Franchise systems typically derive much of their value from information—the systems, processes, data, know-how and relationships that distinguish them in the marketplace. This blog series explores how Canadian law protects those intangible business interests, where the limits of that protection lie, and what franchisors can do—proactively and reactively—to safeguard them.

When Sotos LLP assists franchisors in designing or refining their franchise systems, we offer a tailored audit of their intellectual property to ensure it’s properly protected. This proactive service helps identify potential vulnerabilities and establish safeguards, supporting the long-term value and success of our clients’ systems.

Why Confidential Information Matters

For many franchise systems, confidential information constitutes the core of the business. Operation manuals, pricing strategies, supplier terms, customer data, marketing plans, technical data, and proprietary systems and know-how are often what make a brand scalable, defensible, and valuable.

Yet confidential information is also uniquely vulnerable. Unlike physical assets, it can be copied instantly, transmitted invisibly, and misused long after a relationship ends. Canadian law does protect confidential information, but that protection is not always automatic. It can depend on how the information was created and controlled.

Protecting confidential information is important not only because of its value to the franchisor’s business, but also because the consequences of a breach may extend beyond the immediate actor. In some circumstances, a franchisee’s improper disclosure of customer or system information may expose the franchisor itself to legal and/or reputational risk.

This first post in the series provides a foundational overview: what counts as confidential information, how does the law protect it, and what should franchisors be thinking about now to reduce risk later.

What Is Confidential Information?

At a high level, confidential information is information that courts have described as having a “quality of confidence about it”. To determine whether information possesses this quality, consider the following non-exhaustive list of factors:

• The extent to which the information is known outside the franchisor’s business;
• The extent to which it is known by corporate employees and/or franchisees and others involved in the franchisor’s business;
• The extent of measures taken by the franchisor to guard the secrecy of the information;
• The value of the information to the franchisor and its competitors;
• The amount of money or effort expended by the franchisor in developing the information; and
• The ease or difficulty with which the information could be properly acquired or duplicated by others (e. by their independent endeavours).

Against that backdrop, and speaking generally, the more resources and skill expended to create the information, the greater the market value of the information, and the more comprehensive a franchisor’s efforts to safeguard the information, the more likely that information will be considered to be confidential, and thus capable of protection.

How Does the Law Protect Confidential Information

Unlike statutory protections for intellectual property such as trademarks or patents, confidential information is primarily safeguarded through the common law in Canada. There is no comprehensive legislative framework for the protection of confidential information. Instead, remedies for misuse are developed through established common law principles.

When a franchisor’s confidential information is misappropriated, the law offers several avenues for redress, often including requests for urgent injunctive relief to prevent further damage. Common legal claims for the protection of confidential information include:

• Breach of Confidence. A franchisor may bring a claim for breach of confidence when it can demonstrate that the information in question is confidential in nature, was disclosed in circumstances where an obligation of confidentiality existed, and has been improperly used or disclosed. In the franchise context, this commonly arises where a franchisee or former employee seeks to use proprietary information—such as trade secrets, operations manuals, supplier lists, or customer lists—to benefit a new or competing venture.
• Breach of Contract. A franchisor may also pursue a breach of contract claim if the defendant has violated a specific confidentiality provision agreed upon in a contract. For example, franchise agreements often include clauses that impose an explicit duty of confidentiality on franchisees. A breach occurs when the defendant improperly discloses, uses, or misappropriates confidential information contrary to the terms of its contractual obligations. Given the nature of franchise relationships, this often arises when a franchisee uses confidential system information to create or help others create a competing business.
• Breach of Fiduciary Duty. In certain business relationships, a fiduciary obligation may exist, such as between a senior executive and a franchisor. A breach of fiduciary duty claim arises when a fiduciary misuses confidential information entrusted to them in a manner that undermines the interests of the beneficiary. For example, if a senior executive leaves a franchise system to join or start a competitor, and in doing so improperly utilizes or discloses confidential information gained during their tenure, this constitutes a breach of their fiduciary duty. The franchisor may seek damages or injunctive relief to prevent further misuse of the confidential information.
• Unjust Enrichment. Where a party has improperly benefited from the misuse of confidential information, a claim for unjust enrichment may be available. This claim seeks to prevent the party from retaining the illicit benefits derived from the misappropriation. In the context of a franchise system, unjust enrichment claims may be brought if a former franchisee uses proprietary business methods, marketing strategies, or customer information to establish a competing business and gain a financial advantage at the franchisor’s expense. The court may order the return of any unjust profits or impose equitable remedies to remedy the wrongful benefit.
• Copyright Infringement. There is often an overlap between confidential information and information protected by copyright. Copyright protection arises automatically when an original work is created and fixed in a tangible form. Where a confidential work is also subject to copyright, the unauthorized reproduction, use, or distribution of that work may give rise to statutory claims for copyright infringement, in addition to any common law remedies available for misuse of confidential information. For example, a third party that copies or adapts a franchisor’s operations manual for use in a competing franchise system may be liable for copyright infringement.
• Potential Criminal Liability. The Criminal Code also provides for criminal sanctions in cases of the improper disclosure of trade secrets under sections 391(1) and (2). While criminal charges are infrequently pursued in the context of confidential information breaches, they remain an option where the conduct crosses the threshold of dishonesty or fraud.

How Can Franchisors Protect Their Confidential Information?

While later posts in this series will address specific risk areas, several high-level principles apply universally.

• Identify What Matters. Not all information warrants the same level of protection. Franchisors should clearly identify what information is confidential, who needs access and who does not, and whether sufficient systems are in place to protect information from inadvertent or improper disclosure.
• Use Clear, Enforceable Agreements. Contracts remain a primary, preventative line of defence to breaches. These may include confidentiality and non-disclosure agreements, employment and contractor agreements, and franchise agreements with robust information-protection provisions.
• Limit and Control Access. Access should be need-to-know, supported by passwords and access controls. Clear policies governing use and disclosure should also be in place.
• Act Consistently With Confidentiality. How a franchisor behaves matters. Marking documents as confidential, training staff, and responding promptly to breaches all signal that the information is confidential in nature and deserving of protection.
• Prepare for Exit Events. Departures, whether by franchisees, executives, or employees are high-risk moments. Advanced planning is essential.

How We Can Help

If you have questions about protecting your confidential information or would like assistance assessing your current protective framework, Sotos LLP regularly advises franchisors on these issues and would be pleased to assist.

About the Author

Daniel Hamson, Sotos LLP

Daniel is a partner in the Litigation Department at Sotos LLP. His practice focuses on complex commercial, corporate, and franchise disputes.

Daniel has been recognized for his litigation work and industry expertise. He is listed as “Ones to Watch” in Best Lawyers in Canada and has been named a “Lawyer to Watch” in the Canadian Legal LEXPERT Directory, as well as in the LEXPERT Canada’s Leading Litigation Lawyers. He is also recognized as “Recommended” in Lexology Index: Canada (formerly Who’s Who Legal).

Daniel can be reached directly at 416.572.7303 or dhamson@sotos.ca.

The post Protecting the Information Behind the Brand appeared first on Sotos LLP.

Background

In 2021, Mr. Zagros Management Inc., a restaurant franchisor, leased a premises from Yulee Developments Inc. In turn, Mr. Zagros sublet the premises to its franchisee, 11254316 Canada Inc. Under the lease, notices from the landlord to Mr. Zagros were required to be delivered to the premises.

Throughout the operation of the franchise, as a matter of course, the franchisee paid rent directly to the landlord. In March 2024, however, the franchisee failed to pay rent, which resulted in a demand issued by the landlord to the franchisee. Neither party informed Mr. Zagros of the situation.

The arrears remained uncured into April. In response, on April 3, the landlord delivered a notice of default to the premises addressed solely to the attention of the franchisee’s principal. The landlord also emailed a copy of the notice to the principal, but not to Mr. Zagros. The notice provided for a five-day window to pay the arrears.  Despite being informed the next day by the franchisee’s lawyer that his client had not forwarded the notice to Mr. Zagros, the landlord waited until the cure period expired on April 9 before taking steps to actually bring the notice to Mr. Zagros’ attention.

After Mr. Zagros learned of the arrears on April 9, its principal contacted the franchisee’s principal and, believing that the latter would rectify the arrears, left the matter with her. In the meantime, the franchisee’s principal began negotiating with the landlord. The negotiation included a proposal that the franchisee’s principal pay the arrears, albeit once the lease was terminated and a new lease was entered into directly with her. The parties did not disclose these negotiations to Mr. Zagros.

Shortly thereafter, with the arrears still outstanding, the landlord purported to terminate the lease by issuing a notice of termination addressed solely to the franchisee. The landlord and a newly incorporated company controlled by the franchisee’s principal then signed a new lease for the premises. The franchisee’s principal proceeded to open a restaurant competitive with her former franchise from that location.

The Application

Mr. Zagros commenced an application against the landlord, the franchisee, its principal and her newly incorporated company seeking, among other things, a declaration that the default and termination notices were not delivered in accordance with the lease and were therefore void. According to Mr. Zagros, the notices were non-compliant because, as a matter of contractual interpretation, the notice provision required that notices delivered thereunder, at a minimum, not be addressed to the wrong party.

The landlord defended the application on the principal basis that, irrespective of who the default and termination notices were addressed to or the practical consequences of this error, it complied with the strict wording of the notice provision by simply delivering the notices to the premises.

In two endorsements, the application judge accepted Mr. Zagros’ submission:

[T]he notice of termination is deficient. It was not addressed to Mr. Zagros but rather to 112. 112 was not the tenant. I am of the view that the notice of termination had a fatal defect as it was not addressed to Mr. Zagros Management Inc. and did not accord with the provisions of the lease…

…

In my January 2025 Endorsement, I held that the notice of termination was deficient. I did not explicitly address the notice of default dated April 3, 2024. However, that notice is also deficient as I find it was not properly served upon the Applicant.

The Appeal

The landlord unsuccessfully appealed from that judgment to the Ontario Court of Appeal. In its brief reasons, the Court agreed with and elaborated on the application judge’s analysis:

We see no error in the application judge’s findings that the Default Notice and the Termination Notice were deficient because they had not been properly served on Mr. Zagros. The application judge accepted Yulee’s submission that notices were to be delivered to the Leased Premises. However, they did not comply with the requirements of s. 17.11 of the Lease because they were improperly addressed. The Notice of Termination was addressed to 112, rather than to Mr. Zagros, and the Default Notice was addressed to the attention of Ms. Zamani, again as opposed to Mr. Zagros. Accordingly, as the court advised the parties at the oral hearing of the appeal, Yulee’s appeal was dismissed.

Key Takeaways for Landlords and Franchisor Sublandlords

This case provides a clear lesson: Notices under a lease are more than formalities. Properly addressed and delivered notices are essential to protect both landlords (and franchisors acting as sublandlords). Missteps in this process can leave a landlord or sublandlord unable to rely on the notice — a costly mistake that can be avoided with careful attention to the lease.

Remember:

1. Follow the lease to the letter. Default and termination notices must be addressed to the legal tenant. Even a technically minor misaddressing may invalidate the notice.
2. Monitor communications. Franchisors acting as head tenants must ensure that they receive all communications from the landlord. Notice provisions will often provide for the opportunity to amend the address for service. As a best practice, franchisors should consider adding the franchisor’s head office as an additional required address for service under the lease.
3. Establish a disciplined lease administration framework. Beyond staffing or systems, franchisors acting as head tenants or sublandlords should proactively structure their leasing arrangements to ensure visibility and control over defaults and enforcement steps. This may include evaluating whether a tripartite agreement or rent-flow arrangement are appropriate for the system. Thoughtful lease architecture at the outset can materially reduce the risk that critical notices are misdirected, delayed, or leveraged to the franchisor’s detriment.

Daniel Hamson and his team at Sotos LLP acted as counsel to Mr. Zagros on the application and appeal in Mr. Zagros Management Inc. v. Yulee Developments Inc.

Sotos LLP regularly advises franchisors on leasing strategy and structure, including with respect to head leases, subleases, and tripartite arrangements, to ensure franchisors maintain control over premises and minimize enforcement risks across their franchise systems.

About the Author

Daniel Hamson, Sotos LLP

Daniel is a partner in the Litigation Department at Sotos LLP. His practice focuses on complex commercial, corporate, and franchise disputes.

Daniel has been recognised for his litigation work and industry expertise. He is listed as “Ones to Watch” in Best Lawyers in Canada and has been named a “Lawyer to Watch” in the Canadian Legal LEXPERT Directory, as well as in the LEXPERT Canada’s Leading Litigation Lawyers. He is also recognised as “Recommended” in Lexology Index: Canada (formerly Who’s Who Legal).

Daniel can be reached directly at 416.572.7303 or dhamson@sotos.ca

The post Wrong Addressee, Right Outcome: Why Your Lease Notice Might Not Count appeared first on Sotos LLP.

Read the original article for ‘What does a franchise litigation lawyer do?‘ over on the Lexpert website.

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.

The post Daniel Hamson provides insights into the role of a franchise litigation lawyer 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.

The post Seven Lessons from the “Paramount Trilogy” appeared first on Sotos LLP.

• Nearly two-thirds of hospitality businesses (64.0%) anticipate labour shortages to be an obstacle over the next three months;
• Businesses in this sector were also most likely (24.6%) to expect their number of vacant positions to increase over the next three months, nearly triple the proportion of all businesses (8.8%) that expected the same;
• The number of staff vacancies rose 37.2% (+42,900) in March 2022 for a total of 158,100 vacant positions across Canada. The job vacancy rate in this sector was 12.8% in March 2022, the highest rate across all sectors for the 11th consecutive month.

The Ristorante a Mano Decision

Against that backdrop, a recent tax decision released by the Federal Court of Appeal could make matters worse by requiring businesses to include tips as part of an employee’s pensionable and insurable earnings under the Canada Pension Plan (“CPP”) and Employment Insurance Act (“EIA”), respectively.

The relevant facts of Ristorante a Mano Ltd. v. Canada (Minister of National Revenue) are likely familiar to most restaurant owners:

• Ristorante a Mano operates a restaurant in Halifax and employs servers to provide table service to its customers;
• Those customers sometimes pay tips in cash, which the servers are free to keep without advising the business;
• More typically, customers pay their restaurant bills, including the tip, using electronic payment;
• Through arrangements with the business, the servers receive a portion of the electronic tips paid by the customers they served (the “Due Back Amount”);
• The Due Back Amount was calculated using a formula. Notably, where a server received cash in satisfaction of a customer’s restaurant bill during their shift, the server could retain part of that cash payment as part of the Due Back Amount.

The business did not consider any part of the electronic tips received by servers to be pensionable salary and wages for purposes of the CPP, or insurable earnings for purposes of the EIA. As a result, from 2015 to 2017, the business did not take into account any portion of the electronic tips when computing its liability to make payments under that legislation.

The CRA assessed the business on the basis that a portion of the servers’ electronic tips for the 2015 to 2017 period (the Due Back Amounts actually paid by the business) should have been taken into account.

The business was unsuccessful in its challenge of the CRA’s decision and its appeal to the Tax Court of Canada. The Federal Court of Appeal similarly dismissed the business’s appeal. The Court found that because the electronic tips were initially received by the business and thereafter paid out to the servers (as distinct, for example, from the cash tips and other cash which was received directly by the servers and set-off against the Due Back Amount), this additional administrative step brought the Due Back Amounts paid to servers within the ambit of the legislation. The proportion of the Due Back Amounts paid to servers was thus considered contributory salary and wages for purposes of the CPP and insurable earnings for purposes of the EIA. These amounts therefore must be included on the employees’ T4s.

The Impact of Ristorante a Mano on Business Owners

Following Ristorante a Mano, if your business receives gratuities directly through electronic payment and then transfers any proportion of those gratuities to your staff, those payments will be caught by the CPP and the EIA and must be accounted for as required by that legislation.

Sotos LLP provides counsel and guidance to restaurant owners on all aspects of their business operations. For questions about the application of the Canada Pension Plan or the Employment Insurance Act on your business, contact Daniel Hamson, senior associate at Sotos LLP and member of the firm’s restaurant services sector.

The post Restaurants Beware: The Taxman Cometh! appeared first on Sotos LLP.

When approached with preparedness, renewal negotiations can offer the opportunity to retain a great franchisee and adapt the terms of the parties’ agreement to reflect evolving priorities and changing industry conditions, or, if the arrangement is no longer fruitful, amicably conclude the business relationship.

Conversely, when a franchisor pursues a renewal in an ad hoc manner, the experience can become stormy, whereby the franchisor is unable to steer negotiations towards a beneficial conclusion, resulting in missed opportunities and, at worst, exposure to potential legal liability.

In practice, the renewal process invokes a confluence of often competing “heads” of consideration which can—and should—be contemplated during system design, when the architecture of the franchise agreement, head lease, and other ancillary documents affecting the tenor of any eventual renewal is being conceived. By drafting at this stage with an eye towards process, and in particular through fashioning terms that fit together in chronological lock-step, all while paying due attention to statutory obligations, a franchisor will be adequately prepared to effectively navigate the sometimes uncertain waters of renewal negotiations.

While it is beyond the scope of this article to thoroughly examine any particular head of consideration, or discuss at length the substantial interconnection between each head, the following will provide a high-level map of the significant issues that should be settled as a franchisor seeks to renew, or not renew, a franchise agreement.

I. TERMS OF THE FRANCHISE AGREEMENT

(a) What is the renewal right? As a preliminary step in designing any franchise system, franchisors should contemplate what mechanism for renewal will apply to the parties’ arrangement—an automatic renewal, unconditional or conditional renewal, or one of the numerous other species of renewal. To that end, think of this right like a ship’s hull: It should be the first component designed, it establishes the parameters within which all other renewal terms must fit and, on a practical level, when poorly constructed, it can threaten to sink a prospective deal. Further, at the point of negotiation, and leaving analogies aside, whichever renewal right one chooses will help determine, among other things, whether and to what extent contract terms are negotiable and which party possesses what bargaining leverage.

(b) Notice of intent versus notice of renewal? From a procedural standpoint, franchise agreements typically contain notice provisions, and in particular stipulate rules pertaining to the substance and timing of a notice of renewal required to be delivered by a franchisee. The utility of such terms lies in the commercial certainty they offer by providing confirmation of a franchisee’s agreement to continue the parties’ arrangement into a subsequent term. When drafting such provisions, franchisors should choose their language carefully. All too often, agreements speak instead of a notice of intent in place of a notice of renewal, despite the former being, for practical purposes, procedurally superfluous.

(c) When is compliance assessed? A boilerplate renewal condition found in most franchise agreements requires that the franchisee be in full compliance with the terms of the parties’ agreements. With that in mind, franchisors should investigate when such compliance is assessed—at the time notice of renewal is provided, at the time of the renewal itself, or at some other point? The answer to this question could affect the availability of a franchisee’s right to renew, if default provisions were drafted with foresight, and may provide the franchisor with a useful bargaining chip during the negotiation process.

(d) Conditions or obligations? Franchise agreements regularly contain a host of conditions for renewal that must be satisfied in order for the franchisee to enjoy the benefit of a subsequent term. Some franchisors, however, choose instead to style the same requirements as obligations of the parties’ renewal agreement. The difference between the two approaches is apparent when assessed through the lenses of certainty of performance and enforcement. That is, with respect to conditions, a franchisee has discretion whether and to what extent to fulfill the requirement, but once the parties execute a renewal agreement, the condition is tacitly deemed satisfied. With the latter approach, execution of the renewal agreement confirms the franchisee’s duty to fulfill the obligation, and provides the franchisor with tools to compel performance to a standard to the franchisor’s satisfaction.

(e) Noncompliance or leverage? As touched on above, consider the strategic value of certain procedural or substantive requirements for renewal left unsatisfied by a franchisee. Take, for example, a notice to renew submitted outside the prescribed window—while technically deficient and potentially constituting grounds to disallow renewal, a noncompliant notice can also offer leverage when negotiating an update to the parties’ agreement.

(f) What are the terms on expiry? Given that not all renewal negotiations end up with an inked deal, when drafting post-expiry terms in the initial franchise agreement, there are a myriad of considerations franchisors should pay heed to, for example, whether they anticipate wanting the right to subsequently purchase the franchisee’s assets and how those assets will be valued, as well as the enforceability of restrictive covenants, among other things.

II. TERMS OF THE HEAD LEASE

In certain systems, franchisors require franchisees to contract directly with landlords, thus absolving franchisors of leasing obligations and the headache of coordinating head lease and franchise renewal deals. For the vast majority of franchisors who, for the purposes of having more robust and direct land control, do not follow this practice, there are a number of integral considerations to keep in mind when negotiating a head lease at the outset of system design and at the point of franchise renewal.

For example:

• Will the head lease renewal be conditional upon the franchisor securing a franchisee for a subsequent term? As discussed more fully below under “When to provide disclosure?”, where a head lease renewal is not conditional, due to certain legislative rules regarding the substance and timing of disclosure documents, franchisors may find themselves forced to renew their head lease without the guarantee of a subtenant, risking the possibility of being saddled with vacant premises or an obligation to operate directly if franchise renewal negotiations falter.
• Does the head lease provide for conditions for renewal or obligations upon renewal, and are these requirements similarly styled in the franchise agreement?
• What is the timing and mechanism for setting rent applicable to the new term?

III. STATUTORY OBLIGATIONS

(a) Whether to provide disclosure? Franchisors must pay attention to their statutory obligations in preparing for renewal negotiations. By way of example, Ontario’s provincial franchise legislation requires franchisors to provide a disclosure document to franchisees prior to renewal of the parties’ franchise agreement, subject to a narrow exemption in cases where, among other things, there has been no material change since execution of the franchise agreement or the latest renewal. Where a franchisor fails to meet this exemption yet neglects to provide a disclosure document, the legislation confers on the franchisee an assortment of statutory remedies, including a right of rescission within two years of executing the franchise agreement renewal. The difficulty, of course, is in determining what constitutes a material change.

(b) When to provide disclosure? The question of when to provide disclosure is affected both by procedural and substantive statutory requirements, and is deeply imbricated with the timeline of any simultaneous head lease renewal negotiations. On the point of statutory procedure, franchise laws ubiquitously require a multi-day “seasoning period” between the time disclosure is provided and when the parties may execute an agreement or transfer any funds. From a substantive perspective, provincial franchise legislation obliges franchisors to include in their disclosure documents a copy of the applicable head lease. Together, these two obligations thus mandate that, in practice, a franchisor must have its head lease locked up before it can include it in the disclosure document, which document must in turn be delivered before the franchisee can sign the renewal agreement. A problem arises, however, in situations where the head lease renewal is not conditional upon securing a franchisee—the franchisor must enter into the new head lease without certainty that the franchisee will agree to renew the parties’ arrangement once it has had a chance to consider the disclosure document. While there are solutions to remedy this timing issue, which are beyond the scope of this article, suffice it to say that with sufficient preparation at the time of system design, this dilemma can be safely managed.

(c) What to disclose? Renewals can be, and are often used as, an excellent time to update franchisees to the current form of franchise agreement. A properly drafted franchise agreement contemplates the availability of this option for implementation at renewal. Note that any proposed updated agreement, however, will need to be the subject of disclosure for further consideration by the franchisee.

(d) How does “fair dealing” apply? Another notable statutory obligation that applies to renewal negotiations—the duty of fair dealing (and the related common law concept of good faith, including where no statute applies)—is particularly relevant in instances where the franchise agreement confers upon the franchisor certain discretionary powers exercisable as a condition or obligation associated with renewal (e.g., the power to oblige a franchisee to renovate its premises). Where these powers are vaguely worded, such that the onerousness of the requirement depends upon the franchisor’s discretion (e.g., the extent of the mandated renovation), this statutory duty is engaged. When the exercise of discretion is done in bad faith, or is made in an unfair or unduly burdensome manner, such conduct may offend the statutory duty.

Generally speaking, the statutory duty of fair dealing, which incorporates the common law duty of good faith, requires franchisors to:

• exercise their powers under the franchise agreement in good faith and with due regard to the interests of the franchisee;
• observe standards of honesty, fairness and reasonableness;
• ensure that they do not substantially nullify the bargained objective or benefit contracted for by the franchisee, or causes significant harm to the franchisee, contrary to the original purpose and expectation of the parties; and
• exercise discretion reasonably and with proper motive, and not in an arbitrary or capricious manner.

Knowing whether a franchisor’s conduct has offended the duty of fair dealing, while difficult to assess, is essential to circumscribing commercial risk, as failure to act in accordance with this duty may result in potential legal liability.

IV. CONCLUSION

Renewals are an inevitable part of every franchisor’s business. It is therefore vital to prepare for the seamless continuation or amicable expiry of a franchise agreement by contemplating the abovementioned heads of consideration at the outset of system design. In doing so, and in seeking further advice about the application of these heads to the facts of their particular circumstance, franchisors will be better prepared to identify and leverage tactical opportunities during negotiations, further equipped to close renewals on favourable terms, and more likely to enjoy smooth sailing over the sometimes uncertain waters of renewal negotiations.

The post Navigating the Uncertain Waters of Franchise Renewal Agreements: An Introductory Map appeared first on Sotos LLP.