Rare Clarifications: 2313103 Ontario Inc. et al v. JM Food Services Ltd et al 2015 ONSC 4029

Introduction

In this article, we will revisit an older case that deals with two rare issues: the meaning of “grant” and “franchisee” under the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c.3 (the “AWA”).

These issues were clarified in a summary judgment motion heard by Justice Sean F. Dunphy on June 17, 2015, in which various shareholders of a “franchisee” sought to claim rescission. Justice Dunphy ultimately held that the remedy of rescission was not available to the shareholders, as they were not “franchisees”, that shareholders of a “franchisee” do not have rescission rights, and that “grant” refers to the grant of the right to carry on the business which emanates from the franchisor to the franchisee. Justice Dunphy further held that there are not multiple “grants” of franchises, and that a “grant” does not include a purchase or subscription of treasury shares from a corporation destined to operate a franchise, such that a shareholder would be entitled to claim rescission.

Background

JM Food Services Ltd. (“JM”) was the franchisor of a chain of pizza restaurants known as Freshslice Pizza. 

In the fall of 2011, the three individual plaintiffs, John Amos, Lisa Carvalho and Ian Paterson, entered into negotiations with JM to buy a Freshslice Pizza franchise in Ontario. The parties ultimately agreed that the three individual plaintiffs, through a holding company, 2313103 Ontario Inc. (“231”), would co-invest with JM on a 50/50 basis in a second company, which became F.S. Food Services Ontario Inc. (“FS”). FS would become the Ontario master franchisor of Freshslice.  FS was governed by a unanimous shareholders’ agreement. 

On February 6, 2012, the parties closed the transaction, executing:

1. a Master Franchise and Development agreement;

2. a contract to purchase business asset;

3. a unit franchise agreement; and

4. a sublease agreement.

None of the plaintiffs (231 or the three personal plaintiffs) were parties to the above agreements. FS, who was not a plaintiff or defendant in this action, was a party to each of them.

In late October 2012, FS began running out of funds and was no longer paying its suppliers in the usual and ordinary course. In early November, the individual plaintiffs abandoned FS, and on November 16, 2012, plaintiffs’ counsel sent a notice of rescission pursuant to section 6 of the AWA. 231 and the individual plaintiffs later sued JM. Again, FS was neither a plaintiff nor a defendant to this action.

Standing

The issue before the court on the motion was whether any of the plaintiffs were “franchisees” within the meaning of the AWA.

The term “franchisee” is defined in Section 1 of the AWA as:

… a person to whom a franchise is granted and includes,

1. a subfranchisor with regard to that subfranchisor’s relationship with a franchisor, and

2. a subfranchisee with regard to that subfranchisee’s relationship with a subfranchisor;

The term “grant” is also defined in Section 1 of the AWA as including:

… the sale or disposition of the franchise or of an interest in the franchise and, for such purposes, an interest in the franchise includes the ownership of shares in the corporation that owns the franchise;

The plaintiffs argued that, as shareholders of the corporation that “owns the franchise,” the plaintiffs had been “granted” a franchise and were thus franchisees.

Justice Dunphy concluded at paragraph 64 of his reasons for judgment that none of the plaintiffs were “franchisees” within the plain meaning of the AWA. He relied on the rules of statutory interpretation, which provides that “the words of an Act are to be read in their entire context and in their grammatical ordinary sense harmoniously with the scheme of the Act, the object of the Act and the intentions of Parliament."

The court also took into consideration the fact that none of the ongoing obligations of FS under the Master Franchise Agreement were guaranteed by the Plaintiffs, and all of the parties had treated FS, as opposed to 231 or any of the individual plaintiffs, as the franchisee. 

Justice Dunphy reflected that:

While the Act certainly contemplates that, in some circumstances, the acquisition of shares may constitute the grant of a franchise such that the shareholder is the franchisee for purposes of the AWA, the plaintiffs have adduced no evidence to justify such a conclusion in this case.  The obvious instance of such a structure would be where the franchisor sells shares in a corporation to whom a franchise has already been granted.  Clearly, in such circumstances, the Legislature intended to treat such a sale as being tantamount to an original grant of a franchise.

Justice Dunphy also held that acquiring shares in a corporation (in this case, the individual plaintiffs acquisition of shares of their holding company, 231), which subsequently acquires shares in a franchisee (in this case, a 50 per cent stake in FS) is at least one step removed from the concept of a “grant”, as defined by the AWA. With respect to the corporation, 231, Justice Dunphy stated at paragraph 67 of his decision:

As regards 231, the situation is little different. 231 acquired shares in FS which did acquire a franchise. Even if I were prepared to overlook the rather obvious objection that FS did not “own the franchise” until after 231 acquired its shares in FS (assuming as I do that 231 acquired shares out of treasury as part of the initial organization of the company), I have no basis on the evidence to conclude that the franchise was “granted” to them in the sense of a sale or disposition from JM.  I cannot see how any reading of the defined terms “grant”, “franchise” and “franchisee” can include a purchase or subscription of treasury shares from a corporation destined to operate a franchise. The definitions of “franchise”, “franchisee” and “grant” all make it clear that the grant of the franchise is a grant of the right to carry on the business which emanates from the franchisor to the franchisee. The obvious candidate for the “grant” of a franchise in this case was clearly the issuance of the MFA to FS and all of the parties treated it as such. There is no basis to argue for multiple instances of a “grant” of the same franchise with equal rights and standing.

In response to 231’s position that as a 50 per cent shareholder of FS, 231 could not have caused FS to claim rescission because the other 50 per cent shareholder, JM, might stop such action, Justice Dunphy noted that 231 could have brought a derivative action and sought leave of the court to do so, which 231 declined to do.

Conclusion

In conclusion, the plaintiffs were found not to be “franchisees” within the meaning of the AWA. As such, all of the plaintiffs’ statutory claims, which were based on them having standing as “franchisees”, were dismissed.