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This article, written by Ben Hanuka, was originally published in The Lawyer’s Daily on December 11, 2019, under the same title.
Author: Ben Hanuka, Law Works
Here are highlights from this year’s franchise-related decisions across Canada.
(Ontario – Court of Appeal – Breach of Franchise Agreement/Evidence)
The Court of Appeal for Ontario upheld a decision granting a motion for summary judgment. Crescent Hotels and Resorts Canada Company brought a motion for summary judgment of its claim against the franchisee hotel owner, 246, for early, without-cause, termination of the hotel management agreement. This entitled Crescent Hotels to a sizeable termination fee.
The parties disputed the grounds for 246’s early termination of the agreement. Crescent Hotels alleged that 246 terminated it without cause. 246 alleged that it terminated it for caused, based on alleged mismanagement of the hotel, failure to meet obligations, poor performance, quality issues, etc.
The trial judge held that a material breach had to be substantial and go to the root of the contract. 246 did not provide the necessary evidence to support there being any breaches severe enough to be “material”. As a result, there was no genuine issue requiring a trial.
The Court of Appeal accepted 246’s argument that the contractual words “in any material respect” meant that even less serious breaches could qualify for default. Yet, this did not affect the motion judge’s assessment of the weak evidence of each alleged breach since 246 did not bring sufficient evidence to support its claim.
(Alberta – Court of Appeal – Injunction against Former Employee)
The Court of Appeal upheld a decision of the Court of Queen’s Bench, albeit in split decisions (both decisions upheld the lower court’s ruling but for different reasons – one agreed with the application judge, while the other disagreed wit the application’s judge’s reasoning but held that it was owed deference).
Service Master and its Edmonton franchisee sought an injunction against a former employee, to enforce a restrictive covenant. There was relatively strong evidence to support the former’s employee’s claim for wrongful termination and this significantly impacted the courts’ approach to the interpretation of the restrictive covenant. It was also doubtful whether the covenant applied after the termination of the former employee.
In addition, the Service Master parties were unable to prove that they would suffer irreparable harm – the alleged damage to goodwill could be rectified if Service Master was successful at trial.
(Ontario – Superior Court – Arbitration)
The Ontario Superior Court of Justice dismissed an application for a stay of proceedings in favour of arbitration under operating agreements on the basis that to do so would unreasonably split the proceedings into two nearly identical actions.
The plaintiff franchisees entered into two franchise agreements with the defendant franchisor, The TDL Group Corp. for two Tim Hortons restaurants. They also entered into operating agreements with sub-franchisee operators. The operating agreements contained arbitration clauses.
While the arbitration clauses were valid and the dispute fell within their scope, a stay of proceeding would not apply to the plaintiff’s cross-claim against TDL, since TDL was not a party to the operating agreements. The cases arose from closely related facts. To allow the stay would split the proceedings into two very similar matters. Given section 138 of the Courts of Justice Act which requires court to avoid multiplicity of legal proceedings, it would be unreasonable to split the proceedings.
There was another nuance to the facts: the operating agreements gave TDL the authority to appoint the arbitrator, even it was not a party to those agreements. If a partial stay were granted, the court was concerned that this provision would allow TDL to appoint the arbitrator and possibly control the arbitration.
(Ontario – Superior Court – Disclosure Exemptions and Statutory Misrepresentation)
The Ontario Superior Court of Justice dismissed an application for leave to appeal from an arbitrator’s decision which held that a document disclosed voluntarily, but without obligation under s. 5 of the Arthur Wishart Act, cannot be subject to a misrepresentation claim under s. 7(2) of the Act.
The franchisee, 210, purchased a Country Inn & Suites brand hotel from Radisson Hotels Canada Inc. 210 invested more than $5 million in acquiring the franchise. As a result, section 5(7)(h) of the Act applied to exempt Radisson from its statutory disclosure obligations. Despite its entitlement to statutory exemption, Radisson voluntarily delivered to 210 a franchise disclosure document.
The court found that the arbitrator’s decision regarding the scope of s. 7 of the Act was reasonable and correct.
(Quebec – Supreme Court of Canada – franchisee/employees)
A majority of the Supreme Court of Canada decided that the owner of a cleaning business franchisee was also an employee for the purposes of Québec’s Act respecting collective agreement decrees because the franchisor was the party who assumed the business risk.
The Supreme Court considered the franchisor’s business structure as a whole in determining whether it or the franchisee assumed the business risk and the prospect of making a profit. The majority agreed with the Court of Appeal that the franchisor contracted both with the client and the franchisee. While the franchisee performed the cleaning services, the franchisor guaranteed the quality and provision of services.Tags : Appeal, Arbitration, Damages, Disclosure, Franchise Agreement, Injunction, Misrepresentation, Non-Competition, Termination
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