In June 2015, the Ontario Superior Court of Justice in 2313103 Ontario Inc. v. JM Food Services Ltd., found that shareholders of a master franchisee (which was 50% co-owned by the franchisor) were not franchisees for the purposes of the Arthur Wishart Act (Franchise Disclosure), 2000, on the basis that they were not “granted” a franchise within the meaning of the Act.
While it remains to be seen how this decision will be applied going forward, the decision is a positive one for franchisors and raises the bar for shareholders of a franchisee seeking to pursue Wishart Act claims. At the same time, it recognizes that franchisors should not face liability to a potentially indeterminate set of shareholders.
After lengthy negotiations between a group of investors and the franchisor of the Fresh Slice restaurant brand, JM Food Services Ltd. (JM), the plaintiffs and JM co-invested (on a 50:50 basis) in a company that became a Fresh Slice master franchisee and acquired various Ontario assets of JM (the Master Franchisee).
As a result of the structure of the transaction, none of the plaintiffs were parties to the franchise-related agreements, including a master franchisee agreement, a unit franchise agreement and a sublease agreement, between JM and the Master Franchisee. The individual plaintiffs were owners of a numbered company that was a 50% shareholder of the Master Franchisee.
The venture did not ultimately perform to the plaintiffs’ satisfaction and they commenced an action against JM seeking, among other relief, rescission of the various agreements between the parties, including those between JM and the Master Franchisee, for, among other things, failure to make adequate disclosure contrary to the Wishart Act. Notably, the Master Franchisee was not named as a plaintiff or defendant in the litigation; however, the plaintiffs alleged that they were nevertheless franchisees within the meaning of the Wishart Act.
In framing its reasons, the Court revisited the policy rationale underlying the Wishart Act. While confirming that the Wishart Act is remedial legislation, the Court recognized that not “every dispute between a franchisor and franchisee brings the same issues to the fore with the same urgency.” In this case, the Court found that the agreements underlying the parties’ relationship were not contracts of adhesion, as may be the situation in other cases.
The crux of this case was whether plaintiffs’ were franchisees within the meaning of the Wishart Act on the basis that they were “granted” a franchise, so as to entitle them to pursue Wishart Act claims against JM. In their submissions, the plaintiffs relied on the definition of franchisee under the Wishart Act which means “a person to whom a franchise is granted....” and the definition of grant which is defined to include “... an interest in the franchise and, for such purposes, an interest in the franchise includes the ownership of shares in the corporation that owns the franchise.”
The Court ultimately rejected the plaintiff’s arguments on the basis that, among other things:
- None of the ongoing obligations of the Master Franchisee were guaranteed by the plaintiffs
- No evidence that the plaintiffs were “treated as one entity for the purpose of franchise liabilities” but as separate entities when the question of enforcing rights under the franchise agreement is at issue
- No evidence that any on-going obligations of the Master Franchisee under the master franchise agreement were assumed or guaranteed by any of the plaintiffs in their own right.
For these reasons, the Court found that the plaintiffs’ were not franchisees within the plain meaning of the Wishart Act. Moreover, the court found that the “grant” of a franchise was the issuance of the master franchise agreement to the Master Franchisee and that there was “no basis to argue for multiple instances of a ‘grant’ of the same franchise with equal rights and standing.” In other words, the Court refused to recognize the existence of a “franchisee’s associate” and identified numerous practical challenges associated with such a distinction.
The Court was careful to note, however, that the act does contemplate that, in some circumstances, the acquisition of shares may constitute the grant of a franchise such that a shareholder is a franchisee for the purposes of the Wishart Act. The Court also noted several instances where the quality of the evidentiary record adversely impacted the plaintiffs’ case.
On balance, this decision is a positive one for franchisors as it limits the scope of liability they may face to shareholders as well as beneficial shareholders of a franchisee by raising the bar for such shareholders to assert Wishart Act claims. While shareholders may, in certain cases, be considered a “franchisee” for the purposes of the Wishart Act, such shareholders must have obligations (such as by way of a guarantee) resulting from the franchise relationship.
It is reassuring that the court recognized, notwithstanding the remedial purpose of the Wishart Act, that it is a “slippery slope indeed” to consider shareholders to be the “real” franchisees under this Act.