Originally appeared in the Ontario Bar Association Civil Litigation section’s newsletter Keeping Tabs, Vol 18, No. 4 (June 2010)

Arbitration clauses may not be as impenetrable as they once were. Some recent decisions in the context of class actions and joinder actions have refused to stay proceedings despite arbitration provisions. While consumers have seen their right of access to the courts preserved in the passing of the Consumer Protection Act, 2002, S.O. 2002 c. 30, the same concerns which led to the limitation of arbitration provisions in consumer cases have recently started to emerge in the commercial arena. Class actions and multi-party proceedings have been allowed to proceed even where the Consumer Protection Act, 2002 does not strictly apply.

The judicial system has embraced arbitration as a form of alternative dispute resolution, and for good reason: it is relatively inexpensive, expedient and allows parties to choose their own adjudicator all while freeing up scarce judicial resources. When it comes to enforcing arbitration clauses judges have generally not hesitated to give them full effect. After all, if the parties bargain to keep their disputes to themselves (and away from judicial resources), why stop them?

One need look no further than Kanitz v. Rogers Cable Inc.¹ to see how far Ontario courts were willing to take arbitration clauses absent any legislative direction. In that case the Superior Court of Justice stayed a proposed class proceeding on the basis that the consumers had accepted an arbitration clause as part of their end-user license agreements. In fact, many of the consumers had not even agreed to the arbitration clauses when they first signed up; Rogers introduced them after the fact and merely posted the updated agreements on its website. Nevertheless, the court found that the customers were bound by the contracts and therefore were required to settle their claims individually through arbitration.

Kanitz inspired section 7(2) of the Consumer Protection Act, 2002 which explicitly renders arbitration clauses invalid in the consumer context. The rationale is simple: few consumers would voluntarily submit to arbitration over a dispute relating to a consumer product or service. Only through class proceedings can such small claims be satisfied in an efficient manner. Retailers know this, which is why they included arbitration clauses in the first place.

While it is now settled that consumers are protected from arbitration clauses that preclude class actions, the burning issue is whether or to what extent non-consumers should also be protected. The Supreme Court provided a partial answer in Dell Computer Corp v. Union des consommateurs,² where it held that courts should not assume jurisdiction where parties have contractually agreed to arbitration, even when it is to take place in a foreign forum. However, Dell was decided in the context of the Civil Code of Quebec and the facts of the case arose before the Consumer Protection Act, R.S.Q. c. P-40.1 went into effect.

Despite Dell, a number of Ontario cases have continued to test the boundaries of arbitration clauses. The recent case of Griffin v. Dell Canada Inc.³ dealt with the very same arbitration clause but arrived at the opposite conclusion in light of the Consumer Protection Act, 2002. The proposed class included both consumers and non-consumers who had purchased allegedly defective laptop computers from Dell. After finding that the consumers in the class were protected by the Consumer Protection Act, 2002, Sharpe J.A. went on to consider whether the non-consumers should also be protected. Writing for a unanimous five-judge panel, Sharpe J.A. found that it would be tremendously inefficient and contrary to the efficient administration of justice to force some of the proposed class to proceed through arbitration and while allowing others to go to court. Underlying the decision were worries that small business owners, like consumers, would not realistically be able to resolve their claims through arbitration.

Sharpe J.A.’s overriding concern was that the true purpose of the arbitration clause was not merely to select a form of alternative dispute resolution but rather to deprive non-consumers of any reasonable method of dispute resolution. He wrote, at para. 57:

The choice is not between arbitration and class proceeding; the real choice is between clothing Dell with immunity from liability for defective goods sold to non-consumers and giving those purchasers the same day in court afforded to consumers by way of the class proceeding.

Similar reasoning has been applied in business-to-business disputes. In 2038724 Ontario Ltd. v. Quizno’s Canada Restaurant Corp.,⁴ the Quiznos franchise agreements included a provision prohibiting franchisees from participating in class actions. The Court dismissed a motion to stay a class proceeding based on the provision. Perell J. framed the issue as one of freedom of contract coming into conflict with the public policy goals advanced by the Class Proceedings Act, 1992, S.O. 1992, c. 6, including “access to justice, judicial economy, and behavior modification of civil wrongdoers.” Much like in Griffin, the Court recognized that the franchisees would be unable to effectively resolve their claims as individuals and that there was ‘strong cause’ to override the contract in the circumstances.

In Stoneleigh Motors Limited et al. v. General Motors of Canada Limited,⁵ the facts centered on the federal auto bailout and the termination of approximately 240 GM dealers. Of the terminated dealers, most signed a “Wind-Down Agreement” which among other things aimed to release GM from liability. Nineteen of the dealers, however, did not sign and instead sued GM. GM moved for the proceeding to be stayed on the basis of an arbitration agreement contained in the dealer agreement. The Superior Court of Justice allowed the claim to proceed as a multi-party action, once again citing concerns over the dealers’ lack of resources as individuals. The Court grounded its decision in both the arbitration agreement itself (which excluded multi-party lawsuits from arbitrability) and the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3.

As Sharpe J.A. noted in Griffin, the upcoming appeal to the Supreme Court of Canada from Seidel v. Telus Communications Inc., [2009] 5 W.W.R. 466 (B.C.C.A.) may ultimately decide how far this line of judicial reasoning can be taken. It seems clear that certain classes of non-consumers are indeed vulnerable to arbitration clauses in the same way as consumers are. It remains to be seen to what extent these groups will be afforded similar protection on other grounds.

*David Sterns is a litigation partner and Stuart Freen is a summer student with Sotos LLP.

________

¹ (2002), 58 O.R. (3d) 299 (S.C.J.).
² [2007] 2 S.C.R. 801
³ (2010), 98 O.R. (3d) 481; leave to appeal denied 2010 CanLII 27725 (S.C.C.).
⁴ (2008), 89 O.R. (3d) 252.
⁵ 2010 ONSC 1965.

Originally published on Canadian Lawyer Magazine online March 22, 2010

Franchise law has undergone important changes in the past decade which affect the way lawyers must approach the task of advising a client on the purchase of a franchise. While it is not necessary to be a specialist in franchise law to advise a potential purchaser, it is necessary to have a basic understanding of the law and to be on the lookout for red flags that could prejudice the client and lead to a negligence claim against the reviewing lawyer.

Initial question

Is the client looking to buy a franchise from the franchisor or from an existing franchisee on a resale? The comments which follow apply where the client is buying directly from the franchisor or where the franchisor is actively involved in the resale by a franchisee.

Begin with disclosure document

The review of a proposed franchise purchase in these circumstances begins with the disclosure document.

Ontario’sArthur Wishart Act (Franchise Disclosure), 2000 requires a franchisor to provide a prospective franchisee with a disclosure document at least 14 days before the franchisee signs any agreement that relates to a franchise (including a deposit agreement). The contents of a disclosure document are prescribed by the AWA and its main regulation 58/100. These provisions are not overly detailed or technical and should be consulted whenever a lawyer is asked to review a disclosure document.

It is a common mistake to assume that all franchisors selling franchises in Ontario have proper pre-contractual disclosure practices in place. Even some “name brand” franchisors do not comply with the disclosure requirements.

This is often based on ignorance of Ontario law or the mistaken belief that a U.S.-based disclosure document will pass muster as a disclosure document under Ontario law, when the courts have stated in 1518628 Ontario Inc. v. Tutor Time Learning Centres LLC that it will not.

In other cases, franchisors try to circumvent the disclosure requirement by claiming that they are not franchisors under the AWA. However, the definition of a franchise under Ontario law is very broad and captures most relationships involving the granting of a licence, some level of operational control, and the payment of money by the licensee.

A lawyer reviewing the disclosure document should be aware of the following requirements:

• The disclosure document must be a single, bound document, delivered to the franchisee at one time. Piecemeal disclosure is not permitted. The reviewing lawyer should insist that the client bring to the consultation the entire disclosure document, in its original state (i.e. not separated into envelopes, scanned into multiple pdfs, or haphazardly photocopied).
• The disclosure document must contain a certificate signed by at least two persons who are officers or directors (or a single officer or director if the franchisor does not have more than one) attesting to the accuracy and completeness of the contents. The failure to include a signed certificate is fatal to the disclosure document and means that the franchisee has an ironclad right of rescission exercisable within two years of entering into the franchise agreement.
• The disclosure document must contain copies of all agreements related to the franchise. This includes not only the franchise agreement itself, but any sublease (and head-lease if the franchisee is bound to comply with the head-lease), general security agreement, and personal guarantee. In short, any agreement which the franchisee will be asked to sign or comply with on closing must be included in the disclosure document.
• The disclosure document must contain all material facts related to the purchase of the franchise. The term “material fact” is defined broadly as: any information about the business, operations, capital or control of the franchisor . . . or about the franchise system, that would reasonably be expected to have a significant effect on the value or price of the franchise to be granted or the decision to acquire the franchise.” The onus to disclose material facts is high and yet many franchisors neglect to include them in their disclosure documents.
• Subject to certain exceptions, the franchisor must include its financial statements on an audited or review engagement standard. At least one court decision, Sovereignty Investment Holdings Inc. v. 9127-6907 Quebec Inc., has stated that the failure to include proper financial statements in the disclosure document gives the franchise the right of rescission.

This is not a complete list of all possible disclosure-related defects. For instance, a proper document may be negated by other documents relating to the franchise given to the franchisee outside of the disclosure document.

Franchisors sometimes give out “information packages” containing information which contradicts the disclosure document without realizing that this contravenes the requirement that all pre-contractual disclosure be contained in a single disclosure document delivered at one time.

Likewise, earnings claims made on the back of a napkin or in an e-mail to the prospective franchisee are also prohibited but are still commonplace. All earnings claims by a franchisor or its associate must be included in the disclosure document, and must contain certain statements prescribed by s. 6(3) of the regulation.

Each case is different and must be assessed in light of the requirements of the AWA and the regulation. The reviewing lawyer should keep in mind that the courts have been very stringent in insisting on proper disclosure by franchisors.

What to do in the case of improper or incomplete disclosure

When a prospective franchisee has not received proper disclosure, the reviewing lawyer should clearly state this in its reporting letter. If the franchisee wishes to proceed with the purchase of the franchise without proper disclosure, the reviewing lawyer should inform the client in the reporting letter that it may have a right to rescind the franchise agreement and to obtain a return of its investment.

The client does not waive its right of rescission by proceeding with the purchase without proper disclosure. Failure to advise the client of this important remedy could give rise to a negligence claim.

The right to rescind may be exercised by serving a notice of rescission under the AWA either within 60 days of receiving the disclosure document (s. 6(1)), or within two years of signing the franchise agreement if no disclosure document was provided (s. 6(2)).

The 60-day deadline applies where the franchisor delivers the disclosure document less than 14 days before the franchisee signs the franchise agreement or where the contents of the disclosure document do not meet the legal requirements of the AWA.

The two-year deadline applies if no disclosure document is provided or if the disclosure document is materially deficient in the sense that one of the required elements of a disclosure document is missing, such as a signed certificate.

Conclusion

The harsh reality is that some franchises have a failure rate as high as or even higher than non-franchised businesses. When the franchised business fails, the results are often catastrophic for the franchisee. The legal advice provided by the reviewing lawyer will come under close scrutiny, particularly if the franchisee misses the rescission window because it was unaware of its rights.

The reviewing lawyer is expected to know the essential elements of disclosure.  His or her conduct may be measured against this standard of care even where the client is determined to proceed with the deal regardless of the advice, or only asks for quick or informal advice from the reviewing lawyer.

Lawyers should allocate sufficient time and charge a sufficient fee to permit a proper document review and reporting to the client. Otherwise, they should decline the retainer.

David Sterns is a litigation partner at the firm of Sotos LLP, which focuses on franchising, licensing, and distribution law.

Sotos LLP lawyer David Sterns is quoted in the article:

There can be little doubt that the Court of Appeal intended by this decision to signal that class proceedings are ideal tools for achieving justice for economically disadvantaged and vulnerable groups, such as franchisees. In my view, the Court of Appeal wants these cases to be tried on their merits, and may the best man or woman win.

The lawsuit alleges that the Canadian franchisor of the Quiznos chain and others have illegally conspired to enhance and fix the prices of supplies purchased by Quiznos franchisees for their businesses. On June 24, 2010 the Court of Appeal upheld the certification of Canadian Quiznos dealers, allowing them to proceed with a class action lawsuit.

Click here to go to the digital version of the Lawyers Weekly (free preview)

Click here to go to the Quiznos class action home page

Previously, a lower court rejected Midas’ argument that the dealers were precluded from launching a class action due to release of liability provisions in the dealers’ franchise agreements. The dealers, represented by Sotos LLP, successfully argued that their right to band together as a class was protected under the Arthur Wishart Act (Franchise Disclosure), 2000.

Today, the Court of Appeal upheld that decision and dismissed Midas’ appeal. The Court sided with the Midas dealers on each ground of the appeal, holding that the franchisees were indeed protected by the Arthur Wishart Act and could not surrender their right to a class action.

The decision has big implications for franchisors in Ontario who seek to protect themselves from class action lawsuits. As Justice MacFarland notes in the decision:

[29]          To permit the appellant to require the class members to release any claims they might have against the appellant in order to take advantage of any other rights they might have under the Agreement, in my view, is simply contrary to the spirit, intent and letter of the Act.  Where a franchisor insists upon such waiver or release, s. 11 makes it clear that any such waiver or release will be void.

This ruling marks the second big class action win in the Ontario Court of Appeal for Sotos LLP in just two weeks. On June 24 the Court upheld the certification of Canadian Quiznos dealers in a separate case.

Read the Midas decision

Visit the Midas class action home page

Several hundred driver’s licence and vehicle registration offices can move forward with a class-action lawsuit against the Ontario government for alleged under-compensation.

The Ontario Superior Court of Justice decision, which came late last week, identifies the private licensers as a class, giving them permission to continue the lawsuit launched last October.

Read the rest of the article at CBC.ca.

Go to the Licence Issuers class action home page

Privately-owned issuing offices carry out much of Ontario’s responsibility for issuing drivers’ licenses and vehicle registrations. Private issuers are independently-owned businesses which are paid according to contracts written by Ontario. Over the past decade, several reports, including reports of the province’s Auditor General, have called attention to the inadequacy of the issuers’ compensation.

The court found that the lawsuit meets all of the criteria for class-action status. “This is a major step forward for the issuers in their effort to obtain their fair compensation for the important job which they carry out on behalf of the government,” according to plaintiffs’ lawyer, Allan D.J. Dick. Added Dick: “the private issuers have no influence over their compensation and do not have any of the protections of employees. They are totally dependent on the government for fair compensation.”

The issuers seek substantial additions to their compensation going back to August 2003 and an update of their current compensation formula in the future.

The decision in Mayotte v. Ontario is available at: http://www.sotosllp.com/class-actions/licence-issuers/

Private issuing offices have operated since 1917 and are an example of outsourcing of government services in communities across Ontario. Background information on the private issuers, including the reports of the Auditor General, is available at: http://www.omvlia.com/.

The licence issuers are represented by Sotos LLP, Canada’s leading franchise law firm.

For further information: Allan D.J. Dick at adjdick@sotosllp.com or David Sterns at dsterns@sotosllp.com, Sotos LLP, 416-977-0007, www.sotosllp.com

I am also of the view that a class proceeding in this case will satisfy at least two of the objectives of the Class Proceedings Act of judicial economy and access to justice.  It seems to me that this case involving a dispute between a franchisor and several hundred franchisees is exactly the kind of case for a class proceeding.

As a result, the Quiznos franchisees will be allowed to proceed as a class in their lawsuit against Quiznos Canada and Gordon Food Services. The lawsuit alleges that the Canadian franchisor of the Quiznos chain and others have illegally conspired to enhance and fix the prices of supplies purchased by Quiznos franchisees for their businesses.

Click here to read the rest of the decision

Click here to go to the Quiznos class action home page

Visit Sotos LLP on Twitter

GM’s restructuring plan seemed like a sound idea. But that didn’t make the news any easier for 245 dealers shown the end of the road.

Read the full article at Bizmagazine.ca

To make the list, attorneys are nominated by their peers and clients, plus meet the criteria of the FT editorial panel. Legal Eagles are the attorneys you’ll find speaking at industry events and legal symposiums, winning court cases and writing seamless contracts and documents. These are the trophy-winners.

Read the full article at franchisetimes.com: http://www.franchisetimes.com/content/story.php?article=01633