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Chavdarova v. The Staffing Exchange: The accidental franchise

Author(s): Andraya Frith, Christine Jackson

Apr 14, 2016

A recent decision of the Ontario Superior Court of Justice found that a relationship between two parties will be deemed to be a franchise where the relationship meets the conditions set out in the definition of the term “franchise” in the Arthur Wishart Act (Franchise Disclosure), 2000 (the AWA), notwithstanding the terminology the parties have used to characterize the relationship. This case highlights the importance of being aware of the circumstances under which a relationship between two parties (particularly a licensor and licensee) may fall within the definition of a “franchise” under the AWA, triggering additional rights and obligations of the parties, even where one or both of the parties have not intended to enter into a “franchise agreement.”

The decision

The Chavdarova case arose out of a failed business relationship that led to a claim that the relationship between the defendant, The Staffing Exchange Inc., and the plaintiff, Lyudmila Chavdarova, was that of franchisor and franchisee, rather than licensor and licensee. On the basis that the parties were in a franchise relationship, the plaintiff brought a claim to enforce her (i) statutory right to rescind the franchise agreement under section 6(2) of the AWA; (ii) entitlement to unwind the franchise relationship under section 6(6) of the AWA; and (iii) entitlement to damages for the defendant’s failure to provide a disclosure document under section 7 of the AWA. Each party moved for summary judgment, with the sole issue in the case being the Court’s characterization of the parties’ relationship.

Justice J. Gray agreed with the plaintiff’s submission that pursuant to the AWA, all that needs to be established in order to characterize the parties’ relationship as that of franchisor and franchisee is

  • the payment of money to the defendant as a condition of commencing operations or in the course of operating the business;
  • the right to offer goods or services associated with the defendant’s trademark or trade name; and
  • [one party] exercises significant control over, or offers significant assistance in, [the other party’s] business.

The Justice then reviewed the two agreements between the parties, namely, the Certification and Training Agreement and the Brokerage License Agreement (collectively, the Agreements) and concluded that when both of the Agreements are read together the above criteria are met.

The Justice ruled that the sum of $29,500 plus HST paid by the plaintiff to participate in a training program constituted a payment as a condition of commencing operations under the Brokerage License Agreement, notwithstanding that the obligation to make such a payment was under the Certification and Training Agreement. While continuing a relationship with the defendant was not a requirement following training, it was not possible for a person to sign a Brokerage License Agreement with the defendant without undergoing the training. Additionally, under the Agreements, the plaintiff was required to make indirect payments to the defendant during the course of the relationship, constituting a payment of money to the defendant in the course of operating the business.

There was little doubt that the business operated by the plaintiff was substantially associated with the defendant’s trademarks and its trade name. In particular, the Brokerage License Agreement described the system purchased from the defendant as “a unique and proprietary system” and stated that “the [defendant] has developed, used and continues to use and control the use of certain proprietary interests, trademarks, logos, designs and trade names.” The Justice concluded that the entire relationship was premised on the identification of the plaintiff’s business with the defendant, its trade name and its trademarks.

Finally, the Justice ruled that the defendant exercised significant control over the plaintiff’s method of operation. The Brokerage License Agreement required the plaintiff to acknowledge “the necessity of operating the Licensed Business in strict conformity with the company’s standards and specifications.” Additionally, the defendant provided billing and invoicing services, collection services, office support, accounting support and many other services, which the court concluded constituted significant assistance by the defendant.

The claim was ultimately decided in favour of the plaintiff on the basis that the parties had a franchisor and franchisee relationship and the defendant had failed to meet its disclosure obligations under section 5(1) of the AWA. 

The Court found that the plaintiff was entitled to amounts under section 6(6) of the AWA as well as damages under section 7. In awarding the plaintiff judgment, the Court considered the following evidence from the plaintiff. The plaintiff

  • had purchased insurance, leased space, and purchased furniture and equipment;
  • was unable to obtain “meaningful employment” for a year; and
  • had paid the defendant $33,335 for training, supplies and equipment.    

The plaintiff was awarded judgment in the amount of $99,835. However, it is unclear from the decision which aspects of the award are in respect of section 6(6) of the AWA and which aspects are in respect to section 7. 

Implications and practical considerations

This case highlights the importance of structuring commercial relationships with an awareness of when a franchisor and franchisee relationship may be deemed to exist under the expansive statutory definition of a “franchise” in Ontario. Licensors must strike a careful balance between maintaining adequate support, guidelines and restrictions on the use of licensed intellectual property by a licensee in order to protect the consistency of the brand, while ensuring that the oversight does not give rise to obligations of a franchisor under the AWA. This case emphasizes the important point that it is not necessary for the parties to enter into a “franchise agreement” or to refer to themselves as “franchisor” and “franchisee” for a “franchise” to be deemed to have been created. Rather, where parties are not diligent, they may unintentionally trigger the application of the AWA and face statutory liability.