2017 Legal and Legislative Update By Darrell Jarvis, Fasken - - PowerPoint PPT Presentation

2017 Legal and Legislative Update

By Darrell Jarvis, Fasken Martineau and Jonathan Mesiano-Crookston, Goldman Hine LLP

Cases in 2017 (and late 2016)

• Seto v Wendy’s Restaurants of Canada Inc, 2016 ABQB 493
• Trillium Motor World Ltd v General Motors of Canada Limited,

2017 ONCA 545

• 1291079 Ontario Limited v Sears Canada Inc, 2016 ONSC 7451
• 1250264 Ontario Inc v Pet Valu Canada Inc, 2016 CanLII 66262

(SCC)

• Zwaniga v Johnvince Foods Distribution LP, 2017 ONSC 888
• Mendoza v Active Tire & Auto Inc, 2017 ONCA 471
• Harvey v Talon International Inc, 2017 ONCA 267
• 2212886 Ontario v Obsidian Group, 2017 ONSC 1643
• Reid v Snap Fitness Cloverdale and others, 2017 BCHRT 181

Cases in 2017 (and late 2016)

• Dairy Queen Canada, Inc v MY Sundae Inc, 2017 BCSC 358
• 2122994 Ontario Inc v Lettieri, 2016 ONSC 6209
• 241 Pizza (2006) Ltd v Loza, 2016 ONSC 6623
• Mr Lube Canada Limited Partnership v 2070778 Ontario Limited, 2016 ONSC

7707

• YESCO Franchising LLC v 2261116 Ontario Inc, 2017 ONSC 4273
• Zhao v Pizza Nova Take Out Ltd, 2016 HRTO 1166
• Hanewich v Budget Brake & Muffler Franchising Ltd, 2016 ABQB 727
• Cora Franchise Group Inc v Watters, 2017 ONCA 286
• Sprague v MBEC Communications Inc, 2016 HRTO 1284
• Comité paritaire de l’entretien d’édifices publics de la région de Quebec c.

Modern Concept d’Entretien Inc, 2017 QCCA 1237

• Chavdarova v The Staffing Exchange, 2016 ONSC 1822
• Asian Concepts Franchising Corporation (Re), 2017 BCSC 1452

Seto v Wendy’s Restaurants

• f Canada Inc, 2016 ABQB 493
• F’ee in periodic default of franchise agreement
• ver years including arrears to CRA and bank
• Forbearance Agreement in past
• F’ee in early steps to sell franchise
• Wendy’s terminated franchise agreement
• F’ee alleged: waiver due to past conduct; breach
• f duty of good faith and fair dealing; unjust

enrichment

Seto v Wendy’s Restaurants

• f Canada Inc, 2016 ABQB 493

Take-aways:

• Importance of waiver and entire agreement

provisions; forbearance agreement noted

• Assess circumstances prior to termination:

termination was done in accordance with agreement and no improper purpose but if sale had been imminent it could be evidence

• f termination for improper purpose.

Seto v Wendy’s Restaurants

• f Canada Inc, 2016 ABQB 493
• Importance of provision stating that goodwill

inures to franchisor in assessing claim for unjust enrichment

• Provision for ‘reasonable attorney’s fee

incurred as a result of default’ not sufficient for solicitor and client level legal fee reimbursement

Trillium Motor World Ltd v General Motors

• f Canada Limited, 2017 ONCA 545
• GM was insolvent. Had to restructure and

reduce # of dealers. Offered payouts to terminate franchise agreements, in exchange for releases

• Dealers brought class action against GM
• GM defending saying release was full defence
• Hearing judge agreed, dismissed class action
• Ont CA agreed

Trillium Motor World Ltd v General Motors

• f Canada Limited, 2017 ONCA 545

Take-aways:

• Releases signed over known claims/issues,

and with advice of counsel, are valid

• F’ors can make tough decisions and still be

acting in good faith, as long as commercially reasonable

• “ “rational business decision” made for “valid economic

and strategic reasons, having regard to both GMCL’s

• wn interests and the interests of its franchisees”

1291079 Ontario Limited v Sears Canada Inc, 2016 ONSC 7451

• Action certified as a class proceeding. Parties

then agreed on timetable, discovery plan, exchange of documents, discovery, expert reports; refusals; mediation; and common issues trial

• Plaintiffs sought motion for partial summary

judgment on one of the common issues

• Permitting partial summary judgment motion

would add to expense, and possibly delay resolution of entire matter

1291079 Ontario Limited v Sears Canada Inc, 2016 ONSC 7451

Take-aways:

• Had summary judgment motion been brought

immediately after certification, there might’ve been more justification for it.

• Even then, it would have been difficult to avoid

the problem of two final orders and appeal routes.

• However, at least the significant document

productions and consequent cost would have been avoided, or at least delayed

Further Class Action Update

• 1250264 Ontario Inc v Pet Valu Canada Inc

(2016 CanLII 66262 (SCC)) : SCC denied the representative plaintiff’s application for leave to appeal the unanimous decision of the

• ONCA. Costs awarded to Pet Valu
• Zwaniga v Johnvince Foods Distribution LP

(2017 ONSC 888): Settled pre-certification as between the proposed class and the f’or

Mendoza v Active Tire & Auto Inc, 2017 ONCA 471

• F’ee rescinded based on deficiencies in

disclosure (not most recent financials, and

• nly one signature on certificate, not two)
• Trial judge held that deficiencies minor and

f’ee had information it needed to make informed decision

• On appeal, Ont CA held that test for rescission

is objective: whether Act complied with, not what f’ee knew

Mendoza v Active Tire & Auto Inc, 2017 ONCA 471

Take-aways:

• It doesn’t matter what f’ee knew
• Get disclosure right

– one signature instead of two, on the certificate, is likely a material deficiency (almost certainly in light of other case law) – Providing old financial statements is likely a material deficiency

Harvey v Talon International Inc, 2017 ONCA 267

• This was a condominium law case, but made

comments about franchise law

• Under the Condominium Act, 1998, a condo

purchaser can rescind their purchase in certain circumstances

• Two purchasers allegedly rescinded their

purchase agreements, but did not clearly refer to rescission or the section of the Condo Act being relied on. Court had to determine if their notices

• f rescission were valid or not.

Harvey v Talon International Inc, 2017 ONCA 267

• Court commented on franchise law cases that

indicated that a notice of rescission must inform the recipient what remedies are being claimed but does not have to use any specific language

• Court held the two notices were valid
• Section 74(7) of the Condo Act does not

require the use of the words “rescind” or “rescission” or any specific language.

Harvey v Talon International Inc, 2017 ONCA 267

Take-aways:

• (Really for lawyers.)
• Disclosure documents are technical, and

notices of rescission are less so, but don’t be too lax. Rescinding franchisees still need to inform their (ex-)f’ors what remedies they claim and how much money.

2212886 Ontario v Obsidian Group, 2017 ONSC 1643

• F’ee brought motion for summary judgment,

claiming rescission

– for failing to provide copy of head lease and of earnings projections previously shown

• F’or brought cross-motion to dismiss
• Motion granted in part

2212886 Ontario v Obsidian Group, 2017 ONSC 1643

Take-aways:

• Re: disclosure/rescission:

– head lease apparently not material (contrast with Raibex Ont CA) – earnings projections were, and had been provided by f’or

• Where two franchise agreements signed, 2-year

limitations period may run from the second. But note, it had been requested by f’or and to its benefit.

• For litigators: this last point was decided on summary

judgment, even though an issue of credibility

Reid v Snap Fitness Cloverdale and

• thers, 2017 BCHRT 181
• Employee of f’ee brought complaint against

f’ee and f’or alleging discrimination in employment on basis of physical disability

• F’or applied to have complaint dismissed

against it, claiming that it was not a proper party

• F’or tendered two pages of 45 pg. franchise

agreement in support of its application

• BCHRT denied application to dismiss

Reid v Snap Fitness Cloverdale and

• thers, 2017 BCHRT 181

Take-aways:

• A respondent does not need to employ a

complainant in order to be in violation of Code

• F’or will bear the burden of persuading a

human rights tribunal to dismiss complaints made against it by employees of the f’ee

• Outcome of application to dismiss will depend
• n “nature and extent of the influence”

exerted by f’or

Dairy Queen Canada, Inc v MY Sundae Inc, 2017 BCSC 358

• Breakdown of relationship between f’or and

f’ee

• F’or and f’ee signed Mutual Cancellation and

Release, but postponed termination to give f’ee an opportunity to sell franchise and recoup investment

• F’ee continued to operate the franchise for

months after termination before de-branding

Dairy Queen Canada, Inc v MY Sundae Inc, 2017 BCSC 358

• F’or sought damages for passing off, among
• ther claims
• F’ee claimed duress, unconscionability in

signing Release and counterclaimed for damages of breach of K, and unfair dealing, among other claims

Dairy Queen Canada, Inc v MY Sundae Inc, 2017 BCSC 358

Take-Aways (Duress, Unconscionability):

• Absent evidence of duress or coercion at the time of

negotiation, inequality of bargaining power will not preclude enforcement of release and exclusion clauses

• Opportunity for f’ee to sell business was evidence of

substantive fairness of Release Take-Aways (Passing Off): Note on ultimatums

• In assessing f’or’s damages court found evidence that f’or

had delivered subsequent ultimatum to f’ee to cease business after formal termination date. F’or’s damages were reduced accordingly.

2122994 Ontario Inc v Lettieri, 2016 ONSC 6209

• Rescission for material deficiencies in

disclosure document

• Failure to provide financial statements, signed

certificate or head lease

• F’or disputed evidence but did not keep a copy
• f disclosure document
• Referring to Raibex, court suggests that if

current financial statements are not available, f’or must wait to disclose

2122994 Ontario Inc v Lettieri, 2016 ONSC 6209

• If head lease was not provided, all material terms
• f lease obligations should have been otherwise

disclosed

• Safe course to avoid piecemeal disclosure is to

serve a new disclosure document when new information is available and defer signing franchise agreement

• F’or delivered disclosure document to husband,

but wife was sole shareholder, director and

• fficer; court wonders whether f’or was obliged

to re-deliver disclosure document

2122994 Ontario Inc v Lettieri, 2016 ONSC 6209

• Rent payments made to arms-length landlord

rather than to franchisor could not be refunded (but court does not indicate whether a sublease was in place)

• Acknowledgement in franchise agreement

that f’ee received disclosure document in prescribed time cannot be a bar to rescission

2122994 Ontario Inc v Lettieri, 2016 ONSC 6209

Take-aways:

• F’or should keep copy of disclosure document
• Consider re-disclosing rather than providing a

material change statement when new information available after disclosure

• Consider whether disclosure made to correct

party and whether re-disclosure may be necessary

241 Pizza (2006) Ltd v Loza, 2016 ONSC 6623

• F’or sued f’ee for arrears of royalties, advertising fees

and rent

• F’ee counterclaimed, claiming equitable set-off on

basis of f’or’s breach of the terms of the FA amounting to breach of the duty of fair dealing

• F’ee argued that case not suitable for summary

judgement because counterclaim must proceed to trial

• Court found no basis for equitable relief. F’ee’s

complaints were minor failures, none of which amounted to the breach of the duty of fair dealing

241 Pizza (2006) Ltd v Loza, 2016 ONSC 6623

Take-aways:

• Court will proceed with summary judgement to

enforce provisions of franchise agreement and require franchisee’s claim to proceed to trial on a stand-alone basis

• Costs of this decision: 2017 ONSC 4171.

– Plaintiffs asked for ~$34k on substantial (~$26k

• partial. Granted ~$15k.

– Argument that Fr Agr allowed substantial indemnity costs was overridden by discretion of court re: costs. – Also, 24% interest awarded because in Fr Agr.

Mr Lube Canada Limited Partnership v 2070778 Ontario Ltd, 2016 ONSC 7707

• Agreement not to charge any additional

franchise fees on future renewal

• But, renewal docs called for additional rent

(2% of gross sales)

• F’ee disputed obligation to pay, claiming not in

disclosure document and in violation of initial agreement a franchise fee in disguise

Mr Lube Canada Limited Partnership v 2070778 Ontario Ltd, 2016 ONSC 7707

• Clear in Disclosure Document that a difference

between a franchise fee and percentage rent

• Clear from the past dealings that parties

understood what a franchise fee was.

• Principal of f’ee signed docs did not read

Disclosure Document or agreements

Mr Lube Canada Limited Partnership v 2070778 Ontario Ltd, 2016 ONSC 7707

• F’ee argued non est factum (mistake) rather

than rescission or damages for misrep pursuant to AWA

• Non est factum applies only where

– party signs document w/ a fundamental misunderstanding as to nature or effect of document, not merely as to its contents; and – party not guilty of carelessness in signing document without being aware of its contents.

Mr Lube Canada Limited Partnership v 2070778 Ontario Ltd, 2016 ONSC 7707

Take-aways:

• If one fails to read an agreement, one is

bound nevertheless

• Non-disclosure of a portion of franchise

agreement does not invalidate that portion of the agreement

Chavdarova v The Staffing Exchange, 2016 ONSC 1822

• Staffing Exchange is a service provider to the recruitment industry,

whose licensees are recruitment companies

• Licensees sign a Certification and Training Agreement and a

separate Brokerage License Agreement

• Licensees were required to pay a $29,500 certification and training

fee

• Licensee receives 85% of revenues derived from placements
• In the agreement, parties acknowledge that no requirement for

licensee to make a payment or continuing payment

• Licensor sent a ‘notice of default’ and agreements eventually

terminated.

• Several months later, Licensee purported to rescind agreement on

the basis she was a franchisee that never received a franchise disclosure document, as required by the AWA.

Chavdarova v The Staffing Exchange, 2016 ONSC 1822

• Court found the training fee was in reality a payment

for the right to enter into the relationship

• Distinguished from DiStefeno decision where training

fee not sufficient to constitute payment under AWA

• In reality the licensee is making payments to licensor

“no matter how it will be portrayed”.

• Entire relationship premised on identification of the

business with the licensor, its trade name and TMs

• Finding of the exercise of significant control over

licensee’s method of operation or at least significant assistance

Chavdarova v The Staffing Exchange, 2016 ONSC 1822

Take-aways

• Reversing flow of payments was not sufficient;

question use of “commission payments”

• Cannot assume that a training fee will not

meet the payment requirements of the franchise’ definition under AWA Confirmed on appeal: Chavdarova v. The Staffing Exchange Inc. (TSE Canada Inc.), 2016 ONCA 874

YESCO Franchising LLC v 2261116 Ontario Inc, 2017 ONSC 4273

• F’or entered into franchise agreement with f’ee in 2012
• Franchise unsuccessful and cancelled by f’or in 2015
• F’or brought an action against f’ee and its principal for relief

for breach of contract and various other causes of action

• F’ee and principal brought a counterclaim against f’or and its

associates for relief for breach of contract, breach of the AWA, and negligent misrepresentation

• Motion for summary judgment granted in part

– F’or raised limitation period issues. But court held f’or’s

• bligation was “an ongoing one, as opposed to an obligation

that crystallized at a particular moment in time”

Zhao v Pizza Nova Take Out Ltd, 2016 HRTO 1166

• Claim by a young franchisee that Pizza Nova

discriminated against him and forced him to sell his business

• Applicant failed to establish discrimination (his onus)
• Court considered that franchisor was aware of his age,

race, and languages spoken when they granted franchise

• Court also considered that the other f’ees in the system

were in mid-20s, and were Chinese

• Court considered evidence that f’ee not performing

well, and f’or had non-discriminatory reasons to want him to sell

Zhao v Pizza Nova Take Out Ltd, 2016 HRTO 1166

Take-aways:

• The Human Rights Tribunal will consider claims by f’ees

against f’ors, but will seriously scrutinize the allegations made while considering the unique context of the franchise relationship.

• HRT noted that Pizza Nova had a Human Rights Policy

Statement, and a Complaints Resolution Procedure posted in every store.

Hanewich v Budget Brake & Muffler Franchising Ltd, 2016 ABQB 727

• F’ee (Hanewich) was losing money, closed down. Took position did

not owe rent or royalties after shut down

• F’or terminated, reserving rights for post-termination royalties and

rent.

• F’ee sued for rescission, but was outside the statutory time to do so

(two years after 2006). Argued that the limitation period ought to run from the date on which the court granted rectification

• Court dismissed claim. No rectification needed.
• Court granted the franchisor its damages (31 months of royalties

and rent).

• Take-aways:

– Limitations periods are strict. – Franchisors can recover lost royalties and rent for terminated agreements.

Cora Franchise Group Inc v Watters, 2017 ONCA 286

• F’or granted summary judgment against guarantor of a

f’ee corporation in ongoing default of its obligations

• Guarantor defended arguing the f’ee’s losses ought to

be deducted from amounts owing under its guarantee

• Court of Appeal upheld lower court.

– Franchise agreement precluded set-off – Set-off did not apply because set-off does not apply to business losses of another party – Also, franchisee’s claim was statute barred as brought more than two years after franchisor’s claim had been brought.

Sprague v MBEC Communications Inc, 2016 HRTO 1284

• HRT of Ontario denied a claim that MBEC

Communications was vicariously liable for discriminatory acts of its f’ee

• F’or not responsible for day to day conduct of

f’ee

• Franchisor held not liable for the Franchisee’s

actions

Comité paritaire de l’entretien d’édifices publics de la région de Quebec c Modern Concept d’Entretien Inc, 2017 QCCA 1237

• F’or, a cleaning company entered into contracts for

maintenance and cleaning of public and quasi-public buildings

• Services performed by F’ee
• F’or maintained communication with client and collected

payment.

• F’or deducted F’ee’s fees from payments to F’ee and on one
• ccasion withheld payment
• F’ee terminated franchise agreement
• Court of Appeal (split decision) determined F’ee was

employee and minimum wages owing

• Contract with client was only partially assigned to F’ee (F’or

remained liable and so at risk)

Comité paritaire de l’entretien d’édifices publics de la région de Quebec c Modern Concept d’Entretien Inc, 2017 QCCA 1237

• Controls imposed on F’ee
• Fees paid to F’or and F’or could unilaterally decide

whether to pay F’ee Dissent

• No strict control, simply imposition of standards
• The imperfect assignment does not transform franchise

relationship to employment Take-aways

• In Quebec service franchises, consider relationship

between customer and franchisee and review manner

• f assignment of customer contracts

Legislative update - Ontario

• In 2016, changed regs to allow e-mail delivery
• Now reviewing AWA more substantively:

– In 2016, Business Law Advisory Council reviewed AWA – Recommendations in fall 2016 report expected in Fall 2017 bill – Further recommendations expected in Fall 2017 report, may appear in spring 2018 bill

• Biggest change may be that a list of items be included

in disclosure documents.

Legislative update - B.C.

• Franchises Act, SBC 2015, c. 35, in force Feb 1,

2017

• Sixth province (Alta, Man, Ont, PEI, NB)
• Based on ULCC and follows pattern of existing

legislation with adjustments

• Permits email delivery and courier
• Higher standard for opening balance sheet
• BC law and venue applies to arbitration
• List of current f’ees for all Canada