FRANCHISE GROUP, INC. In this article, we highlight and discuss some of the noteworthy decisions in the Canadian franchise law sphere over this past year.
With the range of subject matter and highly fact-specific nature of the cases (and franchise case law in general!) it can be challenging to parse with precision for broader themes and meaningful takeaways. However, even across the range of topics and circumstances considered by Canadian Courts and regulatory bodies in 2023, certain key patterns emerge.
What is illustrated, in our view, is the best practice for contracts relating to franchise operations, business, dealings with franchisees and dispute resolution to be drafted robustly and to err on the side of inclusion and greater clarity. The theme of strict interpretation for statutory requirements on franchisors and narrow interpretation to exceptions to those requirements remains prevalent at all levels of 2023 Canadian franchise law decision-making.
Aroma
Aroma
In accordance with the master franchise agreement, the parties in this case went to arbitration to resolve a dispute. The arbitration clause in this particular master franchise agreement explicitly stated that the arbitrator, among other things "must either be a retired judge, or a lawyer experienced in the practice of franchise law, who has no prior social, business or professional relationship with either party."
Approximately 17 months into the arbitration, the master franchisee had retained the same arbitrator selected for the ongoing dispute between master franchisor and master franchisee for a separate, unrelated matter. This was not disclosed to the franchisor, and was discovered only as a result of an accidental email from the arbitrator including a different lawyer (from the same firm) that had been representing the master franchisee.
Subsequently, this arbitrator made two costs awards against the franchisor. The franchisor applied to set aside the final awards including on the basis of reasonable apprehension of bias. After a survey of the master franchise agreement, the IBA Guidelines on Conflicts of Interest in International Arbitration and relevant case law, the Court determined that there was a reasonable apprehension of bias in the circumstances. The awards were set aside and a new hearing was ordered.
2355305
This case concerned, among other factual issues, the application of statutory exemptions to the requirement on a franchisor to provide a franchise disclosure document and the corresponding availability to the franchisee of the statutory rescission remedy.
The plaintiff franchisees sought a declaration under the Arthur Wishart Act (Franchise Disclosure) (
The plaintiff 2355305
The Act states that if the grant of a franchise was effected by or through a franchisor, there is an obligation on the part of the franchisor to deliver certain disclosure documents to the franchisee in accordance with its terms. The Act provides an exemption to this requirement if the franchise was not effected by or through the franchisor.
A grant is not effected by or through a franchisor merely because the franchisor has a right to approve or disapprove the grant, or because it may charge a fee for doing so. However, the Court emphasized that the statutory exemption must be narrowly construed. As such, where the franchisor does not play a passive role in the resale limited to specific requirements mandated for its consent under the franchise agreement, it will be unable to avail itself of the exemption.
The Court also placed weight on the rationale of precedent set by the
The Court found that, due to the franchisor's involvement in obtaining a new franchise agreement upon the transfer, rather than simply granting its consent to that transfer, the grant of the franchise was effected by the franchisor. As such, disclosure obligations applied. Secondly, it was found that the disclosure requirements were not met. The Court reiterated that disclosure requirements are statutory and the franchisee was entitled to damages.
Failure to be able to substantiate the financial disclosure provided, the method of delivery, the whole, what, where and when can be tantamount to a failure to provide.
This case involved three related franchisee defendants seeking determination as to whether they validly exercised their statutory right to rescission under the Arther Wishart Act (Franchise Disclosure) (
The franchisees (
Of note, Versatile and Everest had entered into varying franchise agreements directly with the franchisor for new locations, whereas Premium had entered into its own franchise agreement with the franchisor for a location that had previously been operated by another, unrelated franchisee.
Ultimately, Premium was granted its rescission claim as the franchisor defendant had failed to provide proper disclosure as required by the Act.
This was specifically due to the lack of records kept by both the franchisee and the franchisor, and the failure to deliver all requisite disclosure at one time as required by the Act.
While the facts of the case are specific and complicated in nature, a number of interesting and potentially generalizable findings emerged from the decision.
-
The conduct or knowledge of the franchisee claiming rescission does not appear to be a factor in the Court's analysis as to whether the franchisee was entitled to rescind its franchise agreement. The focus will be on the adequacy and compliance of disclosure itself, as opposed to the impact of such disclosure (or lack thereof) on the franchisee.
- On a closely related point, the termination of a franchise agreement cannot be relied upon to bar a franchisee's right of rescission. In this case, the franchisor had purported to terminate the franchise agreement prior to Premium exercising its right of rescission. The Court affirmed that any purported waiver by a franchisee of its rights under the Act would be void.
- As with the decision in Jayasena, exemptions from statutory disclosure obligations are to be interpreted narrowly. There is an exemption under the Act where a single franchisee invests a significant amount of money at the outset to acquire the franchise. The franchisor in this case attempted to make the case that the plaintiffs should be considered as "one" entity on account of the relation and unified operations. The Court rejected this argument as notwithstanding the relationship this was a situation of three separate grants to three separate entities, and distinguished it from the situation where a single franchisee is granted multiple locations.
- In
Ontario , the provision of piecemeal disclosure has been largely found to be a "fatal" flaw to a franchisor's disclosure that would give rise to a franchisee's right to rescind the franchise agreement. How a disclosure document and other important documents in relation to a franchise are delivered is therefore, a critical question of fact. In this case, the Court found that even the delivery of important financial information (concerning operations of that location by the previous franchisee owner and related correspondence) in a piecemeal fashion was sufficient to give rise to the right of rescission to the Premium franchisee. - Unsuccessful on unjust enrichment by certain inventory and procurement policies imposed on policies;
- May have breached a statutory duty of fair dealing or common law duty of good faith in respect of same on an individual basis, but cannot determine on a class-wide basis.
- Successful claiming retaining professional allowances was a breach of contract and statutory and common law duties of good faith, but only for those franchisees operating under older contracts that did not specifically address this unique revenue source.
This class-action involved decisions on four material issues:
-
First, it was alleged that Shoppers was in breach of contractual and statutory good faith obligations under s. 3 of the Arthur Wishart Act (Franchise Disclosure) (
Ontario ) due to the imposition of fees on the franchisees relating to its Optimum loyalty program. The plaintiffs sought to dispute these fees. This claim was unsuccessful for a number of reasons. It was found, among other things, by the Court that the language of the franchise agreements contemplated these fees, and the franchisees were aware that additional fees may become payable at the time the loyalty program was launched and were "willing and eager" to participate. - Second, the plaintiffs alleged that Shoppers was in breach of contractual and statutory good faith obligations by charging fees to its franchisees in excess of its actual costs for service and equipment leasing, resulting in unjust enrichment. The Court rejected this claim and found that Shoppers was under no contractual obligation to charge franchisees service fees "at cost" or without any profit. The franchise agreements entered into by each franchisee were express that the franchisor had the discretion to set fees "in such amount or amounts as [Shoppers] shall, in the good faith exercise of its judgment, determine."
- Third, the plaintiffs alleged that
Shoppers Drug Mart was unjustly enriched in connection with certain of its inventory and procurement policies imposed on franchisees. The Court determined that Shoppers was not unjustly enriched and this claim was not successful. Interestingly, the Court did find that Shoppers may have been in breach of its statutory duty of fair dealing by imposing a unilateral procurement and inventory policy, however such claims were "individual" and therefore this could not be determined or decided on a class-wide basis. - Finally, the plaintiffs alleged that Shoppers was unjustly enriched by retaining certain Professional Allowance Payments paid by generic drug manufacturers to Shoppers that should have been remitted to the franchisees. Such payments were not specifically contemplated in the 2002 version of the Shoppers' franchise agreement, but were captured under the language of its updated 2010 franchise agreement. As such, this claim was successful in respect of those franchisees operating under the 2002 version of the franchise agreement as these amounts were "revenue" that Shoppers was obligated to pass on to the franchisees.
The Court was prepared to make several findings arising out of the inability of the parties to produce clear records as to what disclosure had actually been provided in each instance. Among other things, the Court was prepared to place the onus on the franchisee to prove that it did not receive compliant disclosure (as opposed to the franchisor to demonstrate that it had provided compliant disclosure). As this was a fact-specific and convoluted case, it remains to be seen whether this finding will be challenged in the future and whether and to what extent it will have any broader precedential application.
The facts of this case centered around two franchisees -
There was overlap in ownership between Foods and Holdings. However, there was at least one individual that was different in the latter franchisee (Holdings).
Holdings brought a petition for rescission of its franchise agreement on the basis that the franchisor failed to provide it or Foods with a disclosure document or a statement of material change..
The franchisor argued that the principals of both Taprobane franchisees were the same for both entities and the franchisor was not aware that the son was involved with the latter franchise, Holdings. The franchisor further argued that the first franchise (Foods) had already been operating for two years, and as such the principals of the franchise were familiar with franchise operations and the disclosures were therefore no longer required by the Act.
The Court found that although there was an overlap in share ownership and directorship, the franchisees were nevertheless distinct legal entities and therefore the failure to provide disclosure entitled the petitioner to rescission.
It is important to note that, in both instances, the franchisor did not provide a franchise disclosure or statement of material change, as required by s. 5 of the Franchises Act (
Notwithstanding that Foods and by extension its principals had over two years of experience operating the franchised business, the Court also reiterated the principal that the obligations
The focus of the Act is on protecting the interest of franchisees. The disclosure requirements on franchisors and the associated penalties and remedies are means to that end. As such, limitations and outright exemptions must be narrowly construed. There is no requirement for the franchisee to prove causation in order to access the remedy of rescission. In other words, if the disclosure is not provided or non-compliant with the Act, it would not matter to the Court that the franchisee could not prove that this failure caused damage or loss.
Spina v.
After 10 long years, a class-action lawsuit between the plaintiffs (
-
Unsuccessful claiming breach of contractual and good faith duty as a result of imposing fees on franchisees in relation to its loyalty plan, or by charging franchise fees in excess of actual costs in respect of service/equipment leasing fees;
A breach of contract claim is distinct from the statutory remedy context in that the conduct of the franchisees can have significant consequence. In this case, the franchisees were estopped from alleging breach of contract by virtue of their conduct - their willing and eager participation in the loyalty program - that Shoppers relied upon and incurred significant expenses on that basis.
It is worth noting that this case (like so many in the franchise context), is highly fact-specific and the decision in based largely on the particular contract language and facts and applications in the circumstances of this case. What is clear is that franchisors would be well advised to contemplate and allocate any industry-specific, unique revenue streams in their franchise agreements if it is the expectation to retain them. At least one Canadian Court has demonstrated its willingness to distinguish these revenue streams from "discounts, volume rebates, advertising allowances" that a franchisor would otherwise be allowed to keep.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
30th Floor
MB R3C 4G1
Tel: 204957 0050
Fax: 204957 0840
E-mail: marketingservices@mltaikins.com
URL: www.mltaikins.com
© Mondaq Ltd, 2024 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com, source
