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Thursday, February 9, 2012 – 1:30 p.m. – 4:50 p.m.The Westin Harbour Castle Conference Centre

1 Harbour Square, Toronto

HOT SPOTS IN FRANCHISING

By IAN ROHER, Teplitsky, Colson LLP andFRANK ZAID, Osler, Hoskin & Harcourt LLP

With thanks to KRISTINA DAVIES of Teplitsky, Colson LLP for her assistance

1 LEGAL_1:22744999.2

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� Nature of franchise relationship

� Types of documents

� Statutory disputes

� Contractual disputes

� Statute appears clear on initial reading – but be clear, it is uncertain and ambiguous in parts, and always subject to specific fact situations and judicial decisions

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� Hotspots◦ Content of disclosure documents

◦ Problems with franchise disclosure process

◦ Misrepresentations

◦ Disputes relating to duty of good faith and rights to associate

◦ Common contractual trouble spots

◦ Lawyers’ duties related to content of and process relating to disclosure documents

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� Definitions◦ Franchise agreement

◦ Franchisee

◦ Franchisor

◦ Franchisor’s associate

Case: 1706228 Ontario Ltd. v. Grill It Up Holdings Inc. –What is a franchise

Case: MBCO Summerhill Inc. v. MBCO Associates Ontario Inc. – Franchisor’s associate

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� Form and Content◦ Required contents

◦ Material facts as prescribed

◦ Other material facts

◦ Financial statements

◦ Agreements

◦ Statements

◦ Accurate, clear and concise

◦ One document, one time

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� Major Problem Areas

◦ Required disclosure items

� Franchisor information

� Litigation history

� Costs and fees

� Annual operating costs

� Rebates

� Licenses

� Territory

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◦ Restrictions on sales

◦ Earnings projections

◦ Financial statements

Case: 6792341 Canada Inc. v. Dollar It Ltd.

Case: Melychuk v. Blitz Ltd.

◦ Certificate of disclosure

� Receipt

Case: 6792341 Canada Inc. v. Dollar It Ltd.

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� Miscellaneous◦ wrap-arounds or addendums

Case: 1518628 Ontario Inc. v. Tutor Time Learning Centres LLC.

◦ Material change

◦ One document at one time

Case: 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd.

◦ Updating

◦ Specific franchise being offered

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� Who is the Franchisor

� Who is the Franchisee

� Timing of Disclosure◦ 14 days

◦ No exceptions in Ontario

◦ Franchise agreement definition

� Delivery requirements

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� Exemptions from disclosure◦ Resale/transfer

◦ Additional franchise

◦ Fractional franchise

◦ Renewal or extension

◦ Small franchise

◦ Sophisticated purchaser

Case: 2189205 Ontario Inc. v. Springdale Pizza Depot Ltd.

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Case: TA&K Enterprises Inc. v. Suncor Energy Products

� Disclosure specific to each type of franchise◦ New

◦ Renewal or extension

◦ Resale or transfer

◦ Conversion

◦ Corporate/franchisor unit

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� Pre-Contractual Common Law Misrepresentations and Exclusionary Clauses◦ Nature of sales process

◦ Types of misrepresentations

Case: Murray v. TDL Group Ltd.

� Special relationship

◦ Duty of fair dealing

◦ Defensive drafting

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� Exclusionary Clauses◦ Types of exclusionary clauses

◦ Non-waiver clauses

◦ Entire agreement clauses

Case: Shelanu v. Print Three Franchising Corp.

Case: Queen v. Coqnos

◦ Enforcement of clauses

◦ Contract of adhesion

◦ Entire agreement clause

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Case: Machias v. Mr. Submarine Ltd.

◦ Best practices

◦ Questionnaires

◦ Franchisee description of sales process

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� Statutory Misrepresentations◦ Rights of rescission – s.6

◦ Misrepresentation – s.7

◦ Who is liable

◦ Limitations period

◦ Deemed reliance

� Hot Spots◦ Earnings projections or representations

◦ Business reality situations

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� Common Law Duty of Good Faith◦ Case law description of duty

◦ Utmost good faith?

◦ No fiduciary duty

Case: Shelanu

◦ Meaning of good faith

◦ Duty of franchisor

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� Statutory Duty of Fair Dealing◦ S. 3

◦ Both parties

◦ Performance and enforcement of agreement

◦ Includes good faith

◦ Includes reasonable commercial standards

◦ Discretion

◦ Application to renewals

Case: 33177447 Manitoba Ltd. v. Beaver Lumber Ltd. -

damages award

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Case: Salah v. Timothys’ Coffees of the World Inc. – tort damages

� Statutory Right to Associate◦ S. 4

◦ Application to class actions

Case: 405341 Ontario Limited v. Midas Canada Inc.

Case: 1318214 Ontario Ltd. v. Sobeys Capital Inc.

◦ Current implications and limitations

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� Fundamental drafting principles◦ Contra proferentum

◦ Duty of good faith

◦ Fairness

◦ Contract of adhesion

� Typical disputes◦ Reserved rights

◦ Territory

◦ Encroachment

◦ Renewals

◦ Pricing of products/services

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◦ Supply arrangements

◦ Resales, transfers and assignments

◦ System changes

◦ Defaults

◦ Remedies

◦ Termination

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� Explaining disclosure document to franchisor/franchisee client

� Consequences of incomplete/no disclosure

� Gathering facts process

� Updating of specific disclosure items

� Material facts

� Execution and delivery

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� Solicitor’s report to franchisor client

� Modifications to/updating of disclosure document

� Incomplete or inaccurate disclosure

� Misleading or fraudulent disclosure

� Advising a franchisee

� Requiring franchisee to obtain independent legal advice

� Engagement letters – franchisor/franchisee client

� Future legal conflicts

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� Questions and Answers?

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