What has been the traditional remedy?
Over time, the franchise community has developed a relatively clear expectation for compensation awards in franchise disputes. For rescission cases, the courts would typically allow the franchisee to reclaim all related investments and operational losses from the franchisor, but not lost opportunity costs. For a breach of a franchise agreement by the franchisor, one would not expect a court to award non-pecuniary or punitive damages despite their general availability at common law. However, novel developments in recent court decisions demonstrate a judicial willingness to award additional damages to franchisees. In both Salah v. Timothy's Coffees of the World Inc.1 ("Salah") and 1706228 Ontario Ltd. v. Grill It Up Holdings Inc.2 ("Grill It Up"), franchisees were awarded damages in addition to the expected remedies.
Expanding the scope of damage awards
In Salah, the trial judge found that the franchisor breached the franchise agreement by denying the franchisee his right to renew. In addition to damages for breach of contract, the court awarded $50,000 in damages for the franchisor's breach of the duty of fair dealing and good faith imposed by section 3 of the Arthur Wishart Act3 (the "Act"). On appeal, the Ontario Court of Appeal upheld this award.
In upholding the trial judge's decision, Chief Justice Winkler, for the court, considered the conduct of the franchisor in this case to be particularly egregious.4 The evidence established that the franchisor deliberately and actively kept the franchisee in the dark and withheld critical information.5 Given the purposes of the Act, which the court cited as to redress the imbalance of power as between franchisor and franchisee and provide a remedy for abuses of this imbalance, Winkler C.J.O. stated that "[a]n interpretation of the statute which restricts damages to compensatory damages related solely to proven pecuniary losses would fly in the face of this policy initiative."6
In sum, the Court of Appeal affirmed that the Act permits awards of damages for breach of the duty of fair dealing and good faith "separate and in addition to any award in compensation of pecuniary losses."7 Such an award "must be commensurate with the degree of the breach or offending conduct in the particular circumstances."8 Salah shows us that deliberate and intentional conduct by a franchisor to mislead a franchisee is sufficiently offensive to justify general damages under section 3.
The Grill It Up decision provides additional guidance on the scope for damages under section 3 as well as further expanding the measures of compensation available. In this case, the parties entered into a series of agreements which the court found created a franchise relationship even though no formal franchise agreement was signed. The plaintiff franchisee never received disclosure from the defendant franchisor and was accordingly entitled to rescind the agreements and obtain compensation in accordance with the Act. Justice Corbett awarded damages in the amount of the deposits paid by the franchisee to the franchisor and out-of-pocket expenses incurred by the franchisee.9 However, the court also awarded the individual franchisee compensation for lost income after he resigned his employment to pursue the franchise business.10
In justifying this novel form of damages, the court stated at paragraph 58:
[the franchisee] resigned his employment to work in the business. While he does not have a contractual relationship with the defendants, I am satisfied that the corporate plaintiff [sic] is obliged to pay him for the value of his services, and that an appropriate measure of his claim is the amount that [the franchisee] would have made had he continued in his former employment.
It is notable that the franchisee in this case had participated in various activities in preparation for starting the franchise business, including two weeks of unpaid training in an established Grill It Up store.11 By awarding compensation for lost income, Justice Corbett may have attempted to recognize the value of services provided to the franchisor by the franchisee over the course of their relationship.
Concerning the section 3 duty of fair dealing and good faith, Grill It Up shows how courts may approach the issue after Salah. Justice Corbett explicitly considered the conduct of the parties when assessing whether an additional award of damages for breach of the duty of fair dealing was appropriate. In contrast to Salah, Corbett J. found that both parties had dealt with each other fairly, honestly, and in good faith and that an award of damages under section 3 of the Act was inappropriate.12
And where are we going...?
The Salah decision opens up a new measure of damages in franchise disputes where there is a breach of the statutory duty of fair dealing and good faith. In such cases where the franchisor's actions merit sanction, a court may make an award of general damages in addition to any other compensatory damage awards. Such damages do not have to relate to proven pecuniary losses. In this regard, courts are likely to utilize section 3 of the Act as a form of "punitive" damages where the conduct of the franchisor (or franchisee) is particularly egregious. In order to defend against this risk of additional damages, all parties to a franchise agreement should continue to work cordially with each other, particularly when there is a disagreement.
Grill It Up builds on Salah in that the court explicitly assessed the conduct of the parties during the course of their relationship to determine if it justified an additional award of damages for breach of the statutory duty of fair dealing. Justice Corbett's decision makes it clear that unless the conduct of a party is particularly egregious, as was the case in Salah, an award of damages under section 3 is not appropriate.
Further, Grill It Up is an example of a court awarding damages for lost income resulting from an aborted franchise relationship where the franchisee resigned employment to pursue a franchise opportunity. However, it is possible that by making such an award, Justice Corbett was simply recognizing the value of services provided by the franchisee to the franchisor. It is unclear whether resignation of employment alone would justify such an award. Despite this uncertainty, his decision does raise the prospect that a franchisor may be liable for lost wages of a franchisee where the relationship breaks down. It will be interesting to see whether future cases follow the approach taken by Justice Corbett in Grill It Up.
Manitoba Franchise Regulations
As of early September 2011, it is expected that the Government of Manitoba will release a draft of its franchise regulations within the next month or two. The draft regulations will be posted online and the government will hold a web-based public consultation period during which it will receive written comments. The proclamation of the regulations is expected to take place following the consultation process. It is likely that there will be a six-month lead time between proclamation and the enforcement date. Accordingly, the Manitoba franchise regulations would come into effect in mid-2012.
Footnotes
1. Salah v. Timothy's Coffees of the World Inc., 2010 ONCA 673 ("Salah").
2. 1706228 Ontario Ltd. v. Grill It Up Holdings Inc., 2011 ONSC 2735 ("Grill It Up").
3. Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the "Act").
3. Salah at para 27.
5. Salah at para 22.
6. Salah at para 26.
7. Salah at para 29.
8. Salah at para 29.
9. Grill It Up at para 40.
10. Grill It Up at paras 40, 44-48, and 58.
11. Grill It Up at para 14.
12. Grill It Up at paras 65, 79.
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