45 minute read
Notes on a Pandemic
BY DEMETRE ELIOPOULOS
I’ve spent the better part of the last two decades in the market research/public opinion industry and on March 12, 2020, when the COVID-19 pandemic came to Canada, one thing quickly became clear: a lot of what we knew just went out the window.
Our job at Angus Reid Group is to help our clients truly understand their audience (and the market at large) so that they can create an offering and communicate in a way that truly connects them to others. To do that, we spend all our time engaging with Canadians on their behaviours, perceptions, values, and outlooks on broader society.
No other event in the last hundred years (with perhaps the exception of the great wars) has disrupted the lives of Canadians and those around the world so completely. Canadians were no longer acting the same way, as their daily habits had altered, and the shadow of the pandemic encouraged everyone to re-evaluate their priorities.
Many of our clients came to us asking, “what do we do now?” Overnight, the information they obtained about their audience was out of date. Out of this question emerged the bi-weekly Angus Reid COVID-19 Monitor. The sole purpose of this monitor is to help Canadian businesses understand Canadians in this new environment and how they are changing as the situation evolves.
We are living in highly sensitive and unstable times. At a time when businesses need to bring their ‘A’ game due to all this economic uncertainty, those that are tone deaf to the current climate will encounter setbacks.
Here are five things to think about as you navigate the pandemic in 2021:
A life on hold
On the whole, Canadians are handling the pandemic well. In the face of a volatile environment where cases fluctuate, we’ve been stable in our stress levels, as most of us are doing our part in embracing preventative measures, and we are generally supporting our scientists and government leaders. This is a stark contrast to our neighbours to the south, who are very stressed and everything from masks to science to heeding medical direction is highly politicized and controversial.
However, things are not entirely alright with us. Beneath our stoic approach to this crisis is an emotional underbelly. Half of Canadians (52 per cent) classify their lives as “on hold” as opposed to “moving forward.” We know a lot of this is related to lockdowns and the life disruptions that occur because of precautionary measures. But there are a whole host of reasons behind this general malaise.
Three-in-five Canadians consider precautions to be fatiguing and believe that the confidence in our collective ability to bring cases down is on the decline. Adding to this, almost one-half of our working force has been negatively impacted over the course of the year (either through layoffs, company closures, pay cuts, or shortening hours). Almost one-in-three say their personal finances worsened as a result of the pandemic. One-in-five describe their
mental health as “poor” or “very poor.” From mental well-being to financial well-being, there’s a wide variety of ways that Canadians have felt the effects of the pandemic.
Handle with care
With the personal toll in mind, Canadian companies are asking themselves if they should be reaching out or whether they should stay silent for the time being. The short answer is: this isn’t business as usual, but you can still do business. Reach out to your customers and just be aware of the variety of situations they may find themselves in. Four-in-five Canadians say that “it’s reassuring to hear from Canadian companies at this time.” They also want engagement. A similar proportion say that “Canadian companies that take an active role during this crisis will have gained a loyal customer in me.” In fact, one-half say, “Canadian companies that do nothing during this crisis will lose a customer in me.”
The trick is to find the right way to do it. A great deal of research in the communications space this year yields a few answers. For starters, as long as you’ve addressed your efforts related to the crisis at some point, then you can continue to communicate about products and services. Secondly, context matters. A beer commercial showing a fun night at the club may have rated highly at some point, but now it comes across as being tone deaf, or even worse, irrelevant to our lives. Thirdly, now more than ever, we’re looking for content that moves us emotionally. We’re looking to break free of the monotonous day-to-day and feel something that’s real.
My home is my castle
With nowhere to go and limited ability to have visitors, Canadians turned their attention to their homes. They cooked at home and tried more recipes than usual. Restaurant outings were replaced with take-out nights in the kitchen. Social outings were replaced with “Zoom dates.” As a result of all this time at home, Canadians began investing in their home environment. Home renovations and decorating projects became the norm across the country. So, while Canadians are itching to get out again, they’ve also spent the last year making a better nest.
Case in point – over the last year almost one-half of Canada’s workforce started working from home. These individuals report high levels of satisfaction with the experience (specifically with their overall work productivity and their ability to maintain that coveted work/life balance). In fact, only one-in-five indicate that they want to go back to the office full time, and two-in-five say they don’t want to go back to the office at all. Aside from COVID-19 concerns, they are less eager to return so that they don’t have to commute, will have fewer expenses as a result of being at home, and have a better lifestyle. Employers may have a difficult time coaxing their employees back to the office.
Online shopping is here to stay
Retailers and grocers who think that online services are a pandemic-only situation better think again. Before March, curbside pick-up or online delivery was a niche offering among grocers and relatively non-existent among retailers. Now, almost half of Canadians have tried online grocery services and that proportion increases to three-quarters for retailer services. And while there were definitely some kinks in the process early on (and some companies that continue to have problems incorporating the new system), generally speaking, Canadians are quite happy with the services they receive. Naturally, online-only retailers like Amazon.ca get the highest ratings, but the rest are not too far behind.
What does this spell for the future? Many Canadians are yearning for more in-store experiences these days, but they still want the best of both worlds. About one-quarter of Canadians say that they’ll continue to use online grocery services from time to time after the pandemic. This proportion increases to almost one-half among large retailers in Canada.
What does “back to normal” even mean?
Getting back to normal has been on our minds since the pandemic started. But when will it happen? We don’t yet know the exact timing, but according to most Canadians, we’ll be spending the bulk of 2021 getting there. Few people think that back to normal means things will go back to the way it was before. In fact, half think that there will be some major permanent changes. But what will they be?
We’ve already described how working from home and online services are here to stay, but Canadians report a few more things as well: more urgency for having financial nest-eggs for occasions like these, fewer handshakes, more video calls for business reasons and less business travel, and fewer outings where there are large masses (like concerts and bars).
For now, Canadians are still fixated on “back to normal” and all companies have a role to play in getting us there.
ABOUT THE AUTHOR
Demetre Eliopoulos is a senior vice president and managing director of public affairs at the Angus Reid Group.
How Franchises Can Identify and Recruit Their Ideal Franchisees
BY JOSH ROBINSON
Finding and signing the right franchisees has never been more important. As you look toward your goals for new franchise owners in 2021, it’s important to know exactly who you are looking for so that you can grow your system with the right people.
Franchisors often say the most important consideration is finding franchise owners who are the right “fit.” How you determine that depends heavily on your business model and the values that are most important to your company.
So, where do you begin to find your ideal franchisees?
Do they fit into your industry?
A good place to start is to think about your business model and what kind of people generally are attracted to your industry and your franchise system.
Pearle Vision, for instance, is an optical franchise that operates at the intersection of healthcare and retail. Having eye doctors under the same roof as the retail operation has been a cornerstone of our business model since the first Pearle Vision opened in 1961. Eye doctors and opticians – the technicians who fit and dispense glasses – are natural candidates to become franchisees. Because of their training and chosen careers, we know that optometrists, ophthalmologists, and opticians are knowledgeable about and invested in the vision care industry. They most likely are familiar with the Pearle Vision brand, too.
We also market our franchise opportunity to an investor persona. Investors interested in the healthcare industry seek franchises that have scalable business models so that they can quickly grow their business. For example, our systems and processes make it possible for franchise owners to successfully run their business without a background in the optical industry.
Investors are likely contenders for multi-unit agreements, which are attractive because they offer reduced fees and exclusive territory rights. Additionally, multi-unit agreements in strategic markets are important vehicles of growth for the franchise system.
Do they share your values?
Another key consideration for signing a franchisee who is the right fit is whether they share your values. Whether your company has articulated core values or you operate according to principles and priorities established by your founder, a franchise’s values system is an important component in identifying your ideal franchisee.
At Pearle Vision, we know our ideal franchisees are people who embody the same values that our founder, Dr. Stanley Pearle, had when he opened the first Pearle Vision. We look for entrepreneurs who share our passions for expert care, trust, and personal service. Successful franchise candidates are those who are dedicated to building strong businesses that provide genuine eye care.
If a candidate cannot commit to upholding your company’s values, that should make it easy to determine whether they are the right fit for your franchise. Disagreement about values is a deal-breaker.
It would be easy to award a franchise to every candidate who meets the most basic financial requirements, but it’s not always the best thing for your system. Knowing who your ideal franchisee is and ensuring that a candidate is a perfect fit are essential to growing your franchise the right way. If a candidate does not meet your standards, it’s much better for you and the candidate to realize that before they join your system.
ABOUT THE AUTHOR
Josh Robinson is vice president of licensing & development at Pearle Vision and is responsible for defining and developing business strategies to grow the Pearle Vision franchise system. He has more than 20 years of experience supporting franchisees and helping them optimize the performance of their businesses.
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Real Life Lessons:
Life is too dynamic to learn from books
JOHN PRITTIE has been involved in franchising for over 40 years as a recognized industry veteran with a passion for service-based businesses and has developed over a dozen franchise brands in Canada, the United States, and internationally. He is the president and & CEO of Heron Capital Corporation, a franchise management company that has developed such brands as Mini-Tankers® onsite diesel refueling (now rebranded as 4Refuel), PROSHRED®onsite paper shredding and recycling, and TWO MEN AND A TRUCK® a full-service moving, storage, and junk removal company. To learn more about Heron Capital Corporation, visit www.herity.com/capital or call John at 416-204-7553.
When I began my franchising career in the mid-70s, there was no internet, nor were there cell phones, personal computers, or fax machines.
As I reflect on this statement it is hard to believe, but it’s very true! Few, if any, post-secondary institutions had franchising as part of their core curriculum. While I learned much from books when completing my undergraduate and post-graduate degrees in economics, sociology, finance, and marketing, I was never officially introduced to the concept of franchising until my first “real” job at Dominion Food Stores. I never returned to school after completing my MBA; however, my education continued at an accelerated pace during a very exciting and rewarding career in franchising. Through the world of franchising, I came to understand the importance of embracing technology in business. Technology has developed at such an explosive rate and franchising has evolved and benefited as a result. I couldn’t imagine operating any business today without software, computers, the internet, the cloud, data warehouses, VOIP, and smartphones.
When asked to share some ‘Real Life Lessons’, I can speak to the relevance of technology in business today and the importance of using technology to create a sustainable business and competitive advantage. Technology in business is a growing necessity and as time passes, the business world will continue to become more advanced.
Are you and your organization keeping pace?
As president and CEO of TWO MEN AND A TRUCK® Canada, our organization welcomes and openly embraces technology. Technology has helped us deliver on our customer-centric mission statement which states that we “continuously strive to exceed our customers’ expectations in value and high standard of satisfaction.” Technology provides us with a new and more efficient approach to manage the business, making transactions faster and more convenient for our customers and employees. Operating improvements and efficiencies justify the investment. Technology helps us understand where we have challenges and where new opportunities exist. Our company is committed to being an industry leader and technology has helped us achieve that goal.
Like moving, the implementation of new technology can be very stressful for all involved including IT team members, users, management, and suppliers. Preparation, planning, communications, and genuine commitment from senior management are the keys to successful implementation.
At TWO MEN AND A TRUCK®, we understand the importance of ongoing training to ensure smooth implementation of these new technologies. We understand that after we implement a new technology, we’re not done. We need to keep reviewing features and functionality to help streamline processes and the user experience.
Technology has changed almost every aspect of our business in the last decade. This includes the way we interact with our customers, employees, and suppliers. Our proprietary MOVERS WHO CARE 2® operating system is the backbone of our technology infrastructure. Through MWC2, we capture and track every phone and web lead, create estimates, book moves and removals, generate digital work orders, close jobs, and assign trucks, packers, movers, and drivers with the goal of ensuring we arrive on time, with the proper supplies and equipment. MWC2 allows us to transfer important data to our accounting and payroll platforms and our data warehouse where we can analyze almost every aspect of our business.
In 2020, we implemented several new technologies as a result of COVID-19 concerns and our need to evolve. Using state-of-theart software programs customized for our needs, we are able to complete virtual tours of customers’ homes to create accurate estimates without our in-home consultants ever leaving their offices. Options are now available for customers across Canada to book their own moves 24/7, eliminating, if they prefer, the need to speak with a customer service representative during business hours. Additionally, we have implemented several new platforms allowing us to communicate more effectively with our customers using their preferred method of contact whether by phone, email, text, or chat.
While TWO MEN AND A TRUCK® is known as a professional full service moving, storage, and junk removal business, I often think of us as a technology-focused company.
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Franchise Disclosure In Uncertain Times: Best Practices for Franchisors
BY BLAIR A. REBANE AND ERIC C. LITTLE, BORDEN LADNER GERVAIS LLP
The COVID-19 pandemic has had a significant impact on businesses in almost every sector. For franchisors, managing the effects of the pandemic on franchise systems – which in many cases have been pervasive, complex, and multifaceted – has been challenging. On top of this, the effects of the pandemic and the steps that franchisors and governmental authorities have taken to address them raise disclosure implications which franchisors must consider carefully to ensure they are providing compliant disclosure to prospective or renewing franchisees.
For the majority of franchise systems, the effects of the pandemic have been mostly negative. Decreased revenues, mandatory or voluntary closures, changes to supplier and customer relationships and standard operating procedures have all taken a toll on franchise systems and made doing business more difficult. That said, there are some franchise systems that have experienced positive results in connection with the pandemic, due to increased demand for the products or services they offer. In either case, franchisors must consider whether the effects of the pandemic on their system have impacted any of the information contained in their current form of franchise disclosure document (“FDD”) or raise any new “material facts” that must be disclosed to prospective or renewing franchisees.
This article discusses some of the key items that franchisors should consider to ensure that their FDDs and disclosure practices address the effects of the pandemic on their franchise systems.
Reviewing and Updating Current Form of FDD
In many cases, the pandemic is likely to have implications for the accuracy and completeness of the prescribed information contained in a franchisor’s current form of FDD. Accordingly, franchisors should carefully review their current form of FDD to determine whether any of the information it contains has been rendered incorrect, is out-of-date, or is potentially misleading as a result of the effects the pandemic has had on their system. Franchisors should also consider whether any additional information needs to be added to their current form of FDD in order to completely and accurately disclose such effects. Below are examples of some of the key areas of the FDD that may need to be updated: • Any information given regarding earnings and operating costs – If the FDD provides any information regarding earnings or operating costs, that information must be carefully reviewed to ensure that it is complete, accurate, and up to date. Franchisors should take extra care in explaining the impacts the pandemic has had on the information provided – whether positive or negative – and how that information differs from the franchi-
sor’s pre-pandemic experience. Franchisors should also review the bases and assumptions underlying the information provided and ensure that they are accurately disclosed in accordance with the requirements of applicable franchise legislation. • Details of current locations and closures – The FDD should provide details of any mandatory or voluntary closures that were implemented in response to the pandemic. Franchisors should also ensure that the information provided regarding current franchisees and locations, and franchisees who have left the system, is up to date and reflects any changes in the network arising from or in connection with the pandemic. • Any changes to fees and payments collected by the franchisor – If franchisors have temporarily reduced, waived or deferred the collection of any fees or other payments from franchisees in response to the pandemic, details of those arrangements should be provided in the FDD. • Any changes to costs of establishing the franchise – For some franchise systems, the pandemic has had an impact on the costs that a franchisee is likely to incur in establishing the franchise. For example, some businesses have had to change their typical store layout or design requirements in order to accommodate social distancing requirements and implement protective barriers. Many businesses have also had to purchase personal protective equipment for their employees, which previously would not have been a required expense, and have incurred higher costs for hand sanitizer and cleaning products than they would have in the past. Franchisors should consider carefully how the pandemic and the steps they have taken to address it within their franchise system might have impacted the costs that a franchisee is likely to incur in establishing and operating their franchised business, and ensure that all such costs are accurately reflected in the FDD. • Any changes to required products, services, and suppliers –
The pandemic has created disruptions in many supply chains, as some suppliers have folded, others have been unable to meet the demand for their products or services, and shipping and delivery arrangements have been challenged and forced to adapt. The FDD should address any changes to the products and services that a franchisee is required or permitted to use in connection with operating their franchised business, as well as any changes to the suppliers they are required or permitted to obtain those products or services from. • Any changes to training or assistance offered by the franchisor and how it is provided – If the pandemic has caused any material changes in the training or assistance offered by
the franchisor and how it is provided to franchisees, those changes should be disclosed in the FDD. For example, if any new training is offered or required to be completed in connection with the pandemic or the measures the franchise system has adopted to address it, if any in-person training has been changed to virtual or online training, or if the locations or costs for any training have changed, franchisors should consider whether those changes need to be reflected in the FDD in order for the information provided to be complete, accurate, and up to date. • Changes to the terms of any financing offered by the franchisor – If the franchisor has modified the terms on which it offers any financing to prospective franchisees, or changed whether it offers financing at all, the details of these changes should be disclosed in the FDD.
Of course, the specific items that may need to be updated will vary from one franchise system to another, based on the experience of that system and its own response to the pandemic. Franchisors will need to think critically about their own FDD, and where updates may be needed to any of the information it contains.
Disclosure of New “Material Facts”
In addition to any updates to the prescribed information contained in a franchisor’s current form of FDD, franchisors should also consider whether there are any new “material facts” that need to be disclosed to prospective or renewing franchisees as a result of the effects of the pandemic on the franchise system. “Material facts” include any information about the franchisor or the franchise system that would reasonably be expected to have a significant effect on the value or price of the franchise to be granted or the decision to acquire the franchise. Below are some examples of information that might constitute a material fact in the context of the pandemic: • the overall impact the pandemic has had on revenues or operating costs within the franchise system; • any changes to standard operating procedures, methods for provision or delivery of products or services, or hours of operation within the franchise system; • temporary modifications or waivers of certain obligations under the franchise agreement or any other agreement relating to the franchise; • any known disruptions in the supply chain for required products or services, or any material changes in the pricing terms for such products or services, arising from or in connection with the pandemic; • any changes to build-out timelines or anticipated delays in relation to the construction, opening, and operation of the franchised business; • any industry-specific measures imposed by governmental authorities in response to the pandemic that are relevant to the establishment and operation of the franchised business; and • any site-specific material facts relating to a particular franchise being offered. demic that could potentially rise to the level of a material fact, franchisors should ensure that those developments are disclosed in the FDD.
Disclosure of “Material Changes”
For any prospective franchisees who have been given an FDD but have not yet signed a franchise agreement, franchisors should consider carefully whether any “material changes” have occurred since the FDD was provided, in connection with the pandemic or the steps that the franchisor or relevant governmental authorities have taken in response to it. A “material change” is a change in the business, capital, or control of the franchisor, or a change in the franchise system, that would reasonably be expected to have a significant adverse effect on the value or price of the franchise to be granted or on the decision to acquire the franchise. If a material change has occurred, the franchisor must provide the franchisee with a statement of material change as soon as practicable after the change has occurred and before the prospective franchisee signs the franchise agreement or makes any payment to the franchisor in relation to the franchise. Since the pandemic, the various responses to it, and its effects on franchise systems are all unfolding on an ongoing basis, and can change rapidly, franchisors must exercise extra diligence to stay abreast of these matters and ensure that any developments that could constitute a material change are disclosed to prospective franchisees in accordance with applicable franchise legislation.
Key Takeaways
The pandemic and its ongoing effects on franchise systems present significant disclosure challenges for franchisors. In order to stay on top of these challenges, the best practice is for franchisors to review their standard form of FDD often and ensure that it is updated promptly to reflect any developments associated with the pandemic that affect the accuracy of its contents or that potentially constitute new material facts regarding the franchise being offered. As the pandemic continues to unfold, franchisors should take extra care to ensure that every FDD that is provided to a prospective or renewing franchisee is entirely up to date, complete, and accurate, and that any material changes that arise after an FDD is given to a prospective or renewing franchisee are properly disclosed to the franchisee before they sign the franchise agreement or make any payment to the franchisor. While it seems that little is certain when it comes to the pandemic, its evolution, and its effects, one thing that is clear is that COVID-19 and the business environment it has created will be with us for many months to come. Accordingly, franchisors should ensure that their FDDs and disclosure practices are properly updated and aligned to ensure compliance with their statutory disclosure obligations.
ABOUT THE AUTHORS
Blair A. Rebane is a partner at Borden Ladner Gervais LLP (“BLG”) and the National Leader of the firm’s Franchise and Distribution Group. Eric C. Little is a partner in the Corporate Commercial Group at BLG, who practices corporate commercial law with an emphasis on franchising, licensing and distribution.
Legal Digest
BY DAVID SHAW AND EMILIE ATTIA, DALE & LESSMANN LLP
Alberta Court of Appeal Clarifies Calculation and Assessment of “Net Losses”
This case is an appeal from the Court of Queen’s Bench of Alberta’s decision to not award any rescission damages to the franchisee, 1777453 Alberta Ltd. (“117”). According to Alberta’s Franchise Act, RSA 2000, c F-23 (the “Alberta Act”), franchisees are entitled to be compensated by the franchisor (or its associate, as the case may be) for their net losses incurred in acquiring, setting up and operating the franchised business within 30 days of receiving a notice of the cancellation of the franchise agreement (Section 14(2) of the Alberta Act). 117’s calculation of its net losses that it incurred in acquiring, setting up and operating the franchised business equalled $200,394.27. After considering the expert evidence adduced by 117 and the franchisor with respect to the calculation of “net losses”, the chambers judge determined that $18,372 was the appropriate amount of damages, accepting the methodology of the franchisor’s expert witness. The significant discrepancy resulted from adjustments and excluded expenses that were attributed to the owners who provided services to the franchise at an above-market rate (comprised mainly of management fees, advertising, promotion costs, and accounting services). The chambers judge ultimately found that because there were profits earned from the business after the franchise agreement was cancelled “by virtue of having had the benefit of the franchise for over a year” (para 6) that exceeded 117’s losses, 117 was not entitled to any damages at all.
Relying on Hi Hotel Limited Partnership v Holiday Hospitality Franchising Inc, 2008 ABCA 276 (“Hi Hotel”), the chambers judge found that the “calculation of “net loss” […] may, in circumstances where the franchisee stands to receive a windfall, require the franchisee to account for profits after the rescission of the agreement” (1777453 Alberta Ltd v Got Mold Disaster Recovery Services Inc, 2019 ABQB 259 at para 69). Evidently, the chambers judge was concerned that franchisees use the statutory rescission remedy to claim and be awarded rescission damages under Section 14(2) of the Alberta Act, only to have the franchisor effectively fund the franchisee’s similar competitive business.
The Alberta Court of Appeal (“ACA”) found the chambers judge’s finding and analysis to be inconsistent with the purpose of Section 14(2) of the Alberta Act. Indicating that an award of net losses under Section 14(2) of the Alberta Act were akin to reliance damages and “is intended to return a franchisee who suffers net losses to the financial position the franchisee was in prior to entering the franchise agreement”, the ACA held that “net losses” are to be calculated as the “difference between the revenue generated by the franchisee during the currency of the franchise agreement and the expenses incurred to acquire, set-up and operate the franchised business during that same period of time” (para 28). The ACA clarified that the revenues and profits that are received by the former franchisee after the franchise agreement was rescinded should not be factored into the calculation of net loss unless such profits were, in fact, realized, or earned, during the term of the franchise agreement. The ACA found that that the windfall concern expressed in Hi Hotel was said in obiter and was not sufficiently explained to be relied on here.
In assessing the validity of claims for net loss, the ACA agreed with the chambers judge that an assessment of the reasonableness of expenses is required to determine whether the types of expenses being claimed fall within the scope of expenses that Section 14(2) of the Alberta Act attempts to remedy. The ACA found that expenses of services by the owners of the franchise at an above-market rate are not to be included in the “net loss” calculation. Nevertheless, in assessing the reasonableness of such calculations, the ACA found that for the purpose of Section 14(2) of the Alberta Act, depending on the sophistication of the parties, some deference may be awarded to business decisions with respect to expenses made early on in setting up a franchise. In particular, expenses that, with hindsight, the franchisee may not have incurred had they had more experience, should be allowed. The ACA found this analysis to be consistent with the Alberta Act’s attempt to balance power inequities of franchisee-franchisor relationships. Franchisees need not have “hindsight-aided assessment of the prudence of each and every expense incurred” (para 34). Rather, assessing net losses requires a flexible approach where good faith purchases in acquiring, setting up and operating the franchise during the term of the franchise agreement, as supported by evidence, will properly be included in the net loss calculation.
The flexible approach and added deference in assessing net loss underscores the significance of making proper and complete financial disclosure in franchise disclosure documents. Especially when dealing with first-time and inexperienced franchisees, franchisors in Alberta are put on notice that courts will be more protective of inexperienced franchisees by including certain expenses in the “net loss” calculation that they may not have otherwise incurred had they had more experience.
It should be noted that rescission damages under the Alberta Act are solely and exclusively for the net losses described above.
Conversely, the franchise legislation in Ontario (and the other Canadian jurisdictions with franchise legislation currently in effect) states that the franchisor must provide the following compensation to the franchisee within 60 days of the notice of rescission: (1) refund any money received from or on behalf of the franchisee, other than money for inventory, supplies or equipment; (2) purchase any remaining inventory that the franchisee had purchased pursuant to the franchise agreement at a price equal to the purchase price paid by the franchisee; (3) purchase any supplies and equipment that the franchisee had purchased pursuant to the franchise agreement, at a price equal to the purchase price paid by the franchisee; and (4) compensation for any losses that the franchisee incurred in acquiring, setting up and operating the franchise, less the amounts paid pursuant to (1) through (3). In the result, while there are no rescission damages at all under the Alberta Act in a case where the franchisee is profitable (and thus has no net losses), rescission damages are possible in the other Canadian jurisdictions with franchise legislation in effect as damages can be awarded under categories (1) through (3) above, even in cases where the franchise has been profitable.
To disclose or not to disclose
2619506 Ontario Inc. v. 2082100 Ontario Inc., 2020 ONSC 6817
The Superior Court granted a summary judgement motion brought by the Plaintiff franchisee, who served a notice of rescission under the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the “Act”) for inadequate disclosure in the franchise disclosure document (the “FDD”) delivered to it by the franchisor of the “Fit for Life” quick service restaurant franchise. The Plaintiff entered into a franchise agreement with the Defendant franchisor in April 2018. The Court recognized that the Court of Appeal has repeatedly emphasized that the purpose of the Act is to address an imbalance of power between franchisors and franchisees. Further, the Act protects the interest of franchisees through rigorous disclosure obligations on franchisors and strict penalties for non-compliance. In the result, the Court held that the Plaintiff was entitled to rescind its franchise agreement under subsection 6(2) of the Act. This subsection allows a franchisee to rescind its franchise agreement, without penalty or obligation, within two years of entering into a franchise agreement if the franchisor never provided the disclosure document required to be delivered to the franchisee under the Act.
In this case, the FDD only included unaudited financial statements from 2016. Pursuant to the Act and its regulations, disclosure documents must include either an audited or reviewed financial statement for the most recently completed fiscal year of the franchisor’s operations. The regulations under the Act (O. Reg. 581/00) include an exception where the previous year’s financial statements may be included in the franchisor’s disclosure document if less than 180 days have passed since the end of the most recently completed fiscal year of the franchisor and a financial statement has not yet been prepared nor reported for that year. With the FDD not disclosing any financial statements for 2017 or 2018, the Court found the FDD to not provide any meaningful financial disclosure to the franchisee. Following Raibex Canada Ltd. v ASWR Franchising Corp., 2018 ONCA 62, the Court held that the Defendant franchisor’s failure to provide its most recent financial statements rendered the FDD so deficient as to amount to a complete lack of disclosure. Thus, the Plaintiff was entitled to rescind its franchise agreement under subsection 6(2) of the Act.
On the issue of liability following a valid recession for prescribed losses pursuant to subsection 6(6) of the Act, the Court held that both Samuel Davis and Farhan Absar were “franchisor’s associates” within the meaning of the Act. Mr. Davis was the sole director and shareholder of the franchisor. Additionally, he was directly involved in granting the franchise to the Plaintiff and signed the disclosure certificate. In the case of Mr. Absar, the Court held that he was controlled by the Davis Group, which was another person who directly controlled the franchisor. Such determination was made on the basis of the fact that he testified (and as evidenced by his e-mail signature) that he was the Director of Franchising and Development of the Davis Group. The Davis Group, which was owned and controlled by Mr. Davis, included Fit for Life as one of its franchise systems. Additionally, Mr. Absar was an employee of Dakin News Systems Inc., the franchisor of INS Market, which was also part of the Davis Group. In these roles, Mr. Absar advertised for Fit for Life to find franchisee candidates and discuss their application.
The Court notes that, based on undisputed evidence, Mr. Absar met with the Plaintiff on two occasions to discuss the franchise application and provide the FDD. Since Mr. Absar made representations to prospective franchisees for the purpose of marketing the franchise, the Court held that in addition to Mr. Davis, Mr. Absar was also liable for recession damages as a franchisor’s associate.
This case serves as a reminder that disclosure documents must disclose franchisor financial statements for the most recently completed fiscal year of the franchisor that meet the requirements of the Act. Otherwise, the prospective franchisee will be entitled to rescind their franchise agreement within two years of entering into such agreement. Additionally, the broad definition of franchisor’s associates in the Act may impose personal liability for one who makes representations to grant, market or otherwise offer to grant the franchise even if they do not directly nor indirectly control the franchisor.
SCC declined to hear ONCA appeal: Pleadings constitute proper notice of recession
WORKS Gourmet Burger Bistro Inc., et al. v. 2352392 Ontario Inc., et al., 2020 CanLII, 92509 (SCC)
The Supreme Court of Canada (the “SCC”) dismissed an application for leave to appeal from the Ontario Court of Appeal (the “ONCA”) decision that a franchisee’s notice of rescission of a franchise agreement is sufficiently effected when contained in pleadings: 2352392 Ontario Inc. v. Msi, 2020 ONCA 237. The ONCA held that pleadings within a third party claim to franchisors met the notice requirements of subsection 6(3) under the Act on the basis of being (1) in writing and (2) delivered to the franchisor. Deciding otherwise, explained the ONCA, would be contrary to the stated intention of the Act that aims to balance the power inequities between franchisors and franchisees.
The ONCA’s approach, which favoured substance over form with respect to franchisees’ rights, remains good law in Ontario.
In the result, franchisees in Ontario are not required to provide notice before commencing litigation proceedings with respect to rescission damages. Effectively, the ONCA found that the notice and claim for rescission being simultaneous does not run afoul of the notice requirements under the Act and that the purpose of the notice of rescission is not to serve as a precondition to litigation. Critically, if pleadings for recession damages can be provided without prior notice, the opportunity for a franchisor to make the franchisee whole in the 60-day period allotted pursuant to subsection 6(6) becomes moot. For franchisees, although it is not necessary to provide a separate notice before filing pleadings, as the ONCA notes, the recommended procedure is still for the rescinding franchisee to provide a clearly worded written notice to the franchisor explicitly rescinding the franchise agreement. If the requirements with respect to recession damages under subsection 6(6) are not satisfied by the franchisor within 60 days of receipt of the notice of rescission, only then should a franchisee proceed with commencing an action against the franchisor for its failure to comply with the requirements of subsection 6(6) of the Act.
SCC Finds No Duty of Care: A loss for pure economic loss
1688782 Ontario Inc. v Maple Leaf Foods Inc., 2020 SCC 35
In a 5:4 split decision, the SCC decided not to recognize a novel duty of care owed by suppliers of shoddy goods to franchisees in connection with pure economic loss. The SCC majority shows a continued reluctance in recognizing claims of pure economic loss in the sphere of torts. The SCC majority held that a claim in negligence for pure economic loss in one of three categories (being negligent misrepresentation or performance of a service; negligent supply of shoddy goods or structures; and relational economic loss) is sufficient if the loss is caused by someone who owes a duty of care and is within a proximate relationship with the injured party. Unfortunately for Mr. Sub franchisees in this case, their exclusive supplier of ready-to-eat meats, Maple Leaf Foods Inc. (“Maple Leaf”), was found not to owe a duty to protect the franchisees from the loss of profits, goodwill, sales, nor for the replacement of shoddy supply as they lacked the requisite proximity. That is, not being close and direct enough, despite supplying the franchisees for almost two decades, having a helpline specifically for the franchisees, and the ready-to-eat meats being central to the franchisees’ menu and their operations.
Background In 2008, Maple Leaf recalled some of its products after learning that they contained listeria. Part of its recall included the voluntary recall of the products supplied to Mr. Sub in accordance with an exclusive supply agreement that required its franchisees to purchase only ready-to-eat meats produced by Maple Leaf though a distributor. The franchisees and Maple Leaf were linked indirectly through Mr. Sub, the franchisor, and never had a direct contractual relationship. The recalls resulted in a supply interruption, leaving Mr. Sub’s franchisees with no ready-to-eat meat supply for six to eight weeks. Mr. Sub’s franchisees, as part of a class action, sued Maple Leaf in negligence on the basis of pure economic loss. SCC Majority Judgment The SCC majority held that no duty of care was owed by Maple Leaf to Mr. Sub franchisees since the franchisees entering into a franchise agreement had the effect of “restrict[ing] their autonomy in ways that foreclose their ability to sue in negligent misrepresentation” (para 40). Proximity in cases of negligent misrepresentation or performance of a service is established where two factors are present: (1) the defendant’s undertaking; and (2) the plaintiff’s reliance. Reliance on the defendant’s undertaking that is outside the scope of the undertaking’s purpose, however, is not reasonable, nor foreseeable. The SCC majority reasoned that Maple Leaf’s undertaking to not make Mr. Sub’s customers sick or die, was precisely directed towards its consumers — not commercial intermediaries. Thereby, neither Mr. Sub franchisees, nor Mr. Sub as the franchisor, could have reasonably relied on Maple Leaf’s undertaking.
With respect to negligent supply of shoddy goods, the SCC majority reminds us that there is no right, without a contractual or statutory entitlement, to the quality and fitness of goods. The SCC majority agreed that the duty to recover costs in Winnipeg Condominium No. 36 v. Bird Construction Co., [1995] 1 S.C.R. 85 is limited to those costs required to avert “real and substantial danger” and not to repair defects nor prolong the continued use of goods. The SCC majority found that the franchisees have no right to be protected from the cost to avert loss of past and future sales, profits, capital value or goodwill. The fact that Maple Leaf recalled and destroyed the meat meant that they averted the real and substantial danger. No further recovery for other costs outside losses to avert real and substantial danger under tort law can be pursued. Where the defendant and the plaintiff are linked indirectly by a middleman by contract, it is important that allocating risk with respect to expectations, representations, and reliance are dealt with in such contracts. Otherwise, courts should not allow commercial parties to circumvent contracts to pursue losses in tort.
The SCC majority did not find any analogous category of proximity. Even though the duty between manufacturers and ultimate consumers who are physically injured as a result of negligent conduct is well-known (Donoghue v. Stevenson, [1932] A.C. 562), for the same conduct, such a duty relationship does not extend to intermediaries’ economic losses.
After going through a full proximity analysis, the SCC majority failed to find proximity between the parties. A contractual relationship is not determinative of a proximate relationship. Despite the exclusive supply agreement and the imbalance of power due to the standard form agreement, the SCC majority noted that the franchisees chose to enter into a franchise agreement and benefited from same. Effectively, the vulnerability of franchisees to supply chain negligence is not a tort issue but rather an issue of the operation of franchise systems. Insurance is an option available to allocate risk and reduce franchisees’ vulnerability but was not obtained in this instance. Ultimately, though the SCC majority did not want to make a presumptive finding as to whether the franchisor would approve an alternative supplier, previous case law suggests that parties who chose to forgo options that limit their vulnerability were unsuccessful in claiming tort losses.
Since the SCC majority found no proximity between the franchisees and the supplier, in accordance with the Anns/Cooper framework, the SCC majority failed to find a novel duty of care to recover losses that fall outside the costs of “averting real and substantial danger.”
SCC Dissent The dissenting SCC justices (the “Dissent”) found that proximity exists between Mr. Sub franchisees and Maple Leaf. Holding that the losses were also reasonably foreseeable, the Dissent found a novel duty “to take reasonable care not to place unsafe goods into the market that could cause economic loss to the franchisees as a result of reasonable consumer response to the health risk posed by those goods” (para 167).
The Dissent emphasized that there is no bar to recovery in case law with respect to economic loss for lost profits, sales, goodwill, and special damages for clean up and disposal that was incurred to mitigate the effects of Maple Leaf’s breach. The Dissent found that negligent misrepresentation with a novel duty of care captures the loss that results from the continued association with the supplier. The Dissent held that the potential for economic harm that may result from negligent production was reasonably foreseeable to a supplier like Maple Leaf.
The parties’ relationship was also found to be close and direct to such a degree that imposing a duty of care is just and fair on the basis of the following: (1) Maple Leaf knew the extent its products were imposed on the franchisee, being its exclusive supplier; (2) Mr. Sub’s menu centred around Maple Leaf’s meats; (3) Mr. Sub had a large account with Maple Leaf; (4) Maple Leaf had a direct franchisee contact hotline to deal with supply chain issues directly with the franchisees; and (5) a “three-way contractual matrix” existed between the franchisor, franchisee and supplier. In the view of the Dissent, all of these factors worked to strongly support a finding of proximity.
In the Dissent’s view, even if the contract was silent on the allocation of risk with respect to losses and recovery of unfit or unsafe products, such costs should not automatically oust the finding of a duty of care. Especially since franchisees have no reasonable prospect to negotiate the allocation of risk with their inferior bargaining power, the finding of a lack proximity, and therefore duty, is arbitrary and unfair. In fact, despite the long-standing relationship, Mr. Sub franchisees did not negotiate the renewal of their franchise agreement. Thereby, the integrated nature of Maple Leaf in this franchise system shows a particular dependence on the parties’ proximity.
The Dissent found that Maple Leaf’s duty to its consumers “is aligned with its duty to the franchisees,” (para 154). The scope of recoverable losses, however, are limited to the losses that result from the reasonable consumer response to the risk the supplier posed to the health of its consumers.
At the policy considerations step of the Anns/Cooper framework, the Dissent held that the following considerations of the proposed duty of care do not negate creating it: (1) the recoverable losses associated with the duty is not so great that manufacturers would fear disruptions from liability claims by intermediaries; (2) the argument with respect to a chilling effect on manufacturers making voluntary recalls is not compelling since food is extensively regulated in Canada; (3) imposing a duty would lead manufacturers to make more recalls; and (4) this will, in turn, aid manufacturers to mitigate losses from their own negligence. Furthermore, the fear that a novel duty of care would open the floodgates is irrational as negligence claims have multiple elements that have to be met to be successful.
While the Dissent felt comfortable in expanding recovery to find proximity and create a novel duty of care, the SCC majority was more concerned about clearly delineating where contracts end and torts begin with respect to pure economic loss. This hesitance translated in the SCC majority finding that no proximity exists between franchisees and their exclusive suppliers. While not excluding recovery in tort where no privity of contract exists, the SCC majority seems to be signalling to franchise systems and other contractual parties that are indirectly linked, that despite the interconnectivity of contracts, tort law will not come to your rescue. Even if manufacturers do not recall or dispose of their shoddy goods, there is still no proximate relationship. Ultimately, this decision reinforces the importance of allocating risk in contracts. Specifically, it is important to consider the factual matrix that surrounds the formation of a contract and to include terms that account for future potential losses that may result from third parties. Although this decision can be seen as a loss for the recovery of economic loss, the decision’s close split indicates a shift in the SCC’s approach and a small step towards potentially ultimately allowing recovery of pure economic loss in torts, as opposed to, or even in addition to in contracts.
ABOUT THE AUTHORS
David Shaw is a Partner and Business Lawyer that heads up Dale & Lessmann LLP’s Corporate and Commercial practice group. David regularly advises clients in a wide range of industries on franchise and distribution law matters, including the negotiation and preparation of master franchise agreements, area development agreements, single-unit franchise agreements, disclosure documents and related documentation. He also advises and assists clients with respect to system rebranding, regulatory compliance, franchise acquisitions and divestitures, and terminations. David is the Chair of the Executive of the Ontario Bar Association’s Franchise Law Section following previous years serving as its Vice Chair, Secretary and CPD Liaison. He is also a member of the Canadian Franchise Association’s Legal & Legislative Affairs Committee and its Legislation and Regulations Subcommittee and serves as the Chair of the Legal & Legislative Affairs Committee’s Editorial Advisory Subcommittee. David has presented seminars and workshops and facilitated roundtable discussions at many franchising conferences and has written numerous articles relating to franchising including co-authoring the “Structuring an Expansion to Canada” chapter of the ABA Forum on Franchising's Fundamental of Franchising, Canada textbook published in 2017. David can be reached at 416.369.3812 or dshaw@dalelessmann.com. Emilie Attia is an Articling Student at Dale & Lessmann LLP. She received her Juris Doctor from the University of Ottawa in 2020.
