Arbitration is increasingly displacing traditional litigation as
the dispute resolution mechanism of choice for many businesses,
including franchisors and franchisees.
One of the uncertainties facing franchisors and franchisees
following the enactment of the Ontario Arthur Wishart Act
(Franchise Disclosure), 2000 (the "Franchise Act") is the
extent to which franchise disputes may be arbitrated. The Ontario
Court of Appeal's recent decision in MDG Kingston Inc. v. MDG
Computers Canada Inc. ("MDG") provides some useful
guidance in this area.
The Franchise Act provides franchisees with certain "rights
of action" and various remedies against franchisors, including
the right to rescind or annul a franchise agreement. The MDG
decision considers how such remedies can be enforced procedurally
– and whether they may be resolved by arbitration.
The Facts of the MDG Case
The plaintiff was a franchisee who had operated a retail
computer store under the MDG franchise since 2000 (prior to the
enactment of the Franchise Act). In February of 2005, the parties
replaced their initial franchise agreement with a new franchise
agreement. The franchisor did not provide the disclosure document
required by the Franchise Act when the new franchise agreement was
entered. Both franchise agreements contained mandatory arbitration
Business did not go well after the parties entered into the new
franchise agreement. By February 2007, the franchisee purported to
rescind the franchise agreement, relying on an allegation that the
franchisor failed to provide the disclosure required by the
Franchise Act. The franchisor took the position that the dispute
should be referred to arbitration, as provided by the language of
the franchise agreement.
The Court of Appeal's Decision
As the court noted, the issue raised by the appeal is a classic
one: does an arbitration clause become inoperative when the
agreement containing that clause is rescinded or terminated? Prior
to this case, no Ontario court had considered this issue in the
The Court of Appeal analyzed the relevant provisions of both the
Ontario Arbitration Act, 1991 (the "Arbitration Act") and
the Franchise Act, as well as the arbitration clause in the
franchise agreement itself, in addressing this question.
The court noted that s. 7 of the Arbitration Act requires it to
stay all actions in favour of arbitration, subject only to certain
exceptions (ss. 7(2) permits the court to refuse a stay in certain
circumstances, such as where the arbitration agreement is
"invalid"). The court also noted that s. 17 of the
Arbitration Act gives arbitrators the authority to rule on their
own jurisdiction and whether an arbitration clause survives
termination of the main agreement in which it is found.
The court then made the following observations:
The franchisee was not alleging fraud or that the franchise
agreement was void from the very beginning. It concluded,
therefore, that the franchise agreement was not
The rescission remedy provided for in the Franchise Act would
not, if granted, make the franchise agreement "invalid"
from the very beginning;
Nothing in the Franchise Act suggested that an arbitration
clause in a franchise agreement could not survive rescission of the
rest of the agreement; and finally,
The Franchise Act does not limit or restrict the right of
parties to agree to resolve disputes by arbitration (instead of in
The court found that the arbitration clause was not
"invalid" simply because the franchise agreement might
ultimately be rescinded for want of proper disclosure. The court
therefore stayed the action in favour of arbitration. According to
the Court of Appeal's decision, arbitration is the proper forum
for determining both the limits of the arbitrator's
jurisdiction, and the merits of the franchisee's claim for
The MDG case stands for the proposition that the normal rules
regarding arbitration clauses apply, even in disputes between
parties under the Franchise Act. The decision also confirms a
continuing judicial trend to endorse the use of alternate dispute
The foregoing provides only an overview. Readers are
cautioned against making any decisions based on this material
alone. Rather, a qualified lawyer should be consulted.
It's not often that our little blog intersects with such titanic struggles as the U.S. presidential race – and by using the term "titanic" I certainly don't mean to suggest that anything disastrous is in the future.
J.J. v. C.C., is an interesting case in which the court held that an automotive garage owes a duty to minor children to secure the vehicles on the premises by locking the cars and safely storing the car keys...
In Irwin v. Alberta Veterinary Medical Association, 2015 ABCA 396, the Alberta Court of Appeal found that the "ABVMA" failed to afford procedural fairness to a veterinarian undergoing an incapacity assessment.
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