Franchise distinguished by assistance offered, control exerted

By Kirsten McMahon, Associate Editor

A recent decision stemming from a breach of agreement claim highlights that the definition of franchise can be a trap for the unwary, Toronto franchise lawyer Joseph Adler tells

“Even though you may not call it a franchise, it still may amount to one,” says Adler, a partner with Hoffer Adler LLP. “People who are not in the practice area may not be completely aware of what happens if they don't provide the disclosure document but unknowingly fall under the definition of a franchise.

“It's essentially giving a licensee a two-year money-back guarantee,” he adds.

The Manitoba Court of Queen’s Bench decision involved a plaintiff who responded to an online advertisement to sell a safety product manufactured and distributed by the defendants.

In 2015, the plaintiff entered into a distributor agreement that provided him with an exclusive sales territory and required him to attend occasional training sessions, operate in a professional manner and in accordance with accepted practices, maintain records, and aggressively market the product.

The plaintiff paid almost $25,000 as required by the agreement and was given some training materials, the decision states.

In 2017, upon breakdown of the business relationship, the plaintiff filed a statement of claim against the defendants, alleging breach of the distributor agreement and negligent misrepresentation.

He then filed an amended statement of claim, which added a claim pursuant to Manitoba’s Franchises Act and alleged that the defendants failed to provide him with the franchisor’s disclosure document as required under s. 5 of the Act, invoking a two-year right of rescission.

Adler, who was not involved in the matter and comments generally, says while the plaintiff’s motion was denied, what's most interesting is the court’s analysis of the definition of what constitutes a franchise.

“The judge considered the expansive definition of ‘franchise agreement’ in the Arthur Wishart Act and a 2011 Ontario case that found if the substance of the relationship is a franchise, it doesn’t matter whether the parties sign an agreement," he says.

“The judge considered the expansive definition of ‘franchise agreement’ in the Manitoba Act and a 2011 Ontario case that found if the substance of the relationship is a franchise, it doesn’t matter whether the parties signed a document called a franchise agreement," he says.

"Parenthetically, the Manitoba definition of a 'franchise' differs from that of the Ontario Arthur Wishart Act, insofar as it requires that the significant control or assistance be in relation to a business plan, which is something the Ontario Act does not require," Adler notes.

"It is because, in part, that no business plan was offered in this case, that the Manitoba court decided in favour of the licensor. Counsel therefore must be aware of these nuanced differences in the franchise legislation to provide adequate guidance to their clients," he says.

“In this case, the defendants were not found to fall into the definition of a franchise, but it highlights the arguments that could be made by a licensee,” Adler says.

Justice Sadie Bond laid out the two-part definition of ‘franchise’ under s.1 of Manitoba's Act, where clause (a) states the franchisor is required by contract or otherwise to make a payment, there's a trademark or logo license, and the franchisor exercises significant assistance or control over the operation under a business plan.

Under this part of the definition, Adler says the judge found the plaintiff made a payment of almost $25,000 and there was a trademark license, but found the training materials provided didn’t constitute significant assistance.

"Most franchise agreements will require weeks or months on end of training and assistance," he says. "Payments and trademarks are a routine part of many businesses but what distinguishes a franchise is the amount of assistance offered or control exerted."

Under the second part of the definition, clause (b) states that the franchisor grants the franchisee representational or distribution rights and provides location assistance. The plaintiff argued that the defendants provided location assistance by granting him exclusive sales territory but the judge disagreed.

“Granting exclusive sales territory does not, in my view, amount to providing location assistance as required by the definition in the Act,” Sadie wrote.

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