To Terminate or Not to Terminate
In Ontario, the equivalent of the FTC Rule, the Arthur Wishart (Franchise Disclosure) Act, created a private cause of action. The enforcement of the Franchise Disclosure Act is done by means of a civil suit.
If a franchisee doesn't get a disclosure document, they may elect to rescind the contract, before 2 years, and the franchisor has 60 days to repay the franchise fee, repurchase inventory and supplies at the cost sold to the franchisee, and also make good any losses.
Rescinding a franchise agreement and constructive or defacto termination raise a number of problems -primarily with how to continue the business.
If the franchisee rescinds under the Ontario Act, can he or she continue in the same business? Under one theory, the rescission of the franchise contract means that the franchise contract never existed and the non-competes are of no force. Additional support for this view is to be found in section 6(1):
6 (1) A franchisee may rescind the franchise agreement, without penalty or obligation, no later than 60 days after receiving the disclosure document, if the franchisor failed to provide the disclosure document.
Arguably, the failure to deliver a disclosure document relieves the individual of the obligations inherent in the non-compete.
This has to be balanced by the franchisee's duty of good faith in section 3 of the Franchise Disclosure Act. The statutory duty of good faith is mutual in the Franchise Act, making it it quite different from the common law duty of good faith.
The Ontario Court of Appeal recently had the opportunity to explain how to balance these considerations in Personal Service Coffee ats Stanley Beer.
The facts, as recited by the Court, are simple:
The respondent franchisee, Stanley Beer, received incomplete disclosure before entering into a franchise agreement with the appellant franchisor, Personal Service Coffee Corporation (“PSCC”)..Mr.Beer sought rescission of the franchise agreement, as he was entitled to do under s. 6 of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the “Act”).
The difficulty is that he sought rescission mere days before the expiration of the two-year limitation period provided under the Act, and he immediately set up a competing business that served the same customers as PSCC.
In these circumstances, the issue before this court is whether the franchisee’s right to rescission in the face of inadequate disclosure under the Act is absolute and what, if any, remedy is available to the franchisor
The Court of Appeal decided that the words "without penalty or obligation" could not mean that the franchisor could not sue the franchisee under common law.
"PSCC’s claims in relation to the alleged appropriation of business, unlawful use of customer lists and equipment, misappropriation of know-how and systems, and related complaints would fall to be determined under s. 9."
Section 9 is the standard section which states that the Act is in addition to any common law remedies and causes of action.
Unfortunately, this short analysis makes no sense: if the contract was rescinded, never existed, then there is no contractual breach nor misappropriation of confidential information.
Beer was given all this information, by a franchisor who had a mistaken view of what his own legal obligations were. Generally, for these types of actions to succeed there has to be an element of deceit. There isn't any deceit here -only a mistake by the franchisor.
What other tort could exist?
The Court of Appeal, in a stunning demonstration judicial unreality, stated:
"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."
Yes, there are certainly a lot of those unscrupulous franchisees who mislead poor innocent franchisors about their legal duty to disclose.
In fact, this very point: the duty of a prospective franchisee to alert the franchisor about possible inadequate disclosure was made by the defendant franchisor in Payne Environmental ats Lord and Partners.
Payne Environmental bought a franchise from Lord and Partners Ltd, and no disclosure document was delivered.
The defendant's 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.
Of course this did not succeed - the plaintiff's lawyer owed no duty to the franchisor defendant.
While the Court of Appeal is technically correct, I cannot see how the subsequent common lawsuits as pleaded could succeed.
The defendant franchisor unwittingly took a legal risk, disclosed confidential information and now should have to pay the price. This is consistent with the cases on confidential information.
Franchisees should not have to educate the franchisor about the legal consequences of the failure to comply with the Franchise Disclosure Act.
Comments
I understand the Dwyer Group of Franchises is very active in Canada.
How would I investigate their success/failure rate with first-owner franchisees?
Posted by: CJ Cross | February 19, 2008 12:09 PM