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Author: Evan Ivkovic, J.D., Law Works P.C.
Editor: Ben Hanuka
In Hepburn v AlarmForce Industries Inc., released on October 6, 2017, by the Ontario Superior Court of Justice in London, the court dismissed a franchisee’s summary judgment motion for rescission and bad faith conduct under the Arthur Wishart Act because the factual issues were complex that require a trial (legally, there were ‘genuine issues requiring a trial’).
The franchisee operated an AlarmForce franchise and brought a motion for summary judgment for a declaration that it was in a franchise relationship with AlarmForce, that AlarmForce was required to deliver a franchise disclosure document and failed to do this, and that AlarmForce breached its duty under section 3 of the Arthur Wishart Act to act in good faith and in accordance with commercially reasonable standards.
Both sides agreed that they were in a franchise relationship and that AlarmForce did not deliver a franchise disclosure document.
But they disagreed about whether AlarmForce was required to provide a disclosure document.
The main issue was the renewal disclosure exemption in subsection 5(7)(f) of the Arthur Wishart Act, which gives a franchisor an exemption from providing a franchise disclosure document in a franchise renewal so long as (i) there is no interruption in the operation of the franchisee’s business under the franchise agreement, and (ii) there had been no material change since the franchise agreement or last renewal was signed.
In addition, the court held that the adjudication of the bad faith claim was best left for trial because it was factually intertwined with the main issue about the renewal exemption.
In 1995, AlarmForce and the franchisee entered into two agreements: a franchise agreement for a ten-year term and a franchise amending agreement. Under the terms of the franchise agreement, the franchisee had the right to operate an AlarmForce franchise in some territories within southwestern Ontario. Under the terms of the franchise amending agreement, the franchisee had a right to extend the franchise relationship for two more terms, so long as the renewal conditions had been satisfied.
In March 2005, the franchisee gave notice to AlarmForce about its intention to renew the franchise agreement. AlarmForce advised that it would send to the franchisee a franchise renewal agreement for its review. But it did not send a franchise renewal agreement until more than two years later.
AlarmForce did not provide any reason for the delay in providing to the franchise renewal agreement. During that time, it inquired whether the franchisee was interested to sell its franchise, which it was not.
AlarmForce was shifting toward a corporate-services model. The franchisee alleged that AlarmForce withheld products, services and advertising support in his territory to reduce its profitability to force a buy-out.
The franchisee operated its AlarmForce franchise until December 2015, when it winded down its operations under protest in response to a notice of termination that AlarmForce sent a year earlier.
Application of Franchise Disclosure Exemption
Raikes J. held that the starting point in the legal analysis about the renewal exemption was whether the franchise renewal agreement was in the form then being offered to new franchisees – and not whether there was a material difference between the original franchise agreement and the franchise renewal agreement.
He found that the original franchise agreement required the franchisee, as a renewal condition, to sign a franchise renewal agreement in the form then being offered to new franchisees.
In his opinion, the evidentiary record was insufficient to determine if the franchise renewal agreement that AlarmForce demanded the franchisee to sign was materially different from its then-current standard form offered to franchisees, and that the franchisee failed to prove this point in the context of a summary judgment motion.
In particular, Raikes J. stated that affidavit evidence that each party filed contained only bald assertions. Neither party provided proof of AlarmForce’s then-current form of franchise agreement between 2005 to 2007 (when renewal discussions were held) and whether there was a material difference between the original franchise agreement and AlarmForce’s then-current form of franchise agreement.
The court also held that AlarmForce’s decision to pursue a corporate services model, including the timing of the decision and whether this affected its level of support to the franchisee was part of the factual context to assess how materially different the new terms of the franchise renewal agreement were from the original agreement.
There are at least two key takeaways from Raikes J.’s decision.
First, in the analysis of whether a franchisor is exempt from providing a franchise disclosure document in a renewal, the court needs evidence, and it must be conclusive, about the material differences between the original and then-current franchise agreements and their factual context.
Second, this type of analysis may be factually complex that is not suitable for a motion for summary judgment. Even though the case focused on the renewal exemption in subsection 5(7)(f) of the Arthur Wishart Act, the complexities of materiality apply to many other disputes under the Arthur Wishart Act, including potentially claims for misrepresentation based on material facts. The analysis about the materiality and complexity of the evidence must be done on a case-by-case basis.
For more information about Law Works’ expertise and how we may be able to help you, please contact Ben Hanuka at email@example.com or by phone in Ontario at (855) 978-5293 and in British Columbia at (604) 262-1711.Tags : Disclosure, Franchise Agreement, Franchise System, Good & Bad Faith, Renewal, Rescission, Termination
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