The Case of the Inadvertant Franchisor
A number of business models which appear to be different from the franchise model exist. For example, distributor, dealer, exclusive dealer, etc. These arrangements usually provide some exclusive territory to the purchaser, for consideration.
However, in Ontario, as with many other jurisdictions in North American, what people chose to call their business arrangement will not alter the legal character of that arrangement. Many sellers are not aware of their legal liabilities.
Many business arrangements are at law franchises. Lord and Partners, learned an expensive lesson about not knowing that they were selling a franchise.
As reported, last January, 2007, the Ontario Superior Court granted Doug Payne summary judgment in the amount of $71,683.73, before legal costs against Lord and Partners. Lord and Partners entered into an agreement with Payne Environmental in or around December 12th, 2002, in which "Payne Environmental was provided the exclusive right to show Lord and Partner products, accessories, parts and associated products in the territory of Mississauga East. Lord and Partners did not provide Payne Environmental with the disclosure documentation required by s. 5 of the Arthur Wishart Act at the time of execution of the agreement. It is also agreed that after signing the agreement, disclosure was not provided." (my emphasis)
Once you sell an exclusive territory, offer significant assistance, or exercises significant control, or provide location assistance or help with getting sales accounts, then you have probably sold a franchise. Although Lord and Partners doesn't look like McDonalds, it is a franchise nonetheless.
On Payne's motion for summary judgment, the Judge found that Lord and Partners had to pay the franchisee back the cost of the franchise, the cost of the equipment and compensate the franchisee for two years of operating losses.
Lord and Partners had a novel defence.
"Lord and Partners Ltd. has commenced a third-party claim against, Mr. Murray Box and Pallett Valo,LLP. In this action the plaintiff claims that Mr. Box, a solicitor with the firm of Pallett Valo, provided legal advice to the plaintiff and to the defendant from October to December 2002 concerning the franchise agreement. It is alleged that the legal advice of Mr. Box and Pallett Valo was relied on and acted on by the defendant. It is asserted that Mr. Box or Pallett Valo did not advise the Lord and Partners Ltd. that it did not comply with the disclosure requirements of the Arthur Wishart Act."
Payne Environmental's lawyer knew about the requirements of Arthur Wishart Act, but did not explicitly require the seller to comply with the Act, giving his client a free ride. If the franchise worked out within two years, do nothing. But if it didn't work out, rescind just before the deadline.
Should have the plaintiff's lawyer advised the defendant of the necessity of compliance with the Arthur Wishart Act? I believe that the answer is no, but he might have advised Lord and Partners to obtain their own legal representation. On the facts, it is not clear that the lawyer had any contact with the defendants.
But the point here is clear: if you are buying or selling a business in which there is going to be a continued relation, get proper legal advice as to whether it is a franchise or not. If you have bought a distributorship or dealership within the last two years, in Ontario or other jurisdictions, get an opinion as to your legal options.
