In July 2014, the Ontario Superior Court of Justice released its decision in 2296432 Ontario Ltd v. FOF Franchise Corp. The case involved an action by plaintiff franchisees for rescission of a franchise agreement and related agreements, as well as damages under the Wishart Actand damages for negligent misrepresentation. The defendants in the action moved to stay the proceeding and refer it to arbitration, pursuant to an arbitration clause contained in the agreement. At issue was whether the arbitration clause could be invoked by all parties to the action – not just parties to the franchise agreement – such that the action could be stayed in its entirety. Ultimately, the Court dismissed the stay motion, and in so doing provided a cautionary tale to franchisors regarding the limits of the arbitration clauses which may be contained in their franchise agreements.
For franchisors seeking the certainty of dispute resolution by way of arbitration, franchise agreements that limit rights to only the parties to the agreement (i.e., the franchisee and franchisor) may unintentionally serve to frustrate a franchisor’s ability to stay proceedings pending arbitration where those proceedings involve individual and/or corporate defendants who are not party to the franchise agreement and/or the arbitration clause itself. Franchisors who wish to preserve the ability to invoke arbitration clauses and stay civil proceedings should be aware of this risk, and consider carefully the language used in their franchise and arbitration agreements.
In this case, the franchisor 2296423 Ontario Limited (229 Ontario) entered into a franchise agreement with FOF Franchise Corp., carrying on business as Forest of Flowers (FOF), as franchisor. Kuhnel (a plaintiff in the action described below along with 229 Ontario), was not party to the franchise agreement, but guaranteed a sublease between a related corporate entity to FOF, Perfect Results Flower Corp. (PRFC) as sublandlord and 229 Ontario as subtenant. 229 Ontario and Kuhnel alleged that the disclosure document provided to them was materially deficient and delivered a Notice of Rescission of the franchise agreement, sublease and any agreements related to the agreement. 229 Ontario and Kuhnel then brought this action alleging the defendants FOF Franchise Corp., Wayne M. Watson, Judith Watson and Dennis Leroy, were liable to them for damages for rescission, negligent misrepresentation, further breaches of the AWA and punitive damages. The defendants moved to have the action stayed and the matter referred to arbitration.
Section 19.17 of the franchise agreement contained a dispute resolution clause which governed disputes between the franchisor and franchisee. Further, Article 2.8 of the franchise agreement stated that nothing in the franchise agreement was intended to confer rights upon any person other than parties as expressly indicated in the franchise agreement.
Superior Court of Justice Reasoning
The defendants to the action argued that the franchise agreement included affiliates, employees and other related parties of the franchisor, and moved for a stay of the entire action (including parties not expressly named in the franchise agreement) and referral of the action to arbitration. The Ontario Superior Court of Justice found that for a moving party to qualify for a stay under Section 7(1) of the Arbitration Act, the moving party must be another partyto the arbitration agreement.
The defendants to the action in this case, despite consenting to proceed by way of arbitration, could not unilaterally alter the specific terms of the franchise agreement on the fundamental issue of who was party to the agreement itself. As the franchise agreement “specifically and explicitly” limited the rights and remedies thereunder to the named parties (i.e., the franchisor and franchisee), there were parties to the action who were notpartiesto the arbitration agreement and could not, therefore, invoke the clause. The Court refused to exercise its discretion to send only the named parties (i.e., the franchisor and franchisee) to arbitration, citing concerns of delay, duplication of resources and inconsistent findings, and dismissed the motion for a stay.
Part of the October 2014 - Franchise Review