A recent case from the Ontario Court of Appeal, 2256306
Ontario Inc. v. Dakin News Systems Inc. (Dakin), demonstrates
some of the pitfalls that franchisors can face when navigating the
treacherous waters of franchise transfers and disclosure.
Background to the Case
In the summer of 2010, the franchise agreement between Dakin
News Systems Inc. (Dakin) and its franchisee, Mr. Khalife, expired.
There was no formal renewal of the franchise agreement. Rather,
Khalife continued to operate the news kiosk franchise on a
month-to-month basis after the expiration. In February of 2011,
Khalife sold the assets of the franchised business to a third
party, Mr. Reda, who had previously acted as the manager of the
news kiosk. In response to an inquiry from the lawyer jointly
retained to act for Reda and Khalife on the sale, Dakin requested a
$10,000 transfer fee and indicated that they had a right of
approval. Dakin's request was ignored and Reda and Khalife
proceed to close the sale. Reda took over the franchise and began
paying royalties to Dakin.
During a site visit to the franchise one year later, Dakin
learned that the transfer had in fact occurred without its approval
and demanded payment of the $10,000 transfer fee. Dakin also sent a
new franchise agreement to Reda. Eventually, in October of 2012,
Reda signed the new franchise agreement but did not pay the
transfer fee. No disclosure document was provided. After a dispute
with the landlord for the franchise in February of 2013, Reda
sought to rescind the franchise agreement.
Dakin resisted the rescission, arguing that two statutory
exemptions to the disclosure requirements under the Arthur
Wishart Act applied: (i) under section 5(7)(a)(iv) where the
grant of the franchise is not affected by or through the
franchisor, (ii) under 5(7)(g)(ii) where the grant of the franchise
is not valid for longer than one year and no non-refundable
franchise fee is payable.
Summary Judgment Motions and Appeal
Both parties brought competing summary judgment motions. At
first instance, the Ontario Superior Court of Justice found that
neither of these exemptions applied and the plaintiff was
successful in obtaining an order for rescission. Dakin's
cross-motion was dismissed.
Dakin appealed, arguing that they were denied a fair hearing by
the motion judge because they were not heard on the
franchisee's cross-motion. The Court of Appeal dismissed this
argument, finding that the motion and cross-motion were
intrinsically connected and all of the relevant material was before
the court when Dakin's motion was argued.
The Court of Appeal also noted that, having requested that Reda
enter into a new franchise agreement, Dakin could not rely on s.
5(7)(a)(iv) of the Arthur Wishart Act by arguing that they
were not involved in the sale and that a franchise agreement was
already in place. Further, by requiring the franchisee to pay a
transfer fee, Dakin could not argue that they were exempt under s.
5(7)(g)(ii) of the Act on the basis that no non-refundable
franchise fee was paid. By requiring the payment of the transfer
fee, Dakin was precluded from relying on this exemption,
irrespective of the fact it was never paid. Ultimately, the Court
of Appeal upheld the lower court's decision granting an order
Key Take-Away Principles
More than anything, Dakin provides franchisors with a
helpful guide for "what not to do" when managing
transfers within their systems. Franchisors should be careful to
monitor any proposed transfers by franchisees to new buyers and
carefully exercise their rights of approval. Erring on the side of
disclosure is always preferable to relying haphazardly on the
exemptions under the Arthur Wishart Act, which, as
demonstrated in Dakin and countless other cases, are
routinely construed narrowly by courts against franchisors'
interests. Franchisors are well advised to consult with their legal
advisors in dealing with any proposed transfer within their
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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