Canada: Franchise Law e-Communiqué - October 2008

Last Updated: November 10 2008
Article by Eunice Machado

In This Issue

  1. National "Do Not Call Registry" Launched September 30, 2008
  2. Arbitration Clause in Franchise Agreement Survives Rescission
  3. What We're Up To
  4. Courts Struggle with Franchisee's Right of Rescission

National "Do Not Call Registry" Launched September 30, 2008

Canada's National Do Not Call ("DNC") registry was launched by the Canadian Radio-television and Telecommunications Commission ("CRTC") at the end of September. If telemarketers call a number 31-days after it has been registered, the CRTC can impose administrative monetary penalties ("AMPs"). This means that, as early as October 31, 2008, companies could face significant fines if they do not comply with the DNC registry.

The CRTC's Unsolicited Telecommunications Rules will apply to all unsolicited calls for the purpose of solicitation, which is defined as the sale or promotion of a product or service or the solicitation of money or money's worth. Any telephone number in Canada can be registered, and there is no charge to the consumer to complete a registration. If a telemarketing call is made to a number registered on the National DNC List at least 31 days after its registration, AMPs of up to $1,500 per violation for individual violators and up to $15,000 per violation for corporations may be awarded.

Each separate legal entity that makes telemarketing calls must register and where it makes non-exempt calls, it must also subscribe to the National DNC List. Subscription fees vary; the fee for a full year subscription to all Canadian area codes is $11,280.

A consumer's express consent to receive telemarketing calls overrides a listing on the National DNC List. A number of other exemptions also apply. Telemarketing calls made by or on behalf of registered political parties, nomination and leadership contestants, registered charities and calls to solicit subscriptions to general-circulation newspapers can be made to numbers on the National DNC List. Calls can be made where an "existing business relationship" has been created, in certain circumstances, by the purchase or lease of products or services. In addition, an exemption applies for telemarketing to businesses. Where only exempted calls are made, organizations must maintain their own DNC lists, honour consumers' requests not to be called, and identify the purpose of their call at the beginning of each call.

September 30, 2008 was the start date for registrations by consumers and by telemarketers. Registrations can be made at: Numbers can also be registered using a toll free number, (866) 580 3625.

Arbitration Clause In Franchise Agreement Survives Rescission

In MDG Kingston Inc. v. MDG Computers Canada Inc., 2008 ONCA 656, the plaintiff franchisee brought a claim for rescission and damages related to two franchise agreements. The defendant franchisor brought a motion to enforce the arbitration clause contained in each of the franchise agreements and stay the Court proceedings. In response, the plaintiffs brought a cross-motion for summary judgment for rescission of the agreement.

The franchisee claimed it was entitled to rescission because they had not received a disclosure document before signing their second franchise agreement. The franchisor argued that: (1) the dispute should be determined by an arbitrator, and not the Courts; and (2) the second agreement did not contain any material changes thereby exempting them from the disclosure requirements.

Despite only having the two agreements as evidence, the motions judge determined that there were material changes between them entitling the franchisee to rescind the second agreement.

Furthermore, since the arbitration clause would have had to be contained within the disclosure document, the Court found that the arbitration clause could not be enforced.

The Ontario Court of Appeal ("OCA") allowed the appeal, set aside the summary judgment and stayed the action. The OCA held that the Arbitration Act applied in this situation as there was no evidence to suggest that its application was excluded by the Arthur Wishart Act. The Arbitration Act states that where the matter before the court is governed by an arbitration agreement, the court must stay the action subject to limited exemptions. The OCA held that none of those exceptions applied in this case. In particular, the Court can refuse to stay an action where the case is a "proper case" for summary judgment. The OCA held that this case was not a proper case for summary judgment as the evidence before the motions judge was insufficient to make that finding.

Geoff Shaw and Eunice Machado acted for the franchisor and were successful on appeal.

What We're Up To

The members of the Cassels Brock Franchise Law Group have been busy throughout 2008, and there is more to come. Here is a list of some of the items that filled our calendars this year so far and some upcoming events that we are organizing or at which we are speaking.

  1. In May 2008, Eunice Machado spoke at the Canadian Franchise Association's Annual Conference on a topic of particular interest to franchisors, namely the "Five Best Ways Not To Get Sued."
  2. In May 2008, Larry Weinberg, Jayne Westlake and Eunice Machado hosted roundtables at the IFA Legal Symposium in Washington, D.C.
  3. Larry Weinberg and Geoff Shaw published an article entitled "An Updated Road Map to Entering the Canadian Market" in the ABA Forum on Franchising's Spring 2008 Franchise Law Journal.
  4. On September 25, 2008, Eunice Machado and Jayne Westlake co-hosted a Women's Franchise Network Event. Eunice and Jayne are both co-founders of the Toronto chapter of the WFN, which is affiliated with both the Canadian Franchise Association and the International Franchise Association.
  5. In October, 2008 Geoff Shaw will be presenting a paper he co-authored on "Determining the Rules of Engagement in Litigation Here and Abroad" at the ABA Forum on Franchising's annual meeting in Austin, Texas.
  6. In October 2008 Larry Weinberg will be hosting the ABA Forum on Franchising's International Division breakfast at the Forum's annual meeting in Austin, Texas. The breakfast session is called "In the Trenches of International Expansion: Three General Counsel Report" and features remarks by in house counsel of franchisors engaged in business across national borders.
  7. Larry Weinberg has been honoured by being selected to co-chair the 2009 ABA Forum on Franchising's annual meeting which will take place in October, 2009 in Toronto. He is the first Canadian to be chosen to co-chair the Forum's annual meeting, which is an annual gathering of about 800 franchise lawyers, from private practice and industry, for the purposes of education and networking.

Courts Struggle With Franchisee's Right Of Rescission

According to Alberta's Franchises Act and Ontario's Wishart Act, franchisees are entitled to rescind their Franchise Agreements within two years if they receive no disclosure or within sixty days if they receive incomplete or deficient disclosure from their intended franchisor. Rescission is a drastic remedy with potentially significant damages. Therefore, in order to avail themselves of the two year window of opportunity, franchisees are frequently arguing that their disclosure documents were so deficient that, in essence, no disclosure was provided at all. Three recent court cases have discussed this issue with seemingly different results.

In Hi Hotel Limited Partnership v. Holiday Hospitality Franchising Inc., 2008 ABCA 276, the Alberta Court of Appeal determined that the failure to provide a signed director or officer's certificate in a franchise disclosure document in and of itself rendered that disclosure so faulty that the document could not be considered a disclosure document. Therefore, the franchisees were able to rescind their Franchise Agreement within two years. Meanwhile, two recent cases from the Ontario Superior Court of Justice considered the same general question and seemed to give franchisors far more latitude before finding their disclosure documents invalid.

In Chu v. Chowdry (c.o.b. Liberty Car and Truck Rental), 2008 CanLII 36909, the applicant-franchisee sought a declaration of entitlement to rescind its two licensing agreements for being so deficient that effectively, no disclosure was provided. In dismissing the motion, the Court stated that the two year rescission period has only previously been triggered where a disclosure document was not provided in any form, or where foreign disclosure documents were provided for informational purposes only. The Court found that the disclosure did not meet each of the statutory requirements under the Act but that key information had been provided to the franchisee in a single document. The Court therefore found that the franchisee had been given enough information to make a informed decision about whether to purchase the franchised business, and was therefore not prepared to view the disclosure as fatally deficient.

In 4287975 Canada Inc. v. Imvescor Restaurants Inc., 2008 CanLII 48123, the applicant-franchisee brought a motion seeking a declaration of entitlement to rescind its franchise agreement because the applicant had paid a franchise fee prior to receipt of a disclosure document. The franchisor argued that the franchisee had had 60 days to rescind after receipt of the disclosure document. In dismissing the motion, the court held that the two year rescission period applies only where a disclosure document is not provided at all.

The flood of cases opining on how much disclosure is "enough" disclosure will no doubt continue to flow. And, while the ultimate impact of the Hi Hotel case in Ontario remains uncertain, it nonetheless stands as a warning to franchisors to ensure that their disclosure documents are up to date and complete each time they are given to prospective franchisees!

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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