Unscrupulous Franchisees take advantage of Unwitting Franchisors.
A unscrupulous franchisee taking advantage of an unwitting franchisor? Whatever could this refer to? The actual sentence, in context, is from a recent Ontario Court of Appeal Case, Personal Service Coffee Corp. v. Beer.
"The other flaw with the respondents' argument is that it ignores the fact that, on the franchisee's own admission, he set up a competing business the very day he rescinded the franchise agreement with the appellant and he continues the very same business to the same customers whose names were provided to him by the franchisor and uses equipment provided by the franchisor. While I accept that the facts of this case are still in dispute, it is nonetheless clear that in some cases the respondents' position would allow unscrupulous franchisees to take advantage of inadvertent non-disclosure by unwitting franchisors. In my view, this would be an unacceptable result."
Inadvertent non-disclosure? By an unwitting franchisor? That would be novel. Are there novel facts in this case?
"The facts giving rise to the appeal are as follows. The appellant PSCC has carried on business throughout Ontario for fifteen years in the supply and distribution of coffee and coffee-related services to offices and businesses. The company loans or rents equipment such as coffee brewers to a customer in return for the customer's agreement to purchase all coffee products from PSCC. Such products include coffee, filters, cream, and filtered water. PSCC also sells a variety of brand name coffees and related products in addition to its own lines of coffee.In the fall of 2002, the respondent Mr. Beer contacted PSCC with a view to becoming a dealer in Durham region. On October 28, 2002, Mr. Beer and PSCC executed a five-year dealership agreement. Mr. Beer paid PSCC an initial royalty fee of $10,000 and executed a $25,000 promissory note in favour of PSCC. He agreed to pay a monthly royalty fee of $100 and to purchase all inventory and equipment from or through PSCC. Training was to be provided by PSCC, and Mr. Beer was obliged to attend. Equipment leases were to be arranged through PSCC. In exchange, PSCC provided Mr. Beer with its list of existing customers and the value of the equipment being loaned or rented to those customers in Durham as at the date of the agreement. Mr. Beer had the right to use the PSCC trademark and systems, as well as the exclusive right to market them in Durham.
About one year later, on October 1, 2003, Mr. Beer executed a second dealership agreement for the Peterborough area on similar terms. He was permitted to pay the initial royalty fee of $10,000 over time.
On September 27, 2004, Mr. Beer, through his solicitor, served two notices of rescission on PSCC pursuant to the provisions of s. 6(2) of the Act. It is a matter of dispute between the parties as to what, if any, conduct on the part of PSCC precipitated Mr. Beer's decision to rescind the agreements. The notices came three days before the expiration of Mr. Beer's two-year right of rescission for the original Durham dealership agreement.
...
Mr. Beer admitted in cross-examination that he is operating a business "similar" to the one he carried on under the agreements with PSCC. He is competing with PSCC in the same business and is selling to the same customers that he serviced during the terms of the dealership agreements with PSCC."
But what should the penalty be for the franchisor doesn't know the law, doesn't know that he is peddling a franchise? The public policy behind the Arthur Wishart Franchise Disclosure Act is to protect the consumer by requiring or mandating the disclosure of relevant information. The failure to provide the disclosure document provides the failed franchisee with an expansive remedy: the franchisor must, within 60 days, repay the franchise fee, purchase inventory and supplies at cost, and make good any losses.
The Ontario Court of Appeal ignores this public policy and focusses on the losses for the "unwitting franchisor". A distributor who doesn't know the law, or care about informing his franchisees. But why isn't the loss of the franchisees' goodwill, ie its customers that it serviced, to be counted as a loss for which the franchisor has to compensate the franchisee for? The franchisor can either compensate the franchisee for the loss of goodwill, or compete with it in the same market. Neither remedy seems too harsh or unfair to the "unwitting franchisor."
(PSCC appears to treat its dealership agreement as non franchise business.)
Franchisees complain that their franchise agreement gives too much discretionary power to a franchisor. The pundits are not sympathetic and retort that the franchisee should have read the f....g agreement and disclosure. Read the document, know your rights, franchisees are told. Well, for "inadvertent non-disclosure" I have a similar retort: Read the f...g Arthur Wishart Act.
