Written by Irvin Schein and originally published at www.irvinschein.com.
As any Ontario franchisor will tell you, the last few years have not been a walk in the park for owners of franchise systems. The current legislation in Ontario, known as the Arthur Wishart Act (Franchise Disclosure), 2000, has very strict rules about the type of disclosure that a franchisor (one who grants a franchise) must make to a perspective franchisee (one who is granted a franchise). While that is fair and understandable, the Act also contains provisions which impose a significant penalty or disadvantage on a franchisor for even the most technical violation.
As an example, if the disclosure material contains the slightest deficiency, a franchisee can operate its business for up to two years before deciding whether or not to terminate the franchise agreement.
If the franchisee decides to terminate on that basis, it is entitled to receive back from the franchisor all of the money paid to the franchisor for the franchise rights including any money paid for equipment purchased for use in the business. Obviously, that equipment has to be returned.
The recent case of 2189205 Ontario Inc. v. Springdale Pizza Depot Limited deals with the question of the franchisor’s obligation to re-purchase equipment when the equipment itself is in poor condition.
In this case, the franchisor was ordered to pay compensation to the franchisee in a substantial amount for certain supplies and equipment payable upon the return of that equipment.
The franchisee had kept almost all of these items in storage in a barn in rural Ontario since 2009. It was now prepared to deliver this material to the franchisor in exchange for payment.
The franchisor argued that the franchisee was “unable” to return the supplies and equipment because of their poor condition given that they had been in storage for almost five years. The franchisor argued that the poor condition was at least partially as a result of what it alleged was improper removal and storage by the franchisee.
The Court ruled in favour of the franchisee. It determined that under the legislation, equipment has to be repurchased regardless of its condition. The Court considered that the legislation is remedial in nature and contains no duty on a franchisee to mitigate its damages. As a franchisee is entitled to be made whole, and as there was no evidence in this case of any deliberate acts of damage to the equipment by the franchisee, it was entitled to repayment of the entire purchase price. Its condition was irrelevant.
The legislation is indeed remedial in nature. It came into force as a result of an enormous amount of abuse heaped on unwitting and vulnerable franchisees by unscrupulous franchisors. However, cases like this must make one wonder as to whether or not the legislation simply goes too far.