Court or Arbitration for Franchise Disputes in Ontario

How much can Canadian franchise law learn from US law?  Most of Canada's franchise specific law is less than 5 years old, while US franchise specific law is much richer. One place Ontario franchise law could look to, as something to avoid, is the excessive cost of determining whether a franchise dispute should be decided by an arbitrator or by the Courts. 

Private arbitration at one time was thought of as a more streamlined and less costly avenue than public civil procedure.  In the  former, the parties pay the decision maker directly but opt of many of usual evidentiary rules found in the public courts.

For a number of reasons, private arbitration is no longer as attractive in the US for franchise disputes. Some of the objections that franchisees have for mandatory arbitration are:

a) having to travel out of state, possibly losing state franchise protection

b) using an arbitration service that depends for its commercial life on "pleasing" the franchisor, and

c) arbitrators who are not experienced with franchise law and reality.

As a result, there are legislative efforts designed to make mandatory arbitration illegal for many consumer contracts, including franchise agreements.  

In Ontario, a Canadian province with an FTC like franchise rule but with a private cause of action, many of the US objections to mandatory arbitration for franchise disputes are not present.

There are no major franchisor repeat players, as of yet.  Most commercial litigation would take place in Toronto, requiring the franchisee to travel in any event.  Finally, the vast majority of arbitrators in Ontario are retired judges who are going to deal with an arbitration much the same way a judge in the public Courts would.

As this community has seen, a great deal of legal resources—money—were wasted in the Coffee Beanery case trying to establish whether private arbitration or the public courts were going to hear the dispute.  

While there may be some serious concern for franchisees in the US about this jurisdictional questions, I doubt that the same is true for Ontario franchisees.

Unfortunately, for both franchisors and franchisees, a recent Ontario Court of Appeal decision MDG Kingston Inc. v. MDG Computers Canada Inc., 2008 ONCA 656 has made the question of jurisdiction more costly for both franchisors and franchisees.

In Ontario, like many US states, if a disclosure document is not delivered before the sale of a franchise, then there is a remedy of statutory rescission—the franchise fee, the price of supplies and inventory, and any losses have to be paid by the franchisor to the franchisee.

But who should decided whether the disclosure document was delivered, when there is an arbitration clause in the franchise contract?

On one hand, if the contract is rescinded, then arguably the franchise contract doesn't exist and the Courts can hear the matter.

On the other hand, whether a contract was properly rescinded should be decided by the arbitrator.

And in Ontario, the Arbitration Act allows the Court to hear a dispute if it can be decided in a summary manner notwithstanding the existence of an Arbitration clause.

So if the statutory rescission can be determined in a summary manner, one would think that the appropriate jurisdiction is the Court.

But, not so fast says the Ontario Court of Appeal. The failure to deliver a disclosure document could be a matter for summary judgment, but the damages which flow from that failure might require a trial.  Therefore, the entire matter should be referred to an arbitrator.

Frankly, this is an overly formalistic decision which does not help the franchise industry. When the failure to deliver a disclosure document can be determined in a summary manner, the public courts should be available to either the franchisor or franchisee.  Once liability has been determined, a reference for damages can be had by appointing an arbitrator as a referee, pursuant to the Courts of Justice Act.  Neither franchisor nor franchisee was well served by a decision which required the entire process to be re-done.