Law Times

PAGE 10 FOCUS augusT 9, 2010 • Law Times Ontario courts side with franchisees In-house counsel facing new challenges as judges interpret Arthur Wishart Act BY DARYL-LYNN CARLSON For Law Times the province's franchise law is creating a legal environment that some lawyers fi nd problematic. Primarily, the courts have meticulously interpreted the act's disclosure requirements to the extent that some franchi- sees have been able to win resti- tution from a franchisor based on a minor technicality. "My opinion is that fran- T chise law and its judicial inter- pretation by the courts of On- tario has created probably the most perilous jurisdiction in the world in which to conduct franchises," says Peter Dillon, head of the franchise practice at Siskinds LLP in London, Ont., and author of Franchise Legislation in Canada pub- lished by Canada Law Book. "Ontario has not chosen to harmonize with the U.S. in its he courts' interpreta- tion of Ontario's Arthur Wishart Act that oversees formatting and content of the laws, and we seem to have this misguided notion that franchi- sors are big and bad." Last fall, Dillon sent out a memorandum to all of his fran- chise clients alerting them to recent developments and court decisions that have favoured franchisees. Most of them have been focused on the pre-sale disclosure required by franchi- sors off ering franchises for sale. In the memorandum, he notes the Ontario Court of Appeal's decision in a matter involving 6792341 Canada Inc. v. Dollar It Ltd. "In the Dollar It decision, we're told 'Th e business was not success- ful,'" he writes. "It's not clear whether the franchisee was a deadbeat or incompetent. Eight months after starting opera- tions, the franchisee cast about for a means to escape from the franchise agreement that he had voluntarily entered into, with the accompanying business risk associated with that deal, with a very novice franchisor." He continues: "Th e trial judge, who must have had some appreciation for balancing dif- ferent factors and weighing the pros and cons of a situation, held that 'as a whole,' the disclosure document met the requirements of Ontario law, and therefore the franchisee could not rescind his franchise agreement at any time within two years. "However, the trial judge did not say that the franchisee was without a remedy. If the franchisee could demonstrate that the defects within the dis- closure document he received actually contributed to some kind of loss or if the disclo- sure document he received contained a misrepresentation, then he could seek damages against the franchisor (and the others who signed the disclo- sure document) for the full amount of those damages." As a result, Dillon believes the appeal court concluded that the "entire purpose of the act is to protect franchisees." Th e court then proceeded to fi nd eight ways in which the franchisor's disclosure docu- ment failed to comply with the law, including the fact that it wasn't dated and signed by two directors; it failed to provide the franchisor's fi nancial state- ments; and it didn't include a copy of the off er to lease or the lease between the franchisee and sub-landlord, as well as the head lease for the property. "Until this decision, I would have said that this was not a legal requirement in any Cana- dian province. Th at is still my view," Dillon says. He concludes his memoran- dum by advising his franchi- sor clients that the courts have clearly demonstrated they are favouring the franchisees, which therefore "creates a high degree of risk and uncertainty that will put some franchisors out of business and will deter many others from commencing to do business through franchising." In fact, he notes he's spoken to many U.S.-based franchises "that want nothing to do with Ontario. In an era where fran- chising plays a large part in our retail economic engine, it's a shame to have mechanics at work that seem bent on lower- ing the horsepower or spiking the engine altogether." For lawyers, "the pace of change and volume of case law is almost a part-time vocation just to keep up to speed," he adds. "And for small franchise systems, of which there are hundreds, counsel can't possibly stay current. So this has become a high-risk practice area." Steven Leikin, who has worked as in-house counsel for several franchises and is currently with Manchu WOK Inc., agrees the recent case law pertaining to franchises has in- deed favoured franchisees. "Th e problem that is being caused for in-house counsel in a franchise business is that the courts of the province have taken a very strict and narrow view under the Arthur Wishart Act," says Leikin. "If you've made a minor slip, a franchisee can bring an application to get all his money back and if you've made a ma- jor slip in your disclosure, the franchisee has a two-year win- dow and franchisees think they have a two-year, get-out-of-jail- free card. So you really have to be careful." While he fortunately has The Corporate Counsel Guide to Employment Law Third Edition Know your rights and obligations regarding hiring, retaining and terminating employees Divided into three parts, Hiring, The Employment Relationship and Termination, this third edition continues the tradition of providing a convenient, comprehensive overview of Canadian employment law. It provides pertinent, up-to-date guidance on a host of topics, including: • the new human rights regime in Ontario • the - including a workplace violence and harassment policy template • the end of mandatory retirement • the Supreme Court's reconsideration of "Wallace" damages in • a workplace privacy update ORDER your copy today Perfectbound • 376 pp. July 2010 • $95 P/C 0941010003 ISBN 978-0-88804-512-6 • an employment standards update • the duty to mitigate in wrongful dismissal cases • non-competition clauses • the duty to accommodate never had a franchisee challenge any of the companies for which he has worked as an in-house counsel for over the years, he acknowledges the diffi culty of keeping up to speed on the nu- ances of franchise law. "If you misstate or lie in your disclo- sure document or don't include current fi nancial statements, that's material," he says. "But when you extend those kinds of things to the likes of a docu- ment not being signed by two directors, that's hard stuff . Th e courts are insisting that the leg- islation be read strictly." He points to the most re- cent case, 405341 Ontario Ltd. v. Midas Canada Inc., in which the Ontario Court of Appeal disagreed that Midas franchisees must release the company from a class action claim in order to renew or transfer their franchise under their agreement. Section 4 of the act guarantees franchisees the right to associate without interference by the franchisor, thereby enabling them to com- municate and organize amongst themselves about issues relevant to their operations. Some of the claimants are in British Columbia, where the appeal court agreed with the Ontario Superior Court's as- sertion that Ontario's Arthur Wishart Act applies to out-of- province litigants. Leikin says that ultimately, For a 30-day, no-risk evaluation call: 1.800.565.6967 LT0809 Canada Law Book is a Division of The Cartwright Group Ltd. Prices subject to change without notice, to applicable taxes and shipping & handling. www.lawtimesnews.com the legislature should revisit the act. "I think it's going to take some legislative changes to change the wording, but unfor- tunately, I don't think it's a pri- ority right now," he says. LT Peter Wilson and Allison Taylor H Occupational Health and Safety Amendment Act (Violence and arassment in the W orkplace) Keays

• Cover
• Client Centred
• Bad Luck
• Focus On Corporate/Commercial Law