(Note: This article was also published on AdvocateDaily.com)
The Supreme Court of Canada is set to hear its first franchise case in more than four decades something that, coupled with significant recent decisions, could bring needed balance to the industry, franchise lawyer Peter Dillon tells AdvocateDaily.com.
“If franchise litigation were a wine, then 2015 would be a good year for franchisors,” says Dillon, partner with Siskinds LLP in London, Ont., noting that the Court of Appeal for Ontario sided with franchisors in several high-profile cases.
Together with a number of favourable Superior Court decisions last year, he says it all adds up to a trend “toward a more balanced application of franchise legislation in Ontario.”
Dillon says Canada’s legislative history in the realm of franchise law makes it “one of the most difficult jurisdictions in the world in which to franchise.”
“Personal liability of signatories to disclosure documents remains; open-ended disclosure of material facts remains; and an overly technical application of disclosure requirements in favour of franchisees subsists,” he says.
However, a number of major recent decisions have helped redress the balance, including the dismissal of two high-profile class actions.
The case 1250264 Ontario Inc. v. Pet Valu Canada Inc. involves a former franchisee of the pet supplies wholesaler. Despite selling the franchise at a considerable profit, they sued Pet Valu on behalf of 150 other former franchise owners, claiming the company failed to share volume rebates from suppliers with them. That claim was certified by a Superior Court judge back in 2011, but Ontario’s Court of Appeal recently dismissed the case, finding the franchisor had not breached its fair dealing obligations to the franchisee.
In 1146845 Ontario Inc. v. Pillar to Post Inc., Ontario Superior Court Justice Paul Perell stayed a proposed class action because the franchisees, who run home inspection businesses, had agreed to arbitrate all disputes under the franchise agreement. Section 4 of the Arthur Wishart Act, which gives franchisees the right to associate, could not override the arbitration clause, Perell found.
Dillon says the provincial appeal court had more good news for franchisors in its decision in Caffé Demetre Franchising Corp. v. 2249027 Ontario Inc., which involved a franchisee that attempted to rescind its agreement with the dessert store chain after it was required to perform significant upgrades to its store within a year of signing, and agree to a number of other franchisor policy changes.
The franchisee also claimed it was entitled to rescission because the franchisor failed to disclose its litigation with a nearby former franchisee. However, the appeal court concluded that Caffé Demetre’s litigation was not a “material fact” under the Act, since it was protective of its franchisees against a potential competitor.
“Although considerable danger still exists for franchisors and their counsel who omit to disclose facts, the implication of the Caffé Demetre decision is that helpful or positive facts will not be considered material, and therefore their omission will not be grounds for rescission. The result is a fairer and more level playing field, and that’s good for everyone involved in franchising,” Dillon says.
Dillon says Quebec franchise decisions are rarely of wider interest to franchise lawyers outside that province thanks to the court’s traditional reliance on Civil Code provisions, but he makes an exception for the “rather stunning” verdict of the Quebec Court of Appeal in Dunkin’ Brands Canada Ltd. c. Bertico inc.
“The decision is based on a plain interpretation of the contractual provisions, and legal concepts well known in the common law, such as good faith, and principles such as the ‘business judgment rule,’” Dillon says.
The appeal court’s decision dismissed the franchisor’s reliance on the business judgment rule, which is normally applied in cases relating to the personal responsibility of directors and officers to shareholders, concluding that Dunkin’ Brands was attempting to use the rule “without regard to its proper meaning in order to avoid ordinary liability for breach of contract to the Franchisees as independent businesses under the franchise agreements.”
The case is on its way to the Supreme Court of Canada after leave to appeal was granted, paving the way for the first franchise case at the nation’s top court since Jirna v. Mr. Donuts in 1971.
“Its outcome will be keenly anticipated,” Dillon says.