Arbitration Between Parties to Franchise Agreements in Canada

In most circumstances, a franchise agreement will include an arbitration clause to ensure that any disputes that arise may be resolved without costly and drawn-out litigation. Franchisors will often use their relatively powerful position vis-à-vis franchisees to require that arbitration be held under the laws of their home territory, and at a location that is inconvenient for the franchisee. As discussed in our earlier article about Uber Technologies Inc v Heller, this type of clause can put a potential complainant in the situation of having to arbitrate in a foreign jurisdiction: a challenging proposition for the most sophisticated of parties.

Avoiding Arbitration Clauses – The Arthur Wishart Act

In Ontario, a franchisee that wishes to avoid foreign arbitration must make some argument that the arbitration clause in their franchise agreement does not apply in the circumstances. The Arthur Wishart Act (Franchise Disclosure) 2000,[1] provides several provisions which may render an arbitration clause void. These include:

  • A right of action for damages for breach of the duty of fair dealing, against franchisors that violate a franchisee’s legislative right to associate with other franchisees, and where there are misrepresentations in disclosure by the franchisor (s 3(2), s 4(2), s 7);
  • Failure by the franchisor to provide disclosure under the Act before signing the agreement (s 5);
  • The operation of s 10 which renders any provision purporting to restrict the application of Ontario law, or to restrict jurisdiction to a venue outside Ontario, to be void with respect to any claim otherwise enforceable in Ontario; and
  • That any release or waiver by a franchiser of any rights under the Act

Court Treatment of the Arthur Wishart Act (Franchise Disclosure) 2000

 Courts in Ontario have interpreted this statue narrowly. Its purpose is to address to imbalance of bargaining power that can exist between a franchisor – generally a large, sophisticated commercial actor – and a franchisee that is usually an individual operating a small business who lacks the experience and financial clout necessary to negotiate the terms of their arrangement on equal footing. The obligations set out in the legislation are intended to correct this imbalance of bargaining power and may not be applicable in the same manner where the parties are both equally sophisticated.[2]

Section 10 pf the Act is of particular interest, since this raises the question of whether the section would completely void an arbitration clause selecting a forum and /or a law outside of Ontario, leaving the franchisee free to pursue a remedy in court, or whether it simply voids the extra-provincial requirement but leaves the franchisee with the duty to arbitrate the dispute as long as it occurs in Ontario and under Ontario law.

There is also the question of whether a franchisee has waived their statutory rights of action under the Act where they have agreed to an arbitration clause. The definition of “action” has not been interpreted by the courts in this context, but an arbitrator would be well-served to consider these issues when handling a dispute between parties to a franchise agreement.

If you require an arbitrator to resolve a dispute in a franchising agreement please click here to view our roster of arbitrators, or contact us for assistance in selecting an arbitrator.

[1] RSO 2000, c 3 [the Act]; other provinces also have legislation with similar objectives, including British Columbia’s Franchises Act (SBC 2015 c 35), Alberta’s Franchises Act (RSA 2000, c F-23), Manitoba’s Franchises Act (CCSM, c F156), New Brunswick’s Franchises Act (RSNB 2014, c 111), and Prince Edward Island’s Franchises Act (RSPEI 1988, c F-14.1)

[2] See, for example, 779975 Ontario Ltd v Mmmuffins Canada Corp (2009 CarswellOnt 3262, 62 BLR (4th) 137, (Ont SCJ) at para 30.