In the recent case of ANC Business Solutions Inc. v. Virtualink Canada
Ltd. in the Ontario Superior Court of Justice, Justice
Perell considered whether Virtualink, the franchisor of a franchise
system offering "executive office suites," had unlawfully
terminated ANC, one of its franchisees.
This cautionary case illustrates the risk to a franchisor that
terminates a franchisee without complying with the notice
requirements in the governing franchise agreement. The case
also shows that a settlement agreement will not supersede or modify
the notice requirements in a franchise agreement, unless it is
Virtualink's franchise system, which operated under the
brand "Intelligent Office," involved renting office
suites and providing various office support services, including
(and importantly to this case) a voicemail system.
The parties entered into a Franchise Agreement on April 22,
2010. Setting up the franchise required a significant
investment, which included a $60,000 franchise fee and leasehold
improvement costs of approximately $500,000. ANC was also required
to purchase a technology system, which included phones and
voicemail system, for approximately $80,000. After making
investments which totalled approximately $1 million, ANC opened its
business in early 2011.
Although it received only a passing mention in the Court
decision, ANC served a Notice of Rescission on April 20, 2012, just
two days before the expiry of the two year period in which a
franchisee can assert a rescission claim under section 6(2) of the
Arthur Wishart Act. Not long after the service of the
Notice of Rescission, in June 2012, the franchisor purported to
terminate the franchise.
In July 2012, the parties entered into a Settlement Agreement,
pursuant to which the franchisor agreed to retract its Notice of
Termination and the franchisee agreed to retract its Notice of
Rescission. Importantly, the Settlement Agreement did not
alter or supersede section 18 of the Franchise Agreement, which
required that the franchisor give thirty days' notice of
termination. During the thirty day notice period, the franchisee
could cure the default and avoid termination.
On October 17, 2013, ANC had a technical malfunction in its
voicemail system. The system could not be immediately fixed,
and on October 30, 2013, the franchisor delivered a Notice of
Default. While the franchisee was making efforts to fix the
voicemail system and cure the default, the franchisor terminated
the franchise and the sublease on November 7, 2013, less than 30
days from both the malfunction and the Notice of Default.
ANC commenced an application, seeking immediate reinstatement as
a franchisee, as well as the right to re-enter its subleased
premises and resume its franchise's business operations.
ANC also sought damages for breach of the Franchise
Agreement. As alternative relief, ANC sought relief from
forfeiture under the Commercial Tenancies Act.
The franchisor argued that the Settlement Agreement introduced a
"one-strike policy" which gave it the right to terminate
the franchise immediately. The franchisor also argued that the
seriousness of the breach and the risk to the "integrity of
the franchise system" entitled the franchisor to immediately
terminate this franchisee. Justice Perell disagreed.
Justice Perell found that the franchisor did not give thirty
days' notice, as required by section 18 of the Franchise
Agreement. In doing so, the franchisor breached the Franchise
Agreement. The judgment is clear that "nothing in the
2012 Settlement Agreement that alters the provisions in the
Franchise Agreement or in the associated Agreements that requires
the Franchisor to provide the franchisee with an opportunity (or an
extended opportunity) to remedy a default."
Justice Perell further held that "the notion that ANC's
alleged default went to the core of the franchise system and
compelled the franchisor to terminate the franchise is an
after-the-fact attempt by the franchisor to justify its own breach
of the Franchise Agreement."
In the result, Justice Perell reinstated the Franchise Agreement
and held that ANC is entitled to damages due to the
franchisor's breach. Justice Perell ordered that there be a
trial to determine the quantum of damages, whether the franchisor
breached their duty of fair dealing under section 3 of the
Arthur Wishart Act and whether the franchisor could
require ANC to operate with a new Cloud-based phone message
The clear instructive point to be taken from this case is that
franchisors run a major risk in terminating a franchisee without
complying with the applicable notice requirements in the franchise
agreement, and that franchisors should be careful to ensure that
they have proper grounds to terminate in accordance with their
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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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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