Potential court review of rescission by Fitness Source franchisees may provide case law in Ontario

When executives of The Forzani Group received a franchise rescission from the Toronto-area Fitness Source franchisee, they were at first surprised.

Second, Forzani attorneys said they realized, when checking into the relatively new franchise law in Ontario — one of only four of Canada’s 10 provinces with something similar — there wasn’t much case law to guide a resolution.

Forzani’s in-house legal counsel Mathieu St. Charles told SNEWS® the Arthur Wishart Act of Ontario indicates that a franchisee may rescind a franchise agreement within two years, as stated in our April 6, 2009, story, “Fitness Source Toronto shuts down as Forzani steps back in as owner-operator.” As a part of that rescission, franchisees may also claim losses and expect certain refunds of expenses.

However, the allowance of a rescission and subsequent refunds in the Wishart Act of 2000 is based on the allegation that a franchisor never issued a disclosure statement, issued one late, or did not issue one that is deemed complete. This is where the two sides seem to differ.

“In our opinion, the document was complete,” St. Charles said.

Forzani, with 227 franchise stores under various banners as of Feb. 1, 2009, did not formally accept the rescission letter, St. Charles said, which a franchisor has the option to do. However, both the company and the franchisees agreed Forzani and its subsidiary Sports Experts 2000 would take back the stores and the stores would continue to operate as corporate stores once the transfer is complete.

The franchisees — Mitchell Melnick, Frank Fallico and Peter Zambito — who took on a franchise of the nine Toronto-area Fitness Sources stores in April 2007 and delivered the franchise rescission letter to Forzani offices in March 2009, have declined further comment to SNEWS about the matter.

Meanwhile, the Fitness Source stores in question were shut down on March 31 after inventory was completed. Forzani let go all employees since they were franchisee employees but the company is now working to rehire employees so it can quickly reopen the stores.

St. Charles declined to state how much per store the former franchisees had claimed in refunds or expenses. The Wishart franchise disclosure act describes required refunds of “any money received from or on behalf of the franchisee, other than money for inventory, supplies or equipment,” as well as compensation “for any losses that the franchisee incurred in setting up and operating the franchise.” In addition, the act states that franchisors must purchase back inventory as well as supplies and equipment “at a price equal to the purchase price paid by the franchisee.”

Those refunds are to occur within 60 days, per the law, but St. Charles noted the company does not agree to the refunds.

“We didn’t accept the rescission notice since we don’t feel they have a right to do so,” he told SNEWS, “and we are not prepared to accept the amount the franchisee is claiming.”

He said Forzani and the franchisee have agreed to try to negotiate a resolution of their dispute out-of-court but, if unsuccessful, the court may end up reviewing the matter.

–Therese Iknoian