A. Bill 45 – Healthy Menu Choices Act (Ontario)

In November 2014, the Ontario government introduced Bill 45, which is aimed at promoting transparency and health in the province by enacting the Electronic Cigarettes Act, 2014, amending the Smoke-Free Ontario Actand, of particular interest to franchisors, enacting the Healthy Menu Choices Act, 2014 (the “Act”).   The Bill received Royal Asset on May 28, 2015 and is scheduled to come into force on January 1, 2017.

The Act will require food service providers who are part of a chain of 20 or more locations in the Province of Ontario, and who operate under the same, or substantially the same name (regardless of ownership), to display the number of calories in all standard food and beverage items on their menus and displays. The calorie content, and other prescribed information (yet to be revealed), will need to be displayed for each flavour and size of the various items. The calorie content information must appear on any menus where the relevant food item is listed, on at least one sign in the restaurant, and on the food or beverage’s label or tag where the item is on display. The Act will also allow inspectors to scrutinize businesses for compliance. Failure to adhere to the rules will carry significant fines.

B. Update on British Columbia’s Franchise Legislation

In March of last year, the British Columbia Law Institute released its Report on a Franchise Act for British Columbia, recommending the adoption of franchise legislation by the province. From September 10, 2014 and December 10, 2014, the Government of British Columbia sought comments from the public and stakeholders on the proposed adoption of the statute. If legislation is enacted, it would be consistent with the legislation in Alberta, Manitoba, Ontario, New Brunswick and Prince Edward Island, by regulating the sale of franchises and requiring that franchise agreements be presented with pre-sale disclosure documents. A summary of the feedback received by the BC government was released on January 30, 2015 and can be found online at: http://www.ag.gov.bc.ca/legislation/shareddocs/franchises/stakeholder-input.pdf. Submissions were received from: the Canadian Franchise Association (CFA), the B.C. Chamber of Commerce (BCCC), a Special Committee of the B.C. branch of the Canadian Bar Association (Special Committee), one franchise consultant, four franchisees and a lawyer expert in franchise law.

Only the CFA, the BCCC, and the franchise consultant did not directly express their support for franchise legislation based on the Uniform Franchises Act. However, they did, together with the Special Committee, provide suggestions for improving the uniform statute. Ministry of Justice staff are currently reviewing the received feedback and preparing recommendations for the proposed legislation. 

CASE-LAW DIGEST

A. Volume Rebate Representations

The recent decision in 1250264 Ontario Inc. v Pet Valu Canada Inc. is a cautionary tale for franchisors about making volume rebate representations. A class of former franchisees of Pet Valu brought a class action suit against the franchisor, and sought to amend their pleadings to include a claim that the franchisor had made misrepresentations about the volume rebates available to franchisees. Ultimately, the court denied the request on the basis of prejudice to the defendant, but agreed that there was merit to their claim.

The court found that Pet Valu’s disclosure document and franchise agreement included representations that it possessed significant purchasing power, enabling it to take advantage of volume rebates from suppliers, and that this would translate into a meaningful benefit to franchisees. Despite the fact that Pet Valu passed along all of the rebates to its franchisees, the franchisor did not generate a meaningful measure of volume rebates, contrary to what was represented to franchisees. The franchisor’s insufficient purchasing power constituted a “material fact” under the Arthur Wishart Act (AWA), and failing to inform the franchisees of this truth amounted to a possible violation of the duty of good faith and fair dealing under s.3 of the AWA.

Ultimately, this case highlights the materiality of volume rebates and purchasing power, and takes a greatly expanded view of the duty of good faith in finding that a disclosure obligation exists not only under s.5 of the AWA, but also in the discharge of the duty of good faith and fair dealing. The court cautioned that the franchisors should at least provide information on the amounts of rebates received, retained, and shared, so franchisees can draw their own conclusions.  This decision is currently under appeal.

1250264 Ontario Inc. v. Pet Valu Canada Inc., 2015 ONSC 29.

http://www.canlii.org/en/on/onsc/doc/2015/2015onsc29/2015onsc29.html

B. Arbitration vs. Class Action (and the right to associate)

Three franchisees sought to bring a class action against the franchisor (Pillar to Post) for unilaterally converting its system from exclusive territories to non-exclusive territories. However,the franchise agreement contained an arbitration clause, which the franchisee maintained violated the franchisee’s right to associate pursuant to s.4 of the Arthur Wishart Act (AWA). The court rejected the franchisee’s argument and stayed the class action, ruling that the right to associate does not extend so far as to negate an arbitration clause. In particular, the court pointed out that s.5(1) of the AWA regulations specifically allows for parties to arbitrate and that the Arbitration Act (s.7(1)) directs the court to stay an action where a party tries to sue in respect of a matter which, by contract, is to be submitted to arbitration.

Despite the remedial nature of the AWA, the court found that it would go too far to give franchisees a unilateral right to choose between a class action and arbitration where the agreement includes an arbitration clause. Comparing this case to 405341 Ontario Ltd. v Midas Canada Inc. [2009] OJ No 4354 (Ont Sup Ct), in which the court struck down a release that prevented the franchisee from joining a class action, the court said that the arbitration clause in this case did not deny the franchisee any forum for access to justice.

The ruling here lends support to the success franchisors may find in including arbitration clauses in their agreements.

1146845 Ontario Inc. v Pillar to Post Inc., 2014 ONSC 7400.

http://www.canlii.org/en/on/onsc/doc/2014/2014onsc7400/2014onsc7400.html

C. Material Fact Litigation

A franchisee sought to rescind their franchise agreement pursuant to s.6(2) of the Arthur Wishart Act (AWA) on the basis of the franchisor’s failure to disclose litigation it had commenced against a former franchisee who was operating a competing business. As the AWA does not specifically require that litigation of this specific nature be contained in the disclosure document, the question was whether it constituted a “material fact” within the meaning of the legislation. The Ontario Court of Appeal ruled that if the undisclosed litigation does not fall within the type required to be disclosed pursuant to s.2(5) of the regulations, then whether or not it is material must be addressed on a case by case basis. Given that the undisclosed litigation in this case was not a potential liability to the franchise system, but rather a proactive measure for the benefit of the franchisees, it was not a material fact and did not deprive the franchisee of the opportunity to make an informed decision to invest. In agreeing with the motion judge, the court went on to state that the lack of disclosure in this case did not come close to the type of deficiency that would amount to “no disclosure at all” and the resulting entitlement to a rescission remedy under s.6(2).

Of note is the fact that while the franchisors were successful in this case, the decision lends support to the notion that undisclosed litigation of the sort not listed in the regulations may be reviewed for its materiality.

Caffé Demetre Franchising Corp. v 2249027 Ontario Inc., 2015 ONCA 258.

https://www.canlii.org/en/on/onca/doc/2015/2015onca258/2015onca258.html

D. Unfair & Unreasonable Releases

This case centres around the settlement of a class action suit between a group of franchisees and Quizno’s. The suit involved the alleged misconduct on the part of the franchisor for discouraging a food supplier from offering discounts to the franchisees. A Settlement Agreement was reached between the parties and brought forward to the court for approval. In rejecting the proposed settlement, the court ruled that the wording of the release had the potential to be interpreted in an overly broad manner. Had the release simply prevented the class members from bringing further suits against the franchisor based on the existing alleged misconduct and future continuations of those claims, then it would have been reasonable. However, the release was broad enough so that it could be interpreted as categorically releasing Quizno’s from all future claims of the type identified in the suit. In other words, it could prevent members of the class from bringing any claims against Quizno’s relating to the purchase, sale, distribution, promotion, or marketing of supplies. As such, the court rejected the settlement as being unfair, unreasonable, and not in the best interest of class members.

2038724 Ontario Ltd. v Quizno’s Canada Restaurant Corp., 2014 ONSC 5812.

http://www.canlii.org/en/on/onsc/doc/2014/2014onsc5812/2014onsc5812.html

E. Dunkin’ Donuts Revisited

In a decision released on April 15, 2015, the Québec Court of Appeal has, save for reducing the damages awarded, upheld the trial court decision from 2012 in which Dunkin’ Donuts was found liable for failing to protect and enhance its brand in the face of increased competition in the province from the likes of Tim Hortons.

On appeal, the franchisor claimed that the trail judge misinterpreted a clause in the franchise agreement regarding the franchisor’s commitment to enhancing and protecting the brand by transforming what was merely a “hoped-for result” into a binding contractual obligation. In rejecting the argument, the Appeal Court noted that the trial judge said nothing about a contractual duty to outperform the competition or guarantee a market share to franchisees. Rather, the decision marked the application of the existing good faith duty of a franchisor, identified in the earlier Quebec case of Provigo Distribution Inc. v Supermarché A.R.G. Inc., to require it to cooperate with franchisees and to respond and adjust to market conditions. The Appeal Court noted that the duty of good faith is not limited to a franchisor merely refraining from competing unfairly with their franchisees, which had been the main issue in the Provigo case.

Moving beyond the explicit language of the agreement, the court clarified that the franchisor’s obligation to protect the brand was not based only in the provisions of the franchise agreement, but also in an implied undertaking made to all franchisees. The right the franchisor had to insist that franchisees respect the standards of the system and the brand, brought with it a mirror obligation “owed to the network” to protect the brand. This obligation, whether explicitly stated or not, translated to a duty owed to each of the franchisees; in continuing to carry on business as usual in the face of competition and market challenges, the franchisor failed to meet its contractual obligations.

While this decision comes out of Québec’s civil law system, franchisees Canada-wide can still refer to this case to support their position that there is an additional or emboldened duty on the part of franchisors to protect the franchise system in the face of a changing market.

Dunkin' Brands Canada Ltd. v Bertico Inc., 2015 QCCA 625.

http://www.canlii.org/en/qc/qcca/doc/2015/2015qcca625/2015qcca625.html

F. The New Common Law Duty of Good Faith

In a unanimous decision released on November 13, 2014, the Supreme Court of Canada (SCC) has set down a new common law duty of good faith that applies to all commercial contracts. This is not to be confused with a duty of loyalty, a duty of disclosure, or a requirement that a party forego advantages flowing from the contact; rather, the obligation is simply not to lie to, or mislead, the other party about one’s contractual performance.

The surrounding facts of the case involved Bhasin and Hrynew, who were competing enrolment directors for Canadian American Financial Corp. (Can-Am). Looking to take over his competitor’s business, Hrynew had pressured Can-Am not to renew its dealership agreement with Bhasin and subsequently scooped his competitor’s sales agents. Bhasin consequently sued both Hrynew and Can-Am, claiming conspiracy and that Can-Am had failed to act in good faith.

In overturning the Alberta Court of Appeal’s decision in this matter, the SCC found that in repeatedly lying to Bhasin about, among other items, its intention to force him out, Can-Am had breached its duty to perform the contract honestly. Referring to it as a general organizing principal, akin to unconscionability, the SCC explained that this duty of honest performance cannot be waived by the parties or excluded by an entire agreement clause.

The relevance of this case to franchisors will likely be widespread, as it bolsters the duty of good faith found in existing franchise legislation, and imposes a new common law duty of good faith even in those provinces without such legislation.

Bhasin v Hrynew, 2014 SCC 71.

https://www.canlii.org/en/ca/scc/doc/2014/2014scc71/2014scc71.html