Canada: Ontario Superior Court Of Justice Finds That Shareholders Of A Franchisee Are Not "Franchisees" Within The Meaning Of The Arthur Wishart Act

In 2313103 Ontario Inc. et. al. ("231") v JM Food Services Ltd. et. al. ("JM"), the Ontario Superior Court of Justice (the "Court") considered whether the shareholders of a corporate franchisee ("Franchisee") can invoke the same statutory rights afforded to franchisees under the Arthur Wishart Act (Ontario) (the "Act"). The ruling of the Court confirms that shareholders of a Franchisee must look to the remedies and rights afforded to them in applicable corporate legislation (in this case the Business Corporations Act (Ontario) (the "OBCA")) rather than the Act unless such shareholders can adduce appropriate evidence to justify that they, together with the Franchisee, have been treated as one entity for the purpose of franchise liabilities.

Three individual plaintiffs (collectively, the "Amos Group") incorporated 231, the plaintiff company, to facilitate a franchise transaction with JM, the defendant franchisor, in order to operate JM's pizza stores in Ontario. The Amos Group, through 231, and JM co-invested on a 50/50 basis to form a third company, F.S. Food Services Ontario Inc. ("FS"), to act as master franchisee of JM pursuant to a master franchise agreement.

Unfortunately, business for the FS pizza franchise in Ontario was poor and soon ran out of money. The Amos Group abandoned its operational roles with FS and issued a notice of rescission of the master franchise agreement to JM.

As a matter of strategy, the plaintiffs decided to bring their claim under the Act. JM argued that the plaintiffs lacked standing to bring this action or any claims under the Act given that FS, and not the Amos Group or 231, was the "franchisee" within the meaning of the Act.

In refusing to recognize any of the plaintiffs as franchisees under the Act, the Court made a number of findings. First, the relevant franchise documents, including the master franchise agreement, designated FS as the master franchisee. Second, the plaintiffs led no evidence to demonstrate that they guaranteed any of the ongoing obligations of FS under the master franchise agreement. Third, Justice Dunphy concluded that the Plaintiffs failed to satisfy the Court that the franchise was granted to any of them in the sense of a sale or disposition from the franchisor; the obvious candidate for the grant was from JM to FS and there was no basis to argue for multiple instances of a "grant" of the same franchise.

The Court found that the plaintiffs were not "franchisees" within the meaning of the Act and therefore had no standing under the Act. Instead, any claims should have been brought by the plaintiffs pursuant to the OBCA. The Court also held that it was inappropriate to characterize 231 and the Amos Group as "franchisees" under the Act as a result of their equity ownership of FS since it would be akin to creating a new class of "franchisee's associate" under the Act.

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