The Ontario Court of Appeal recently released its decision in Spina v. Shoppers Drug Mart, 2024 ONCA 642, an appeal in a class action brought by franchisees of Shoppers’ Drug Mart. In the underlying summary judgment motion decision, the franchisees were successful in establishing that Shoppers had breached a franchise agreement when it failed to remit $955 million in professional fees to franchisees. The Court of Appeal found that Shoppers breached the duty of good faith by misallocating certain professional fees, and increased the amount awarded to the franchisees by approximately $129 million.

Summary Judgment Motion Decision

A summary by Adil Abdulla of the underlying motion decision can be found here. In that decision, the franchisees claimed that Shoppers breached its contracts and the duty of good faith in various ways.

The franchisees succeeded in their claim that Shoppers breached a  2002 franchise agreement by retaining professional allowances that should have been distributed to franchisees. Professional allowances are provided to pharmacy operators by certain generic drug producers for the provision of direct patient care. This includes running clinic days, education days and private counselling within pharmacies. The professional allowances regime was introduced in 2006 when the Ontario government enacted the Transparent Drug System for Patients Act.

The motion judge found that Shoppers had breached a 2002 franchise agreement, drafted before the introduction of the professional allowances regime, and the franchisees who had signed this agreement were entitled to receive payment of professional allowances. The motion judge found that Shoppers had not breached a separate 2010 franchise agreement, and the franchisees who had signed this agreement were not entitled to receive professional allowances.

The 2002 agreement franchisees were awarded $955 million in respect of professional allowances that Shoppers had retained.

Appeal Decision

The central issue in the appeal decision was how much Shoppers had received in professional allowances. The franchisees claimed that the motion judge understated the amount of professional allowances that Shoppers received, and they should have been entitled to recover $1.084 billion, instead of $955 million.

The motion judge found that, given the direct patient services that Shoppers and the franchisees performed, Shoppers would have been eligible to receive $1.084 billion in professional allowances. However, Shoppers only invoiced drug manufacturers for $955 million and treated the balance of payments received as rebates attributable to non-Ontario stores where rebates were allowed, and which it was entitled to retain under the 2002 franchise agreement.

The Court of Appeal found that Shoppers had a statutory duty under the Wishart Act to deal fairly and in good faith, and a common law duty of honest performance to not knowingly mislead franchisees about performance of the franchise agreement. Shoppers had discretion under the contract to allocate money it received from drug manufacturers between professional allowances and rebates, but it had an obligation to do so in good faith. Instead, it allocated revenue obtained from generic drug purchases made in Ontario to rebates for non-Ontario stores, thus removing the payment from revenue it had to share with franchisees. The court found that this was not fair dealing in accordance with the Wishart Act or honest performance of the agreement under common law.

The Court therefore found that the motion judge had understated the professional allowances that Shoppers received by about $129 million.

Key Takeaways

The appeal again highlights the importance of good faith in contractual performance. Parties cannot lie or knowingly mislead one another. As the court notes, “’knowingly misleading’ is not confined to direct lies – it can also include ‘half-truths, omissions, and even silence depending on the circumstances’” (at para. 166).

Where parties have discretion under a contract, they may be tempted to act opportunistically. Instead, they should be careful to exercise discretion in a way that is consistent with the reason the discretion was granted. If they fail to do so, they may find themselves on the hook for a large damages award.

Adrienne Boudreau, Sotos LLP

Adrienne is a partner at Sotos LLP. She has earned recognition as a leading Canadian lawyer from numerous prestigious publications, including Chambers Canada, Best Lawyers in Canada, and the Best Lawyers Global Business Edition. Adrienne is consistently recommended in the Canadian Legal LEXPERT Directory and has been acknowledged by Who’s Who Legal Canada and the Who’s Who Legal Global Guide. Additionally, she is listed as a Leading Litigation Lawyer in the LEXPERT Special Edition – Canada’s Leading Litigation Lawyers. Adrienne can be reached directly at 416.572.7321 or aboudreau@sotos.ca.

Evan Brander, Sotos LLP

Evan is an associate at Sotos LLP. He can be reached directly at 416.572.7310 or ebrander@sotos.ca.

The post A Prescription for Good Faith: The Court of Appeal’s Decision in Spina v. Shoppers Drug Mart appeared first on Sotos LLP.

In its recent decision, Edmonton (City) v AW Holdings Corp, 2024 ABCA 92, Alberta’s top court has upheld a decision by the province’s Land and Property Rights Tribunal (LPRT), which dealt with the issue of whether a franchisor who neither owns title to, nor leases land, can be an owner through possession or occupation of that land, or have an interest in it, under provincial expropriation legislation.

The key point here was that the LPRT held, based on a very fact-specific analysis, that the franchisor’s interest in the business operated by its franchisee on land leased by the franchisor’s leasing corporation, pursuant to the franchise agreement was different and separate from an interest as a franchisee and as a sublessor. Based on its interest as a franchisor under its franchise agreement, the franchisor was entitled to control over the business activities of the franchisee and to income for the use of the franchise system, which was based on a right for compensation for expropriation of that land.

The case is novel, as it indirectly, and in the limited context of expropriation under the Expropriation Act, RSA 2000, c E-13 (“Act”), recognizes and affirms the party’s interests within a franchise relationship. The case recognizes that, for brick-and-mortar locations, where there is a sublease relationship, the franchisor (and not just the franchisor’s leasing company) may have an interest in the land. The overreaching implications of this case may be limited, as the court’s analysis is highly fact-dependent and dependent on the specifics of the Act. However, a takeaway for Canadian franchise counsel may be to balance the protective intent of having a separate leasing company with having some nexus between the franchisor and the premises. Counsel may find it a good idea to review their current forms of sublease to consider these issues.

Facts

As is common in franchise systems, the Booster Juice franchise system ( “System”) includes a franchisor corporation, AW Holding Corp (“Franchisor”), which owns the Booster Juice franchise and enters into franchise agreements with franchisees and includes a leasing corporation, Booster Juice Inc. (“LeasingCo”), which acquires, leases and sublets premises for the Booster Juice System.

Starting in 2001, LeasingCo entered into a lease agreement (the “Head Lease”) with Sun Life Assurance Company of Canada (“Landlord”) for Unit 11838-104 Avenue, Edmonton (the “Land”) and in turn sublet the Land (“Sublease”) to 1154264 Alberta Ltd ( “Franchisee”).

The Headlease contained a standard clause giving the Landlord control over the form of any sublease, however, this clause was crossed out.

This change in the lease enabled Franchisor to dictate the form of sublease Franchisee would have to execute with LeasingCo for the premises under its Unit Franchise Agreement (“Franchise Agreement”) between Franchisor and Franchisee. This section of the Franchise Agreement stated:

“4(a) If Franchisor or any corporation or Person linked with the Booster Juice System (including Booster Juice Inc.) enters into the lease for the Premises, Franchisee shall execute a sublease with Franchisor or such other corporation or person in Franchisor’s standard form attached hereto as “Schedule 3” concurrently with the execution of this Agreement.”

Clause 1.6 of the Franchise Agreement provided additional discretion to Franchisor, stating that the provisions of the Franchise Agreement must be read in priority to and must supersede the provisions of any sublease.

The Land subsequently became the subject of a proposed expropriation by the City of Edmonton (the “City”) to facilitate the construction of an LRT line and the City acquired LeasingCo’s sublease under an agreement with Franchisee in 2020 (the “Consent Agreement”), pursuant to section 30 of the Act which stipulates that, “the owner [of expropriated land] may consent to the acquisition of land by an expropriating authority subject to the condition that compensation for the land shall be determined by the [LPRT]”.

Franchisor, who was not a party to the Lease or Sublease, signed the Consent Agreement following the wording: “Booster Juice hereby consents to the conveyance of the Leasehold interest from [the Franchisor] to the City pursuant to the terms and conditions of this Agreement”.

The land was left vacant by the city from March 2020 until it was demolished in June 2022, resulting in Franchisor losing royalty income at that location.

The City acknowledged that Landlord, LeasingCo, and Franchisee were all “owners” and proper claimants under the Act, but disputed that Franchisor had the same status.

In August 2021, Franchisor, LeasingCo and the City submitted a joint written application to the LPRT for a determination regarding Franchisor’s status. The LPRT determined that Franchisor was a proper claimant for compensation by virtue of having both “possession” of, and an “interest” in, the Land.

Issue

The City appealed this decision submitting that the LPRT erred in its interpretation and application of the terms “possession […] of the land” under s. 1(k)(iii) of the Act, and “interest” or “interest in the land” under s. 1(k)(iv) of the Act.

Analysis

First Instance

The LPRT based its analysis on the wording of the Act and in particular on whether the Franchisor qualified as an “owner” such that they were entitled to compensation under the Act.

• Possession

Section 1(k)(iii) of the Act defines “owner” as: any other person who is in possession or occupation of the land. If a person can show possession or occupation of the land, they are an owner. In this case, the LPRT found the powers Franchisor reserved to itself under the Franchise Agreement gave it (i) control over the Land, because it could and did, dictate the terms of the sublease on the Land, and (ii) the right to possession of the Land if certain circumstances under the Franchise Agreement arose.

This finding is novel in that it confirms the context of expropriation contemplates relationships that could give rise to possession or occupation other than those through the chain of legal ownership of property. The LPRT found possession in the broadest sense is sufficient. The Franchise Agreement gives the Franchisor a degree of control over the Land, distinct from the legal ownership of freehold owner or the legal interests of the lessee or sublessee.

• Interest

Section 1(k)(iv) defines “owner” as: any other person who is known by the expropriating authority [here the City] to have an interest in the Land. It is clear. Under this section, if a person, who is known to the expropriating authority, has an interest in the Land that is different from the interests of freehold or lease hold, they are an owner for the purposes of the Act.

The Franchisor argued that the powers it reserved to itself under the Franchise Agreement gives it control over the business operations of Franchisee, and through control of the System, control over the use of the Land by Franchisee under the terms of the Franchise Agreement. In effect, Franchisor’s interest under the Franchise Agreement gives it participation in the business of the Franchisee located on the Land.

The LPRT agreed the Franchisor had a business interest in the franchised business and had significant control of the operation of the franchised business located on the Land.

Appeal

The LPRT’s decision was reviewed on a reasonableness standard in light of its underlying rationale and as a whole to determine whether it exhibited (i) justification, (ii) transparency, and (iii) intelligibility. The Court of Appeal of Alberta (“Court”) reviewed the LPRT’s analysis of the Franchise Agreement grounding “possession” of the Land for the Franchisor under section 1(k)(iii) of the Act, and upheld their decision. Having upheld the decision on the first analysis, the court did not consider whether the Franchisor had an “interest” under Section 1(k)(iv) of the Act.

The Court held that Sections 1(k)(iii) and (iv) must be interpreted broadly and strictly construed in favour of claimants. It reasoned that the terms “possession” and “interest” in those provisions have broader meanings in the expropriation context than the same terms used in the context of property law, citing Edmonton (City) v Business Care Corp, 2019 ABQB 724.

The Court affirmed the LPRT determination that the Franchisor was a party “in possession or occupation of the land”, pursuant to section1(k)(iii) based on a number of factors.

• Control Over the Sublease – Franchisor maintained control over the land by dictating the terms of the sublease in the Franchise Agreement. Part of the bundle of rights initially held by Landlord was the ability to dictate the terms of any sublease by LeasingCo. By deleting Landlord’s standard clause from the Headlease, Landlord had expressly given up its right to control the sublease terms on which the Franchisee would use the subject premises. Franchisor exercised that control through its Franchise Agreement with the Franchisee which dictated with whom the Franchisee could enter into a sublease and the use of Franchisor’s mandatory form of sublease for the subject premises.
• Control over the operation of the business on the Land – Franchisor had possession of the land by virtue of the non-exclusive rights of the Franchisee to use Franchisor’s day-to-day business operations system in the operation of the franchise outlet and the control exercised by Franchisor over that system.
• Signing the Consent Agreement – Franchisor signed the Section 30 Agreement pursuant to the Franchise Agreement with the Franchisee, thereby consenting to the City’s acquisition of the Franchisee’s sublease interest. Both parties acknowledged that there was sparse information as to how and why Franchisor came to sign the Section 30 Agreement, however the Court concluded that it was not unreasonable for the LPRT to infer from it that the Franchisee deemed it was at least prudent if not necessary, and sufficient, to obtain Franchisor’s consent to the Section 30 Agreement. It was not unreasonable for the LPRT to conclude that Franchisor’s signature was therefore another indicia of control.

Obiter Dicta

The City raised the concern with the Court that the LPRT decision creates a dangerous precedent by allowing the Franchisor, which was not on the Headlease or Sublease, to claim possession of the Land. The court commented that the LPRT did not espouse any novel principles of general application relating to the law of “possession” in the expropriation context, but rather clearly decided the matter based on the very particular facts before it.

Adrienne Boudreau, Sotos LLP

Adrienne is a partner at Sotos LLP, Canada’s leading franchise law firm. She has earned recognition as a leading Canadian franchise law practitioner from numerous prestigious publications, including Chambers Canada, Best Lawyers in Canada, and the Best Lawyers Global Business Edition. Adrienne is consistently recommended in the Canadian Legal LEXPERT Directory and has been acknowledged by Who’s Who Legal Canada and the Who’s Who Legal Global Guide. Additionally, she is listed as a Leading Litigation Lawyer in the LEXPERT Special Edition – Canada’s Leading Litigation Lawyers. Adrienne can be reached directly at 416.572.7321 or aboudreau@sotos.ca.

The post A Boost to Franchisor Entitlements under Alberta’s Expropriation Act appeared first on Sotos LLP.

Nearly seven years after it began, the “Paramount Trilogy” has now concluded.

The trial[1] and appeal[2] decisions have significantly advanced the law with respect to statutory rescission under Section 6(2) of the Wishart Act.[3]  This article attempts to identify the most important aspects of these decisions and to identify, where applicable, new developments in the law in this area.

Brief facts

Three “Paramount Fine Foods” franchisees delivered notices of rescission in the fall of 2017.  The franchisor rejected the validity of the rescissions, and otherwise relied on several exemptions for its position that it need not have provided disclosure to the franchisees.

The three actions were heard together in a trial that began in late 2021.  Vermette J. (the “Trial Judge”) found one of the three rescissions valid, and granted the franchisor parties’ counterclaims for breach of contract in the other two cases.

All parties appealed nearly every aspect of the Trial Judge’s decision in three appeals and three cross-appeals.  The appeals were heard by the Court of Appeal for Ontario in June, 2024.  In the result, the Court of Appeal dismissed all appeals and cross-appeals, and affirmed all aspects of the Trial Judge’s decision.

Lessons Learned

1. The time to rescind runs from the time the franchise agreement was entered into by the franchisee

At the relevant time, the franchisor had a practice of requiring franchisees to enter into a “generic” franchise agreement.  The franchisor’s witness described this document as a “placeholder” agreement.  Its purpose was to evidence and affirm a party’s commitment to later becoming a franchisee.

The franchisor’s form of franchise grant was tied to location:  its grant gave franchisees the right “to establish and operate the Franchised Business solely at the Premises which Premises should be solely situated in the Territory.”  The generic franchise agreement failed to identify the actual “Premises” or “Territory”.

The parties that signed the “generic” franchise agreement later entered into an entirely new franchise agreement.  This agreement was not an amendment of the “generic” agreement, but a fresh and separate document that did not refer to the earlier “generic” agreement.

The franchisor later argued that the time to rescind ran from the date that the “generic” franchise agreement was entered into by the parties, and that the franchisee was therefore out of time to rescind.

The Trial Judge rejected the franchisor’s argument.[4]  She found that the franchisor’s form of grant required the premises and territory to be defined.  She found that the failure to identify a “Premises” and “Territory” made the grant of franchise incomplete and ineffective.  The parties were not granted a legally enforceable right to operate a franchise.  Accordingly, she found the generic franchise agreement was not a “franchise agreement” within the meaning of the Wishart Act, and did not effect a grant of franchise.  The franchisee’s time to rescind therefore ran from the time it entered into the second (effective) franchise agreement.

While heavily dependent on the facts of this case, franchisors should be mindful of the language of their form of grant.  Purported grants that are tied to defined terms that as yet have no meaning (for instance, “Premises” that do not exist and “Territories” that are not defined) may result in no grant, at all.  The parties should consider when a grant of franchise is complete and perfected, as this will be the date from which a franchisee’s potential right of rescission will run.

2. A franchisee can rescind post-termination

NEW:  the Court of Appeal for Ontario has now expressly confirmed that where a franchisor exercises a contractual right of termination under a franchise agreement, the franchisee may later exercise a statutory right of rescission under the Wishart Act.[5]  A franchisor cannot prevent rescission by terminating a franchise agreement.

The Trial Judge relied on the non-waiver provisions of the Wishart Act (Section 11) to conclude that the exercise of a contractual right (termination) cannot unilaterally deprive a franchisee of a statutory right (rescission).[6]  Citing the Midas[7] case, she found that if contractual termination could pre-empt access to the rescission remedy this would run afoul of the purpose of the Wishart Act, which is to protect franchisees.

The franchisor parties argued on appeal that a terminated contract “ceases to exist” and therefore cannot be rescinded.  The Court of Appeal rejected this argument.[8]  It confirmed that termination does not render a contract voib ab initio but rather absolves the non-breaching party from performing future obligations.  The Court of Appeal generally agreed with the reasoning of the Trial Judge on this point, and confirmed that the Wishart Act does not make statutory rescission conditional on non-termination, even in circumstances where the franchisee is in breach of the franchise agreement.

This outcome will likely come as no surprise to the majority of franchise practitioners.  Notably, several recent rescission cases have proceeded in the Ontario courts notwithstanding  the franchisor had earlier purported to exercise contractual termination rights.[9]  However, the issue of whether the rescission right could be exercised, notwithstanding the earlier termination, was not raised or considered by the Court in these earlier cases.

3. Exemptions

The franchisor relied on three different exemptions to advance its argument that it need not have provided a “disclosure document” to the franchisees in these cases.  All three of these arguments were rejected by the Trial Judge.  Prior to this case, certain of these exemptions had never previously received direct judicial consideration.

In all instances, the Court of Appeal agreed with the Trial Judge’s analyses and conclusions on the franchisor’s exemption defences.[10]

• 5(7)(h) – the “large investment” exemption

NEW: in considering this exemption, each grant of franchise must be considered on its own and cannot be combined with other grants of franchise; the time to assess the quantum of the franchisee’s prospective investment is at the time of the grant.

This is the first case to consider this exemption.

At the time of the grants in these cases,[11] franchisors did not need to provide disclosure to prospective franchisees who were investing in the acquisition and operation of a franchise, over a one year period, in an amount grater than $5MIL.

In these cases, the franchisor advanced two arguments:  1) the three grants made to the three franchisees should be considered a single “grant” for the purposes of the exemption, and; 2) the franchisees, collectively, invested over $5MIL in the acquisition and operation of the three restaurants in the course of their subsequent operations.

The Trial Judge rejected these arguments.[12]

The foundation of her conclusions rest on the definition of “grant” and “franchise”.  She found, as fact, that three separate grants of franchise had occurred.  She found there was no basis to combine these grants or consider them collectively for the purposes of this exemption.

She also found that the relevant time to assess the quantum of the franchisees’ investments is at the time of the grant.  In so doing, she confirmed that the expected, prospective costs of acquisition and investment are determinative for the purposes of this exemption.  The expenses actually incurred by the franchisees during their operations do not retroactively affect whether or not the franchisor had to provide disclosure to the franchisee.

• 5(7)(c) – the “additional franchise” exemption

NEW: distinct corporate franchisees that operate some aspects of their franchised businesses on a collective basis, or that have overlapping or similar shareholders, will not be considered the “same” franchisee for the purposes of this exemption; a franchisee must already be operating the franchised business for the exemption to apply.

This is the first case to directly consider the application of this exemption.[13]

The Wishart Act states that disclosure need not be provided for “the grant of an additional franchise to an existing franchisee if that additional franchise is substantially the same as the existing franchise that the franchisee is operating and if there has been no material change since the existing franchise agreement or latest renewal or extension of the existing franchise agreement was entered into.”

The franchisor argued this exemption applied to it on the basis that the corporate franchisees did not observe separate corporate personality in their operations, and had some common shareholders as among them.  In its submissions, the franchisees were therefore “the same”.

The Trial Judge rejected these arguments.[14]

She found that relevant franchisee was not an “existing franchisee” as it was only ever granted a single franchise.

The Trial Judge then went on to consider whether an “existing franchisee” could be a new corporation with principals who are involved in another corporate franchisee of the same system.  She concluded it could not.  In relying on the wording of the exemption, she found that the qualifying words “substantially the same” described the relationship between the “existing franchise” and “additional franchise.”  These words did not apply to the franchisee.  In other words, she found that the existing and additional franchise could be substantially similar, but that the franchisee had to be “the same.”

The Trial Judge also noted that a plain interpretation of s. 5(7)(c) requires an existing franchisee to be “operating” a franchise for the exemption to apply. The “operation” requirement will not be satisfied if the franchisee has only signed the franchise agreement, or is in the midst of building out/constructing the franchise, and has never actually operated the business that is the subject of the grant.  She found that none of the franchisees were operating any franchised business at the time the relevant franchisee signed its franchise agreement. In arriving at this conclusion, the Trial Judge confirmed the underlying policy rationale for this requirement, namely, that disclosure has little utility if the prospective franchisee is already familiar with the operations of the franchise system and for whom the risk of making a further investment of funds is low.

• 5(7)(a)(iv) – the “franchisee transfer” or “resale” exemption

The Trial Judge found the franchisor could not rely on the resale exemption.  The Trial Judge’s decision[15] follows a long line of case law in which this exemption has been narrowly determined by the courts.[16]

The basis of the Trial Judge’s decision is factual.  First, she found there was no grant of a franchise by a franchisee on the facts.  She found that the previous operator’s franchise agreement was terminated, and the relevant parties entered into fresh agreements.

Second, and in any event, she found that the franchisor “was directly involved and an active participant” in the relevant grant.  Among her findings, she found that the franchisor directed the franchisee to the existing operator, was involved in negotiations between the franchisee and the prior operator, had input on relevant documents, and was involved in discussions about purchase price, and otherwise acted as an intermediary  She also found that the franchisor and the franchisee met at the franchisor’s head office in the absence of the former operator.  Her decision on this defence is generally consistent with prior case law on this exemption.

4. Piecemeal disclosure remains a fatal flaw

The franchisee that validly rescinded, Premium Host Inc., did so on the basis that the Franchisor provided it with material information outside of a “disclosure document”.  In upholding the Trial Judge’s decision, the Court of Appeal confirmed a very long line of cases confirming that disclosure must be provided to a franchisee “as one document, at one time,” and that piecemeal disclosure provides a franchisee with valid grounds to rescind.[17]

Although not directly addressed, this decision also confirms a related line of case law that financial information relating to the operation of the subject unit under a previous operator will generally be “material” within the meaning of the Wishart Act.[18]

5. A franchisee bears the burden of proving a valid rescission and its entitlement to statutory compensation

NEW:  the Court of Appeal for Ontario has now expressly confirmed that a franchisee bears the burden of proving that it rescinded on valid grounds.[19]  Accordingly, a franchisee must prove:  1) what it received from the franchisor; and 2) that the purported “disclosure document” contained a defect that is so material as to render the disclosure document no disclosure at all.

On appeal, the franchisees argued that the franchisee need not prove it received materially deficient disclosure.  They took the position that upon delivery of a notice of rescission in accordance with the Wishart Act, a franchisor could defeat a statutory rescission by demonstrating that it fulfilled its disclosure obligations under the Wishart Act by providing compliant disclosure document to the (then-prospective) franchisee.

In rejecting this argument, the Court of Appeal cited its earlier decision in Raibex, in which the Court (arguably in obiter) stated:  “the Franchisee must not only demonstrate that the FDD was deficient, but also show that it was so deficient that the Franchisor effectively ‘never provided [a] disclosure document.’”[20]

In the result, the Paramount Trilogy cases are somewhat unusual in that the Trial Judge found that no purported “disclosure document” relied on by any party at trial had actually been provided to any franchisee but, notwithstanding, two of the franchisees were not entitled to rescission.  Arguably, this result is at odds with the Court of Appeal’s decision in MAA Diners, in which the Court of Appeal confirmed the lower Court’s decision that a franchisee had validly rescinded its franchise agreement in the absence of any evidence that a disclosure document was provided to that franchisee.[21]

6. Provided the franchisee proves that the expenses it claims were actually incurred in connection with the franchised business, a court may reclassify expenses as between subsections 6(6)(a)-(d)

NEW:  the Trial Judge expressly confirmed that compensation claimed by franchisees under various subsections of 6(6) could be reclassified and recovered under subsections 6(6)(a)-(d).[22]  While various earlier decisions have permitted the recharacterization of amounts claimed,[23] this is the first case to expressly address whether this practice is permissible.

At trial, the franchisor parties argued that the franchisees should not be permitted to reclassify any portion of their statutory compensation claim.  For instance, they argued that amounts originally characterized by the franchisees under 6(6)(a), 6(6)(b), and 6(6)(c) should not be permitted to be reclassified and claimed under 6(6)(d).  The need for reclassification in these cases arose largely as a result of the Trial Judge’s findings about which franchisor parties were and were not “franchisor’s associates” within the meaning of the Wishart Act.

The Trial Judge rejected these arguments and permitted the recharacterization of certain elements of the franchisees’ compensation claim.[24]

7. An employee of the franchisor may be found to be a “franchisor’s associate” on the basis that they were involved in reviewing or approving the grant of franchise

NEW:  The Court of Appeal upheld the Trial Judge’s finding that a non-director/non-officer employee of a franchisor can be “involved in reviewing or approving the grant of a franchise” for purposes of satisfying the second element of the definition of a “franchisor’s associate” under section 1(1) of the Wishart Act.

At trial, the franchisees submitted that the franchisor’s Manager of Franchising was a franchisor’s associate because the individual was controlled by the franchisor (this fact was admitted at trial by the franchisor parties) and because the individual was involved in reviewing or approving the grants of franchise.

The Trial Judge accepted this submission. In so doing, the Trial Judge relied on the fact that the individual’s role included: (a) vetting new franchisees for the initial phase of the recruitment process; (b) reviewing and evaluating franchise applications; (c) advising the franchisor’s principal about the results of this review; (d) initially meeting with prospective franchisees; and (e) advising the franchisor’s principal about these meetings.[25] In addition to performing these duties in the context of these cases, the Trial Judge also noted that the individual was in “constant communication” with the prospective franchisees, including to discuss the progress of their transactions to purchase the franchises.

On appeal, the franchisor parties submitted that the individual should not be found liable as a franchisor’s associate on policy grounds.  They took the position that insofar as individuals are concerned, the definition of a franchisor’s associate should be read to only apply to directors and officers of the franchisor. They argued that failing to do so would create potential liability for all clerical and junior employees that perform rote functions in the grant process.

The Court of Appeal rejected the franchisor parties’ proposed interpretation of the Wishart Act.[26] Moreover, while the individual was not a director or officer of the franchisor, “neither was she a clerical or junior employee”. She performed a significant role in the process of reviewing the franchisees’ applications, exercising professional judgment, and advising the ultimate decision-makers.

Sotos LLP was trial and appellate counsel to the franchisees.

Adrienne Boudreau, Sotos LLP

Adrienne is a partner at Sotos LLP, Canada’s leading franchise law firm. She has earned recognition as a leading Canadian franchise law practitioner from numerous prestigious publications, including Chambers Canada, Best Lawyers in Canada, and the Best Lawyers Global Business Edition. Adrienne is consistently recommended in the Canadian Legal LEXPERT Directory and has been acknowledged by Who’s Who Legal Canada and the Who’s Who Legal Global Guide. Additionally, she is listed as a Leading Litigation Lawyer in the LEXPERT Special Edition – Canada’s Leading Litigation Lawyers. Adrienne can be reached directly at 416.572.7321 or aboudreau@sotos.ca.

Daniel Hamson, Sotos LLP

Daniel is a senior associate with Sotos LLP in Toronto, Canada’s leading franchise law firm. He has received multiple legal accolades, including being named as a “Lawyer to Watch” by the Canadian Legal LEXPERT Directory in the franchise law category, as well as in the LEXPERT Special Edition – Canada’s Leading Litigation Lawyers. Daniel can be reached directly at 416.572.7303 and dhamson@sotos.ca.

[1] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507.
[2] Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577.
[3] Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3.
[4] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at paras 354-361.
[5] Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577 at para 11.
[6] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at para 368.
[7] 405341 Ontario Limited v Midas Canada Inc, 2010 ONCA 478.
[8] Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577 at para 11.
[9] See 2352392 Ontario v MSI, 2019 ONSC 4055 at para 6, overturned on other grounds 2352392 Ontario Inc v Msi, 2020 ONCA 237, and 2364562 Ontario Ltd v Yogurtworld Enterprises Inc, 2021 ONSC 5112.
[10] Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577 at para 10.
[11] We note that the language of this exemption has subsequently been amended, and now exempts a franchisor from disclosure in circumstances where a franchisee’s total initial investment is in excess of $3MIL.
[12] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at paras 326-334.
[13] Bark & Fitz Inc v 2139138 Ontario Inc, 2010 ONSC 1793 at para 26 briefly touches on whether this exemption can be relied upon where the principals of two different corporate franchisees are the same.  However, this discussion occurs in the context of evaluating whether there is a “serious issue to be tried” in an injunction hearing.  Karakatsanis J., as she then was, does not decide the matter.  3574423 Canada Inc v Baton Rouge Restaurants Inc, 2011 ONSC 6697, aff’d 3574423 Canada Inc v Baton Rouge Restaurants Inc, 2013 ONCA 39 discusses this issue in obiter, starting at para. 290.  The discussion relates primarily to whether the franchisee to whom a franchise is granted had to have previously received compliant disclosure from the franchisor to rely on this exemption.
[14] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at paras 335-342.
[15] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at paras 343-352.
[16] See, for example, 2189205 Ontario Inc v Springdale Pizza Depot Ltd, 2011 ONCA 467 at para 32.
[17] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at para 421; Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577 at para 12.
[18] See, for example, 2212886 Ontario v Obsidian Group, 2017 ONSC 1643 at paras 46-53, overturned on other grounds 2212886 Ontario Inc v Obsidian Group Inc, 2018 ONCA 670, leave to the SCC denied at 2212886 Ontario Inc, et al v Obsidian Group Inc, et al, 2019 CanLII 16450. In the within case, the franchisor provided Premium Host Inc. with the weekly gross margin statements of the previous operator, which showed the business’ remaining revenue after subtraction of direct costs.  The Trial Judge’s findings that this information was “material” can be found at Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at para 421.
[19] Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577 at para 4.
[20] Raibex Canada Ltd v ASWR Franchising Corp, 2018 ONCA 62 at para 40.
[21] MAA Diners Inc v 3 for 1 Pizza & Wings (Canada) Inc, [2003] OJ No 430 (Sup Ct J), aff’d Maa Diners Inc v 3 for 1 Pizza & Wings, 2004 CanLII 19240 (Ont CA).
[22] The franchisor parties pursued this matter on appeal.  In upholding the Trial Judge’s decision relating to the validity of the Premium Host Inc. rescission, the Court of Appeal by implication also affirmed the Trial Judge’s reasoning on this point, although it did not specifically comment on this matter in its Reasons for Decision.
[23] See, for example, 2122994 Ontario Inc v Lettieri, 2016 ONSC 6209 at paras 76-77, aff’d 2122994 Ontario Inc v Lettieri, 2017 ONCA 830, and 2483038 Ontario Inc v 2082100 Ontario Inc, 2020 ONSC 475 at paras 72-76.
[24] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at paras 461-465.
[25] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at para 458.
[26] Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577 at para 13.

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To find the right franchisee and safeguard your brand, it’s critical that, as a franchisor, you have a strategy that you can put into practice to help you identify your future franchisee partners.  This article will help you identify the right franchisees for your specific system, and provides practical advice about how to assess if a prospective franchisee has what it takes to succeed in your system.

1. Business experience. Franchisees are essentially small business owners.  Prior experience operating a business, even if it’s a business type different than the franchise business they may operate, will help to set a franchisee up for success.  Remember, your new franchisee is going to have a lot of learning to do when they are onboarded to the system:  learning your system standards, understanding your brand values and how those are expressed in your daily operations, and any specific or special skills that may be necessary to operate their franchise business.  A franchisee with an understanding of small business fundamentals, such as basic accounting, budgeting, cash flow management, reporting, sales, marketing and hiring and management of employees is already one step ahead.  Franchisees with no business experience may be completely overwhelmed if, at the same time they are completing their system training, and also have to learn everything about operating a business.

2. Alignment with brand values, mission, and culture. “Fit” is going to mean something different to every franchise system, but it’s one of the most important things that franchisors need to consider in evaluating potential franchisees.  A prospective franchisee who otherwise “ticks all the boxes” but has a fundamentally different view of your brand, or of the system and its overall goals and direction is, at best, unlikely to succeed and, at worst, may create significant problems for you and the system, in general.  What’s the best way to identify the elusive “right fit?”  Here are some practical tips:

• Your initial screening and application processes should include at least some questions that directly address your brand’s values and mission. For example, ask some questions about why they are interested in your brand, in particular, and why they think they are right for the system.
• In interviewing a franchisee candidate, ask historical, behaviour-based questions that will help to reveal their personal characteristics and qualities. For instance, if one of your brand values is customer satisfaction, ask them to give you a specific example of a time in their past when a customer satisfaction issue arose, what it was, how they handled the situation, and what the result was.  These types of questions and answers will likely be very helpful to you in assessing whether the franchisee candidate is the person you’re looking for.  Past experience is often the best indicator of future performance.
• You may want to hold a discovery day or other workshop where the prospective franchisee can learn about your brand and also interact with existing franchisees. Not only will the franchisee learn about whether your system is right for them, but you can observe the candidate and assess whether you think they are right for the brand.  For instance, do they seem excited about your brand?  Do they seem engaged?  Do they get along with existing franchisees?  Are they asking good questions?  Your existing franchisees may also be able to provide you with insight on whether the candidate is compatible with your brand.
• You may wish to conduct reference checks. You might speak to previous employers, business partners or colleagues to gain insights into the candidate’s abilities and alignment with your brand values.  Another good idea is to check publicly available sources (a “Google” search, social media feeds, etc.) to see whether the franchisee candidate has a public presence and, if so, whether it reveals anything about them that is in conflict with your brand.
• You may wish to employ good profiling technology and related services. There are services available that will identify the qualities and characteristics of the most successful franchisees currently in your system, and then analyze franchisee candidates to determine whether or not they possess these same qualities.

3. Sufficient financial resources. No matter how much business experience a candidate may have, or how much they seem to fit into your brand’s culture, that franchisee is virtually certain to fail if the franchisee doesn’t have sufficient financial resources to operate.  A new unit that opens and then rapidly closes may harm the reputation of the brand, as may a unit that opens and then has to cut hours or reduce staff to stay afloat.  Franchisors should set clear financial criteria for prospective franchisees.  In particular, franchisors should ensure that prospective franchisees have a sufficient amount of unencumbered liquid assets to meet initial capital expenses, and sufficient initial operating capital to sustain the business until it is able to generate adequate profit.  The creditworthiness of the franchisee’s principal should also be explored.

4. Ambition and dedication. What are the franchisee’s expectations around business ownership and operation?  Do they intend to personally devote their full time and attention to the franchise business?  Do they understand that opening a new business, even a franchise business with excellent franchisor support, can be hard work?  Or do they think that, because the business is a franchise business, it will essentially “run itself”?  Do they believe they can just “hire a manager” to perform all business functions?  It’s important to assess a candidate’s expectations around these important issues.  Most franchise systems require franchisees to devote their full time and attention to the franchise business.  Individuals who understand this from the outset, and are keen to work hard to build a great business, are best placed to achieve success.

5. Understanding of the franchise relationship. While many franchisees are ambitious, want to be “their own boss”, and often have an entrepreneurial spirit, it’s very important for a prospective franchisee to understand the role of a franchisee within a franchise system.  A franchisor should assess whether a candidate understands that a franchisee will need to carefully follow the franchisor’s standards, methods of operation, management techniques, and business practices.  Success as a franchisee depends on the successful execution of these existing practices and standards.  The reputation of the system also depends, in part, on franchisee compliance with system standards.  For example, while it may be that restaurant franchisees can source individual items for prices lower than those offered by a franchisor’s approved suppliers, buying supplies only from approved suppliers is important to ensure consistency across the brand, manage health risks from food-borne illnesses, and achieve overall lower supply costs that are the result of volume discounts and product bundling.  Those candidates looking to “innovate” or “improve” upon the system need to understand, from the beginning, that their aspirations may not be compatible with the role of a franchisee.  It’s important for franchisors to explain to franchisee candidates the role of the franchisor, the role of the franchisee, and how their different functions work together to create the conditions for system success.

6. The right attitude and realistic expectations. It’s critical that the franchisee candidate has the right mindset.  Misalignments between expectations and reality is a recipe for unhappy franchisees and negative brand publicity.  A candidate should have genuine enthusiasm and passion for being a franchisee in your system, and understand what they can achieve with a franchise business.  It’s important that the franchisee candidate have a realistic understanding of the potential profitability of the franchise business.  In particular, it may be a red flag if a franchisee seems interested only in how much money they can make.  Franchisors who elect to directly provide financial information to franchisees must be very careful to do so in accordance with relevant franchise legislation.  Providing earnings claims or historical financial information in the wrong way may lead to significant claims against franchisors in future.

At Sotos LLP, we assist restaurateurs in determining whether to franchise their systems and guide them through the various stages of development and maturity. We also assist franchisors in every aspect of their sales processes. The author can be reached at aboudreau@sotos.ca.

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Nearly every franchise system includes a franchise marketing and promotion fund, often referred to as an “ad fund.” Typically, an ad fund operates as follows: individual units are obliged to contribute a specific percentage of their revenue to the ad fund, and the franchisor utilizes these funds for advertising and promotional activities to benefit the overall system and brand.

Ad funds serve as a potent tool for fostering system growth and expansion. They create a pool of funds for promotional endeavours that might otherwise be financially burdensome for either the franchisor or individual franchisees to undertake independently. In addition, initiatives funded by the ad fund contribute to maintaining consistent and brand-aligned messaging, as they are centrally coordinated by the franchisor.

However, ad funds can also become a focal point for discontented and divisive franchisees to unite around. Dissatisfied franchisees may join forces to raise concerns – real or “strategic” – regarding the management or administration of the ad fund. Even if these grievances lack merit, they can consume valuable time and resources for franchisors. Moreover, they can sow discord within the franchise system and among franchisees. In the most extreme scenarios, franchisees may unite and utilize their collective resources to initiate and maintain vexatious lawsuits concerning the ad fund, which can result in significant expenses and protracted legal battles for the franchisor.

This article aims to provide guidance on ad fund best practices and to highlight essential considerations for franchisors in creating and managing their ad funds.  Implementing these practices and thinking about these issues can help franchisors avoid the most common potential ad fund pitfalls.

1. Consider what geographic area the advertising fund will cover, and whether franchisees will have additional local marketing obligations

Prior to establishing its ad fund, a franchisor should think carefully about the geographic area the fund will cover. Should the ad fund be national in scope, and responsible for promoting the brand across the country, or should there be multiple regional funds to account for Canada’s size and the distinctness of its many regions?  Or should there be both a national fund and various regional funds? A franchisor should consider these questions in light of the nature of its brand and operations and the current market conditions. Are there important local or regional differences that the franchisor wants to address in its marketing efforts?  Or is it better to focus on a single advertising strategy Canada-wide?

A franchisor should also determine whether franchisees will be required to invest in a local ad fund geared towards promoting their local markets (over and above their obligation to contribute to the franchisor’s national fund), and/or whether they must individually meet certain self-directed local marketing spend minimums.  Making advertising a joint responsibility, by requiring individual unit spend minimums, can be an effective way to preempt complaints about the franchisor’s advertising strategy and decisions.  As discussed in more detail, below, franchisors that opt to require franchisees to participate in marketing should ensure there is appropriate franchisor oversight over the content of such marketing initiatives.  Franchisors should implement a tracking, approval, and reporting system to ensure that franchisees’ marketing efforts align with system standards, and that individual franchisees achieve minimum marketing spend requirements.

2. Management and reporting considerations: creating a special purpose “ad fund” entity, preserving the right records, and reporting to the franchisees

With very few exceptions, it’s generally advisable that the franchisor set up and manage the ad fund as a separate entity within the franchise system.  A general best practice is to incorporate a separate corporate entity whose sole purpose is to be responsible for all matters relating to the ad fund.  Ad fund contributions should not generally be co-mingled with other funds.  Instead, they should be maintained in a separate account in the name of the special-purpose entity that the franchisor has created for management of the ad fund.  While it is technically not improper to deposit ad fund monies into a mixed purpose account, such practice can create significant practical difficulties relating to tracing funds in the event the franchisor receives a demand to account for its use of ad fund monies.  To that end, any transfers in or out of the ad fund account should be properly memorialized.  Original source documentation relating to ad fund expenditures (for instance, invoices from third party marketing services providers) should be organized and preserved for a reasonable period, in accordance with the franchisor’s document retention policies.

A franchisor should maintain accurate financial records detailing contributions to and expenses drawn from the ad fund.  Such financial records should be distinct from those kept by the franchisor as part of its overall business operations.

A franchisor should consider whether it will provide franchisees with some degree of financial reporting relating to the revenue and expenses of the ad fund.  For example, will the franchisor provide regular financial reports to the franchisees about the ad fund?  Or will such reports be provided only in response to franchisee requests?  In any case, a franchisor should make sure it adheres to whatever reporting requirements it may put in place, as failure to do so can provide a pretext for disgruntled franchisees to stir up trouble.

The franchisor will also want to carefully consider the type of financial information it wants to make available to the franchisees in relation to the ad fund.  Will the franchisor provide financial statements, which may require the franchisor to engage external accountants to prepare?  Or, more commonly, will the franchisor provide only a statement of income and expenses, summarizing the revenue and expenses of the ad fund in a particular fiscal period?  In either case, it is generally recommended that franchisors provide such summary financial information to franchisees, rather than access to all source documents relating to the ad fund (for instance, general ledgers, invoices and other information relating to the financial activities of the ad fund).

3. Consider whether all franchisees will benefit equally from, and contribute equally to, the advertising fund, and specify if that is not the case

As a fundamental matter, a franchisor should carefully consider which entities will contribute to the ad fund, how the quantum of such contributions shall be calculated, and what use may be made of the funds.  For instance, is there any obligation for the franchisor to make ad fund contributions and, if not but the franchisor nonetheless contributes to the ad fund, how will such contributions be accounted for and used?  Will corporate and franchisor-owned stores be required to contribute?  What about stores that operate seasonally, or operate in a format that is different from the majority of stores in the system (kiosks, food trucks, special venue stores, ghost kitchens, etc.)  Will all franchisees contribute equally to the ad fund in accordance with a prescribed formula?

Is it fair for all units to pay the same ad fund fees if some units are only operating for a portion of the year?  The answer to this question is not always clear or straightforward.  Sometimes, units with reduced hours or seasonal units are in a prominent location, for instance, major sporting venues or pop-ups during special events, and have the potential to greatly increase brand awareness and attract new customers to existing units operating in traditional formats in the future.  Are these special location units creating goodwill for other franchisees to enjoy, or are they trading off the goodwill that other franchisees have created?

In addition to these considerations, a franchisor should specifically outline whether rebates, marketing allowances, and other amounts received by the franchisor will be contributed to the ad fund or retained by the franchisor for its own use.

Addressing these matters clearly, in both the franchise disclosure document and in the franchise agreement, can help to ensure that the ad fund is administered in a manner that franchisees perceive as transparent and fair.

4. Clearly define the key terms of the ad fund, including how much franchisees are required to contribute, the mediums and content of advertising that are permissible, whether the ad fund will be administered internally and/or externally, and who will pay for ad fund’s administrative expenses

While franchisors generally have a great deal of discretion as to how ad fund monies should be spent, it is important that the scope of this discretion is clearly communicated to the franchisees to avoid accusations of “unfairness” later.  It’s important to preserve the franchisor’s ability to spend the ad fund as it sees fit.  This might mean applying ad fund monies towards assisting troubled regions, or towards initiatives that seek to have the system enter new markets.

A franchisor should consider how the monies it collects for the ad fund will be apportioned, and whether franchisees can expect the ad fund to devote a proportional amount of the collected funds to specific markets or regions. Many franchisors will explicitly state in their franchise agreement that the ad fund has been created for the benefit of the system as a whole, and that franchisees should not expect that ad fund spend will benefit individual units on a proportionate or equal basis relative to their contributions or other franchisees.

To avoid potential disputes, a franchisor should address in specific detail the following considerations when structuring its ad fund:

• What amounts will franchisees be required to contribute? The franchisor should clearly define the amount that franchisees will be required to pay into the ad fund, the frequency with which they will contribute to the fund, and how the contribution will be paid to the franchisor. A franchisor should consider whether the franchisees will be required to make payments in pre-determined amounts, or whether their ongoing contributions will be determined by way of a formula based on their gross revenues or another metric.
• What media and content may the ad fund employ? A franchisor should ensure it reserves the right to employ any and all types of content and mediums of advertising (including television, radio, online, social media, etc.) for the fund as part of its activities.
• Will the ad fund rely on third-party advertising agencies, an in-house advertising department, or a combination of both to carry out its activities? A franchisor should consider whether the ad fund will be administered internally or externally, or through a combination of both. Expenses incurred by a franchisor in directly administering the fund, including direct expenses such as printing and ad placement, and indirect expenses such as salaries and head office rent, may be properly chargeable to the ad fund. When considering what and how much to charge to the ad fund, a franchisor should make a commonsense determination as to whether there is a nexus between the expenses it has incurred and whether these expenses furthered the objectives of the ad fund. Additionally, the quantum of the allocation should be proportional to the expense incurred by the franchisor and assessed reasonably. For instance, if one quarter of the franchisor’s head office space is dedicated to offices for internal marketing personnel, it may be appropriate to charge one quarter of the franchisor’s head office occupancy costs to the ad fund.
• Will the ad fund be used for purposes other than traditional marketing of the system and brand? There are a variety of promotional-related activities in which franchisors are increasingly required to engage. For instance, increased reliance on social media means that, sometimes, a franchisor must engage in reputational “damage control” or respond to negative comments on social media.  What about the cost of administering customer surveys across all or part of the system?  Franchisors should consider whether the ad fund provisions of their franchise agreements permit them to charge the cost of these activities to the ad fund. Ultimately, the franchisor should thoughtfully consider all uses or potential uses of the ad fund monies.

Finally, a franchisor should reserve the right to change and amend the rules relating to its use of ad fund monies, as necessary, to keep up with new advertising mediums and technologies, and to ensure the best possible use is being made of ad fund dollars.

5. Decide who will manage the fund, who will be responsible for its decision making, and whether there will be a franchisee advisory council.

Prior to forming the ad fund, a franchisor should carefully consider who will operate and administer the fund, and whether an advisory committee should be established to oversee and make suggestions as to the ad fund’s activities. In a majority of cases, the franchisor (or an affiliate of the franchisor) will be responsible for administering the fund and crafting the message and media to be employed in its advertising. Such centralized leadership allows the franchisor to broadcast a consistent message to potential consumers regarding its brand and products.

Some franchisors also establish franchisee advertising and marketing advisory councils, which bring together franchisees to make recommendations as to how the ad fund should carry out its activities. Most such councils are limited to making only non-binding recommendations.  However, engaging franchisees can allow franchisors to tap into franchisees’ valuable on-the-ground knowledge.  In addition, involving franchisees in the operations of the ad fund heightens transparency which can, in turn, preempt potential ad fund disputes.

6. Consider how much leeway individual franchisees will have to undertake their own advertising

One of the key advantages of franchising is establishing a common brand which can provide customers with a consistent experience. In establishing an ad fund, a franchisor can ensure that all advertising it produces is consistent with the brand’s policies, standards and image. A franchisor should carefully consider whether there is a place in its system for individual franchisees to undertake their own advertising at a local level, and whether there should be controls on the form and content of such local advertising. A franchisor should consider whether local advertising directed by individual franchisees would complement or conflict with national and regional advertising undertaken by the system’s ad fund.

A franchisor should be especially wary when it comes to a franchisee’s use of social media to promote its franchised business. Social media content and messages can spread quickly and easily.  A franchisor should be sure to clearly delineate the system’s policies on social media usage and content.  Franchisors should also ensure they have effective mechanisms to step in when and if a franchisee’s advertising is inappropriate or inconsistent with the brand.

7. Consider how the franchisor’s disclosure will be affected by the establishment of, or the reservation of the right to establish, an advertising fund

A franchisor should ensure that its franchise disclosure document fully discloses the material specifics of the ad fund it has established and its use of funds, as required by franchise legislation.

If particular franchisees are required to contribute different amounts to the ad fund, the franchisor should consider how widespread these variations are across its system, and whether knowledge of these variations is information that would be material to a decision by a prospective franchisee to acquire a franchise.

Conclusion

A well-managed ad fund, which pools contributions from franchisees, can be a valuable asset and a competitive advantage for a franchise system. However, the process of developing and administering such a fund can be complex. It is important to engage professional advisors throughout all stages of the ad fund’s lifecycle to ensure legal compliance and alignment with the system’s best interests.

At Sotos LLP, we specialize in assisting both emerging and established franchisors in navigating these complexities. Our expertise includes designing systems that adhere to best practices and crafting agreements and disclosure documents tailored to each franchise system’s unique needs.  We also have substantial experience in defending against ad fund-related claims. No matter the system or the issue, Sotos LLP is here to support and guide franchisors in optimizing their ad funds for success.

Adrienne Boudreau, Sotos LLP

Adrienne is a partner with Sotos LLP in Toronto, Canada’s leading franchise law firm. She has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. Adrienne can be reached directly at 416.572.7321 or aboudreau@sotos.ca.

John Yiokaris, Sotos LLP

John Yiokaris is a partner with Sotos LLP in Toronto, Canada’s leading franchise law firm. He has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, Lexology, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. John can be reached directly at 416.977.3998 or jyiokaris@sotos.ca.

Jason Brisebois, Sotos LLP

Jason Brisebois is a senior associate with Sotos LLP in Toronto, Canada’s leading franchise law firm. He has been recognized by Best Lawyers in Canada in the Ones to Watch category. Jason can be reached directly at 416.572.7323 or jbrisebois@sotos.ca.

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The facts are straightforward.

270[2] entered into agreements with Lightbox for the operation of two retail cannabis stores under the “Dutch Love” brand.  Under the agreements, Lightbox was required to operate both stores on a day-to-day basis. 270 was never involved in the operation or direct management of the stores.

In December 2021, 270 delivered two notices of rescission to Lightbox pursuant to the Wishart Act.[3]  270 took the position that it was a franchisee of the “Dutch Love” franchise system, and it did not receive the required disclosure.  Lightbox disputed that the businesses were franchises.[4]

Upon delivering the notices of rescission, 270 jointly rebranded both stores.  It stopped using the “Dutch Love” marks, and began operations under its own brand, “Roll N Rock Cannabis.”

Lightbox commenced an action against 270 and brought a motion for an injunction.  It sought to prevent 270 from “owning and/or operating a ‘Roll N Rock Cannabis’ retail store or any other cannabis retail store, other than a ‘Dutch Love’ branded store.”  Lightbox also sought to restrain 270 from using the marks and “operating methods” associated with the Dutch Love brand.  This included a long list of prohibitions, including requiring 270 to no longer use the services of certain third-party suppliers (such as the global HR software company ADP) and not displaying certain items in-store, including “potted plants”.

The Court dismissed Lightbox’s motion after a preliminary assessment of the evidentiary record, and did not need to consider the three-part test that is standard on injunction motions.

First, the Court found no right capable of enforcement.  There was “no evidence whatsoever of any agreement between the parties that 270 would refrain from the ownership or operation of another cannabis retail brand at either of the store locations in question or at all.”  In fact, the Court noted that the order Lightbox wanted it to make would be contrary to certain express terms of the agreements, which allowed 270 to transition its operations to another cannabis brand.

Second, the Court found Lightbox had failed to lead any evidence to support its claim that 270 had misused any confidential information or operating methods.  In fact, one of Lightbox’s affiants bluntly admitted that many of the resources needed to understand the cannabis business can be found publicly online.

The following lessons can be learned from this case:

1. An injunction remains an extraordinary remedy that must be grounded in pre-existing contractual rights. The Court will not enforce rights for which the parties never bargained. The Court will not find that a restrictive covenant is an implied term in the parties’ agreements, particularly where that implied term would contradict the express terms of the contract.
2. Allegations must be supported by adequate evidence. Evidence in support of injunctive relief must be clear, cogent, and detailed. Any proprietary information or methods must be clearly identified, and the existence of such interests and methods must be established by the evidentiary record.  Vague allegations will not be sufficient to support a claim for injunctive relief.
3. Whether the injunction is mandatory or prohibitive may be determined by evaluating the result of the proposed order. Lightbox argued on the motion that the injunction sought was prohibitive. 270 agreed that while the order was phrased as a prohibition, its practical effect was that 270 had no choice but to perform its positive obligations under the agreements.  Essentially, that 270 would have to operate as a “Dutch Love” or cease operations entirely.   The Court agreed with 270.  It concluded that because the result of the order would be to restore the status quo, the relief sought was mandatory in nature.  Had the Court been required to consider the three-part test for an injunction, Lightbox would have had to meet the more demanding strong prima face case standard.
4. An “ill-conceived” motion is not sufficient grounds for an elevated costs award. Although the Court agreed with 270 that Lightbox’s motion was “ill-conceived and as well unsupported by a proper evidentiary record relating to the relief sought” it found this was not a sufficient basis to increase the costs awarded to 270 on the motion. 270 was awarded partial indemnity costs, payable within 30 days.[5]

Adrienne Boudreau, Sotos LLP

Adrienne is a partner at Sotos LLP.  Her practice focuses on all areas of commercial litigation with an emphasis on franchise litigation.  Adrienne can be reached directly at 416-572-7321 or aboudreau@sotos.ca.

[1] 2022 ONSC 1873 (CanLII).
[2] Sotos LLP was counsel to 270 on this motion.
[3] Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3.
[4] The parties agreed that the Court did not need to determine whether they were in a franchise relationship in order to fully adjudicate the issues on the motion.
[5] 2022 ONSC 2999 (CanLII).

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It is well-known that franchisors must disclose all material information (“materials facts”) relating to the grant of a new franchise, or the renewal of an existing franchise.  Material information will, of course, include information that is prescribed by the Wishart Act[2] and the associated Regulation.[3] However, it will also include any information that would reasonably be expected to have a significant effect on the decision to acquire the franchise, or information that will have a significant effect on the value or price of the franchise, whether or not that information is expressly prescribed.  Failure to disclose all material facts creates a risk that a franchisee can later rescind its franchise agreements and look to the franchisor for significant compensation.

Facts

In the Freshly Squeezed case, Freshly Squeezed Franchise Juice Corporation (the “Franchisor”) took the position that it had provided a “disclosure document” to the principal of the franchisee, 2611707 Ontario Inc. (the “Franchisee”), prior to the Franchisee entering into any franchise agreements.

The Franchisee’s franchise business was to be located in the “RioCan Food Hall” of Mount Sinai hospital in Toronto.  This was going to be the first time that a “Freshly Squeezed” franchise would be located outside of a shopping mall setting.

The Franchisee entered into a franchise agreement in January 2018, and began operating its “Freshly Squeezed” franchise business in March 2018.  In the fall of 2018, the Franchisee delivered a notice of rescission pursuant to Section 6(2) of the Wishart Act, on the basis that it had not received a disclosure document.  The Franchisor took the position that disclosure had been provided.  The Franchisee later commenced an application seeking rescission and compensation.

The Court ultimately found that the Franchisor had failed to disclose certain material facts to the Franchisee, including facts that were “material” but not specifically prescribed by the Wishart Act and the Regulation.  The Court granted the Franchisee’s rescission application, and ordered the Franchisor and its principal to pay over $300,000 in statutory compensation.

Comments on rescission, generally

In reaching her decision, the application judge relied on the Ontario Court of Appeal’s decision in Raibex.[4]

At the application hearing, the Franchisor had argued that Raibex “changed the law”, and that now franchisees seeking rescission must prove the alleged non-disclosure actually impacted their ability to make an informed investment decision. The application judge rejected this submission.

After carefully reviewing Raibex, and earlier Ontario Court of Appeal decisions, the application judge found the test for determining whether an alleged disclosure deficiency entitled a franchisee to rescind remained objective.  Accordingly, she confirmed that rescinding franchisees need not lead evidence that, in their own specific case, their ability to make an informed investment decision was actually impaired by the alleged non-disclosure.

However, the application judge found that, per Raibex, this objective analysis does not occur in a vacuum.  Rather, the Court will consider the particular facts and circumstances of the underlying grant of franchise.  In so finding, she confirmed that the key question on a rescission is whether the subject deficiency is so serious that it deprived the franchisee of an opportunity to make an informed investment decision (about whether or not to purchase the franchise business) in the particular circumstances of the case.

Findings in the case[5]

Financial Statements.  The alleged disclosure document in issue in this case included financial statements, which were prepared to a “review engagement” standard.  However, certain line items in the financial statements referred to the notes of the financial statements, and these notes were not included in the disclosure document.

The application judge recognized previous Ontario Court of Appeal case law confirming that disclosure of a franchisor’s financial statements is a “foundational part of disclosure”, and that failure to provide compliant financial statements will generally result in a finding of non-disclosure.  She found the Franchisor’s failure to include the notes to the financial statements meant that the Franchisor had failed to comply with the Regulation, and to fully disclose the required financial information.  Incomplete financial statements deprived the Franchisee of information that was necessary for it to assess the Franchisor’s financial status and provided the basis for the Court’s first finding of material non-disclosure.

Site-specific disclosure.  At the time the disclosure document was provided, the head lease had not been entered into, and so could not be included with the disclosure document.  The disclosure document did not disclose that no head lease was in place.  However, the Court found this non-disclosure was mitigated by the fact that the Franchisee was aware of this fact.

Also at the time of disclosure, the Franchisor had signed, and delivered to the landlord, a negotiated agreement to lease.  This agreement to lease had not been countersigned by the landlord or returned to the Franchisor at the time of disclosure.

The agreement to lease contained a provision that, in certain circumstances, the landlord could terminate the lease at any time on three months’ notice, without compensation.  This termination provision was included in the final head lease.  Pursuant to the franchise agreement, the Franchisee was bound by the terms of the head lease.

The disclosure document did not reveal that an agreement to lease had been negotiated.  The disclosure document also did not contain a summary of the material terms of the agreement to lease, including the termination provision, and did not append a copy of the agreement to lease.

The Franchisee took the position that the termination clause was material because, if exercised, it could adversely affect its expected return on investment in the franchise business.

The Franchisee was not involved in any lease negotiations and had no ability to cancel either the franchise agreement or sublease, as did the franchisee in the Raibex case.

In all the circumstances, the Court found that the failure to disclose the agreement to lease, or to at least provide a summary of its material terms, was a material fact that ought to have been disclosed pursuance to Section 5(4)(a) of the Wishart Act.  This combined with the lack of any “contractual comfort” to the Franchisee that would permit it to exit the franchise relationship if the lease terms were not to its satisfaction, resulted in the Court’s second finding of material non-disclosure.

Entry into a new market.  As noted above, the Franchisee’s franchise business was to be the first “Freshly Squeezed” franchise in a “non-mall” retail location.  This fact was not disclosed to the Franchisee in the disclosure document, or otherwise.

Prior to entering into the franchise agreement, the Franchisee had visited several operating “Freshly Squeezed” franchise businesses.  The disclosure document contained a list of all currently operating “Freshly Squeezed” locations, which the Franchisee had telephoned.  At the application hearing, the Franchisor argued that this list provided the raw data from which the Franchisee could have “extrapolated” the fact that its unit was to be the first in a non-mall location.

The Court rejected this argument.  It found that the fact that this was to be the first non-mall location was a material fact that ought to have been explicitly disclosed pursuant to Section 5(4)(a) of the Wishart Act.  The Court noted that there was “no track record for the success of this franchise business in non-mall settings and that, in and of itself, could pose a risk to the financial viability of this particular venture.”  This was the basis for the Court’s third finding of material non-disclosure.

Important lessons for franchisors

The Freshly Squeezed case serves as an important reminder to franchisors that disclosure should not be approached as a rote or mechanical exercise.  There is no standard disclosure “template”.  The unique qualities of the specific unit to be granted, and the features and characteristics of the franchise system, need to be considered in determining what information must be disclosed relating to each franchise opportunity.  What facts are “material”, and therefore required to be disclosed, may vary with each grant of franchise.  A disclosure document that is adequate for one franchise opportunity may be materially deficient in respect to another.

In addition, the Court will look to all the circumstances of the underlying grant of franchise in assessing whether or not the disclosure standard has been met.

Failing to properly disclose a prospective franchisee can be a costly mistake.  Franchisors are well-advised to seek the advice of experienced franchise counsel to assist with the disclosure process.  Competent counsel should carefully review information provided by the franchisor, question information that appears to be inaccurate, and identify any apparent information gaps to assist in ensuring that all material facts are included in each disclosure document.

Sotos LLP acted as counsel to the applicants in this matter. The decision is currently under appeal.

Adrienne Boudreau is a partner with Sotos LLP in Toronto, home to Canada’s largest group of franchise lawyers.  She provides counsel to many franchised businesses, for both franchisors and franchisees, and has extensive experience litigating franchise rescission cases.

[1] 2611707 Ontario Inc., et al v. Freshly Squeezed Franchise Juice Corporation, et al., 2021 ONSC 2323.
[2] Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3.
[3] O. Reg. 581/00.
[4] Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62.
[5] Certain of the application judge’s findings were the product of a unique, evidentiary agreement, to which the parties agreed at the beginning of the application hearing, in order to determine the matters at issue by way of application (as opposed to by way of trial).  This bulletin will therefore consider only those findings made that were not impacted by this unique agreement.

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On March 15, 2020, Chief Justice Geoffrey B. Morawetz issued a Notice to the Profession, the Public and the Media Regarding Civil and Family Proceedings in response to the COVID-19 situation. The Notice, which applies to all Superior Court of Justice proceedings in Ontario, states that regular court operations have been suspended. As a result of the suspension, only certain, urgent matters are being heard by the court at this time.

The Notice stipulates that the following types of matters will continue to be heard during the suspension:

1. Certain matters related to public health and safety;
2. Certain family and child protection matters;
3. Certain civil and commercial list matters that may result in “immediate and significant financial repercussions” if the matter is not heard; and
4. “Any other matter that the Court deems necessary and appropriate to hear on an urgent basis.”

What matters are being heard?

We provide some examples of cases that the Court has determined to fall within the above types, such that they should be heard during the suspension.

• Matters with health and safety considerations: York Condominium Corporation No. 419 v Black, 2020 ONSC 2066 (dispute between a condo corporation and condo resident over continuing renovations to a condo unit, which required multiple tradespeople and third parties to attend at a building that housed a high number of senior citizens); Almeida v Morgan, 2020 ONSC 2192 (motion under the Health Care Consent Act, 1996 to allow a medical professional to administer treatment to Mr. Almeida pending Mr. Almeida’s appeal of a decision from the Consent and Capacity Board);
• Matters related to national politics: Karahalios v Conservative Party of Canada, 2020 ONSC 1820 (disqualification of candidacy for the Conservative Party of Canada);
• Matters related to privacy rights of minors: Rogerson v Havergal College, 2020 ONSC 2022 (public material filed with the Court contained private information about a minor, which was contrary to an order that had previously been made in the proceeding to protect the privacy of the children involved);
• Certain matters involving commercial or residential tenancy rights: Morguard Corporation v Corredor, 2020 ONSC 2166 (enforcement of a residential eviction order that was made prior to the suspension of court operations where the tenant was being evicted as a result of alleged criminal behaviour towards other residents); Slimmon-Weber v Racco, 2020 ONSC 2169 (ongoing commercial tenancy dispute that began in 2019; the hearing and Chambers appointment were adjourned as a result of the Notice to the Profession; respondent landlord took the position that the adjournments did not require him to stay any eviction proceedings);
• Matters involving property disputes: Saine v Niagara Escarpment Commission, 2020 ONSC 2151 (applicant seeking to appeal a finding that there is no jurisdiction to vary conditions of a development permit; the appeal process must be commenced prior to the expiry date of the permit, which was April 13, 2020; if the permit expires before the appeal process is commenced, the applicant would be forced to begin the entire process again, after having already dedicated over a decade and significant money to the process); Wang v 2426483 Ontario Limited, 2020 ONSC 2040 (dispute related to the upcoming closing of a pending real estate transaction); and
• Compliance with existing court orders: Hrvoic v Hrvoic, 2020 ONSC 1711 (party not complying with an order to repay money to a line of credit in the context of contentious civil and family proceedings); Morris v Onca, 2020 ONSC 1690 (judgment debtors ignoring court orders to repay funds to the judgment creditor).

Since the March 15 Notice, the Ontario Superior Court of Justice has released various Notices and Orders related to the ongoing COVID-19 situation and court operations. A full list of the Notices and Orders issued by the Ontario Superior Court of Justice, including ongoing updates and regional notices, can be found here.

Adrienne Boudreau, Sotos LLP

Adrienne is a partner at Sotos LLP.  Her practice focuses on all areas of commercial litigation with an emphasis on franchise litigation.  Adrienne can be reached directly at 416-572-7321 or aboudreau@sotosllp.com.

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COVID-19-related scams, in particular, have surged.  The Washington Post reports that, according to IBM’s X-Force research division, coronavirus email scams have increased by 14,000 percent in just the past two weeks.  Such emails often try to get the recipient to divulge sensitive information, such as usernames and passwords.  Phony websites claiming to sell PPE and COVID-19 “cures” have proliferated.   “Zoombombing” – interrupting zoom calls to spread racist, pornographic, or vulgar content – is becoming commonplace.  Fake texts, asking people to click on harmful links, have increased.

Franchise systems may be particularly vulnerable to these kind of cyber-attacks.  By their very nature, franchise systems are decentralized.  Often, many different people have access to a franchise system’s computers and electronic information, including franchisors, franchisees, their respective employees, suppliers, and other third parties.  In the wake of the global pandemic, many more people may now have access to these online systems.  This decentralization and increased access poses certain challenges at the best of times.  During a crisis, it is even more difficult to ensure compliance with cybersecurity best practices.

What can you do to keep your franchise systems safe online?  Education is your first line of defence.  Here are some basic tips that you can circulate to everyone who has access to your online systems:

• Exercise caution in opening attachments/clicking on links – be especially on guard if the link/attachment relates to COVID-19. Be cautious of messages with a sense of urgency to them, or those that include deadlines.  If the link or attachment is available from a reputable and recognized website (for instance, the Government of Canada), you may wish to access the article/link directly from the website, rather than through the attachment or link.
• For emails, double check the sender’s information – if an email address looks suspicious, don’t respond and delete it. In particular, scrutinize emails inviting you to join a videoconference or chat.  Look for spelling errors in names and websites – these can be a red flag that the invitation is not legitimate. When in doubt, contact the sender via another means, such as by phone or text, to confirm the invitation is actually from them.
• Be wary of texts – particularly those relating to coronavirus or COVID-19, or relating to “your” subscriptions/accounts. We’ve seen suspicious texts claiming to be from the government, major banks, and “Netflix”, among others.  Many of these texts are actually phishing scams, trying to get you to click on a harmful link.
• Videoconference best practices – change your videoconference settings so that only the meeting host can share their screen, make calls private, and consider requiring participants to enter a password to join the meeting.
• Family/household members – if you’re sharing a device with anyone, including children, take the time to educate them about good online practices. Device security is only as strong as the weakest link.

Adrienne is a partner with Sotos LLP in Toronto, Canada’s largest franchise law firm.  She provides counsel to many franchised businesses.  Adrienne can be reached directly at 416-572-7321 or aboudreau@sotosllp.com.

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Fit for Life confirms that the “informed investment decision” approach to the evaluation of disclosure, as discussed by the Ontario Court of Appeal in Raibex[3], should not be used in “deficient certificate” cases.

In addition, the Court has also found that written statements contained in a franchise disclosure document may constitute “representations to the prospective franchisee on behalf of the franchisor for the purpose of granting the franchise, marketing the franchise or otherwise offering to grant the franchise” sufficient to make a person a “franchisor’s associate” within the meaning of the Wishart Act.

Facts

The two individual plaintiffs in Fit for Life were interested in purchasing a “Fit for Life” franchise.  The franchisor provided each of them with a substantively identical franchise disclosure document (collectively, the “FDD”).

The first four pages of the FDD contained some prescribed information about the “Fit for Life” franchise system, such as its corporate name, affiliates, business experience, etc.  Following this information, there was an unusual signature block on page 4 of the FDD.  The signature block was signed by Samuel Davis, the sole director and officer of the franchisor, 2082100 Ontario Inc. (the “Franchisor”).  Mr. Davis testified at trial that what appeared in the first four pages of the FDD prior to his signature were his “aspirations” for the franchise system.  He testified that, by signing on page 4, his intent was to endorse the FDD in its entirety, and to be personally liable for its contents.

On page 27 of the FDD there was a heading entitled “Fit for Life Franchise Certificate of Disclosure” and various statements about the truthfulness and completeness of the disclosure document.  This page did not contain a signature block or line, and there was no signature on this page.

The corporate franchisee (the “Franchisee”) and its officers and directors subsequently entered into a franchise agreement and related agreements for the operation of a “Fit for Life” franchise.

After approximately 20 months of operation, the Franchisee delivered a notice of rescission pursuant to Section 6(2) of the Wishart Act, on the basis that the FDD did not contain a properly signed certificate.  The Franchisee sought statutory compensation pursuant to Section 6(6) of the Wishart Act in the amount of $624,821.06.

The Franchisor failed to pay any amount pursuant to the notice of rescission, and the Franchisee commenced an action.  It named the Franchisor and Samuel Davis as defendants.  The plaintiffs sought a declaration that all “franchise agreements” had been rescinded by the Franchisee’s notice of rescission, and the payment of statutory compensation.  They also sought a declaration that Mr. Davis was a “franchisor’s associate” within the meaning of the Wishart Act, and was therefore personally responsible with the Franchisor for the payment of statutory compensation.

The plaintiffs were ultimately successful.  The Court found that the franchisor did not provide proper disclosure because the FDD did not include a certificate that met the requirements of Section 7 of the Regulation to the Wishart Act.  It further found that the Franchisee had rescinded all “franchise agreements” pursuant to Section 6(2) of the Wishart Act, and that Mr. Davis was a “franchisor’s associate”.

Two approaches to the evaluation of disclosure

Fit for Life is notable in that the trial judge, Justice Kimmel, rejected the defendants’ argument that Raibex “shifted the focus” of Section 6(2) rescission cases relating to deficient certificates and that, post-Raibex, franchisees have to demonstrate how a deficient certificate deprived them of the ability to make an informed investment decision about whether to purchase the franchise.  In refusing to reach this conclusion, the Court drew a distinction between rescission cases concerning non-disclosure of “material facts” and those concerning deficient certificates.  The Court found that it is not appropriate in deficient certificate cases to apply an “informed investment decision” approach to the evaluation of disclosure.

The Court reviewed the Section 6(2) rescission case law.  It noted that two different policy objectives underlie these decisions:  1) informed investment decision-making, which recognizes the rights of franchisees; and 2) impressing upon those who sign disclosure documents the importance of complete and accurate disclosure, which recognizes a specific obligation on the franchisor.

The issue in Raibex related to the alleged non-disclosure of a material fact.  In considering this issue, the Court of Appeal endorsed a purposive analysis.  It considered whether the non-disclosure of a material fact negated a prospective franchisee’s ability to make a “properly informed decision about whether or not to invest in the franchise”.  The Court in Fit for Life identified that this inquiry was informed by the first policy objective:  full disclosure to franchisees.

By contrast, the Court in Fit for Life found that a defective certificate case is not informed by the policy objective of full disclosure to franchisees.  Rather, the requirement for a properly signed certificate serves the second policy objective of impressing upon franchisors the importance of complete and accurate disclosure.

In light of the existence of these two distinct policy objectives it makes no sense to require a franchisee, in a deficient certificate case, to explain how the absence of a compliant certificate impacted its ability to make an informed investment decision.  The purpose of the signed certificate is to remind the franchisor of the importance of the certification.  The requirement for a signed certificate does not exist to better inform the franchisee.  Accordingly, the Franchisee in Fit for Life was not required to show that the absence of a compliant certificate negatively impacted its ability to make an informed investment decision.

Justice Kimmel rejected the defendants’ argument that a deficient certificate must be accompanied by additional disclosure deficiencies in order to give rise to a Section 6(2) rescission.  In so doing, she confirmed a long-standing line of case law that a non-compliant certificate, on its own, is a fatal defect amounting to non-disclosure under the Wishart Act.  This finding also suggests that each of the two policy objectives identified by the Court are important, and one cannot be ignored at the expense of the other.

In the result, the trial judge found that Mr. Davis’ signature on page 4 of the FDD did not serve the policy objective of impressing upon him the importance of ensuring the FDD was complete and accurate.  She found the evidence before the court did not support the defendants’ position that Mr. Davis intended to certify the entire FDD, but signed on the wrong page, in error.  Justice Kimmel found the absence of a compliant certificate to be a fatal flaw, sufficient, on its own, to give rise to a right of rescission under Section 6(2) of the Wishart Act.  She further found that the franchisee had properly exercised its right of rescission, and was entitled to statutory compensation pursuant to Section 6(6) of the Wishart Act.

Fit for Life has provided important guidance in deficient certificate cases.  However, Raibex’ application to cases where the alleged deficiency is the non-disclosure of a material fact will need to be clarified and developed in future cases.

A person can be a “franchisor’s associate” on the basis of written representations in an FDD that does not contain a signed certificate

The Court also considered whether Mr. Davis, the sole officer and director of the franchisor, was a “franchisor’s associate” within the meaning of the Wishart Act.

The plaintiffs first argued that Mr. Davis exercised “significant operational control” over the plaintiffs’ franchise because the Franchisor sublet the premises from which the franchise was operated to the Franchisee.  The Court refused to find that Mr. Davis, personally, exercised significant operational control based on the existence of the sublease.  The sublease was between Franchisor and Franchisee, and Mr. Davis was not a party to the sublease in his personal capacity.  The court refused to infer any level of personal involvement by Mr. Davis based on the existence of the sublease, alone.

The plaintiffs then argued that the statements on page 1-4 of the FDD, which promoted the “Fit for Life” concept, should be considered “representations” made by Mr. Davis on behalf of the Franchisor for the purpose of granting the franchise, marketing the franchise, or otherwise offering to grant the franchise.   The Court agreed and, on the basis of the “representations” on pages 1-4 of the FDD, found Mr. Davis to be a “franchisor’s associate” and therefore personally liable to compensate the Franchisee for the Franchisor’s failure to provide adequate disclosure.

The presence of Mr. Davis’ signature on page 4 of the FDD was important to the Court’s conclusion that the contents of the preceding pages were “representations” made by him.  However, the placement of his signature in the FDD was unusual.  Deficient certificate cases typically concern disclosure documents containing no signatures, at all, or the incorrect number of signatures on the certificate.  It will be interesting to see whether and how the findings in Fit for Life will be applied in future rescission cases to the question of whether a person is a “franchisor’s associate”.

The plaintiffs also made an alternative submission that, even if Mr. Davis wasn’t personally involved in the review or approval of the grant of franchise, he should be found to be a franchisor’s associate on the theory that Mr. Davis delegated his control over the franchisor to others, and these persons acted as Mr. Davis’ agents.  The plaintiffs argued that in carrying out these delegated responsibilities, Mr. Davis should be imputed with all of his agents’ actions and knowledge.

The plaintiffs pointed to the fact that Mr. Davis was the sole director and officer of the Franchisor and that the FDD, which he signed, represented that no affiliates of the Franchisor would have any dealings with the Franchisee.  They also argued that the other individuals with whom they dealt were not employed by the Franchisor.  Accordingly, the only capacity in which these persons could be dealing with the Franchisee for the purposes of the grant of franchise was as the agent of Mr. Davis.  In addition, the plaintiffs noted that Mr. Davis established the process for reviewing and approving the grant, ensured this process was followed, and was kept informed on the approval process in relation to the grant, in which he had the sole financial interest.

While employing the theory of implied agency is an interesting argument, the Court ultimately rejected it, although it left open the possibility that such an agency relationship could be present in another case.  The trial judge found in Fit for Life that it was more plausible that the persons with whom the Franchisee interacted were agents of the Franchisor, rather than agents of Mr. Davis, personally.  The trial judge noted that no authority was presented to her that Mr. Davis could not delegate his responsibilities as a director, officer, or employee of the corporate franchisor to other people, for them to exercise on behalf of the corporation.  The Court noted that the idea that Mr. Davis could only delegate his responsibilities to someone to carry out for him personally “seems antithetical to the corporate veil and recognized distinction in which officers and directors act.”

Sotos LLP acted as counsel to the plaintiffs at trial.

Adrienne Boudreau is a partner with Sotos LLP in Toronto, Canada’s largest franchise law firm.  She provides counsel to many franchised businesses, for both franchisors and franchisees, and has extensive experience litigating franchise rescission cases.

[1] Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3.

[2] 2483038 Ontario Inc. v. 2082100 Ontario Inc., 2020 ONSC 475.

[3] Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62.

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