Ontario’s franchise legislation gives the little guys a leg up
A recent Ontario Superior Court decision that cost the owners of the Wild Wing chain almost $1 million underlines the consumer-protection role of the province’s franchise legislation, says Toronto civil litigator Stephany Mandin.
In the case of Jayasena Management Corp. et al. v. Savannah Wells Holdings Inc. et al., Justice Jasmine Akbarali ordered the Ontario-based franchisor of the Wild Wing chain to pay $700,000 in damages to the owners of a failed outlet who walked away from the restaurant 18 months after buying if from another franchisee.
Despite the lengthy passage of time since the purchase, the judge concluded that the franchisees were entitled to rescind their franchise agreement under the Arthur Wishart Act, which governs disclosure requirements in the sector, and awarded them an additional $250,000 in legal costs.
While the odds in civil litigation matters can sometime feel stacked against smaller parties with fewer resources at their disposal, Mandin, principal of Mandin Law, says the situation is a bit more optimistic when it comes to those in the franchise industry.
“The Arthur Wishart Act is a statute intended to balance the rights of both the franchisor and franchisee,” she explains. “It imports rigorous and mandatory disclosure obligations on the franchisor and has been drafted as remedial legislation intended to redress some of the imbalance of power between the parties.”
According to Mandin, franchise disputes typically centre around the onerous disclosure obligations owed by franchisors to franchisees, and the recission rights that flow where these obligations are not met.
“The idea is to provide prospective franchisees – who may not be experienced in running a business – with sufficient, readily accessible, clear and transparent information in order for them to be able to make a fully informed decision,” she says.
Under the AWA, franchisors must deliver a comprehensive disclosure document to potential franchisees at least 14 days before the signature of any binding agreement or payment of money.
Late or incomplete disclosure entitles franchisees to rescission within 60 days under s. 6(1) of the Act, but if the disclosure is “materially deficient,” Mandin explains that judges typically rule that it will be treated as if no disclosure was made at all, giving franchisees a full two years to seek rescission under s. 6(2) of the AWA.
In the Wild Wing case, the franchisor claimed that an exemption from the disclosure obligation related to resales of existing franchises should apply.
According to the ruling, the plaintiffs had reached out directly to the Wild Wing head office after developing an interest in the chain, and ended up meeting with a representative of the firm who suggested they buy an existing franchise, rather than starting from scratch in a new location.
After taking a tour of the location and receiving some of the selling franchisee’s financial information, the plaintiffs went through with the purchase without receiving a full disclosure document, and entered a franchise agreement with the franchisor, before running into the financial difficulties that prompted them to walk away and seek recission 18 months down the line.
Noting that disclosure exemptions must be “narrowly construed” according to franchise case law, Justice Akbarali sided with the plaintiffs, finding that the resale exemption did not apply because the deal had been “effected by or through the franchisor.”
Mandin says the ruling is one of many that highlight the necessity of legal counsel for franchisors who intend to enter agreements with new franchisees or get involved with deals involving an existing franchise.
“It’s really important to know all of your obligations under the Wishart Act and ensure that the requisite disclosure is provided,” she says.
Otherwise, the franchisor runs the risk of the often heavy financial burden that comes with rescission of a franchise agreement.
“The law calls for franchisees to be put back in the position they were before the agreement, so it covers basically all of their costs, which can be quite onerous, depending on how long the franchise was in operation,” Mandin explains.
In the Wild wing case, the plaintiff’s $700,000 damages covered a wide variety of expenses incurred during their time in charge of the restaurant, including royalties paid to the franchisor, supplies and equipment, operating losses, prepaid rent, unpaid wages and interest.