Franchise Disputes in Canada: The Case for Mediation and Arbitration

All Canadian franchise legislation is founded on two major principles that will be familiar to franchisors and counsel who operate in the United States and do not need extensive discussion here: pre-sale disclosure and a post-sale duty of fair dealing and good faith. If disclosure laws are violated by a franchisor, a franchisee can rescind the franchise agreement, in which case the franchisor is required to refund to the franchisee any money received from the franchisee, purchase any inventory, supplies or equipment the franchisee purchased pursuant to the franchise agreement at the original purchase price, and compensate the franchisee for any losses incurred in the operation of the franchise. These amounts can run into millions of dollars for a costly franchise, such as a hotel or full-scale restaurant. A breach of good faith finding also can be exceedingly costly to a franchisor, especially if the breach is deemed to affect many of its franchisee operators. Furthermore, litigation between franchisor and franchisee can severely damage a brand ' to the detriment of successful, satisfied franchisees ' or bankrupt a franchisee that loses the dispute. As a result, we are seeing in the franchise legal and business community many initiatives to direct franchise disputes into ADR at an early stage.

Model Regulation Includes Mediation Requirement

In 2005, the Uniform Law Commission of Canada (“ULCC”) released a report after nearly five years of consultative activity conducted by a specialized committee (of which the writer was co-chair) of lawyers, government officials, and industry participants heavily involved in the franchise community. The report included a model Uniform Franchises Act, a model Disclosure Regulation, and a model Mediation Regulation. The model Mediation Regulation included detailed provisions allowing either party to a franchise to require the dispute to be submitted to mediation. Of the three provinces that have adopted franchise legislation since release of the ULCC Report (Prince Edward Island, New Brunswick and Manitoba), New Brunswick has substantially adopted the mediation process included in the ULCC model legislation.

While Ontario franchise legislation (the Arthur Wishart Act (Franchise Disclosure), 2000) does not include a mediation process, the Ontario Rules of Civil Procedure now include a program of mandatory mediation in case-managed cases in various areas of Ontario, including Ottawa-Carleton, the City of Toronto, and the County of Essex. Certain actions are exempted from this procedure, including actions placed on the Commercial List in the Toronto region, and actions certified as class proceedings under the Class Proceedings Act, 2002. For all other actions in Ontario, the Rules of Procedure stipulate that a mediation session shall take place within 180 days after the first defense has been filed, unless the court orders otherwise.

Matters that may be listed on the Commercial List include applications, motions and actions which in essence involve, among other matters, “suitable complex cases under the Arthur Wishart Act (Franchise Disclosure), 2000.” While mandatory mediation does not apply to cases on the Commercial List, the Practice Direction establishing the Commercial List states that “resort to the techniques of alternative dispute resolution, where appropriate, is recognized and encouraged as an effective aid in the disposition of issues and matters on the Commercial List.” Further, “it is the duty of the case management judge and the obligation of counsel to explore methods to resolve the contested issues between the parties, including the resort to ADR, at the case conferences and on whatever other occasions it may be fitting to do so.” In addition, “at any time, particularly on consent of the parties, the case management judge may refer any issue for ADR, as appears appropriate.” Once a matter, or any issue with the matter, has been referred to ADR, counsel are required to “report to the case management judge at regular intervals as to the progress of the ADR proceedings. The timing of such report shall be agreed upon by counsel and the case management judge.” In other words, there is a recognized and encouraged initiative to attempt to resolve such disputes through mediation or arbitration prior to court proceedings.

Another fact which highlights government initiatives to promote mediation of franchise disputes is present in all provincial franchise legislation. Taking Ontario's legislation as an example, regulations under the Arthur Wishart Act (Franchise Disclosure), 2000 dealing with the content of disclosure documents provide that “if an internal or external mediation or other alternative dispute resolution process is used by a franchisor in disputes with a franchisee, the disclosure document must include a description of the mediation or other alternative dispute resolution process, and the circumstances when the process may be invoked.”

In addition, every disclosure document is required to include the following statement: “Mediation is a voluntary process to resolve disputes with the assistance of an independent third party. Any party may propose mediation or other dispute resolution process in regard to a dispute under the franchise agreement, and the process may be used to resolve the dispute if agreed to by all parties.”

One of the required items of disclosure under all provincial franchise legislation is a statement, including a description of details, regarding whether the franchisor or a director, general partner, or officer of the franchisor has been convicted of fraud, unfair or deceptive business practices, or a violation of a law that regulates franchises or business, or if there is a charge pending against the person involving such a matter. Further, a disclosure document must contain a statement, including a description of details, regarding whether the franchisor, the franchisor's associate or a director, general partner, or officer of the franchisor has been subject to an administrative order or penalty imposed under a law of any jurisdiction regulating franchises or business, or if the person is the subject of any pending administration actions to be heard under such a law. Finally, a statement ' including a description of details, indicating whether the franchisor or a director, general partner, or officer of the franchisor has been found liable in a civil action of misrepresentation, unfair or deceptive business practices of violating a law that regulates franchises or businesses including a failure to provide proper disclosure to a franchisee, or if a civil action involving such allegations is pending against the franchisee ' must be disclosed. However, disclosure regulations do not include any requirement to disclose whether a dispute has been submitted to ADR, or the results or settlement of any such dispute by ADR.

Franchisors would prefer not to have descriptions of these matters (especially civil suits), included in their franchise disclosure documents because of the negative effect on prospective franchisees and, in certain cases, because such actions may disentitle the franchisor from relying on an exemption from the requirement to disclose financial statements. If a franchise dispute is submitted to ADR and resolved without further court process, the resolution or decision will be confidential and likely not subject to inclusion in a franchise disclosure document (unless considered to constitute a “material fact” as defined in the legislation).

The Canadian Franchise Association (“CFA”), whose members represent more than 40,000 business outlets across Canada and include almost 500 franchise systems, adds another layer of support for ADR. CFA franchise system members are required to abide by the CFA's Code of Ethics in the general course of conduct and in carrying out their general policies, standards, and practices. Among the ethical franchising practices adopted by the CFA are that “both parties should make reasonable efforts to resolve complaints, grievances and disputes with each other through fair and reasonable direct communication, and where reasonably appropriate under the circumstances, mediation or other alternative dispute resolution mechanisms.”

Also, the CFA has established a program under which the services of a confidential and neutral third-party ombudsman are provided to help resolve problems as early as possible “in an amicable and expeditious fashion.” The ombudsman is a “neutral, independent resource who helps facilitate a resolution through discussing the issue and facilitating possible resolutions.” Of major importance to this program and ADR is that “where possible, the ombudsman will suggest and refer unresolved complaints and problems to alternative methods of dispute resolution.” There is no charge for the use of the CFA's ombudsman program, and all proceedings before the ombudsman are private and confidential. The senior CFA ombudsman is a certified ombudsman through the International Ombudsman Association, and all ombudsmen are recognized members.

In addition to government and industry association initiatives, independent mediators and arbitrators and ADR organizations have recognized the utility and application of ADR as a means of resolving franchise disputes. As of Jan. 1, 2012, ADR Chambers Canada, a highly recognized ADR organization that provides conflict-resolution services across Canada and internationally, established an expert panel of ADR neutrals (of which the writer is head) to specialize in franchise disputes: http://adrchambers.com/ca/expert-panels/franchising/.

Conclusion

All aspects of franchising point to the need and desirability of having disputes submitted to ADR and, in particular, to mediation whenever possible. Legislators, judicial administrators, and industry associations are encouraging this direction, at the same time as franchising occupies a major position in the retail economy of the country. With all of these factors present, and with the continuing interest of the general print and electronic media to report on franchise disputes, particularly those involving well-known names, it is almost a foregone conclusion that more franchise disputes will proceed to ADR in the future. What the ADR community can and should do in preparation for the increased utilization of ADR for franchise disputes is to ensure that a sufficient number of mediators and arbitrators are well-versed in the dynamics, business issues, and legal regulation of the franchise relationship.

Frank Zaid is a partner and co-chair of the Franchise & Distribution Group at Osler, Hoskin & Harcourt LLP, Toronto, Ontario ([email protected]), and a franchise mediator and arbitrator with ADR Chambers in Toronto, Ontario ([email protected]).

Canada enjoys a robust and growing franchising environment. According to the Canadian Franchise Association (www.cfa.ca/Publications_Research/Fastfacts.aspx), franchise businesses account for 40% of all retail sales in Canada. More than 78,000 franchise units across Canada directly employ more than one million people. Commensurate with growth, franchise-specific legislation has now been enacted in five provinces in Canada (in order of enactment, Alberta, Ontario, Prince Edward Island, New Brunswick and Manitoba). In addition, franchising is generally regulated in Quebec under that province's Civil Code, in which franchise agreements are considered to be contracts of adhesion.

With the introduction into Ontario of class action legislation in 1992 under the Class Proceedings Act, franchise disputes common to a distinguishable group of all or substantially all the franchisees within a specific franchise system have become the subject matter of very large and significant class actions. Companies with such prominent names as Petro Canada, Bulk Barn, A&P, Midas, Quiznos, Tim Hortons, Sears, Suncor, Pet Valu, and Shoppers Drug Mart, and even the Ontario government, have been or are currently involved in franchise class actions.

Given all this activity, one might question why alternate dispute resolution methods (“ADR”) such as mediation or arbitration are not used more regularly to try to resolve disputes. In this writer's opinion, franchise disputes are a natural fit for ADR, and more and more franchise disputes are likely to head to ADR in the future.

All Canadian franchise legislation is founded on two major principles that will be familiar to franchisors and counsel who operate in the United States and do not need extensive discussion here: pre-sale disclosure and a post-sale duty of fair dealing and good faith. If disclosure laws are violated by a franchisor, a franchisee can rescind the franchise agreement, in which case the franchisor is required to refund to the franchisee any money received from the franchisee, purchase any inventory, supplies or equipment the franchisee purchased pursuant to the franchise agreement at the original purchase price, and compensate the franchisee for any losses incurred in the operation of the franchise. These amounts can run into millions of dollars for a costly franchise, such as a hotel or full-scale restaurant. A breach of good faith finding also can be exceedingly costly to a franchisor, especially if the breach is deemed to affect many of its franchisee operators. Furthermore, litigation between franchisor and franchisee can severely damage a brand ' to the detriment of successful, satisfied franchisees ' or bankrupt a franchisee that loses the dispute. As a result, we are seeing in the franchise legal and business community many initiatives to direct franchise disputes into ADR at an early stage.

Model Regulation Includes Mediation Requirement

In 2005, the Uniform Law Commission of Canada (“ULCC”) released a report after nearly five years of consultative activity conducted by a specialized committee (of which the writer was co-chair) of lawyers, government officials, and industry participants heavily involved in the franchise community. The report included a model Uniform Franchises Act, a model Disclosure Regulation, and a model Mediation Regulation. The model Mediation Regulation included detailed provisions allowing either party to a franchise to require the dispute to be submitted to mediation. Of the three provinces that have adopted franchise legislation since release of the ULCC Report (Prince Edward Island, New Brunswick and Manitoba), New Brunswick has substantially adopted the mediation process included in the ULCC model legislation.

While Ontario franchise legislation (the Arthur Wishart Act (Franchise Disclosure), 2000) does not include a mediation process, the Ontario Rules of Civil Procedure now include a program of mandatory mediation in case-managed cases in various areas of Ontario, including Ottawa-Carleton, the City of Toronto, and the County of Essex. Certain actions are exempted from this procedure, including actions placed on the Commercial List in the Toronto region, and actions certified as class proceedings under the Class Proceedings Act, 2002. For all other actions in Ontario, the Rules of Procedure stipulate that a mediation session shall take place within 180 days after the first defense has been filed, unless the court orders otherwise.

Matters that may be listed on the Commercial List include applications, motions and actions which in essence involve, among other matters, “suitable complex cases under the Arthur Wishart Act (Franchise Disclosure), 2000.” While mandatory mediation does not apply to cases on the Commercial List, the Practice Direction establishing the Commercial List states that “resort to the techniques of alternative dispute resolution, where appropriate, is recognized and encouraged as an effective aid in the disposition of issues and matters on the Commercial List.” Further, “it is the duty of the case management judge and the obligation of counsel to explore methods to resolve the contested issues between the parties, including the resort to ADR, at the case conferences and on whatever other occasions it may be fitting to do so.” In addition, “at any time, particularly on consent of the parties, the case management judge may refer any issue for ADR, as appears appropriate.” Once a matter, or any issue with the matter, has been referred to ADR, counsel are required to “report to the case management judge at regular intervals as to the progress of the ADR proceedings. The timing of such report shall be agreed upon by counsel and the case management judge.” In other words, there is a recognized and encouraged initiative to attempt to resolve such disputes through mediation or arbitration prior to court proceedings.

Another fact which highlights government initiatives to promote mediation of franchise disputes is present in all provincial franchise legislation. Taking Ontario's legislation as an example, regulations under the Arthur Wishart Act (Franchise Disclosure), 2000 dealing with the content of disclosure documents provide that “if an internal or external mediation or other alternative dispute resolution process is used by a franchisor in disputes with a franchisee, the disclosure document must include a description of the mediation or other alternative dispute resolution process, and the circumstances when the process may be invoked.”

In addition, every disclosure document is required to include the following statement: “Mediation is a voluntary process to resolve disputes with the assistance of an independent third party. Any party may propose mediation or other dispute resolution process in regard to a dispute under the franchise agreement, and the process may be used to resolve the dispute if agreed to by all parties.”

One of the required items of disclosure under all provincial franchise legislation is a statement, including a description of details, regarding whether the franchisor or a director, general partner, or officer of the franchisor has been convicted of fraud, unfair or deceptive business practices, or a violation of a law that regulates franchises or business, or if there is a charge pending against the person involving such a matter. Further, a disclosure document must contain a statement, including a description of details, regarding whether the franchisor, the franchisor's associate or a director, general partner, or officer of the franchisor has been subject to an administrative order or penalty imposed under a law of any jurisdiction regulating franchises or business, or if the person is the subject of any pending administration actions to be heard under such a law. Finally, a statement ' including a description of details, indicating whether the franchisor or a director, general partner, or officer of the franchisor has been found liable in a civil action of misrepresentation, unfair or deceptive business practices of violating a law that regulates franchises or businesses including a failure to provide proper disclosure to a franchisee, or if a civil action involving such allegations is pending against the franchisee ' must be disclosed. However, disclosure regulations do not include any requirement to disclose whether a dispute has been submitted to ADR, or the results or settlement of any such dispute by ADR.

Franchisors would prefer not to have descriptions of these matters (especially civil suits), included in their franchise disclosure documents because of the negative effect on prospective franchisees and, in certain cases, because such actions may disentitle the franchisor from relying on an exemption from the requirement to disclose financial statements. If a franchise dispute is submitted to ADR and resolved without further court process, the resolution or decision will be confidential and likely not subject to inclusion in a franchise disclosure document (unless considered to constitute a “material fact” as defined in the legislation).

The Canadian Franchise Association (“CFA”), whose members represent more than 40,000 business outlets across Canada and include almost 500 franchise systems, adds another layer of support for ADR. CFA franchise system members are required to abide by the CFA's Code of Ethics in the general course of conduct and in carrying out their general policies, standards, and practices. Among the ethical franchising practices adopted by the CFA are that “both parties should make reasonable efforts to resolve complaints, grievances and disputes with each other through fair and reasonable direct communication, and where reasonably appropriate under the circumstances, mediation or other alternative dispute resolution mechanisms.”

Also, the CFA has established a program under which the services of a confidential and neutral third-party ombudsman are provided to help resolve problems as early as possible “in an amicable and expeditious fashion.” The ombudsman is a “neutral, independent resource who helps facilitate a resolution through discussing the issue and facilitating possible resolutions.” Of major importance to this program and ADR is that “where possible, the ombudsman will suggest and refer unresolved complaints and problems to alternative methods of dispute resolution.” There is no charge for the use of the CFA's ombudsman program, and all proceedings before the ombudsman are private and confidential. The senior CFA ombudsman is a certified ombudsman through the International Ombudsman Association, and all ombudsmen are recognized members.

In addition to government and industry association initiatives, independent mediators and arbitrators and ADR organizations have recognized the utility and application of ADR as a means of resolving franchise disputes. As of Jan. 1, 2012, ADR Chambers Canada, a highly recognized ADR organization that provides conflict-resolution services across Canada and internationally, established an expert panel of ADR neutrals (of which the writer is head) to specialize in franchise disputes: http://adrchambers.com/ca/expert-panels/franchising/.

Conclusion

All aspects of franchising point to the need and desirability of having disputes submitted to ADR and, in particular, to mediation whenever possible. Legislators, judicial administrators, and industry associations are encouraging this direction, at the same time as franchising occupies a major position in the retail economy of the country. With all of these factors present, and with the continuing interest of the general print and electronic media to report on franchise disputes, particularly those involving well-known names, it is almost a foregone conclusion that more franchise disputes will proceed to ADR in the future. What the ADR community can and should do in preparation for the increased utilization of ADR for franchise disputes is to ensure that a sufficient number of mediators and arbitrators are well-versed in the dynamics, business issues, and legal regulation of the franchise relationship.

Frank Zaid is a partner and co-chair of the Franchise & Distribution Group at Osler, Hoskin & Harcourt LLP, Toronto, Ontario ([email protected]), and a franchise mediator and arbitrator with ADR Chambers in Toronto, Ontario ([email protected]).