Forum Selection Clauses and Jurisdictional Challenges in British Columbia: The Case of Canstar

  • June 28, 2021
  • Rory McGovern

In the recent decision of Canstar Restorations Limited Partnership v. DKI Canada Ltd. (“Canstar”),[1] the British Columbia Supreme Court interpreted Section 12(1) of the Franchises Act, (the “BC Act”) which is similar to Section 10 of the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Ontario Act”). Section 12 of the BC Act and Section 10 of the Ontario Act read:

The BC Act

12 (1) If a provision in a franchise agreement purports to restrict the application of the law of British Columbia or to restrict jurisdiction or venue to a forum outside British Columbia, the provision is void with respect to claims arising under a franchise agreement to which this Act applies.[2]

The Ontario Act

10. Any provision in a franchise agreement purporting to restrict the application of the law of Ontario or to restrict jurisdiction or venue to a forum outside Ontario is void with respect to a claim otherwise enforceable under this Act in Ontario.[3]

In Canstar, the plaintiff/respondent franchisee, Canstar Restorations Limited Partnership (“CRLP”), commenced an action alleging breaches of contract by the Franchisor under the terms of a franchise agreement, among other things. The applicant/franchisor, DKI Canada Ltd. (the “Franchisor”), defended the action and counterclaimed against CRLP. Subsequently, the Franchisor brought an application pursuant to Rule 21-8 of the British Columbia Supreme Court Rules seeking an order staying CRLP’s action on the basis that there was a forum selection clause in the franchise agreement that stipulated that any dispute would be heard in and governed by the laws of the Province of Ontario.[4] The forum selection clause read as follows:

“This agreement and the rights, obligations and relations of the parties shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein. The parties agree that the Courts of Ontario shall have exclusive jurisdiction to entertain any action or other legal proceedings based on any provisions of this agreement. Each party hereby attorns to the jurisdiction of the Courts of the Province of Ontario.”[5]

CRLP responded to the Franchisor’s application and took the position that the forum selection clause in the franchise agreement was void pursuant to Section 12 of the BC Act.[6] This was the first case decided in British Columbia regarding the application of Section 12 of the BC Act.[7]

The parties agreed that the proper analysis of the validity of forum selection clauses is governed by the two-stage test that was set out in Z.I. Pompey Industrie v. ECU-Line V.V.,[8] which required:

1. The applicant franchisor must establish the forum selection clause is “valid, clear and enforceable and that it applies to the cause of action before the court.”

2. If so, the respondent franchisee must show “strong cause” why the Forum Selection Clause should not be enforced (the “Pompey Test”)

The Franchisor’s main argument was that the B.C. Court could not examine the applicability of the BC Act at the first stage of the Pompey Test arguing that, “as long as the forum selection clause is valid, clear, and enforceable, and applies to the cause of action, the burden shifts to Canstar to show ‘strong cause’ why this Court should not give effect to the clause.”[9] In response to the Franchisor, CLRP took the position that in order to analyze the first stage of the Pompey Test, the court is required to consider the applicability of Section 12 of the BC Act, as its application may ultimately render the forum selection clause unenforceable or inapplicable.[10]

The Franchisor further argued that the BC Act did not apply because there was no imbalance of power between the Franchisor and CLRP and that the parties were both sophisticated commercial entities.[11] The Court rejected this argument noting that there was no indication in the BC Act that it was not meant to apply in situations where there is no power imbalance. The Court reasoned that if the legislature intended to exempt businesses of a certain size or sophistication from the application of the BC Act, it could have done so.[12]

Applicable Legislation Takes Primacy Over Contractual Provisions

While acknowledging that Ontario jurisprudence was not binding on the Court, Justice MacDonald of the BC Supreme Court referred to the Ontario case of Di Stefano v. Energy Automated Systems Inc.,[13] which dealt with a motion to stay and the interpretation of Section 10 of the Ontario Act. In Di Stefano, Justice Code of the Ontario Superior Court of Justice noted that “where there is applicable legislation, the defendant has a preliminary burden to persuade the court that the forum selection clause applies and that the legislation does not apply.”[14]

Following Justice Code’s analysis, Justice MacDonald held that any legislation restricting jurisdiction, such as Section 12 of the BC Act, is to be considered at the first stage of the Pompey Test and that the burden to show that the legislation does not apply is on the party seeking to enforce the forum selection clause.[15] Justice MacDonald further noted that “to ignore potentially applicable legislation when considering enforceability would be contrary to the reasoning in Pompey that legislation takes precedence over forum selection clauses.”[16]

Does the BC Act Apply?

After determining the proper application of the Pompey Test, the Court then determined whether the BC Act applied and whether the business relationship between CLRP and the Franchisor was a franchise relationship. The definition of “franchise” under the BC Act reads as follows:

“franchise” means a right to engage in a business in which a franchisee is required by contract or otherwise to make a payment or continuing payments, whether direct or indirect, or a commitment to make that payment or those payments, to a franchisor, or a franchisor’s associate, in the course of operating the business or as a condition of acquiring the franchise or commencing operations, and

(a) in which

(i) the franchisor grants the franchisee the right to sell, offer for sale or distribute goods or services that are substantially associated with the franchisor's or the franchisor’s associate’s trademark, trade name, logo or advertising or other commercial symbol, and

(ii) the franchisor or the franchisor’s associate exercises significant control over, or offers significant assistance for, the franchisee’s method of operation, including building design and furnishings, locations, business organization, marketing techniques or training…[17]

In this case, the Franchisor conceded that the relationship between the parties met the first two parts of the test – the only issue was whether the Franchisor exercised “significant control” over or offered “significant assistance” to CLRP.[18] In analyzing this part of the test, the BC Court relied heavily on Ontario jurisprudence regarding this issue setting out the factors considered by the Ontario Court in Beer v. Personal Service Coffee Corp.:[19]

• Control over how the franchisee represents itself and how it uses the trademark;

• Control over standards for the identification of all users of the trademark;

• Requirements to purchase or lease equipment through the franchisor or with the franchisor’s consent;

• Requirements to attend initial and ongoing training and meetings;

• Ability to inspect samples of the uses of the trademark and the method of performance of the franchisee’s services in order to control the character and quality of the goods/services offered;

• Requirements to provide purchase and sale information upon request;

• Control over promotional pricing;

• Requirements to obtain insurance and name the franchisor as an additional insured;

• The right for the franchisor to change or modify the system, products, or trademark without notice or consent;

• The right to set quotas or minimum sale requirements; and

• Significant assistance in training, sales presentations and demonstrations, non-financial advertising assistance, and provision of printed materials such as brochures and pamphlets.[20]

The Franchisor pointed to the following facts in support of its position that it did not exercise significant control over the franchisee:

  • There was evidence that the Franchisor was an association of independent business owners and that the members of the association decide the rules governing the Franchisor’s business. Changes to membership structure, fee increases, new proposals are subject to majority votes by members;
  • The President of CLRP was, until recently, a member of the Franchisor’s Board of Directors;
  • The Franchisor did not enforce its national branding standards or its mandatory software requirements as against CLRP when it was not in compliance with same;
  • The Franchisor had no oversight or knowledge of how CLRP operated, whom it hired, or the investment structure of the company. It had no control of any employee or management compensation, did not set any strategic plans or financial targets and it did not assist with client growth objectives; and
  • There was a transfer of ownership in CLRP in 2016 but the Franchisor was not advised of the terms and was not involved in the discussions or negotiations regarding the transfer of ownership.[21]

Despite admitting that it trains members, the Franchisor took the position that all of the above factors demonstrated that there is no reasonable basis to assert that it exercised “significant assistance” or control of CLRP’s operations.[22]

In response, CLRP pointed to the following elements that showed the Franchisor exercised significant control or assistance to CLRP:

  • The Franchisor provided significant assistance by allowing CLRP to access the Franchisor’s national client base of insurers;
  • The Franchisor negotiated contracts with insurance clients on behalf of its members (including CLRP);
  • The Franchisor collected funds for services provided by CLRP, provided account receivable billing services, provided collections services if CLRP’s clients did not pay, operated a central emergency referral phone line on behalf of its members, and provided branding assistance to its members (including CLRP); and
  • The Franchisor exercised significant control over CLRP’s methods of operation as CLRP was bound to agreements with the Franchisor to adhere to all of the Franchisor’s policies and by-laws. This, in effect resulted in the Franchisor exercising significant control over: performance and quality standards; reporting and inspection requirements; insurance obligations; mandatory attendance at training or other meetings; control of pricing and the scope of services; marketing or branding standards and materials; and customer development and administration.[23]

Lack of Enforcement Does not Mean A Lack of Control

MacDonald J. noted that based on the jurisprudence, “control does not have to be total or all encompassing. It is not a bright line test. Control arises from a combination of factors determined by an inquiry into the facts and the evidence. It can be found on the basis of contractual rights and obligations.”[24] After analyzing the evidence adduced by the parties, MacDonald J. determined that on the basis of the record before him, there was a reasonable basis for finding that the parties were in a franchise relationship.[25] Notably, in response to the Franchisor’s position that it did not in fact exercise control, despite its contractual rights, MacDonald J. noted:

“Control is not simply based on exercising it. The threat of control, or the knowledge that the other party can exercise that control at any moment, is sufficient to establish the power between the parties. I do not accept that a lack of enforcement of the bylaws or policies translates into a conclusion that no significant control was exercised over Canstar.”[26]

The Court also found that there was a reasonable basis to show that the Franchisor provided significant assistance to CLRP by providing access to insurance company clients, negotiating contracts for CLRP and managing collections.[27] In light of the analysis the Court found that there was a reasonable basis to establish that a franchise relationship exists but qualified its assessment as not entirely determinative, leaving the ultimate determination to the trial judge.[28]

On the basis of the foregoing analysis, MacDonald J. found that the forum selection clause was unenforceable and void pursuant to Section 12 of the BC Act. After determining that the forum selection clause was unenforceable, the Court analyzed the forum non conveniens test noting that the burden to show that Ontario was “clearly more appropriate” fell on the Franchisor. Ultimately, the Court determined that the Franchisor failed in this burden and dismissed the Franchisor’s application.[29]

This case is significant as it was the first time the courts of British Columbia were forced to determine the application of Section 12 of the BC Act. In light of the decision in Canstar, it should be noted that there is some early consistency in the application of the BC Act and the Ontario Act regarding the treatment of forum selection clauses which seek to limit the jurisdiction of the courts of the provinces in which a franchise is operated. As a best practice, franchisors should be mindful that in order to avoid costly applications which challenge jurisdiction, it is advisable to ensure that any forum selection clause contained in a franchise agreement is consistent with the provincial statute that governs the franchise relationship.

 

[1] 2021 CarswellBC 1596, 2021 BCSC 951 [Canstar]

[2] Franchises Act, S.B.C. 2015, c. 35, at s. 12.

[3] Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000 c. 3, at s. 10.

[4] Canstar, at paras 1-4.

[5] Ibid at para 18.

[6] Ibid at para 5.

[7] Ibid at para 6.

[8] 2002 SCC 27.

[9] Canstar at para 29.

[10] Ibid at paras 34 and 68.

[11] Ibid at paras 39-42.

[12] Ibid at paras 39-46.

[13]  2010 ONSC 493.

[14] Canstar at para 87.

[15] Ibid at para 89.

[16] Ibid at para 90.

[17] Ibid at para 120.

[18] Ibid at para 121.

[19] Ibid at paras 122, citing Beer v. Personal Service Coffee Corp., 2005 CarswellOnt 3142 (SCJ) This list of cases is very helpful for counsel in analyzing the “significant control” element of the definition of a “franchise” under various provincial statutes across Canada.

[20] Ibid at para 128.

[21] Ibid at paras 130-136.

[22] Ibid at para 137.

[23] Ibid at paras 138-139.

[24] Ibid at para 141.

[25] Ibid at para 143.

[26] Ibid at para 46.

[27] Ibid at para 150.

[28] Ibid at para 152.

[29] Ibid at paras 159 to 195.There is an interesting analysis of the applicable principles for the forum non conveniens test in these paragraphs which may be of use to counsel considering bringing or responding to jurisdiction applications in Ontario and B.C.

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