Yue Fang wanted to own a fast food restaurant in a good shopping center location. He had worked as a waiter and as a cook in the restaurant industry, but had no experience as a business manager. He felt that as a new entrepreneur, lacking experience and training, he would not be credible as a prospective tenant to a shopping centre landlord. He therefore concluded that he needed the assistance of an established franchisor to obtain a lease and set up his restaurant.
Mr. Fang met Paul Fredericks, who operated a franchise business specializing in Jamaican food. Fredericks had come up with the concept for a new fast food restaurant which would emphasize foods grilled in front of the customers. The new franchise chain was to be known as “Grill It Up”. He developed a set of trademarked “special sauces” for the restaurant and obtained a head lease for a restaurant site at a major shopping center. He made arrangements to install restaurant fixtures and furnishings at the site, and provided Mr. Fang with two weeks of training at an existing Grill It Up restaurant.
The parties entered into a sublease for the restaurant premises, along with a license agreement allowing Mr. Fang to use the Grill It Up trademarks and promotional materials. Under the license agreement, Mr. Fang was to pay a monthly royalty of $1,200. In addition, the parties entered into an asset purchase agreement under which Mr. Fang purchased the physical assets of the restaurant from Grill It Up.
Neither Mr. Fredericks nor Grill It Up provided Mr. Fang with a disclosure document at the time the agreements were signed. Several months later, as the store was nearing completion, Mr. Fredericks provided Mr. Fang with a draft “franchise agreement”. This agreement included financial obligations that were significantly more onerous for Mr. Fang, and he rejected it. The defendants then proceeded to open the store without Mr. Fang’s participation, even though Mr. Fang had paid deposits in excess of $110,000 under the asset purchase agreement.
The relationship between the parties fell apart, and Mr. Fang purported to rescind the agreements for failure to comply with the disclosure obligations imposed by the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the “Act”). He sued for the return of his deposits and other damages.
In their defense, Fredericks and Grill It Up took the position that the arrangement between the parties involved an agreement to purchase the assets of the restaurant business. Since Mr. Fang had refused to sign the franchise agreement, the relationship between the parties was not one of franchisor and franchisee, and the Act did not apply.
Under the Act, “Franchise” is defined as the right to engage in a business where the franchisee is required to make a payment or continuing payments to the franchisor in the course of operating the business or as a condition of acquiring the franchise.
In addition, the definition incorporates a two-part test. Under part one, the arrangement is a franchise if the franchisor grants the franchisee the right to sell or distribute goods or services associated with the franchisor’s trademark, business name, advertising, or other commercial symbol, and the franchisor exercises control over or offers significant assistance in the operation of the business.
Alternatively, the arrangement will be considered a franchise if it meets the second part of the two-part test: whether or not a trademark or other commercial symbol is involved, the business is a franchise if the franchisor grants the franchisee the right to sell or distribute goods or services supplied by the franchisor or the franchisor’s designated supplier, and the franchisor provides the franchisee with assistance in obtaining a location or securing a retail outlet.
The case came on for trial in Brampton before Corbett, J. The judge was clearly of the view that the fact that the document entitled “franchise agreement” was never signed was only one factor to be considered and would not be determinative: “…if the substance of the relationship is a franchise, it matters not whether the parties sign a document called a ‘franchise agreement’”.
Corbett, J. was of the opinion that the relationship between the parties met the statutory definition of a franchise under either branch of the two-part test:
“… Grill It Up granted the plaintiffs the right to sell and offer for sale food that was ‘substantially associated with’ the Grill It Up name and trademarks, that is, grilled foods, offered with special sauces, in a fast food restaurant setting. The defendants did not exercise control over the plaintiffs, but did “offer significant assistance” respecting the store construction, design, equipment, location, menu, training and branding.”
…
“Under the alternative definition of “franchise”, it is clear that the plaintiffs would not have to purchase all of their products from the defendants or from the defendant’s suppliers. It was not clear whether the plaintiffs would have to buy any goods from the defendants or their suppliers. However, the agreements do require the plaintiffs to offer products consistent with those offered by the defendant, both in terms of selection and quality. On balance, I conclude that the parties intended that the plaintiffs would purchase the special sauces from the defendants, or their designated suppliers, and would source the bulk of their supplies from designated suppliers. The second part of the alternative definition is satisfied, for the same reasons given for the first definition: the defendants obtained a site and designed and constructed a Grill It Up store for the plaintiffs.”
Since the defendants never provided any disclosure document, the plaintiff was entitled to rescind the agreements and to obtain a return of the deposits paid by Mr. Fang. In addition, the court allowed some $17,000 in out-of-pocket expenses incurred by Mr. Fang in setting up his business, along with over $14,000 in lost income arising from the fact that Mr. Fang left his employment in order to dedicate his full time and effort to establishing the franchise business.
Link: 1706228 Ontario Ltd. v. Grill It Up Holdings Inc., CanLII – 2011 ONSC 2735 (CanLII)
Brief informational summaries about commercial litigation matters in the courts of Ontario and other developments are periodically published on this website. They are intended to be a general comment or general discussion, not legal advice and should not be relied upon as legal advice. Should you require legal advice, please contact info@heydary.com or 416 972 9001.