The Ontario Superior Court of Justice has determined that companies and individuals associated with a franchisor must participate in arbitration under the franchise agreement.
The case involved two sets of franchisees of the respondent, Lick’s Franchising Inc. One group franchised a Lick’s restaurant in Oakville, while the other group entered into a franchise agreement with Lick’s for a restaurant in Mississauga. Both groups of franchisees gave notice of rescission in October of 2010. The franchisees and Lick’s agreed to submit the disputes to arbitration, as was required under the franchise agreement applicable to each restaurant franchise.
The franchisees also sought relief against a number of corporations, identified in the franchise agreements as affiliates of Lick’s, and the franchisees took the position that the affiliated corporations were required to submit to arbitration under the franchise agreements as well. The arbitration clause in the franchise agreements required arbitration of any dispute between the “parties” to the franchise agreements.
On motion by the franchisees, the Ontario Superior Court of Justice held that the affiliates of the franchisor are parties to the franchise agreements. The franchise agreements impose rights and obligations as between the affiliates and the franchisees. From the point of view of the franchisees, the franchisor had apparent authority to bind the affiliates as parties to the arbitration clause. Therefore, the court concluded that the affiliated corporations were called upon to participate in the arbitration proceedings.
The franchisees also alleged that two individuals, Denise Meehan and Frank Peruzzi, were principals of the corporate parties, including both Lick’s and the affiliated corporations. In addition, Meehan and Peruzzi were alleged by the franchisees to be “Franchisor Associates” under section 1(1) of the Arthur Wishart Act, the legislation that establishes franchisee rights in Ontario. Three of the affiliated corporations were also alleged to be Franchisor Associates under the legislation on the basis that they were controlled by Meehan and Peruzzi, who also controlled Lick’s. For the above reasons, Meehan, Peruzzi, and the corporations were all required by the court to submit to arbitration.
In past cases Ontario courts have held that where the franchise agreement contains an arbitration clause, disputes between franchisor and franchisee are to be determined, at first instance, by an arbitrator. It therefore makes sense that affiliates as well as Franchisor Associates should be compelled to submit to arbitration. The decision seems to serve the purposes of obtaining the most expeditious and low-cost resolution to disputes between franchisee and franchisor, while avoiding multiplicity of proceedings.
Richard Hayles, B.A., J.D.
Link: Adlakha v. Meehan, CanLII – 2011 ONSC 444 (CanLII)
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