The following case decision is a cautionary tale for any party confronted with an anticipatory breach or repudiation of a contract—in layman’s terms, when it becomes clear before the end of the contract terms that one party will not fulfill their side of the agreement. These principles were recently applied by the Ontario Superior Court of Justice in Caivan (Creekside) Limited Partnership et al. v. Logoteta et al.,[1] a summary judgment decision involving a failed pre-construction real estate transaction.

A mere acknowledgement of repudiation, or even an internal belief that the agreement is over, is insufficient. Unless the non-repudiating party clearly communicates its acceptance of the repudiation within a reasonable time, the contract remains in force. As this case illustrates, silence can have serious and costly consequences.

Although the dispute arose in a residential real estate context, the Court’s reasoning has broad application across commercial agreements. In particular, it carries important lessons for franchise systems and supply or distribution relationships, where franchisors, franchisees, and suppliers frequently confront defaults, payment issues, and threatened non-performance.

The Facts

In June 2022, the defendants entered into an agreement of purchase and sale with the plaintiffs to buy a pre-construction townhouse in Oakville for approximately $3.31 million, with completion anticipated in July 2024. The defendants paid an initial deposit of $100,000 but failed to make subsequent required payments in August and October 2022, due to difficulties selling their home in the United Kingdom.

The plaintiffs granted an extension to November 10, 2022, warning that failure to pay could result in termination. On November 8, 2022, the plaintiffs advised that if payments were not made by 5 p.m. on November 10, they “will move to terminate the Purchase Agreement and all deposits shall be forfeited.” However, the plaintiffs also stated that if the defendants later became able to make payment and the house remained available, they were “willing to consider in good faith reviving the transaction,” including crediting the forfeited deposits towards the purchase.

The payments were not made by the deadline. Despite their prior warnings, the plaintiffs took no steps to actually terminate the agreement or communicate any acceptance of the defendants’ repudiation.

Several months later, in March 2023, while the agreement remained technically in force, the plaintiffs resold the property to a third party at a lower price. When the defendants subsequently inquired about reviving the transaction, the plaintiffs asserted that the agreement had already been terminated and sought damages. The defendants countered that the resale constituted a breach and demanded the return of their deposits.

The Decision

The Court reaffirmed the settled law on anticipatory breach repudiation does not terminate a contract unless and until the innocent party clearly accepts it. While acceptance may be communicated expressly or inferred from conduct, it must be clear, unequivocal, and communicated within a reasonable time.

The plaintiffs relied on Cachet Summerhill Developments Inc. v. Kaznlson,[2] where the Court termination based on mandatory and unequivocal language stating that the agreement “shall be declared null and void” unless performance occurred. In contrast, the communications in this case fell short.

Here, the plaintiffs’ October 31 and November 8, 2022 letters did not effect termination. Statements that the vendor “shall have the right” to terminate, or “will move to terminate,” contemplated future steps rather than an immediate and final election. Further, by expressly inviting the defendants to revive the transaction if payment later became possible, the plaintiffs affirmed the contract.

When the defendants failed to pay on November 10, 2022, the plaintiffs were required to make a fresh election, either to terminate or to continue with the agreement. They did neither. Their silence meant the repudiation went unaccepted and the contract remained alive.

By reselling the property in March 2023, the plaintiffs rendered themselves incapable of performing the agreement. In doing so, the “tables turned”: the plaintiffs became the breaching party. The Court held that the defendants were therefore entitled to the return of their deposits, with interest.

Why This Matters for Franchise and Commercial Relationships

This decision carries particular significance for franchise systems. Franchisors often grant indulgences, extensions, temporary forbearance, or informal accommodations to struggling franchisees or suppliers. While commercially understandable, such indulgences can inadvertently affirm the contract and eliminate the ability to later rely on an earlier repudiation.

Similarly, communications that reserve rights, threaten future termination, or continue to press for performance may prevent a franchisor (or franchisee) from later asserting that the agreement was already at an end. In commercial relationships failing to clearly accept repudiation can expose parties to unexpected liability.

Key Takeaways

At the core of the decision is a long-established principle of contract law: a repudiatory breach does not, by itself, bring a contract to an end. Termination depends not on the breaching party’s conduct, but on the clear and unequivocal election of the innocent party to accept the repudiation.

The key takeaways of this case are as summarized:

• Repudiation alone does not terminate a contract. Termination requires a clear and unequivocal acceptance by the “innocent” (non-repudiating) party.
• Termination cannot be unilateral or internal. A belief that an agreement is over has no legal effect unless communicated.
• Granting indulgences carries risk. Courts may infer that a party willing to extend time once may do so again.
• Pressing for performance affirms the contract. Once affirmed, the right to accept the repudiation is lost.
• Silence can be fatal. Where there is still time for the defaulting party to cure, inaction may leave the contract alive and shift breach risk to the innocent party.

For franchisors, franchisees, and commercial actors alike, the lesson is clear: when faced with repudiation, contact counsel, decide, and communicate, quickly and decisively. Silence is not termination.

About the Author

Sara Ray Ramesh is a litigation associate at Sotos LLP.  Prior to joining Sotos, Sara gained valuable experience as a summer and articling student at a national full-service law firm in Toronto. Sara has worked on a wide range of litigation matters spanning various practice areas, including general commercial litigation, construction law, and regulatory proceedings. She can be reached at 416.572.7306 or srayramesh@sotos.ca.

[1] 2025 ONSC 1875.
[2] 2021 ONSC 2512.

This article originally appeared in the Canadian Franchise Association’s Legal Digest column. 

The post Silence is Not Termination: The Risk of Doing Nothing appeared first on Sotos LLP.

A “time is of the essence” (TOE) clause is a common contractual provision used in a wide range of commercial agreements. At its core, a TOE clause indicates that compliance with specified timelines is a material term of an agreement and that failure to meet those timelines, however minor or inconsequential, can constitute a breach entitling the non-breaching party to terminate the contract. In transactions with clearly defined deadlines (such as a fixed closing date), a TOE clause demonstrates that performance within a stipulated timeframe is an essential term of the agreement.

Notwithstanding their widespread use, TOE clauses have frequently been the subject of commercial disputes, highlighting the persistent challenges associated with their interpretation and application. Most recently, the Supreme Court of Canada (SCC) granted leave to appeal the decision of the Court of Appeal of Newfoundland and Labrador in Nova Fish Farms Inc. v Cold Ocean Salmon Inc., highlighting the continued significance of TOE clauses in Canadian contract law.

The Dispute: Nova Fish Farms Inc. v Cold Ocean Salmon Inc.

In this dispute, Cold Ocean Salmon Inc. (the Seller) agreed to sell several trout farms to Nova Fish Farms Inc. (the Buyer) under an agreement of purchase and sale signed in February 2020 (the Agreement). The trout farms were on property leased from the provincial government and were licensed and regulated by both federal and provincial governments. As a result, the sale of the trout farms was conditional on government approval. The Agreement required each party to take the necessary steps to obtain government approval “as promptly as practicable” and that the parties use “commercially reasonable efforts” to obtain approval before closing. The Agreement contained a TOE clause.

Due to the COVID-19 pandemic, neither of the parties took any meaningful steps to obtain the necessary government approvals over the next 16 months. In June 2021, the Buyer submitted transfer applications to the government and received approval in October 2021. The Buyer then notified the Seller of the government approval and that the Buyer wished to proceed with closing. The Seller ultimately informed the Buyer that it did not intend to close, which led to the Buyer suing for specific performance.

The Lower Court’s Decision

The trial judge found that the Buyer had breached the Agreement by failing to take the necessary steps to obtain government approval “as promptly as practicable”. Although there were no set timelines in the Agreement to obtain the government approvals, the trial judge held that the 16-month period was not in the contemplation of the parties and that the TOE clause entitled the Seller to terminate the Agreement.

The Court of Appeal’s Decision

The Court of Appeal disagreed with the trial judge, holding that the TOE clause did not extend to obligations governed by indefinite time provisions (i.e., “as promptly as practicable”). Rather, the Court of Appeal observed that the cases cited by the parties where TOE clauses were enforced “involved precisely stipulated time limits”, such as a fixed or outside closing date.

The Court of Appeal placed particular emphasis on the need for certainty in commercial agreements. It explained that contracting parties utilize TOE clauses to provide clear consequences of a breach relating to timelines, most notably, that a failure to meet such timelines entitles the non-breaching party to terminate the contract. Extending a TOE clause to obligations without defined timelines, the Court of Appeal cautioned, would undermine this objective by introducing ambiguity as to both compliance and the point at which termination rights arise.

Key Takeaways for Drafting and Strategy

The Nova Fish Farms Inc. v Cold Ocean Salmon Inc. case underscores the nuanced application of TOE clauses in Canadian commercial contracts. While TOE clauses are designed to ensure timely performance of contractual obligations, their enforceability may be tied to the presence of clearly defined deadlines. Subject to further guidance from the SCC, the Court of Appeal’s decision suggests that where contractual obligations are expressed in indefinite terms, such as “as promptly as practicable,” a TOE clause may not automatically grant a party the right to terminate.

This case serves as a cautionary reminder to contracting parties of the importance of establishing clear and precise deadlines within their agreements, particularly where the timing of performance is intended to be of fundamental importance. Parties should also carefully assess whether the inclusion of a TOE clause is appropriate in the circumstances. Such clauses should not be adopted as a matter of course, and instead should be evaluated and tailored on a case-by-case basis to ensure alignment with the parties’ intentions.

For businesses navigating complex commercial agreements, the use and interpretation of “time is of the essence” clauses can have significant legal and financial consequences. Sotos LLP has extensive experience advising clients on contract drafting, risk management, and high-stakes commercial disputes. If you have questions about how these developments may impact your agreements or require strategic guidance, our team would be pleased to assist.

About the Author
Sam Fata is an associate in the corporate and commercial group at Sotos LLP. His practice focuses on corporate finance, mergers and acquisitions, securities, and commercial law. He advises clients across a wide range of industries, including technology, manufacturing, mining, agribusiness, entertainment, artificial intelligence, and consumer goods. Sam takes a client-focused approach, working closely with businesses to understand their objectives and deliver practical, tailored legal solutions. He can be reached at 416.530.0447 or sfata@sotos.ca.

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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.

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The Ontario Court of Appeal’s recent decision in Aroma Franchise Company, Inc. v Aroma Espresso Bar Canada Inc. (the “Aroma Decision”)[1] explored the grounds of arbitrator impartiality and disclosure obligations under the UNCITRAL Model Law on International Arbitration (the “Model Law”), adopted in the International Commercial Arbitration Act, 2017, S.O. 2017, c. 2, Sched. 5.

The Model Law contains provisions that promote arbitral impartiality. Article 12(1) imposes a duty on an arbitrator to disclose – before appointment and as the arbitration proceeds – any circumstance likely to give rise to justifiable doubts about the arbitrator’s impartiality. Article 12(2) permits a challenge to the arbitrator or the award that was made if circumstances exist that give rise to justifiable doubts about the arbitrator’s impartiality, as long as the person making the challenge was unaware of the circumstances when they participated in the arbitrator’s appointment. Justifiable doubts about impartiality is an equivalent phrase to reasonable apprehension of bias.^[2]

So, What Happened?

The franchisor, Aroma Franchise Company Inc. (the “Franchisor”) and its affiliates alleged that their Canadian master franchisee, Aroma Espresso Bar Canada Inc. (the “Franchisee”) breached an exclusive coffee supply arrangement. As a result of the breach, in May of 2019, the Franchisor sent a notice to the Franchisee terminating the Master Franchise Agreement (“MFA”). The Franchisee, in turn, argued the termination was unlawful. Following a lengthy arbitration over the termination of the MFA, substantial damages were awarded to the Franchisee. After the arbitration had concluded, the Franchisor discovered the arbitrator had accepted another arbitration appointment on an unrelated matter from counsel for the Franchisee during the proceedings. The arbitrator did not disclose this to the Franchisor, arguing the two cases had no overlapping parties or issues.

This non-disclosure led to claims of bias, prompting the Franchisor to successfully have the award set aside by the Ontario Superior Court of Justice. The decision was rooted in a finding of reasonable apprehension of bias, due to the arbitrator’s silence regarding his other engagement. However, the Court of Appeal disagreed, restored the award relating to this issue, and clarified the threshold for bias in arbitration.

The Appeal

The Court of Appeal corrected the lower court judge’s fundamental error in failing to address the fact that the arbitrator was not made aware (and deliberately so by Franchisor’s counsel) of the communications between counsel for the parties which predated counsel’s approach to the arbitrator. The Court of Appeal found that the arbitrator could not have known of any potential concerns which the Franchisor had about other relationships with the arbitrator because Franchisor’s counsel deliberately chose not to so inform the arbitrator.

The Court of Appeal confirmed that the threshold for disclosure under Article 12(1) of the Model Law is an objective one and relied on the objective test for reasonable apprehension of bias – what would a fair-minded and informed observer think?

1. Disclosure ≠ Determinative

The Court acknowledged that while arbitrators must disclose any circumstances that are likely to raise justifiable doubts about impartiality, failure to disclose does not automatically indicate bias. In this case, the Court emphasized that the two arbitrations were entirely unrelated, involving different parties, industries, and issues. This lack of a meaningful connection diminished the likelihood that the arbitrator’s impartiality could reasonably be called into question, ultimately tipping the scales in favour of upholding the award.

2. International Decisions

The Court leaned heavily on UK precedent, including Halliburton Company v Chubb Bermuda Insurance Ltd., (“Halliburton”)[3] and Aiteo Eastern E & P Company Ltd. v Shell Western Supply and Trading Ltd., & Ors (“Aiteo”)[4] emphasizing that disclosure obligations in international arbitrations are context-specific and guided by the Model Law. These cases underscored the principle that multiple appointments by the same counsel does not inherently give rise to bias.

3. Objective Test Prevails

A fair-minded observer, the Court concluded, would not find the arbitrator’s undisclosed second appointment sufficient to displace the presumption of impartiality. The decision underscored that Canadian courts apply a strong presumption of arbitrator impartiality, even when disclosure lapses occur.

Key Takeaways for Coffee (and Arbitration) Enthusiasts:

• Disclosure Duties Are Not Black and White

While the Model Law sets a high standard for disclosure, it’s not a free pass to challenge awards where an arbitrator does not disclose something. Context matters and parties must assess the potential overlap of issues and parties objectively.

• Precedent Percolates Across Borders

Canadian courts are aligning their approach with international best practices, as seen in Halliburton and Aiteo. Practitioners should familiarize themselves with these decisions to better anticipate disclosure risks.

• “Reasonable Apprehension of Bias” Is Not a Catch-All

Bias remains a high bar to prove. Parties seeking to challenge arbitrators must go beyond subjective discomfort and belief and demonstrate objectively justifiable doubts about impartiality.

• Toward a Global Trend

This decision hints toward greater alignment in how arbitrator disclosure and disqualification are approached globally. While it does not supplant the International Bar Association Guidelines on Conflicts of Interest in International Arbitration (the “IBA Guidelines”), it signals a move toward consistency for cases where the IBA Guidelines are not adopted. This could help standardize outcomes and strengthen confidence in arbitration as a fair and predictable dispute resolution method.

Final Sip…

The Aroma Decision reaffirms the importance of maintaining impartiality in arbitration while recognizing that non-disclosure alone does not automatically indicate bias. By emphasizing the objective standard of a fair-minded and informed observer, the Court of Appeal clarified that disclosure obligations must be assessed in each specific context. This ruling aligns Canadian arbitration practices with international standards and reinforces the principle that arbitration should balance transparency with practicality, to preserve its integrity and efficiency. Additionally, its influence may extend beyond Canada, contributing to greater global consistency in arbitrator disclosure and disqualification approaches.

NOTE: Allan D.J. Dick and his team at Sotos LLP acted as counsel to the Franchisee in the arbitration and in the court proceedings and, with co-counsel, Alison FitzGerald, on the appeal.

[1] 2024 ONCA 839.
[2] Ibid, para 2.
[3] [2020] UKSC 48, [2021] 2 All E.R. 1175.
[4] [2024] EWHC 1993 (Comm).

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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.

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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.

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 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.

The post Franchise Advertising Funds: A Blueprint for Success and Pitfall Prevention appeared first on Sotos LLP.

• Estoppel: If a franchisor provides a service not listed in the franchise agreement, and the franchisees support the provision of that service, the franchisees may be estopped from later disputing the fees charged by the franchisor for that service;
• Discretionary Fees: If the franchise agreement gives a franchisor discretion to set fees for services it provides franchisees, the franchisor may set those fees at a level higher than its actual costs of providing those services;
• Unwanted Inventory: If a franchisor requires a franchisee to purchase significant unwanted inventory, the franchisor may be in breach of the duty of fair dealing; and
• Franchisor’s Revenues: Franchisors may have to disclose sources of revenue obtained because of a franchisee, even if the franchisee has no right to that revenue.

(1) Estoppel

Shoppers operates a loyalty program called “Optimum”. The franchisees were required to participate in the Optimum program. Shoppers charged franchisees a fee to participate in Optimum.  This fee was not expressly listed in the franchise agreement. Shoppers relied on a term in the franchise agreement allowing it to charge for “services from time to time rendered”, besides “included services”, to charge the franchisees the fee related to Optimum.

The plaintiff alleged that participation in Optimum was an “included service”. The court rejected that claim. In the alternative, the court endorsed Shoppers’ other argument: even if Optimum was an “included service”, franchisees were estopped from disputing the fee because: (1) they were “eager participants in the Optimum Program” and told Shoppers as much, and (2) Shoppers relied on the franchisees’ words and deeds to incur the huge expenses of underwriting the Optimum program costs (paras 732-736).

From a practical point of view, this finding should be of comfort to responsible franchisors who undertake system changes in consultation with their franchisees.  Where the franchisees’ response to a change or new program is positive, and the changes are implemented collaboratively, the franchisor is justified in relying on the franchisees’ positive words and deeds.  Franchisees may be estopped from retroactively claiming that changes were improper if they willingly embraced and sought the benefits of such changes.

For franchisees, this finding stands as a reminder to raise concerns promptly and clearly if they perceive changes to be improper or problematic. Acquiescence may be interpreted as endorsement.

(2) Discretionary Fees

The franchise agreement expressly allowed Shoppers to charge fees for loss prevention, training, accounting, and equipment rental. Shoppers was entitled to set the amount of those fees “in the good faith exercise of its judgment”. The court found as a fact that Shoppers set fees at a level higher than Shoppers’ actual costs to provide the related services.

The plaintiff alleged that Shoppers was only allowed to charge its actual costs. The court rejected that argument, noting that it was not connected to any express language in the contract.  In contrast, Shoppers relied upon express language that Shoppers Charges “shall be such amount or amounts as [Shoppers] shall, in the good faith exercise of its judgement, determine”.  On this basis, the court held that Shoppers was entitled to exercise its contractual discretion to extract profits from those fees (paras 749-760).

For franchise systems, one take-away is the benefit of clear contractual language, reserving rights of discretion and sources of profitability where appropriate. As a corollary, franchisors should consider the extent to which their practices and rights to profit from alternative sources constitute material facts, that must be disclosed in provinces with franchise legislation.

(3) Unwanted Inventory

Shoppers sold inventory to franchisees. The franchise agreement also allowed it to mandate minimum purchases of inventory through mass delivery of products to large groups of stores.

The plaintiff alleged that this practice downloaded the financial risk of inventory management onto the franchisees, in breach of Shoppers’ duty of fair dealing.  The court observed that the evidence had not established offloading of unwanted or stale products onto the franchisees and found as a fact that Shoppers’ imposition of mass orders was not a systemic breach of its contracts or breach of the duty of good faith. However, the court also accepted that there may have been breaches of good faith with respect to individual franchisees. Thus, the court sent the franchisees to individual issues trials on this point, among others (paras 375-377, 766-772).

Since the merits of this argument were left to individual issues trials, this decision does not establish that franchisors breach their duties of fair dealing if they impose minimum purchase requirements on their franchisees. However, this is now the third Ontario decision suggesting that force-feeding unwanted inventory on franchisees may be a violation of a franchisor’s legal obligations.[1] Hopefully, the individual issues trials will provide more definitive answers on this subject.

As we await further clarity on forced distribution from the courts, it is notable that actions found to be justified on a system-wide basis may be interpreted differently at the unit level.   Franchisors may have legitimate cause to impose certain policies on their portfolios but they must also bear in mind the impacts of their decisions on the individual franchisees with whom they have specific contractual relationships.

(4) Franchisor’s Revenues

Shoppers received more than $1 billion in “professional allowance” payments from generic drug manufacturers. These payments were permitted under the Ontario Drug Benefit Act, R.S.O. 1990, c. O.10 and the Drug Interchangeability and Dispensing Fee Act, R.S.O. 1990, c. P.23 because the franchisees were providing “direct patient care services”.

The plaintiff alleged that Shoppers was required to remit the professional allowance payments to the franchisees. Shoppers argued that it was allowed to keep that money under a clause allowing it to keep “all discounts, volume rebates, advertising allowances or other similar advantages”.[2]

The court found that this clause had different effects in the franchise agreement drafted in 2002 and the one drafted 2010. The 2002 franchise agreements predated the creation of the professional allowances regime, so the parties could not have intended that clause to cover these amounts. For such franchisees there had been a breach of contract.[3] Those class members who were not statute-barred by limitation periods were referred to individual issues trials (paras 825-843, 856-863).

In contrast, by 2010, the professional allowance regime was in existence and part of the factual nexus for that group at the time that they signed their contracts. Accordingly, the court found that the 2010 franchise agreements allowed Shoppers to retain professional allowance payments (paras 844-855).

Again, this decision demonstrates that the determination of whether a franchisor or franchisee has breached its duties of good faith and fair dealing is a fact-specific determination requiring an examination of the franchise contract and all the circumstances known to the parties at the time their agreements were executed (paras 709-721).

Another interesting issue raised in Spina was the extent to which the sharing of information may be required as part of the obligation of good faith.  Shoppers argued that franchisees were not entitled to information about the professional allowances. The court found that franchisees were aware of the professional allowances, so this argument was moot. But it noted, arguably in obiter, that Shoppers was wrong in saying that the franchisees were not entitled to disclosure (para 855).

It is unclear on what basis Shoppers would have been required to disclose this information. It was arguably required by the statute, but the court made this statement under the heading “Analysis: Professional Allowances and the Duty of Good Faith”, so the court may have been suggesting that disclosure was necessary under the duty of honesty, which is part of the duty of good faith.

Any common law developments finding that franchisors must disclose information on their alternative sources of revenue could be extremely impactful on franchising in Canada.  Currently, franchisors disclose the receipt of rebates and other benefits received as a result of purchases of goods and services by franchisees, as prescribed by statute.  However, many do not disclose other revenue sources, such as upcharges on products and leases, monetization of data, or other income streams. Franchisors would be expected to strongly resist expansion of the scope of such disclosure requirements, arguing that the information is highly confidential, and does not qualify either as a material fact under statute or as part of the common law duty.

Adil Abdulla, Sotos LLP

Adil is an associate with Sotos LLP in Toronto. He can be reached at 416.572.7325 or aabdulla@sotos.ca.

[1] Bark & Fitz Inc v 2139138 Ontario Inc, 2010 ONSC 1793 at paras 16-17, 21, 49; Spina v Shoppers Drug Mart Inc, 2012 ONSC 5563 at paras 92, 170-171.
[2] This is the language from the 2002 franchise agreement. The 2010 franchise agreement is almost identical: “all discounts, rebates, advertising or other allowances, concessions, or other similar advantages”.
[3] The court found that there had been a breach of contract but not unjust enrichment due to specifics of the Associates’ arrangements, whereby increased revenue might have been claimed by Shoppers under separate revenue streams.

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