A brief summary as to what this case means for you:

It is important for franchisors to realize that one of the effects of the franchise disclosure legislation put in place in Ontario, P.E.I., and Alberta is that when a franchisee rescinds a franchise agreement for lack of disclosure, the franchisee is entitled to all of the costs it has incurred in the operation of the franchise, with the intent that the franchisee be put back into the place it was before it operated the franchise. This case below deals with a franchisor disputing the payment of certain amounts, and the court's clear reiteration that the franchisee is entitled to reimbursement of all costs.

PAYNE ENVIRONMENTAL INC. V. LORD AND PARTNERS LTD.

[2006] O.J. No. 273, Superior Court of Justice
J.C. Murray J.
January 25, 2006

This case was brought by the plaintiff franchisee against its franchisor for failure to comply with the disclosure requirements pursuant to the Arthur Wishart Act (Ontario). The plaintiff sought judgment and damages pursuant to section 6 of the Act, on account of payment provided to the franchisor to secure the franchise, supplies and equipment purchased, and in connection with losses incurred in operating the franchise. In November of 2000, the parties entered into a letter of intent and a deposit was provided to the franchisor. In 2002 the parties entered into the franchise agreement. The defendant franchisor did not know that what it was selling was in fact a franchise and therefore subject to the Act until 2004. At no time was the agreement referred to as a "franchise agreement" but as a "dealer network agreement". In November of 2004 the plaintiff submitted a formal notice of rescission pursuant to section 6 of the Act based on the franchisor's failure to provide disclosure. The defendant franchisor did not reimburse the franchisee for any of the amounts claimed, and as a result the franchisee brought this summary judgment motion in response.

The court found that there was no dispute that the Act applied to this relationship, that there was no disclosure provided to the franchisee in accordance with the Act, and that the notice of rescission was sent by the plaintiff within the requisite time. The issue that was in dispute was the interpretation of section 6(6) of the Act. The defendant franchisor argued that section 6(6)(d) provides for compensation to the franchisee for any losses the franchisee incurred in acquiring, setting up and operating the franchise, less the refund of the franchise money (6(6)(a)), less any equipment that the franchisee purchased from the franchisor (6(6)(c)). The defendant claimed that this meant that the court must look at the total losses claimed by the franchisee, then deduct from that the franchise fee, and then deduct the costs of equipment and inventory, and whatever amount was left over was the amount the franchisee was entitled to. The court disagreed with this interpretation and held that sections 6(6)(a) – (c) are losses for which the franchisee is entitled to reimbursement. Section 6(6)(d) is meant to cover any losses, aside from those already covered in 6(6)(a) – (c), to ensure that there is no duplication in the amounts recovered by the franchisee. The defendant's interpretation would result in the franchisor paying only the amounts calculated per 6(6)(d), which defeats the purpose of section 6 as a whole, and the plaintiff would not be compensated for the amounts set out in 6(6)(a)-(c). The purpose and objects of the Act are to put the franchisee in the position it was in prior to entering into the franchise agreement, and therefore, subsections (a) – (d) are to be read conjunctively.

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