................................................................. 17

1193430 Ontario Inc. v. Boa-Franc (1983)

Ltée, [2003] O.J. No. 5138 (S.C.J.) (QL).................................................................. 18

Bekah v. 3 For 1 Pizza & Wings (Canada) Inc.,

[2003] O.J. No. 4002 (S.C.J.) (QL).................................................................. 19

The Board...........................................20

Volume 1 • Number 1 March 2004

MESSAGE FROM THE EDITOR

The Canadian Franchise Review is unique in its focus on the multi-disciplinaryaspects of franchising, and caters to various professionals in the franchiseindustry, such as lawyers, accountants, consultants and executives.

Writers of articles and members of the Editorial Board consist of Canadian,U.S. and international professionals strongly recognized as leadingpractitioners in their respective fields.

Franchise-related professional services to be covered in this publication invariablyspread over several disciplines and include countless issues. A few of these are:

• planning of system structure (legal, accounting, management, etc.);• national or international expansion;• buying out, selling or merging systems;• disclosure requirements;• franchise system changes;• management and legal issues relating to dealings with franchisees;• coordinating legal, accounting and business strategies and outsourcing them;• litigation and dispute resolution; and• closing, terminations and insolvencies.

This publication aims at providing you, as a member of one of the aboveprofessions, with information on developments in these cross-disciplinary areas.Each quarter, the publication will feature articles, commentary and casedigests authored by leading practitioners in the above areas.

We hope that this innovative Review for the Canadian franchise practitioner isof interest to you, and invite your comments so that we can continuouslyimprove this publication to meet the changing demands of your practice.

Ben V. HanukaChair, Franchise/Licensing/Distribution Law TeamGoldman Sloan Nash & Haber LLP, Toronto, ON.

The Canadian FranchiseReview is unique in its focuson the multi-disciplinaryaspects of franchising, andcaters to various professionalsin the franchise industry, suchas lawyers, accountants, con-sultants and executives.

CANADIAN FRANCHISE REVIEW • Volume 1 • Number 1

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FRANCHISE CONSULTING LAW

The U.S. Invasion: A Look at Some U.S.Franchisors Coming to Canada

Introduction

The last time the U.S. invaded Canada was close to 200 years agoduring the War of 1812. Since that time, notwithstanding occasionalminor political spats between Canada and the U.S., relations betweenthe two countries have been anything but hostile. The U.S. is Canada’slargest trade partner and the two countries currently share thelongest demilitarized border in the World. When Americans “invade”Canada today, therefore, they do so by widely distributing theirproducts and services throughout Canada.

The Canadian franchising landscape is representative of thisphenomenon. Several U.S. franchise systems continue to dominatethe quick service restaurant and other retail sectors, while otherAmerican franchisors distribute their popular products and servicesthrough Canadian-based franchises. Consequently, Canadians arevery familiar with such brands as McDonalds®, Midas Auto® andSylvan Learning Centers®, just to name a few.

Other U.S. franchise systems are on the cusp of entering Canada.They vary from quick service restaurants, full serve restaurants andfranchise systems offering various kinds of products and services. Thisarticle examines some of those U.S. systems, including, Papa John’s®,Two Men And A Truck®, Pudgie’s Famous Chicken®, ArthurTreacher’s Fish & Chips®, Wall Street Deli® and Burritoville®. Inaddition, this article will examine some of the issues these systemsface as they attempt to penetrate the Canadian marketplace.

Papa John’s

As the third largest U.S. pizza chain (with close to 3,000 units, 22commissaries and a presence in 14 countries outside of the U.S.),Papa John’s phenomenal growth since its inception in 1984 can beattributed to its emphasis on quality and on concentrating on their

Canadian FranchiseReview

The Canadian Franchise Review is publishedquarterly by LexisNexis Canada Inc., 75 CleggRd., Markham, Ont., L6G 1A1, and is availableby subscription only.

Web site: www.lexisnexis.caDesign and compilation © LexisNexis Canada Inc.2004. Unless otherwise stated, copyright inindividual articles rests with the contributors.

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Editor-in-Chief:Ben V. HanukaChair, Franchise/Licensing/Distribution Law TeamGoldman Sloan Nash & Haber LLPE-mail: [email protected]

Butterworths Editor:

Verna MilnerLexisNexis Canada Inc.Tel.: (905) 479-2665 ext. 308Fax: (905) 479-2826E-mail: [email protected]

Editorial Board:• Joseph Y. Adler, Davis & Company,

Toronto, ON• John R. F. Baer, Sonnenschein Nath &

Rosenthal LLP, Chicago, IL• Gregory Harney, Shields Harney, Victoria, B.C.• Edward N. Levitt, Levitt Hoffman,

Toronto, ON• J. Perry Maisonneuve, Northern Lights

Franchise Consultants Corp., Mississauga, ON• David Sanderson, McGovern, Hurley,

Cunningham LLP, Toronto, ON• Michael Seid, Michael H. Seid & Associates,

LLC, West Hartford, CT• John Sotos, Sotos Associates, Toronto, ON• Vicky Wilkes, Wragge & Co LLP,

Birmingham, U.K.

Note: This Review solicits manuscripts for consideration by theEditor-in-Chief, who reserves the right to reject any manuscript orto publish it in revised form. The articles included in the Canadian

Franchise Review reflect the views of the individual authors and donot necessarily reflect the views of the advisory board members. ThisReview is not intended to provide legal or other professional adviceand readers should not act on the information contained in this Reviewwithout seeking specific independent advice on the particular matterswith which they are concerned.

Joseph Y. AdlerVice-Chair of the Franchise & Distribution Group at thelaw firm of Davis & Company and is a member of theEditorial Board of the Canadian Franchise Review.


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core product offering, i.e., pizza. A visit to their seven-acre ($45 million U.S.) “Papa John’s CorporateCampus” in Louisville, Kentucky will easily persuade thecasual observer that Papa John’s is committed tosourcing the best quality ingredients and providing itscustomers with a superior-quality pizza. Theirconsumers seem to agree as they paid this NASDAQ-traded company approximately a billion dollars ofrevenue this past year. This franchisor also boasts thatthe quality service, training and support provided totheir franchisees are among the best in the industry.

Papa John’s currently has seven franchisee-ownedrestaurants in Alberta (six in Calgary and one inEdmonton) and is about to sign franchise agreementsfor restaurants to be situated in the Provinces ofManitoba and Saskatchewan. John Campbell, VicePresident, New Business Development, is currentlyleading Papa John’s efforts to locate franchisees for theProvince of Ontario. “Ontario represents a hugeopportunity for Papa John’s to gain a significant footholdin Canada’s most populous province”, Campbell sayswith great enthusiasm, something that is obviously notlacking anywhere at the Papa John’s head office.

This pizza giant is specifically looking for franchiseeswith quality and speed for restaurant success (“QSR”)operational experience, sufficient capital and a strongcommitment to make the system flourish in Ontario.Tina Toole, Director, New Business Developmentconfirms this approach: “we are actively seekingfranchisees who have the financial depth andmanagement and franchising skills necessary torepresent one of the leading U.S. brands and to assist usto quickly expand throughout Ontario”. Toole furtheremphasizes that “it is critical that there be an absolutelytight fit between us and the prospective franchisees inorder to ensure that our entry into Ontario is successfuland that our franchisees meet our high, yet realisticgoals and expectations”.

TruFoods Corp.

Other systems such as Pudgie’s Famous Chickens,Arthur Treacher’s Fish & Chips, Wall Street Deli andBurritoville are also seeking to expand into Canada, saysJeff Bernstein, President and CEO of TruFoods Corp,the Lake Success, New York-based firm that managesall of these brands. TruFoods concentrates its efforts onacquiring, rebuilding and repositioning under-

performing concepts in the quick serve fast food andfast casual categories. It now wishes to pursue growthfrom the U.S. where it is based, to Canada.1

“We recognize the economic viability of our neighboursto the North and are anxious to recapture the brandawareness once held by Arthur Treacher’s Fish & Chipsand to expand our other concepts there, as well” saysBernstein. “The Canadian market largely representsuncharted territory for TruFoods and we seek wellqualified franchisees/area developers to work closelywith us in our efforts to expand into the importantmarkets located throughout Canada”.

TruFoods however faces similar challenges as otherU.S. franchisors as each of them seeks to secure localCanadian master franchisees, area developers orfranchisees with the appropriate qualifications. Placingtraditional advertisements, attending trade shows, hiringfranchise brokers and other common recruitmentstrategies are often found to be insufficient in locatingthe right candidate. As a result, U.S. franchisors haveresorted to more targeted marketing strategies tolocate and solicit qualified Canadian investors andmanagers by, for example, inculcating relationships withentrepreneurs and former and even existing masterfranchisees and area developers of other systems. Bydoing so, they hope to develop a wider pool of qualifiedinvestors.

Two Men And A Truck

Two Men And A Truck (“TMT”), based in Lansing,Michigan, started as an after-school endeavour for twohigh school boys, but has now grown to be the largestlocal residential and commercial moving franchisesystem in the United States. TMT provides care in thehandling and transportation of its customers’ personaland business possessions and offers a full-range ofresidential and commercial moving services. TMT isnow looking to sell the master franchise rights to all ofCanada.

John Rogers, Chair of the Franchise and DistributionGroup at Davis & Company, is the Canadian lawyerrepresenting TMT. Rogers says that finding someonewho can act as master franchisee for such an expansivecountry as Canada is not a simple task, but that “TMTprovides a necessary service in such a high qualityfashion, with excellent training and support, that it isproving to be attractive to Canadian entrepreneurs. I


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have spoken to one serious candidate who was veryimpressed with the home office operations in Lansing”,says Rogers, who has visited there himself.

Issues When Expanding into Canada

Not all U.S. franchisors, however, expand to Canadaby way of a grant of master franchise rights to all ofCanada or a certain territory within it. Some U.S.franchisors seeking entry to Canada do so by grantingarea developer rights or by direct franchising. In suchcircumstances, the financial wherewithal is less of aconcern as less capital is required to purchase thearea development rights or unit franchises. Still, U.S.franchisors have found that it is not always an easytask to find the right “partner” for theirrequirements.

Other issues which confront U.S. franchisors whenentering Canada include being able to source theirproduct and equipment within Canada to reducetransportation costs and avoid tariff or quotarestrictions. U.S. franchisors must incur professionalfees in order to “Canadianize” their legal documents(i.e., by “converting” their Uniform Franchise OfferingCirculars (“UFOC”) into disclosure documents for usein Ontario and Alberta and tailoring their franchiseagreements) and to ensure that their disclosuredocuments and franchise agreements comply withCanadian federal, provincial and local laws.

“These fees and issues must be factored into thefranchisor’s cost of entry; otherwise U.S. franchisorswill have a rude awakening”, says franchise consultantJohn Hagood of Franchise Consultants, Inc., an Orlando,Florida franchising consulting firm that specializes indeveloping and promoting both start-up and maturefranchise systems. According to Hagood, “it isimperative that we work with professional advisorsfamiliar with the targeted foreign jurisdiction, orotherwise, our clients’ entry into Canada could becomea legal and business quagmire. We avoid these pitfalls byretaining qualified attorneys and accountants who arewell versed not only in technical aspects of theirrespective legal, tax and accounting fields, but also

intimately qualified to work with demanding U.S.franchisors who are anxious to expand their systemsinto Canada”.

Finally, prior to expanding their systems into Canada,U.S. franchisors must conduct sufficient marketresearch on the Canadian marketplace to determine thedemand for the product or service and to identify thelevel of competition; make changes to ingredients andproduct specifications to address different preferencesof Canadian palettes; confirm that the trade-marks fortheir franchise systems are available for use in Canada;review their operations manuals and marketingmaterials; and make other changes to their respectivesystems to adapt to the Canadian marketplace.

Conclusion

U.S. franchisors have sought, and continue to seek, newmarkets for their goods and services and Canada isoften the most logical destination for their expansionplans. Papa John’s is more than cognizant of this fact asit prepares to enter the world’s most populardestination for U.S. franchise systems outside of GreatBritain and Australia. John Schnatter, the 42-year-oldFounder and CEO of Papa John’s, recalls fondly that hisfather, while only modestly successful in business, “wastenacious and had the guts never to quit”. “Neverquitting builds character”, Schnatter says. Papa John’sand various other U.S. franchisors will certainly not quitin their search for qualified franchisees, area developersand master franchisees to help them spread their well-sought out products and services throughout Canada.Canadians are bound to see more American “invaders”in the decades to come. Given their insatiable appetitefor American goods and services, Canadians are unlikelyto resist the trend, especially when good quality, pricingand services are being offered.

1 TruFoods also recently offered US $54 million for the financiallysagging cafeteria-style eateries of Piccadilly Cafeterias, Inc.,based in Baton Rouge, Louisiana. The successful purchase byTrufoods of this chain of restaurants would add 145 restaurantsto Trufood’s portfolio.


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FRANCHISE CONSULTING

FRANCHISOR

Franchise Expansion

All too often Franchisors both large and small experiencethe pains of growth! These pains are not necessarily theability to open new locations, although, in some cases thiscan be a result; moreover, a vision of the future as it relatesto their field of endeavour. The business must constantlyevolve and change with the times. The old adage of “if it isnot broken don’t fix it” does not apply in an ever changingmarket place. If a franchise chain waits until it is broken andthen attempts the fix, it can often be too late as the attritionof franchised units and loss of market share can create adownward spiral that may not be recoverable.

Change is inevitable and is obvious in all facets of everydaylife; it used to be the case that a generation would createchange, however, this is no longer true. To succeed andgrow requires constant evolution. It is not enough,although it is important, to cosmetically enhance ourfacilities. One needs to be clearly cognisant of theenvironment of our business, this is achieved throughMarket Analysis and Research and Development.

For instance, to view a few albeit significant changes in ageneration brought about by research and development:we have gone from record albums to eight tracks tocassettes and now compact discs. As well, from mainframecomputers to personal computers and perhaps the mostpowerful media to date, the Internet. From these changesa host of other markets have been born and are untothemselves multi-billion dollar industries.

Research and Development is not limited to technologicaladvances. Companies such as McDonald’s® and TimHorton’s® are but two prime examples of product changeand are currently making additions to their menu items tobroaden market appeal. We have to reflect on companiesthat did not survive to the new millennium. Companies

such as Eaton’s, Simpson’s, Sayvette. Miracle Mart, andConsumers Distributing are just a few. These companieswere once giants in their field. Wal-Mart®, HomeDepot® and others continue to make enormous strides.By understanding the consumers’ needs past, present andfuture. The prior examples are not limited to mega stores,the philosophy of the success stories will work in 500 to1000 sq ft.

It is our findings that today’s potential franchisee is moreaware and knowledgeable than their predecessorsresulting in a more discriminating purchaser. Now with theaid of the Ontario Disclosure Document, they have thetools required in assisting them to make a qualifieddecision. It has been our practice over the past 23 years togive full disclosure to a would be purchaser. Today morethan ever, it is imperative that extreme care is exercised inthe selection of a franchise selling representative.

Master Franchising and Area Franchising

There are conflicting views on this form of franchiseexpansion, as this method of expansion, unless supportedby the entire infrastructure of the corporate offices oftenproves unsuccessful. Unsuccessful negotiations can in turntie up large areas of geography for a considerable period oftime. That is, although contracts can be and are designedwith good intentions by both parties, the distance fromongoing corporate resources have led to less than desiredresults. If the following is true, to run a successful Franchisecompany, certain systems, criteria and personnel must bein place to run an autonomous business. Therefore, amaster scenario would require: Operational expertise,Marketing Strengths, Ongoing franchisee support, plus theability to complete the sales and qualification process.Failing to have the aforementioned components/personnelin place should immediately raise a red flag, as certain keyareas would be dramatically affected.

Franchise Companies seeking to expand in newgeographical areas have a viable alternative to theMaster relationship. By entertaining a consortium thathas all of the required components to establish asatellite business through the early days of growth maylead to ongoing and long-term relationship ortransference to a local corporate division.

Franchisee

As the franchisor must endeavour to make a suitable matchbetween the franchise offering and the individual

Lee SampsonPresident of Sampson & Associates,Franchise Consultants, BusinessBrokers, in Richmond Hill, ON.


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prospective franchisee, there is much preparation work apotential franchise purchaser should do prior to attendingfranchise meetings. This begins with a thorough, honest andrealistic self-appraisal. Such an appraisal should consist of thefollowing (it should be noted that all of the steps have equalimportance and that only as a composite of these steps canthe correct business be sought):

Financial Criteria

• The preparation of a comprehensive net worthstatement which should consist of all assets and liabilities.

• How much unencumbered funds the franchisee hasand how easily accessible are they?

• Prepare a complete monthly budget so as tomaintain normal living expenses. It is wise to budgetfor at least six months’ living expenses.

The above three steps will show the amount ofpersonal funds that can be invested in a business. This isnot only useful for the purchaser’s knowledge but canbe useful to the franchisor and bank, should financing bean option. It is with this knowledge that a franchisee can

determine the price range of the business to be sought.Depending on the business closing, adjustments must becontemplated. This information should be readilyavailable, additional amounts could be training costs,legal and accounting. It is recommended that an openingbalance sheet be prepared along with a realistic financialplan for the first three years of operation.

Personal Criteria

As with the financial the personal criteria is equallyimportant. This is a balance sheet of the purchaser’sstrengths and weaknesses, combined with their likes anddislikes. This exercise should be a total and honest self-appraisal and will begin to identify the type of franchisedbusiness that is both appealing and rewarding.

It is all too often we meet people who have notproperly prepared themselves to undertake a business.In essence, without applying these few simple rules thechances of achieving one’s aspirations are hindered. IfFranchisor and Franchisee are truly committed a lastingand fruitful relationship can be born.

FRANCHISE ACCOUNTING

Earnings Claims and the ArthurWishart Act*

The Accountant’s Perspective

For purposes of this article, a brief summary of certaingeneral information is required in order to understandcertain parts of the Arthur Wishart Act (FranchiseDisclosure), 2000, S.O. 2000, c. 3 (the “Act”) andO. Reg. 581/00 (the “Regulation”), in terms of estimates

of annual operating costs and earnings projections orclaims for a franchise system.

Currently, by standards contained in the CanadianInstitute of Chartered Accountants’ Handbook (CICAHandbook), various rules and procedures are requiredin terms of preparation of future oriented financialinformation (“FOFI”), of which budgets, forecasts andprojections fall within that scope.

A forecast, according to CICA Handbook, s. 4250, isFOFI prepared using assumptions, all of which reflectthe entity’s planned courses of action for the periodcovered, given management’s judgment as to the mostprobable set of economic conditions. A projection, onthe other hand, is also FOFI, prepared usingassumptions that reflect the company’s planned courseof action for the period covered given management’sjudgment as to the most probable set of economicconditions, together with one or more hypotheses thatare assumptions which are consistent with the purposeof the information, but not necessarily the mostprobable in management’s judgment. As well, the scopeof the section deals with circumstances when acompany is not negotiating or dealing directly with thepublic, versus situations where the entity is negotiatingor dealing directly with the public. In these cases, they

W. David SandersonMr. Sanderson practises at the accountingfirm of McGovern, Hurley, Cunningham LLPChartered Accountants, Toronto, ON.

Arthur TrebilcockMr. Trebilcock practises at thelaw firm Sotos & Associates,Toronto, ON.


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are called either general purpose or special purposeFOFI.

It is important to note that, in terms of measurement ofFOFI, the information must be prepared on the basis ofassumptions and must be appropriate in thecircumstances. The development and appropriatenessof assumptions is the responsibility of management.Assumptions must be consistent. Assumptions that arenot hypothesis must be reasonable and supportable andany hypothesis must be reasonable, in that they shouldbe consistent with the purpose of the projection andrepresent plausible circumstances.

Other general rules include a requirement thatassumptions underlying projections that are nothypotheses to be consistent with the purpose of theprojection. Also, the projection period must not extendbeyond a point in time when the FOFI can bereasonably estimated.

In terms of presentation, FOFI must be presented inhistorical financial statement form with, at a minimum,inclusion of an income statement meeting the disclosurerequirements listed in CICA Handbook, s. 1520.02.Disclosure in the historical format would include acautionary note that the FOFI would almost certainlyvary from actual results to be subsequently achievedand that the variations could be material. Included in thedisclosure of FOFI is the effective date for underlyingassumptions, the extent to which any actual financialresults are incorporated and the period covered bythose results, and whether the business intends tosubsequently revise its FOFI.

Section 6(1)3 of the Regulation states that “[i]f anearnings projection for the franchise is provided...”,then the disclosure document must include “...astatement specifying the reasonable basis for theprojection, the assumptions underlying the projectionand a location where information is available forinspection that substantiates the projection”. A moreappropriate word for projection here may be the word“claim” although the wording says projection. To theextent that an accounting firm is assisting with thepreparation of various financial information for inclusionin a franchise disclosure document, then not only shouldthe Act’s requirements be reviewed, but the largergeneral requirements in the CICA Handbook shouldalso be reviewed.

Section 6(1)3 is just one of a number of disclosure itemswhich must be presented together in one place in thedisclosure document. Section 6(1)2 states that “[i]f anestimate of annual operating costs for the franchise isprovided...”, then the disclosure document must include“...a statement specifying the basis for the estimate, theassumptions underlying the estimate and the locationwhere more information is available for inspectionwould substantiate the estimate”. Some may view theword “estimate” as another way of saying budget orprojection or forecast. Some of the wording in s. 6(1)2is the same type of wording that is referenced in theCICA Handbook although one would have to interpretboth bodies of information to ensure compliance withthe rules and law.

It should be noted that both ss. 6(1)2 and 6(1)3 indicatethat estimates of annual operating costs and earningsprojections do not need to be provided. If a franchisordoes include these types of projections or claims, therisks to the business increase significantly.

Inclusion of earnings claims and presentation of annualoperating costs in a franchise disclosure document alsocreates a problem area for prospective and actualfranchisees alike. Many business operations supplyestimates of costs and earnings claims with very littlesupport (i.e., assumptions and basis for use). As such,the disclosure document would provide very littlecomfort in relation to actual data provided. Sometimes,a correlation cannot be made. Also unknown in theseclaims is whether the business entity had the assistanceof external accountants.

The Lawyer’s Perspective

The Province of Alberta and those Americanjurisdictions that require written pre-sale disclosure offranchise offerings all regulate the use of what they call“earnings claims”. In essence, these jurisdictions define“earnings claim” as any information given by or onbehalf of a franchisor or its agent to a prospectivefranchisee from which a specific level or range of actualor potential sales, costs, income or profit fromfranchised or non-franchised units may be easilyascertained.1 While these jurisdictions do not require afranchisor to make an earnings claim in the first place, ifa franchisor chooses to make an earnings claim, theneach jurisdiction requires (as a minimum):


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• that the earnings claim be included in full in thedisclosure document;

• that the earnings claim have a reasonable basis atthe time it is made; and

• that the disclosure document:

• summarize the reasonable basis for the claim,• state all material assumptions (other than

matters of common knowledge) underlying theclaim,

• state whether the claim is based on actualexperience of existing units, and if so, thepercentage of units that have met or exceededeach range of results, and

• state the place where substantiating informationwill be made available for inspection uponreasonable request.

“Basis” of an earnings claim means factually-significantinformation that a prudent business person would relyon in making an investment decision. The basis will be“reasonable” if those facts reasonably support theearnings claim as it is likely to be understood by areader of average intelligence who is unfamiliar with thebusiness being franchised.

In contrast to Alberta and these American jurisdictions,s. 6(1)3 of the Regulation regulates the use of an“earnings projection”. However, since neither the Actnor the Regulation defines what “earnings projection”means, we are left to speculate whether the intention ofthe section is to regulate just the use of projections, orto regulate the use of all FOFI,2 or even to regulateearnings claims generally.3

Since assumptions are the single most importantingredient of any financial forecast or projection,4 andsince the thrust of s. 6(1)3 is to provide the reader withthe assumptions and other relevant information whichhe must have if he is to judge for himself the weight tobe given to an earnings projection, it follows that afranchisor would be very foolish to conclude that

“earnings projection” in s. 6(1)3 does not include anearnings forecast.

Historical financial information often is inherently morereliable than either a projection or a forecast (because itis easier to verify objectively), but the reader still makescertain important assumptions when judging the worthof a historical earnings claim.5 As well, from a legalperspective (but never an accounting perspective6)there is a perceived danger that the reader will implicitlyassume that the factors, assumptions and conditionswhich gave rise to the historic earnings claim will eitherremain the same or will improve in the future. Thus,regulators readily adopt the view that historical earningsclaims always carry an implicit representation aboutfuture earnings, and that is why they championregulating the use of these claims. The question iswhether an Ontario court will perceive the samedanger, adopt the same viewpoint, and interprets. 6(1)3 widely to include historical earnings claimswithin its ambit. But even if Ontario courts decide tolimit the application of s. 6(1)3 to earnings forecasts andprojections, a franchisor who uses an historical earningsclaim to sell franchises would be well advised to followthe Alberta and American earnings claims requirements,since s. 9 of the Act preserves the common-lawremedies for misrepresentation.

* This article was initially provided to attendees of a dinner pro-gram, “Disclosure Documents: Preparing a Bullet-proof Disclo-sure Document”, held by the Joint Subcommittee on Franchisingof the Ontario Bar Association on December 9, 2003.

1 See, for example, Alberta Franchises Regulation, Alta. Reg.240/95, Schedule 1, #16.

2 Recall that FOFI includes both projections and forecasts, andthat in essence “projections” are future-oriented outcomes whichare reasonably possible, while a “forecast” is the single future-oriented outcome which management believes to be the mostprobable outcome.

3 I.e., both FOFI and financial information based on actual experi-ence.

4 CICA Handbook, s. 4250.08 through s. 4250.14 and s. 4250.32.5 For example he may assume that the underlying data used to

compile the claim was prepared in accordance with generallyaccepted accounting principles, or that the franchisor independ-ently verified data provided by franchisees.

6 CICA Handbook, s. 4250.24.


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LEGISLATION UPDATE

Amendments to Regulations Underthe Arthur Wishart Act (FranchiseDisclosure), 2000Information Bulletin, Ministry of Consumerand Business Services

The Arthur Wishart Act (Franchise Disclosure), 2000, andregulations came into full effect on January 31, 2001. Sincethat time, the Ministry of Consumer and Business Services(MCBS) has been monitoring their impact on the franchisemarketplace, and has received a number of suggestions forhousekeeping improvements to Ontario Regulation581/00. These changes include clarifying the type ofinformation to be included in the disclosure document,and adding a definition of “franchisor’s agent” to clarify theright of action for damages.

MCBS also received input on expanding the criteria for aMinister’s exemption from the requirement to include thefinancial information described in clause 3(1)(a) or (b) orsubsection 3(2) or (3) of Ontario Regulation 581/00 in adisclosure document. This change was proposed torecognize situations of corporate restructuring (i.e., wherea franchisor meets the criteria because it is controlled by acorporation). These changes, together withcomplementary amendments to Ontario Regulation 9/01,have been reviewed and are supported by franchisors,franchisees, and members of the legal community.

Enclosed are two regulations made under the ArthurWishart Act (Franchise Disclosure), 2000, that will befiled and come into effect on March 22, 2004. Theseregulations will amend Ontario Regulation 581/00 andOntario Regulation 9/01 made under the Act, and havebeen approved by the Lieutenant Governor in Counciland the Minister of Consumer and Business Services.These regulations must be read in conjunction withRegulations 581/00 and 9/01, which can be viewedthrough the Government of Ontario’s E-Laws web site,located at <www.e-laws.gov.on.ca>.

To encourage stakeholder awareness and ensurefranchisors are in compliance with the reviseddisclosure standards on the date they take effect, MCBShas notified the Canadian Franchise Association and theOntario Bar Association and requested theircooperation in notifying the franchise community aboutthese changes.

Franchisors that have been ineligible for an exemptionunder the provisions of s. 13(1) of the Act may wish totake note of the revised criteria and consider whetherthey will be eligible to make an application to theMinister. Each franchisor applying for an exemption isrequired to declare that it meets the criteria byexecuting a Franchise Indemnity Agreement. In caseswhere a franchisor meets the criteria because it iscontrolled by a corporation, the controlling corporationwill also be required to complete a ControllingCorporation Franchise Indemnity Agreement. Copies ofthese agreements and an application guide are availableby contacting (416) 326-6203.

Since the changes are broadening rather than narrowing theexemption criteria, franchisors prescribed in Regulation 9/01which have been previously granted an exemption are notrequired to execute a new Franchise Indemnity Agreement,provided that the criteria under which the exemption wasoriginally granted continues to be met. If a franchisor that iscurrently exempt under the Regulation will be exempt inthe future because it is controlled by a corporation, thefranchisor must then execute the new Franchise IndemnityAgreement and submit it together with a ControllingCorporation Franchise Indemnity Agreement executed bythe controlling corporation. These agreements reflect therevised criteria.

Franchisors are reminded that, pursuant to s. 2(2) ofRegulation 9/01 and ss. 4 and 5 of the Franchise IndemnityAgreement, any franchisor that has been granted aMinister’s exemption but which no longer meets thecriteria has a duty to promptly notify the Ministry andrequest that the exemption be revoked.

Questions regarding the amendments or about therequirements for a Minister’s exemption may bedirected to Randy Hopkins in the Ministry’s PolicyBranch at (416) 326-8875.

ONTARIO REGULATION

made under the

ARTHUR WISHART ACT (FRANCHISEDISCLOSURE), 2000

Amending O. Reg. 581/00

(General)

Note: Ontario Regulation 581/00 has previously beenamended. Those amendments are listed in the Table


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of Regulations (Legislative History) which can befound at http://www.e-laws.gov.on.ca.

1. Ontario Regulation 581/00 is amended by adding thefollowing section:

0.1 For the purposes of the Act,

“franchisor’s agent” means a sales agent of the franchisor whois engaged by the franchisor’s broker and who is directlyinvolved in the granting of a franchise.

2. Paragraph 6 of section 2 of the Regulation is revokedand the following substituted:

6. Details of any bankruptcy or insolvency proceedings,voluntary or otherwise, any part of which took placeduring the six years immediately preceding the date ofthe disclosure document, against any of the followingpersons as debtors:

i. The franchisor or the franchisor’s associate.

ii. A corporation whose directors or officers in-clude a current director, officer or generalpartner of the franchisor, or included such aperson at a time when the bankruptcy or in-solvency proceeding was taking place.

iii. A partnership whose general partners includea current director, officer or general partnerof the franchisor, or included such a person ata time when the bankruptcy or insolvencyproceeding was taking place.

iv. A director, an officer or a general partner ofthe franchisor in their personal capacity.

3. (1) Clause 3 (1) (a) of the Regulation is amended bystriking out “operations” at the end and substituting“operations, prepared in accordance with the gener-ally accepted auditing standards set out in the Cana-dian Institute of Chartered Accountants Handbook”.

(2) Clause 3 (1) (b) of the Regulation is amended bystriking out “the most recently completed year” andsubstituting “the most recently completed fiscal year”.

4. (1) Paragraph 1 of section 6 of the Regulation isamended by striking out “and operation” in the por-tion before subparagraph i.

(2) Subparagraph 1 ii of section 6 of the Regulation isamended by striking out “things” and substituting“tangible and intangible property”.

(3) Subparagraph 1 iii of section 6 of the Regulation isamended by striking out “associated with the fran-chise” and substituting “associated with the establish-ment of the franchise” .

(4) Paragraph 16 of section 6 of the Regulation isamended by striking out “the previous three years” inthe portion before subparagraph i and substituting“the three fiscal years”.

5. (1) Paragraphs 1, 2 and 3 of section 11 of the Regu-lation are revoked and the following substituted:

1. The net worth of the franchisor on a consolidatedbasis according to its most recent financial state-ments that have been audited or for which a reviewengagement report has been prepared,

i. is at least $5,000,000, or

ii. is at least $1,000,000, if the franchisor iscontrolled by a corporation whose networth on a consolidated basis according toits most recent financial statements thathave been audited or for which a reviewengagement report has been prepared is atleast $5,000,000.

2. The franchisor,

i. in the five years immediately preceding thedate of the application, has at least 25 fran-chisees engaging in business at all times inCanada,

ii. in the five years immediately preceding thedate of the application, has fewer than 25franchisees engaging in business at all timesin Canada and has at least 25 franchiseesengaging in business at all times in a singlejurisdiction other than Canada,

iii. does not meet the requirements of sub-paragraph i or ii, but is controlled by a cor-poration that meets the requirements ofsubparagraph i, or

iv. does not meet the requirements of sub-paragraph i or ii, but is controlled by a cor-poration that meets the requirements ofsubparagraph ii.

3. The franchisor,

i. has engaged in the line of business associ-ated with the franchise continuously for notless than five years immediately precedingthe date of the application, or

ii. is controlled by a corporation that meetsthe requirements of subparagraph i.

(2) Subparagraph 4 i of section 11 of the Regulation isamended by adding “or iii” after “2 i”.


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(3) Subparagraph 4 ii of section 11 of the Regulation isamended by adding “or iv” after “franchisor described in sub-paragraph 2 ii”.

ONTARIO REGULATION

made under the

ARTHUR WISHART ACT (FRANCHISEDISCLOSURE), 2000

Amending O. Reg. 9/01

(Exemption of Franchisors under Subsection 13 (1) ofthe Act)

Note: Ontario Regulation 9/01 has previously beenamended. Those amendments are listed in the Tableof Regulations (Legislative History) which can befound at http:/ /www.e-Iaws.gov.on.ca.

1. (1) Clause 2 (1) (b) of Ontario Regulation 9/01 is re-voked and the following substituted:

(b) the franchisor no longer meets any of the followingconditions:

The franchisor has at least 25 franchisees engaging inbusiness at all times in Canada.

2. The franchisor has fewer than 25 franchisees engagingin business at all times in Canada and has at least 25franchisees engaging in business at all times in a singlejurisdiction other than Canada.

3. The franchisor does not meet the conditions of para-graph or 2, but is controlled by a corporation thatmeets the conditions of paragraph 1.

4. The franchisor does not meet the conditions of para-graph I or 2, but is controlled by a corporation thatmeets the conditions of paragraph 2.

(2) Clause 2 (1) (d) of the Regulation is amended byadding “or iii” after “2 i”.

(3) Clause 2 (1) (e) of the Regulation is revoked andthe following substituted:

(e) in the case of a franchisor described in subparagraph 2 iior iv of section 11 of Ontario Regulation 581/00, a judg-ment, order or award relating to fraud, unfair or decep-tive practices, or a law regulating franchises is made inCanada or in the jurisdiction referred to in subparagraph2 ii of section 11 of that regulation against any of the fran-chisor, the franchisor’s associates, and the directors, gen-eral partners and officers of the franchisor.

FRANCHISE LAW/CASE DIGESTS

Shelanu V. Print Three Franchising: The Most Important Franchise Decision in

Canada in 2003

The Ontario Court of Appeal’s May 2003 decision inShelanu Inc. v. Print Three Franchising Corp., [2003] O.J.No. 1919 (QL), 64 O.R. (3d) 533, is by all accounts themost important Canadian decision on franchise law in2003. It is arguably one of the most important decisionsin Canadian franchise law since Jirna Ltd. v. Mister Donutof Canada Ltd. [1975] 1 S.C.R. 2. In overturning the trialdecision of October 2000, the Court of Appeal set the

doctrine of good faith in franchising on a new course foryears to come.

In allowing both appeal (by the franchisor, Print Three)and cross-appeal (by the franchisee, Shelanu), the Courtof Appeal was faced with two main issues:

Subsequent Oral Agreement Held Enforce-able Despite Entire-Agreement Clause

The oral agreement between the parties entered intoafter the signing of the franchise agreement was upheldenforceable. The court held that (i) the entire clauseand related clauses in the franchise agreement did notapply to the subsequent oral agreement, and (ii) therewas consideration for the agreement. (In addition, thefranchisor appellant did not appeal the trial judge’sfindings as to the existence of the oral agreement,which was therefore assumed to reflect the trueintentions of the parties.)

The decision on this issue is important given that it isone of the few, if not the only, Canadian appellantdecision with respect to the enforceability of asubsequent oral agreement after the signing of afranchise agreement. The Court of Appeal’s decision to

Ben V. HanukaChair, Franchise/Licensing/DistributionLaw TeamGoldman Sloan Nash & Haber LLP,Toronto, ON.


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not apply the franchise agreement’s entire agreementclause to future agreements between the parties, and toinstead enforce their subsequent oral agreement,formalizes a growing tendency in Canadian courts toprohibit a franchisor from contractually disregardingfuture agreements in advance.

Breach of Duty of Good Faith

While the Court of Appeal generally upheld thecommon law duty of good faith in franchising, it fleshedout the applicability of the duty and clarified that notevery breach of the franchise agreement will amount toa breach of the duty of good faith. For the same reason,the court reinforced the principle that not every breachof the franchise agreement is a fundamental breach.

In dealing with the franchisor Print Three’s establishmentof a competing Le Print Express franchise, the court heldthat Print Three had an obligation to have regard to thefranchisee’s legitimate interests and to deal with itpromptly, honestly, fairly and reasonably.

The court went on to strengthen the duty of good faith inthe franchisor/franchisee relationship, and compared it tothe good faith duty which the Supreme Court recognizedin the employment context in Wallace v. United GrainGrowers Ltd. (c.o.b. Public Press), [1997] 3 S.C.R. 701.

However, the court ultimately disagreed with the trialjudge’s finding that the setting up of this competingfranchise by the franchisor, in the circumstances of thiscase, amounted to a breach of the franchisor’s duty ofgood faith, or to a fundamental breach of the franchiseagreement. It appears that this finding may very well belimited to the facts of this case, given that the franchiseefailed to show any damages as a result of the competingLe Print Express business, and did not complain about ituntil much later.

As such, the decision should not be taken for thegeneral proposition that the setting up of a competingsystem may not be found to be in breach of afranchisor’s duty of good faith in another situation. Thisis particularly so in light of the court’s above comparisonof the duty of good faith in franchising as akin to thegood faith duty in the employer/employee relationship.

Given the importance of the court’s reasoning withrespect to the doctrine of good faith in franchising assummarized above, relevant excerpts are reproducedbelow in full, starting at para. 63:

Shelanu V. Print Three Franchising

[2003] O.J. No. 1919 (QL), 64 O.R. (3d) 533 (C.A.)

2. The Duty of Good Faith and Fiduciary Duty

[63] The trial judge found that the appellant owed the respon-dent a duty of good faith either under the Arthur Wishart Act,supra, or at common law. Having regard to my conclusions re-garding good faith, set out below, it is unnecessary to decidewhether the Arthur Wishart Act, which applies to existing fran-chises, is applicable in this case where the acts in issue took placeprior to the coming into force of the Act.

A. Circumstances giving rise to a duty of good faith

[64] In Wallace v. United Grain Growers Ltd. (c.o.b. PublicPress), [1997] 3 S.C.R. 701, 152 D.L.R. (4th) 1, the majority ofthe Supreme Court was prepared to recognize a good faith obliga-tion in employment contracts. Indeed, at paras. 91-95, Iacobucci J.held that contracts of employment have unique characteristics thatset them apart from ordinary commercial contracts. He describedthree special characteristics of employment contracts: (1) the for-mation of the contract is not the result of the exercise of bargainingpower between two equals; (2) the person in the weaker position isunable to achieve more favourable contractual terms because of,for example, that person’s inability to access information; (3) thepower imbalance continues to affect other facets of the relationshipafter the contract has been entered into.

[65] In some instances a duty of good faith may arise ordinarilyout of the nature of the relationship, or the circumstances cre-ated by the other party: see 978011 Ontario Ltd. v. CornellEngineering Co. (2001), 53 O.R. (3d) 783, 198 D.L.R. (4th)615 (C.A.) at para. 35.

[66] The relative position of the parties as outlined by Iacobucci J.in Wallace also exists in the typical franchisor-franchisee rela-tionship. First, it is unusual for a franchisee to be in the position ofbeing equal in bargaining power to the franchisor: See KentuckyFried Chicken Canada, a Division of Pepsi-Cola Canada Ltd.v. Scott’s Food Services Inc. (1998), 41 B.L.R. (2d) 42, 114O.A.C. 357 (C.A.), per Goudge J.A. at para. 16; Machias v. Mr.Submarine Ltd., [2002] O.J. No. 1261 (QL), 24 B.L.R. (3d) 228(S.C.J.) at para. 109. The second characteristic, inability to nego-tiate more favourable terms, is met by the fact that a franchiseagreement is a contract of adhesion. As I have indicated, a con-tract of adhesion is a contract in which the essential clauses werenot freely negotiated but were drawn up by one of the parties onits behalf and imposed on the other. Further, insofar as access toinformation is concerned, the franchisee is dependent on thefranchisor for information about the franchise, its location andprojected cash flow, and is typically required to take a trainingprogram devised by the franchisor. The third characteristic,namely that the relationship continues to be affected by thepower imbalance, is also met by the fact the franchisee is re-quired to submit to inspections of its premises and audits of its


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books on demand, to comply with operation bulletins, and, oftenis dependent on, or required to buy, equipment or product fromthe franchisor. It is hardly surprising, therefore, that a number ofcourts, including the Manitoba Court of Appeal in Imasco RetailInc. (c.o.b. Shoppers Drug Mart) v. Blanaru, [1995] 9 W.W.R.44, 104 Man. R. (2d) 286 (Q.B.), affd (1996), [1997] 2 W.W.R.295, 113 Man. R. (2d) 269 (C.A.) have recognized that a duty ofgood faith exists at common law in the context of a franchisor-franchisee relationship.

B. Whether the trial judge held Print Three to afiduciary duty

[67] The appellant submits that the trial judge held Print Threeto a higher standard than that imposed by the duty of good faith,namely, the duty of a fiduciary. The appellant’s submission thatthe trial judge applied a fiduciary standard to Print Three rests onthe trial judge’s comment that the relationship of franchisor tofranchisee is akin to a partnership. The appellant states partnersowe each other a fiduciary duty and that this is the standard thathe applied to Print Three’s relationship with Shelanu.

[68] The imposition of a duty of good faith and a fiduciary dutyare closely related. As stated in Cornell, supra, at para. 33 they,along with the standard of unconscionability:

[a]re points on a continuum in which the law acknowledges alimitation on the principle of self-reliance and imposes an obli-gation to respect the interests of the other. They are defined byP. Finn, “The Fiduciary Principle” in T. Youdan, ed., Equity, Fi-duciaries and Trusts, (1989), 1 at 4 as follows:

“Unconscionability” accepts that one party is entitled as ofcourse to act self-interestedly in his actions towards theother. Yet in deference to that other’s interests, it then pro-scribes excessively self-interested or exploitative conduct.“Good faith,” while permitting a party to act self-interestedly, nonetheless qualifies this by positively requiringthat party, in his decision and action, to have regard to thelegitimate interests therein of the other. The “fiduciary”standard for its part enjoins one party to act in the interestsof the other — to act selflessly and with undivided loyalty.There is, in other words, a progression from the first to thethird: from selfish behaviour to selfless behaviour. Much themost contentious of the trio is the second, “good faith.” Itoften goes unacknowledged. It does embody characteristicsto be found in the other two [footnotes omitted].

[69] There is at least one important difference between the dutyof good faith and a fiduciary duty. If, for example, A owes a fiduci-ary duty to B, A must act only in accordance with B’s interestswhen A exercises its powers or exercises a discretion arising out ofthe relationship: see York Condominium Corp. No. 167 v.Newrey Holdings Ltd. (1981), 32 O.R. (2d) 458, 122 D.L.R.(3d) 280 (C.A.) at p. 467 O.R., p. 289 D.L.R., leave to appeal tothe Supreme Court of Canada refused [1981] 1 S.C.R. xi; Hodg-kinson v. Simms, [1994] 3 S.C.R. 377, 117 D.L.R. (4th) 161. If,

on the other hand, A owes a duty of good faith to B, A must giveconsideration to B’s interests as well as to its own interests beforeexercising its power. Thus, if A owes a duty of good faith to B, solong as A deals honestly and reasonably with B, B’s interests arenot necessarily paramount: see for example Mason v. Freed-man, [1958] S.C.R. 483, 14 D.L.R. (2d) 259.

[70] The trial judge recognized that the relationship between afranchisor and a franchisee would not normally be characterizedas a fiduciary one in accordance with Jirna Ltd. v. Mister Donutof Canada Ltd., [1972] 1 O.R. 251, 22 D.L.R. (3d) 639 (C.A.),affd [1975] 1 S.C.R. 2, 40 D.L.R. (3d) 303. I do not agree that itlogically follows from the trial judge’s reference to partners thathe applied the fiduciary standard in this case. At a later point inhis reasons, the trial judge reiterated that a franchise relationshipwas akin to that of a partnership and, accordingly, like a partner-ship required mutual respect. He quoted from the decision ofKelly J. in Gateway Realty Ltd. v. Arton Holdings Ltd. (1991),106 N.S.R. (2d) 180 (Sup. Ct.) at pp. 191-92, affd (1992), 112N.S.R. (2d) 180, [1992] N.S.J. No. 175 (QL) (C.A.), to the effectthat parties to a contract are required to exercise their rights un-der that agreement honestly, fairly, and in good faith, and that,when a party acts contrary to community standards of honestyand reasonableness or fairness, he acts in bad faith. The trialjudge well knew the distinction between a duty of good faith anda fiduciary duty and did not hold Print Three to a fiduciary duty.

[71] Moreover, the fact that contractual terms are ultimatelycomplied with, does not mean that there has been no breach ofthe duty of good faith.

C. Breaches of Print Three’s obligations as found by thetrial judge

[72] The trial judge found that Print Three breached its duty ofgood faith towards Shelanu in four respects. The specific breachesfound by the trial judge are:

– Print Three’s attempts to rescind the May 1995 agreementwere not only a breach of that agreement but, in the cir-cumstances, evinced a lack of good faith dealing by the fran-chisor;

– Print Three unilaterally changed the terms and conditionsupon which the franchisees agreed to participate in the AirMiles program, and in so doing, breached the representa-tions made and acted upon by Shelanu;

– Print Three failed to make prompt payment of several roy-alty rebates and its refusal to pay a royalty rebate for thefourth quarter of 1996; and

– Print Three’s establishment of the Le Print Express system,“not only would but did take work and customers from ex-isting Print Three franchises”. As a consequence he heldthat, “... the establishment of such an enterprise by the veryperson who owned and controlled the defendant was fun-


14

damentally at odds with the defendant’s obligations, includ-ing the obligation to deal in good faith, to its franchisees.”

[73] In relation to the first three breaches, the trial judgeawarded damages for breach of contract. He did not awardseparate damages for breach of the duty of good faith. No dam-ages were awarded for the establishment of the Le Print Expressfranchise. The breaches, including his finding respecting the es-tablishment of the Le Print Express franchise, led the trial judgeto conclude that Print Three did not intend to honour or be boundby the commitments it had made to its franchisees and that, as aresult, Shelanu should be discharged from any further obligationunder the contract.

[74] Whether or not a party under a duty of good faith hasbreached that duty will depend on all the circumstances of thecase, including whether the party subject to a duty of good faithconducted itself fairly throughout the process. See by analogy:702535 Ontario Inc. v. Lloyd’s London, Non-Marine Under-writers (2000), 184 D.L.R. (4th) 687, [2000] I.L.R. 1-3826(Ont. C.A.), per O’Connor J.A., at paras. 28-37, leave to appealto [the] Supreme Court of Canada dismissed, [2000] S.C.C.A.No. 258. See also the decision of Laskin J.A. in the Court of Ap-peal in Whiten v. Pilot Insurance Co. (1999), 42 O.R. (3d) 641,170 D.L.R. (4th) 280, in dissent, affd [2002] 1 S.C.R. 595,[2002] S.C.J. No. 19 (QL).

3. Breaches of Print Three’s Obligations to Shelanu

A. Royalty rebates

(i) Refusal to recognize the 1995 oral agreement

[75] I have already dealt with the facts and findings of the trialjudge in relation to the 1995 oral agreement and have held thatPrint Three breached that agreement.

[76] Where a duty of good faith exists, not every breach of con-tract will be a breach of the duty of good faith. An honest dis-agreement concerning the interpretation of a franchiseagreement ultimately decided in favour of the franchisee could bea breach of contract but need not be a breach of the duty of goodfaith owed by the franchisor. Denial of payment under an agree-ment should not, however, be made in order to gain leverage orbargaining advantage in a dispute with the other party or out ofvindictiveness. In this case the evidence indicates that PrintThree’s refusal to pay Shelanu the royalty rebate pursuant to theoral agreement was linked to Banks’ anger concerning Shelanu’sposition respecting the Air Miles advertising program. There wasevidence upon which the trial judge could hold that the refusal torecognize the 1995 oral agreement was also a breach of the dutyof good faith.

(ii) Delay in payment of undisputed royalty rebates

[77] Print Three withheld all royalty rebates payable to Shelanufor the third and fourth quarters of 1995 (July to September 1995and October to December 1995). All royalty rebates for April to

June 1996 were also withheld but that portion about which therewas no dispute was paid when Bob Davis met with Shelanu inOctober 1996. Similarly, the rebates for 1995 were paid in Sep-tember. No explanation was given for the delay in paying thatportion of the royalty rebate about which there was no dispute.The trial judge found Print Three acted arbitrarily in withholdingpayment of the royalty rebates. I agree Print Three had no rea-sonable basis for refusing to pay the royalty rebates that were notin dispute.

[78] The fact that the royalty rebates were ultimately paid doesnot mean that Print Three did not breach its obligations towardsShelanu. The duty of good faith comprises a time component.That time component requires the party under a duty of goodfaith to respond promptly to a request from the other party andto make a decision within a reasonable time of receiving that re-quest. Parties under a duty of good faith also have an obligationto make payment of any amounts that are clearly owed to theother party in a timely manner: 702535 Ontario Inc. v. Lloyd’sLondon, supra.

…

[95] The appellant’s submission that Print Three possessed anabsolute discretion with respect to the use of advertising funds ig-nores para. 9 of the franchise agreement which stipulates thatthe three per cent advertising fee is to compensate Print Three“for the actual cost of advertising and promotional campaigns”[emphasis added], to provide reasonable compensation to itsemployees in preparing and purchasing advertising activities, andto reimburse the franchisor for advertising fees paid. Furthermore,nothing in para. 9 gives Print Three the right to use Shelanu’sthree per cent advertising fees for non-advertising related or per-sonal purposes as happened here. Paragraph 26 of the agreementrespecting amendments being in writing has nothing to do withexcusing breaches of the agreement.

[96] Even if para. 9 is only a statement of intent and Print Threehad an absolute discretion with respect to the use of the AirMiles, Print Three could not exercise that discretion without re-gard to Shelanu’s interests; it was obliged to exercise the discre-tion in a reasonable manner. See J.D. McCamus, “The Duty ofGood Faith Contractual Performance” (N.J.I.: Civil Law Seminar,Contract Law: From Form to Remedies, Osgoode Hall LawSchool, 17 May 2000). Professor McCamus is of the opinion thatunder ordinary contract principles, a party has an obligation toact reasonably in exercising a discretionary power. Applying thisprinciple, he says the same result could have been reached incases recognizing the existence of a duty of good faith in the exe-cution of a contract such as Mason v. Freedman, [1958] S.C.R.483, 14 D.L.R. (2d) 259 at p. 486 S.C.R.; Greenberg v. Meffert(1985), 50 O.R. (2d) 755, 18 D.L.R. (4th) 548 (C.A.), leave toappeal to the Supreme Court of Canada dismissed (1985), 30D.L.R. (4th) 768; Le Mesurier v. Andrus (1986), 54 O.R. (2d)1, 25 D.L.R. (4th) 424 (C.A.); and Gateway Realty Ltd. v. ArtonHoldings Ltd., supra. In Greenberg v. Meffert, supra, where a


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breach of a duty of good faith was found, this court held that thewords “at the sole discretion”, in relation to payment of commis-sion by a real estate company to its real estate agent after termi-nation of the relationship meant that the company, “must actreasonably in exercising its discretion, and also honestly and ingood faith”. Those standards not having been attained, the agentwas entitled to his commission. Here, the trial judge found PrintThree acted arbitrarily and unreasonably and not in conformitywith the standards for exercising a discretion. On the evidence, itwas open to him to make this finding.

…

[99] Around October 1990, the appellant set up a business ini-tially known as Print Three Express that subsequently becameknown as Le Print Express. The trial judge found that these out-lets were to be smaller than Print Three franchises in order totarget individuals and small businesses. The cost to purchasethese franchises was lower than the cost to purchase a PrintThree franchise and some financing was also offered to potentialLe Print Express franchisees. Shelanu complained that the estab-lishment of the Le Print Express concept involved the franchisor ina business that competed with existing Print Three franchises.Brian Deslauriers testified that Le Print Express offered the samekinds of products and services that were, to a large extent, of-fered by Print Three. In support of his evidence he produced aflyer from the Le Print Express at the Eaton Centre that had beenfaxed to Shelanu. He further testified that contrary to his under-standing that the Le Print Express operations were to be small,occupying 200 square feet, the Eaton operation was three to fourtimes this size and had the same kind of equipment and capabili-ties as Shelanu. The same personnel and staff who operated andmarketed Print Three franchises also handled the requirements ofthe new franchise. The trial judge held:

It seems to me to be intrinsically troublesome for a franchisor todevelop a concept for a new franchise operation that will oper-ate in competition with its existing franchise operation. Eventhough Le Print Express franchisees were directed at a specificsegment of the industry, I am satisfied that they not only would,but did, take work and customers from existing Print Threefranchisees. As a consequence, in my view, the establishment ofsuch an enterprise by the very person who owned and controlledthe defendant was fundamentally at odds with the defendant’sobligations, including the obligation to deal in good faith, to itsfranchisees. The defendant could not properly and fairly institutethis new concept without at least obtaining the agreement ofthe existing Print Three franchisees to this crucial change totheir contractual relationship which, of course, the defendantmade no attempt to do. The establishment of the Le Print Ex-press franchises fundamentally altered the nature of the PrintThree franchise network and impacted directly on the businessenvironment in which the Print Three franchisees operated.

…

[107] I would therefore, hold that the appellant has met the highstandard required to overturn a trial judge’s finding of fact that LePrint Express competed with Shelanu and took business from it.My reasons for doing so may be summarized as follows: (1) thedifferent nature of the business engaged in by Le Print Express;(2) Shelanu’s delay in complaining about the establishment ofthat business; (3) the lack of evidence before the trial judge as toShelanu’s consequential loss of income; (4) the trial judge’s find-ings that there had been no misrepresentation concerning whatPrint Three was to provide in exchange for royalty payments andthat Print Three had done the minimum required to dischargethose obligations; and (5) the trial judge’s finding that the declinein Print Three franchises was primarily due to prevailing economicconditions. The finding that Print Three breached “reasonablecommercial standards” must also fail for the same reasons.

[108] Inasmuch as I have not upheld the trial judge’s finding offact in respect of Le Print Express, I would not uphold his conclu-sion that the establishment of Le Print Express was a breach ofPrint Three’s duty of good faith.

4. Fundamental Breach

A. The findings of the trial judge

[109] The trial judge concluded that the various failings andbreaches of the franchise agreement by Print Three constituted afundamental breach of the franchise agreement. The trial judgefurther held Shelanu was entitled to terminate the franchiseagreement because the breaches

[a]lso reveal an attitude of the defendant generally toward thisfranchisee, at least, and toward its obligations under the fran-chise agreement which demonstrates an intention by the defen-dant that it was not going to be bound by, nor honour, itsobligations under the franchise agreement unless it suited itspurpose to do so.

B. The standard of review and analysis

[110] A trial judge’s finding of fundamental breach is a matter ofmixed fact and law. This is because it is a question “about whetherthe facts satisfy the legal tests”: Housen, supra, at para. 26, citingCanada (Director of Investigation and Research) v. SouthamInc., [1997] 1 S.C.R. 748, 144 D.L.R. (4th) 1 at para. 55. The ap-propriate standard of review is dependent on where the error lies.As stated by Iacobucci and Major JJ. at para. 36:

Matters of mixed fact and law lie along a spectrum. Where, forinstance, an error with respect to a finding of negligence can beattributed to the application of an incorrect standard, a failureto consider a required element of a legal test, or similar error inprinciple, such an error can be characterized as an error in law,subject to a standard of correctness. Appellate courts must becautious, however, in finding that a trial judge erred in law in hisor her determination of negligence, as it is often difficult to ex-tricate the legal questions from the factual. It is for this reasonthat these matters are referred to as questions of “mixed law


16

and fact”. Where the legal principle is not readily extricable,then the matter is one of “mixed law and fact” and is subject toa more stringent standard. The general rule, as stated in JaegliEnterprises, supra, is that, where the issue on appeal involvesthe trial judge’s interpretation of the evidence as a whole, itshould not be overturned absent palpable and overriding error.

Thus, as stated by Rosenberg J.A. in Algoma Steel Inc. v. UnionGas Ltd. (2003), 63 O.R. (3d) 78, [2003] O.J. No. 71 (QL)(C.A.) at para. 19, “where the issue concerns application of alegal standard to a set of facts the question is one of mixed factand law and a somewhat less deferential standard may be ap-propriate, although not the standard of correctness required forquestions of law.”

[111] In order to conclude that Print Three had committed afundamental breach of its obligations to Shelanu, the trial judgerelied on the evidence as a whole, requiring the application of themore stringent standard of review. At the same time, it must beborne in mind that I have not upheld the trial judge’s finding thatPrint Three breached its duty of good faith to Shelanu by estab-lishing the Le Print Express franchise. It is therefore necessary toconsider whether the remaining breaches can support the trialjudge’s conclusion that there was a fundamental breach of theagreement. I am of the opinion that they cannot. As of the dateShelanu gave notice of termination of its obligations to PrintThree, Print Three had abused its discretion respecting Air Miles,failed to make payment of the full royalty rebate based on therebeing a single franchise, delayed in making payment of royalty re-bates admittedly due on three occasions, and refused to pay oneroyalty rebate allegedly based on Shelanu’s breach of the fran-chise agreement for refusing to allow Davis to inspect its prem-ises. The breaches respecting the Air Miles program and non-payment of royalty rebate were the subject of damages awardedby the trial judge.

[112] It is also necessary to consider what appears to me to be afurther palpable and overriding error on the part of the trial judge.This is the trial judge’s failure to consider the fact that althoughShelanu gave notice of termination of the agreement on May 8,1997, it continued to use the name Print Three for a further twoand a half years and continued to have an exclusive territory.Shelanu was therefore able to carry on the commercial purpose ofthe agreement.

[113] In Majdpour v. M & B Acquisition Corp. (2001), 56 O.R.(3d) 481, 206 D.L.R. (4th) 627 (C.A.), the event alleged to havetriggered a fundamental breach of the franchise agreement bythe franchisor was a bankruptcy. Because the franchisee was ableto carry on the commercial purpose of the agreement intact afterthe bankruptcy, MacPherson J.A. dismissed the franchisee’s claimit was discharged from further performance. That reasoning isequally applicable in this case.

[114] In dismissing the claim for fundamental breach, MacPher-son J.A. noted that the test was a restrictive one, namely,whether the conduct of one party deprived the other party of

‘substantially the whole benefit of the contract’ as stated by Wil-son J. in Hunter Engineering, supra. [See Note 2 at end ofdocument] This is the classic formulation of the test as set out byDiplock L.J. in Hongkong Fir Shipping Co. Ltd. v. KawasakiKisen Kaisha Ltd., [1962] 1 All E.R. 474, [1962] 2 Q.B. 26(C.A.) at p. 66 Q.B.:

[D]oes the occurrence of the event deprive the party who hasfurther undertakings still to perform of substantially the benefitwhich it was the intention of the parties as expressed in thecontract that he should obtain in consideration for performingthose undertakings?

[115] Print Three submits that, because the trial judge relied onthe words of Gonthier J. at para. 33 of his reasons in Farber v.Royal Trust Co., [1997] 1 S.C.R. 846, 145 D.L.R. (4th) 1, namelythat, “where one party to a contract demonstrates an intention nolonger to be bound by it, that party is committing a fundamentalbreach of the contract that results in its termination”, the trialjudge applied the wrong legal test for fundamental breach. The ap-pellant submits that this phraseology is only appropriate for em-ployment law contracts and that the only correct phraseology forfundamental breach is whether the failure of one party to performits contractual obligations had the effect of depriving the other of“substantially the whole benefit” of the contract.

[116] I do not agree that the phraseology used by Gonthier J. inFarber, supra, is restricted to the employment law context. In-deed this is precisely the phraseology used by G.C. Cheshire andC.H.S. Fifoot to describe the circumstances in which a breach ofcontract will excuse further performance in their text The Law ofContract, 5th ed. (London: Butterworths, 1960) at p. 488:

A breach of contract is a cause of discharge only if its effect is torender it purposeless for the innocent to proceed further withperformance. Further performance is rendered purposeless ifone party either shows an intention no longer to be bound bythe contract or breaks a stipulation of major importance to thecontract.

[117] I agree, however, that the deprivation of “substantially thewhole benefit of the contract” is the phraseology adopted by thiscourt to describe the test for fundamental breach in Robson v.Thorne, Ernst & Whinney (1999), 127 O.A.C. 215, [1999] O.J.No. 4638 (QL) (C.A.), at para. 18 and Bayer v. Aktiengesell-schaft v. Apotex Inc. (1998), 113 O.A.C. 1, 82 C.P.R. (3d) 526(C.A.) at para. 34, as well as Majdpour, supra. In the circum-stances of this case, the phraseology chosen by the trial judge todescribe the test for fundamental breach may not have been themost appropriate one to define the sort of breach that would ex-cuse Shelanu from further performance of its obligations.

[118] Professor Waddams addresses the variety of expressionsthat have been used to define the sort of breach that will excusea party from further performance under a contract in his text:Waddams, supra, at para. 583. Waddams says that behind all ofthese expressions lies a single notion, that of substantial failure of


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performance. Irrespective of the expression used, he proposes fivefactors derived from the jurisprudence to measure whether futureperformance under a contract should be excused at para. 587. In968703 Ontario Ltd. v. Vernon (2002), 58 O.R. (3d) 215, 22B.L.R. (3d) 161 (C.A.), this court, after referring to the decisionsin Robson, supra, and Bayer, supra, adopted and applied thefactors suggested by Waddams to measure whether future per-formance should be excused. They are: (a) the ratio of the party’sobligation not performed to the obligation as a whole; (b) the se-riousness of the breach to the innocent party; (c) the likelihood ofrepetition of such breach; (d) the seriousness of the conse-quences of the breach; and (e) the relationship of the part of theobligation performed to the whole obligation. Applying those fac-tors to the breaches by Print Three in this case would not lead tothe conclusion that Shelanu should be excused from further per-formance of its obligations.

[119] Applying Waddams’ guidelines in this case would not leadto the conclusion that Shelanu should be excused from futureperformance. The first and fifth factors appear to be aimed athelping a court to ascertain whether the contract was substan-tially performed. See Fairbanks Soap Co. v. Sheppard, [1953] 1S.C.R. 314, [1953] 2 D.L.R. 193. The crux of the agreementbetween Print Three and Shelanu was the licence to use PrintThree’s name and trademark in exchange for royalty paymentsand its exclusive territory. Print Three did not revoke or under-mine Shelanu’s licence to use Print Three’s name and trademarkand Shelanu continued to use them. In return, Shelanu was obli-gated to make royalty payments which it did. Over the ten yearsof the franchise agreement, Print Three also paid Shelanu themajority of its royalty rebates. I would also disagree that PrintThree evinced an intention to no longer be bound by the agree-ment as a whole although it certainly refused to be bound byparts of it. Print Three did not place another franchisee in She-lanu’s territory until after Shelanu’s franchise agreement had ex-pired. Shelanu was not deprived of substantially the whole of thebenefit of its agreement with Print Three.

[120] The second and fourth factors are aimed at measuring theeffect of the breach on the innocent party while the third factor,the likelihood of repetition of the breach, is aimed specifically atwhether the aggrieved party should be released because contin-ued performance would be intolerable due to repetition of thebreaches. To a small business like Shelanu, the delay in paymentof royalty rebates on three occasions, the failure to pay the rebatebased on there being a single franchise and the abuse of discre-tion respecting the advertising program were undoubtedly seriousbut they do not appear to have made it intolerable for Shelanu tocontinue to operate the franchise because that is what it contin-ued to do.

[121] Consequently, Shelanu is not entitled to recover the royal-ties paid by it since May 8, 1997 which the trial judge assessed at$199,622 nor the $59,870 in advertising fees paid by it after thatdate. (The latter amount would be subject to any credit for un-used Air Miles until that program was discontinued.)

[122] Lastly, I would point out that in Hunter Engineering,supra, the court was concerned with the delivery of damagedequipment. The court was not dealing with a contractual rela-tionship that required the parties to continue to interact witheach other on an ongoing basis. The same is also true of thesituation in Hongkong Fir Shipping, supra. In the context of afranchise agreement, which, as I have noted bears certain simi-larities to the employment law situation, there is an ongoing, in-teractive relationship. I note that, following Farber, supra, thiscourt has held that a party may be excused from further per-formance of an employment contract and the employer held inconstructive breach of the agreement where the employer’streatment of the employee makes continued employment intol-erable: Shah v. Xerox Canada Ltd., [2000] O.J. No. 849 (QL),49 C.C.E.L. (2d) 166 (C.A.). See also Whiting v. Winnipeg RiverBrokenhead Community Futures Development Corp.(1998), 159 D.L.R. (4th) 18, 126 Man. R. (2d) 176 (C.A.).

[123] Having regard to the current jurisprudence, the trial judgemight have chosen more apt phraseology to describe the test forfundamental breach but I would not hold that the trial judgeerred in law in using the phraseology that he did. Rather, as I haveindicated, it is in the application of the test for fundamentalbreach that he erred.

...

In light of the above reversal in the finding of breach ofgood faith, the trial judge’s decision that Shelanu wasrelieved from further obligation under the franchiseagreement due to a fundamental breach was thereforealso overturned. The court therefore awarded damagesagainst Shelanu for not continuing to perform the termsof its franchise agreement. However, the quantum ofdamages was reduced from a period of ten years (thelife of the agreement), to one year worth of damages,which was based on the breach by Shelanu of its oneyear non-competition clause, quantified as the loss ofrevenue and advertising fees for one year at $29,700. Inaddition, the court upheld the trial judge’s finding thatShelanu was also liable to pay Print Three an amountequal to the loss of one franchise fee namely $64,500for failing to surrender its customer list, telephone andfax numbers at the end of the agreement.

Ahmed V. 3 For 1 Pizza & Wings (Canada) Ltd.

[2004] O.J. No. 144 (S.C.J.) (QL)

This is a decision of the Superior Court of Justice ofOntario, per Mr. Justice Ground, granting judgment on acombined application/summary judgment motion infavour of the applicant managers for rescission.


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The respondent 1571817 (“157”) Ontario was afranchisee of the respondent 3 For 1 Pizza & Wings.

The applicant managers sought to declare therespondent franchisee, 157, a ‘franchisor’ or ‘sub-franchisor’ under the Arthur Wishart Act (FranchiseDisclosure), 2000, S.O. 2000, c. 3, and that 157’smanagement agreement with the applicant managerswas a franchise agreement in itself.

One of the main issues was that the trade-marks used inthe operation of the business were owned by 3 for 1Pizza, not by the alleged franchisor 157 or by anassociate of 157, while the definition of a “franchise” inthe Act provides that “the franchisor grants … the rightto sell… services that are substantially associated withthe franchisor’s, or the franchisor’s associate’s, trade-mark…”. The court relied on the intent and purpose ofthe Act to give a contextual interpretation to thedefinition, and found as follows (at para. 8):

...When one looks at the purpose and intent of the Act, it isclearly to afford protection to persons contemplating an invest-ment in a franchise operation and to provide disclosure of mate-rial facts with respect to such operation to the proposedfranchisee. The Act by defining franchisor to include a subfranchi-sor specifically contemplates that there will be subfranchisesgranted by a franchisee, as subfranchisor, to a subfranchisee as iscommon in the franchise industry. To carry out the intent andpurpose of the Act and to grant protection to subfranchisees in-vesting in a franchise operation, the definition of “franchise” inthe Act must be given a contextual interpretation. Accordingly,the reference to the “franchisor’s, or the franchisor’s associates’trademark” must be interpreted, in the context of an agreementbetween a subfranchisor and a subfranchisee, to mean the sub-franchisor’s interest in trademarks licensed to it as in virtually allcases the trademarks are owned by the top franchisor. To inter-pret the definition as submitted by counsel for the Respondentswould result in the Act providing no protection whatsoever by wayof disclosure to prospective subfranchisees intending to enter intoa franchise operation.

The court then went on to also find that the otherelements of a franchise agreement were met, and thatthe management agreement between 157 and themanagers was in fact a franchise agreement with 157 assubfranchisor. Given that no disclosure was provided by157 to the applicant managers, judgment was granted intheir favour for rescission on this combinedapplication/summary judgment motion, and 157’sseparate action against the applicants for damages in thecourse of managing the store was dismissed by way ofsummary judgment.

1193430 Ontario Inc. v. Boa-Franc(1983) Ltée

[2003] O.J. No. 5138 (S.C.J.) (QL)

This was a trial of an action before Madam Justice Sachsof the Superior Court of Justice of Ontario for damagesresulting from a termination of a distribution agreement.The main issue was whether Boa-Franc had just causeto terminate the distribution agreement with Salem.

Salem Hardwood Flooring was a distributor ofhardwood flooring products under a distributionagreement with the defendant Boa-Franc. Salem’sshares were later sold to a company that was acompetitor in a different aspect of the same business asBoa-Franc. Salem never advised Boa-Franc of the sale ofits shares, and their distribution agreement did notcontain any explicit terms governing or restricting theownership of Salem. After finding of the share sale, Boa-Franc terminated the distribution agreement withoutnotice, as well as other alleged grounds. The agreementwas acknowledged by the parties to be subject to a dutyof good faith and good communication.

In analyzing the meaning of the duty of good faith, thecourt applied the definition set out in Shelanu Inc. v. PrintThree Franchising Corp., [2003] 64 O.R. (3d) 533 (C.A.),where the Court of Appeal in paras. 68 and 69 quotedfrom P. Finn, “The Fiduciary Principle” in T. Youdan ed.,Equity, Fiduciaries and Trusts, (1989): “...‘Good faith’, whilepermitting a party to act self-interestedly, nonethelessqualifies this by positively requiring that party, in hisdecision and action, to have regard to the legitimateinterests therein of the other” (at para. 73).

The court then set out three questions on this issue (atpara. 74):

1. Did Boa-Franc have a legitimate interest in the transactionbetween Salem and Floorco [the purchaser]?

2. If so, were those interests considered by Salem?

3. Did Salem deal honestly and reasonably with Boa-Franc?

Justice Sachs found that Boa-Franc did have a legitimateinterest in the Floorco/Salem transaction for thefollowing reasons: (i) once the shares of the distributorwere owned by a manufacturer of only unfinishedhardwood, Boa-Franc could no longer be assured thatits distributor was treating both pre-finished andunfinished products equally, and presenting its Mirage


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pre-finished product to the marketplace in a way inwhich its advantages were fairly and completelypresented; (ii) the shares of Salem were now owned bya corporation that also owned three retail outlets, andits sole shareholder had a financial interest in one ofBoa-Franc’s Master Dealers, who were competitors ofeach other; (iii) the distributor and the retail stores nowhad access to information that was to be keptconfidential from the retailers. In particular, informationabout pricing between Boa-Franc and its distributor wasnow available to retailers, while it was supposed to bekept confidential; (iv) the principal of the distributor,who had recently persuaded Boa-Franc to make Salemtheir exclusive distributor, had now agreed to take onthe responsibility for the day-to-day operations of amuch larger merged business entity, and his fullcommitment to Boa-Franc’s line was now questionable;and (v) Salem was now the exclusive distributor forBoa-Franc. The volume of its purchases from Boa-Francwas growing. This gave Boa-Franc a legitimate interestin Salem’s financial stability.

As a result of the Floorco/Salem transaction, Salem wentfrom a profit-making, low overhead, “tightly run ship” withno bank debt, to a debtor who was jointly and severallyliable for a major debt with another company that had lost$1 million in its most recent financial year and had anaccumulated deficit of close to $4 million.

With respect to questions 2 and 3, the court found thatSalem knew that Boa-Franc had such an interest “...andthat is why, when they considered those interests,instead of acting honestly and reasonably towards Boa-Franc, they took deliberate steps to conceal the Floorcotransaction from them” (at para. 76).

As a result, the court found that Salem breached the dutyof good faith to Boa-Franc by entering into the Floorcotransaction without telling Boa-Franc, and further bymisleading Boa-Franc about the nature of the transactionwhen Boa-Franc asked them about it. The breach gaveBoa-Franc just cause to terminate the relationship withoutnotice, and the action was dismissed.

Bekah v. 3 For 1 Pizza & Wings (Canada) Inc.

[2003] O.J. No. 4002 (S.C.J.) (QL)

The issue in this case was whether parties who enterinto an agreement for the purchase of a franchise, but

who do not close the transaction and do not enter intoa franchise agreement, are franchisees under the ArthurWishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3,and are entitled to the rescission remedy in s. 6(2) ofthe Act.

The plaintiffs and defendant Triple Holdings enteredinto an offer to purchase a 3 for 1 Pizza franchise, andprovided two deposits totalling $25,000. The plaintiffsalleged they had never received a disclosure documentas required under the Act. They then served a notice ofrescission, and later brought this action for a rescissionunder s. 6(2) of the Act.

The defendants claimed they had provided thedisclosure document, but that in any event the plaintiffswere not entitled to a rescission under the Act becausethey had not closed the transaction, had not signed thefranchise agreement, and were not franchisees underthe Act.

At the close of opening statements of the trial, theplaintiffs proposed to bring a motion for summaryjudgment for a rescission, and the defendants agreed forpurpose of the summary judgment motion thatdisclosure had never been provided.

The issue was whether the plaintiffs were franchiseesunder the Act (so that they can be entitled to rescissionand judgment) given that they had not closed thetransaction, and given the definition of a “prospectivefranchisee” under the Act, which is different from thatof a “franchisee”.

Ultimately, Madam Justice Karakatsanis grantedjudgment on the motion for summary judgment, holdingthat the purchase and sale agreement falls within thedefinition of a franchise agreement in the Act as “anyother agreement relating to the franchise”, and that thepurchasers are franchisees under the Act because thethree applicable definitions, “franchise agreement”,“franchisee” and “prospective franchisee”, must be readtogether.

As a result, the court held the plaintiff purchasers asfranchisees were entitled to the relief of rescission forlack of disclosure document in s. 6(2) of the Act.

The decision solves the lacunae in the Act, where aprospective franchisee is entitled to receive disclosure,but only a franchisee is entitled to the remedy of arescission. The decision is believed to be the first in


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Ontario expressly holding an offer to purchaseagreement to be a franchise agreement under the Act,and analyzing and interpreting the definitions of a‘prospective franchisee’ and ‘franchisee’.*

* A decision dated May 2003 of the Ontario Superior Court ofJustice by Mr. Justice Pitt in 1368741 Ontario Inc. v. TriplePizza (Holdings) Inc., [2003] O.J. No. 2097 (QL), also held in

the plaintiffs’ favour in an almost identical set of facts, but wasin essence limited in reasons on this issue to the following (atpara. 5):

No authority has been cited for the proposition that theplaintiff is not entitled to a protection of the Act and I see noprincipled basis for accepting it. What is more, the subjecttransaction was closed in the sense that the vendor re-ceived the deposit and the debt instrument that secured thebalance of the vendor take back loan.

THE BOARD

Ben V. Hanuka, Editor-in-Chief of the Canadian FranchiseReview, concentrates his law practice in the area offranchise/distribution/licensing law and commerciallitigation, and heads the Franchise /Distribution/LicensingLaw Team at Goldman Sloan Nash & Haber LLP inToronto. Mr. Hanuka is founding chair of the Ontario BarAssociation’s Joint Subcommittee on Franchising, andfounding moderator of the Ontario Franchise Law Listserv.He serves as Treasurer of the Canadian Bar Association’sNational Civil Litigation Section Executive, which he alsorepresents on the Federal Court of Canada Bench and BarLiaison Committee. He regularly speaks at continuing legaleducation seminars and writes on these subjects.

Joseph Adler is a senior corporate and commerciallawyer. He is the Vice-Chair of the Franchise &Distribution Group at Davis & Company. Mr. Adleroften acts on behalf of U.S. franchisors doing business inCanada and for Canadian franchisors in the U.S.

John R.F. Baer is a partner in the Chicago office ofSonnenschein, Nath & Rosenthal LLP. He has extensiveexperience representing companies engaged infranchising and distribution, both in the U.S. andinternationally. Mr. Baer is Chair of the Illinois AttorneyGeneral’s Franchise Advisory Board and a member ofthe Legal/Legislative Committee of the InternationalFranchise Association.

Greg Harney is a franchise litigation lawyer practisingin both Victoria and Vancouver. Mr. Harney hasprimarily represented franchisors in disputes withfranchisees or third parties for over 20 years.

Edward N. Levitt is a founding partner of the Torontolaw firm, Levitt, Hoffman and is General Counsel to theCanadian Franchise Association. Mr. Levitt is a widelyrecognized author, lecturer and authority on franchise,licensing and distribution law.

Perry Maisonneuve is the principal of Northern LightsFranchise Consultants Corp., a management consultingfirm specializing in developing and expanding small andmedium sized businesses with an expertise infranchising principles and practices.

Dave Sanderson is a partner with McGovern, Hurley,Cuningham LLP, Chartered Accountants in Toronto. Hispublic practice is varied with special interest andexperience in franchise matters.

Michael Seid is founder and managing director ofMichael H. Seid & Associates, a consulting firmspecializing in franchising and other methods ofdistribution. He is past chairman of the InternationalFranchise Association’s Council of Franchise Suppliersand is a former member of the IFA’s Board of Directorsand Executive Committee. Mr. Seid is also the co-author of Franchising for Dummies, which he co-wrotewith the late Dave Thomas, founder of Wendy’sInternational.

John Sotos is a founding partner of Sotos Associatesand a leading practitioner in Canadian franchise,licensing and distribution law with a large national andinternational client base. He has extensive experience infranchise system development, repositioning,insolvencies and complex litigation. Mr. Sotos is amember of the Canadian, American and InternationalBar Associations; a member of the Canadian andInternational Franchise Associations; listed in theInternational Who’s Who of Franchise Lawyers, Lexpertand Leading 500 Lawyers in Canada since its inception.

Vicky Wilkes practises with the UK law firm, Wragge& Co LLP. Ms. Wilkes has been practising for over 12years, eight of which she has worked as in-housecounsel before returning to private practice toconcentrate on franchising and other distributionnetworks.

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