Canada: Ontario Court Of Appeal Upholds Lower Court Decision On Franchisee Right Of First Refusal

In 3574423 Canada Inc. v. Baton Rouge Restaurants Inc., the Ontario Court of Appeal recently upheld the judgment of Justice David M. Brown of the Superior Court of Justice dismissing the action of a franchisee who was seeking damages for the alleged failure of a franchisor to properly and fully provide notification in accordance with the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 ("AWA") when it offered the franchisee the opportunity to acquire an additional franchise. Our summary of the original Ontario Superior Court of Justice decision can be found  here.

The appellant, 3574423 Canada Inc., was a franchisee of the Baton Rouge Restaurants Inc. ("BRRI") franchise that owned a franchise in the Toronto Eaton Centre and had a contractual right of first refusal ("ROFR") over the next franchise in the Greater Toronto Area.  Over the course of their business relationship, BRRI offered the appellant various franchise locations, all of which were repeatedly turned down.  In 2001, the appellant was provided with a second opportunity to acquire a further location and once again, passed it up.

The appellant commenced an action for damages alleging a breach of a contractual duty of good faith and a breach of the statutory duty of fair dealing pursuant to the AWA.  It claimed that when it was given the opportunity in 2001 to acquire a second franchise, BRRI failed in its obligation under the AWA because the offer was premature, as the lease for the franchise had not yet been finalized, and did not disclose critical information, namely the size of the territory.  The appellant claimed that had there been full disclosure, it would not have waived its ROFR and would have chosen to purchase the franchise.

The issue before the Court of Appeal was whether the trial judge erred in finding no breach of section 3 of the AWA regarding the question of whether the franchisor provided the appellant with sufficient disclosure in respect of the availability of the franchise.

Section 3 of the AWA provides that every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement, which includes the duty to act in good faith and in accordance with reasonable commercial standards. The Court acknowledged that while the AWA imposes onerous disclosure requirements on franchisors, the duty of fair dealing as required by section 3 applies to both franchisors and franchisees.  In this case, the standard of fair dealing was to be governed by the parties' prior dealings with each other.

In consideration of the appellants' first assertion of unfair dealing, specifically that they did not receive a copy of the offer to lease and that it was premature, the trial judge found that this was simply untrue and that the appellants did, in fact, receive a copy of the offer to lease, from which it was apparent that a final lease document had not yet been finalized.  The Court further found that at all times, the appellant's opportunity to exercise their right of first refusal, subject to final review and negotiation of all the lease terms, was available to them, but instead they chose to reject the opportunity without seeking any further information.

Regarding the appellants second assertion of unfair dealing, namely their failure to disclose the size of the territory, the Court found that the appellant knew at the time of the offer that the franchise would have a much larger territory than its existing franchise. Plain commercial sensibility dictates that franchises located in less populated suburban areas enjoy larger-sized territories than those in highly populated urban areas, which the appellants ought to have known based on their rejection of various suburban BRRI locations in the past. 

In both instances, the Court repeatedly noted that the appellant's level of sophistication and business practicality were sufficient upon which to base their decision and that if either the status of the lease or the size of territory had been significant factors, the appellants would have followed up to obtain further information.

What ultimately did not sit well with the Court was the fact that the appellants were essentially asking it to ignore the credibility findings made against it by the trial judge and as stated by Justice Lederman, "such an inference would defy logic and cannot be drawn in the face of the knowledge of the parties and the history of dealings between them".  In consideration of all of the evidence, the appellant's principals were found to be unreliable witnesses who had altered their evidence in an attempt to support their position and the Court saw no basis to interfere with the conclusion that BRRI had acted in good faith and in a commercially reasonable manner in accordance with section 3 of the AWA.

In going forward, both franchisors and franchisees ought to be mindful that in cases where they are seeking damages based on section 3 of the AWA, courts will consider the history of the parties' dealings and more specifically, the behaviour and actions of both parties, when making a determination. Ultimately, both franchisees and franchisors must be aware of the fact that when it comes to allegations surrounding fair dealing and the duty of good faith, the obligation imposed by section 3 of the AWA is anything but one-sided.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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