Ontario courts side with franchisees

“My opinion is that franchise law and its judicial interpretation by the courts of Ontario has created probably the most perilous jurisdiction in the world in which to conduct franchises,” says Peter Dillon… “It’s not clear whether the franchisee was a deadbeat or incompetent. Eight months after starting operations, the franchisee cast about for a means to escape from the franchise agreement that he had voluntarily entered into, with the accompanying business risk associated with that deal, with a very novice franchisor.”

http://www.canadianlawyermag.com
August 9, 2010

Ontario courts side with franchisees
In-house counsel facing new challenges as judges interpret Arthur Wishart Act
Daryl-Lynn Carlson

The courts’ interpretation of Ontario’s Arthur Wishart Act that oversees the province’s franchise law is creating a legal environment that some lawyers find problematic.

Primarily, the courts have meticulously interpreted the act’s disclosure requirements to the extent that some franchisees have been able to win restitution from a franchisor based on a minor technicality.

“My opinion is that franchise law and its judicial interpretation by the courts of Ontario has created probably the most perilous jurisdiction in the world in which to conduct franchises,” says Peter Dillon, head of the franchise practice at Siskinds LLP in London, Ont., and author of Franchise Legislation in Canada published by Canada Law Book.

“Ontario has not chosen to harmonize with the U.S. in its formatting and content of the laws, and we seem to have this misguided notion that franchisors are big and bad.”

Last fall, Dillon sent out a memorandum to all of his franchise clients alerting them to recent developments and court decisions that have favoured franchisees. Most of them have been focused on the pre-sale disclosure required by franchisors offering franchises for sale.

In the memorandum, he notes the Ontario Court of Appeal’s decision in a matter involving 6792341 Canada Inc. v. Dollar It Ltd.

“In the Dollar It decision, we’re told ‘The business was not successful,’” he writes. “It’s not clear whether the franchisee was a deadbeat or incompetent. Eight months after starting operations, the franchisee cast about for a means to escape from the franchise agreement that he had voluntarily entered into, with the accompanying business risk associated with that deal, with a very novice franchisor.”

He continues: “The trial judge, who must have had some appreciation for balancing different factors and weighing the pros and cons of a situation, held that ‘as a whole,’ the disclosure document met the requirements of Ontario law, and therefore the franchisee could not rescind his franchise agreement at any time within two years.

“However, the trial judge did not say that the franchisee was without a remedy. If the franchisee could demonstrate that the defects within the disclosure document he received actually contributed to some kind of loss or if the disclosure document he received contained a misrepresentation, then he could seek damages against the franchisor (and the others who signed the disclosure document) for the full amount of those damages.”

As a result, Dillon believes the appeal court concluded the “entire purpose of the act is to protect franchisees.”

The court then proceeded to find eight ways in which the franchisor’s disclosure document failed to comply with the law, including the fact that it wasn’t dated and signed by two directors; it failed to provide the franchisor’s financial statements; and it didn’t include a copy of the offer to lease or the lease between the franchisee and sub-landlord, as well as the head lease for the property.

“Until this decision, I would have said that this was not a legal requirement in any Canadian province. That is still my view,” Dillon says.

He concludes his memorandum by advising his franchisor clients that the courts have clearly demonstrated they are favouring the franchisees, which therefore “creates a high degree of risk and uncertainty that will put some franchisors out of business and will deter many others from commencing to do business through franchising.”

In fact, he notes he’s spoken to many U.S.-based franchises “that want nothing to do with Ontario. In an era where franchising plays a large part in our retail economic engine, it’s a shame to have mechanics at work that seem bent on lowering the horsepower or spiking the engine altogether.”

For lawyers, “the pace of change and volume of case law is almost a part-time vocation just to keep up to speed,” he adds. “And for small franchise systems, of which there are hundreds, counsel can’t possibly stay current. So this has become a high-risk practice area.”

Steven Leikin, who has worked as in-house counsel for several franchises and is currently with Manchu WOK Inc., agrees the recent case law pertaining to franchises has indeed favoured franchisees.

“The problem that is being caused for in-house counsel in a franchise business is that the courts of the province have taken a very strict and narrow view under the Arthur Wishart Act,” says Leikin.

“If you’ve made a minor slip, a franchisee can bring an application to get all his money back and if you’ve made a major slip in your disclosure, the franchisee has a two-year window and franchisees think they have a two-year, get-out-of-jail-free card. So you really have to be careful.”

While he fortunately has never had a franchisee challenge any of the companies for which he has worked as an in-house counsel for over the years, he acknowledges the difficulty of keeping up to speed on the nuances of franchise law. “If you misstate or lie in your disclosure document or don’t include current financial statements, that’s material,” he says. “But when you extend those kinds of things to the likes of a document not being signed by two directors, that’s hard stuff. The courts are insisting that the legislation be read strictly.”

He points to the most recent case, 405341 Ontario Ltd. v. Midas Canada Inc., in which the Ontario Court of Appeal disagreed that Midas franchisees must release the company from a class action claim in order to renew or transfer their franchise under their agreement. Section 4 of the act guarantees franchisees the right to associate without interference by the franchisor, thereby enabling them to communicate and organize amongst themselves about issues relevant to their operations.

Some of the claimants are in British Columbia, where the appeal court agreed with the Ontario Superior Court’s assertion that Ontario’s Arthur Wishart Act applies to out-of-province litigants.

Leikin says that ultimately, the legislature should revisit the act. “I think it’s going to take some legislative changes to change the wording, but unfortunately, I don’t think it’s a priority right now,” he says.

Comments

The Promise of Wishart going Sideways
Les Stewart

I appreciate that the franchise bar and their thought leaders have some explaining to 95% of their cash flow (franchisors).

However, as a keen observer of all things that go bump in the franchising night, I have not noticed an appreciable decline in the number of franchises on Ontario that could not be explained by the wholesale collapse of investor trust in the business format franchising industry.

So it appears the ON judiciary has concluded that the Legislative Assembly of Ontario was sincere in passing the Wishart Act (ie. not just the appearance but the fact of equitable treatment)? As a witness at the public hearings, I did not get the feeling that

As it turns out, even the "deadbeat and incompetent" former franchisees can assign reputations accurately: to systems, industries and "thought leaders".

Reassuringly to everyone else, it appears you may not be able to fool all of ON Superior Court Justices all of the time even in the face of regulatory and political capture. Exempting crown corporation franchises: now, that's just a little too far!

But I'm certainly willing to debate these opinions in any forum Mr. Dillon or his clients can conjure.

Otherwise, this "deadbeat and incompetent" former franchisee will muddle through somehow.

Les Stewart MBA
Midhurst ON Canada
FranchiseFool : WikidFranchise.org : LinkedIn

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