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

In cases where one party to a franchise relationship is a U.S. entity, and the other a Canadian entity, the parties should be aware when litigating any disputes against each other as to the application of the laws of both the Canadian and American jurisdictions. The case below indicates that American courts are prepared to apply Ontario's Arthur Wishart Act in franchise disputes commenced in the U.S. concerning Canadian franchisees.

Chafchak v. Hungry Howie's Pizza & Subs Inc.

[2007] O.J. No. 734, Ontario Superior Court of Justice
T.L.J. Patterson J.
February 27, 2007.

The defendant franchisor, a US corporation, commenced an action for breach of the franchise agreement against the plaintiff, a Canadian franchisee corporation operating in Canada, in the Circuit Court of the County of Oakland in the City of Michigan (the "US Action"). The plaintiff retained Michigan counsel to defend it in the US Action. The defendant franchisor was awarded damages in the amount of $238,702.72 in the US Action. The plaintiff franchisee then commenced an action against its franchisor in Ontario for damages for negligent or fraudulent misrepresentation, loss of opportunity, and punitive damages (the "Ontario Action"). The defendant franchisor brought this motion to stay the proceedings on the grounds that the plaintiff's allegations were or could have been raised in the previous US Action and were therefore barred on the grounds of res judicata.

The franchisor argued that the matters raised by the plaintiff in the Ontario Action were previously dealt with in the US Action, and it was therefore improper to re-litigate the issues in Ontario court. The plaintiff relied on the provisions of section 3, 5 and 7 of the Arthur Wishart Act (the "Act") in the Ontario action. The defendant produced evidence that the plaintiff's counsel relied on the Act in its submissions in the US Action (specifically, section 9 and 10 of the Act relating to choice of law and forum clauses in franchise agreement). The court noted that the plaintiff, in the US Action, could have relied on sections 3, 5 and 7 of the Act in that action but failed to do so. The court went on to find that the court in the US Action was prepared to apply Ontario law and did in fact apply Ontario law when requested to do so by the plaintiff. The court in this instance was ultimately satisfied that the plaintiff did raise the issues in the US Action prior to commencing the Ontario Action, and in instances where it did not raise the issues in the US Action it could have and should have done so in that forum. The plaintiff's claim was therefore stayed on the basis of res judicata , in that the 3 part test for the staying of an action was met (the prior decision was a final decision pronounced by a court of competent jurisdiction; the prior decision involved a determination of the same issues or cause of action as sought to be advanced in the present action; and the parties to the prior proceeding were the same as in the present action).

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