The last year has seen significant developments and clarifications in franchise law, particularly in the context of franchise class proceedings. Recent cases have clarified a franchisor’s disclosure obligations and emphasized the importance of careful and clear drafting of franchise agreements and releases in order to minimize the risk of litigation further down the road. This article summarizes some of the key franchise cases and themes of 2015.
Enforceability of franchisee releases
In 2176693 Ontario Ltd. and 2139679 Ontario Inc. v. The Cora Franchise Group Inc., the Ontario Court of Appeal reaffirmed that franchisee rights under the Arthur Wishart Act (the AWA) cannot be readily released. The issue before the Court of Appeal in Cora was whether a general release of any and all claims against the franchisor could be read down and enforceable in respect of non-AWA claims. Applying s. 11 of the AWA, the Court affirmed the decision of the Ontario Superior Court that the requirement to sign a general release contained in the franchisor’s standard form franchise agreement was unenforceable. It also upheld the decision that it would be inappropriate in the circumstances to “read down” the clause to narrow it to the release of non-AWA claims.
Lessons learned from Canada’s first franchise class action trial
Last summer, the Ontario Superior Court released an important franchise law decision in the first franchise class action to go to trial in Canada. In Trillium v General Motors of Canada Ltd. (GMCL) and Cassels, Brock & Blackwell LLP (Cassels), more than 200 dealers who had accepted a “Wind-Down Agreement” to terminate their business brought a class action against GMCL, claiming that it had breached the AWA and franchise legislation in Alberta and P.E.I. Osler, Hoskin & Harcourt LLP was co-counsel for GMCL.
After a 42-day trial, the Court dismissed all of the dealers’ claims against GMCL. Some notable findings of the Court with respect to franchise issues include the following:
- If a franchise agreement contains an Ontario governing law clause, the AWA will apply even if the franchise operates in a province with its own franchise statute (this is consistent with Cullity J.’s 2009 decision in 405431 Ontario Ltd. v Midas Canada Inc., which was affirmed by the Court of Appeal).
- The duty of good faith and fair dealing does not amount to a fiduciary duty. What the “single duty” will require depends on the context in which the franchise is acting and what is considered reasonable conduct.
- In certain circumstances, the duty of fair dealing under s. 3 of the AWA may give rise to an obligation to disclose important and material facts. This duty of disclosure is separate from the statutory duty to deliver a disclosure document to a prospective franchisee prescribed by s. 5 of the AWA.
- The right to associate under s. 4 of the AWA does not require franchisors to facilitate the association with other franchisees or to do anything beyond refraining from activities that inhibit association: “It is a negative duty in the fullest sense.”
- A waiver or release by a franchisee of a right under the AWA will generally be void and unenforceable, unless the release is given by a franchisee with the advice of counsel in settlement of a dispute for existing and fully known breaches of the AWA. The form of release at issue in Trillium, which contained a “high degree of specificity” and was accompanied by a certificate of independent legal advice, met the conditions of what is known as the “Tutor Time exception.”
- There is no duty to provide a disclosure document to franchisees in respect of an agreement that does not relate to a grant of a franchise. The phrase “any other agreement relating to the franchise” in s. 5(1) of the AWA refers to ancillary documents signed by a franchisee in connection with entering into a franchise agreement such as an indemnity agreement, a general security agreement and sublease.
The decision is currently under appeal.
Franchisor obligations in Québec
In Dunkin’ Brands Canada Ltd. c. Bertico Inc., the Québec Court of Appeal relied on certain concepts contained in the Civil Code of Québec (which are not mirrored in the law of other Canadian provinces) to find that a franchisor had an implicit duty to provide its franchisees with technical support and cooperation in the aim of maintaining the relevance of the franchise relationship. This duty was found to exist irrespective of the express contractual language contained in the parties’ franchise agreements. The franchisor has sought leave to appeal to the Supreme Court of Canada.
Jennifer Dolman and Alexandre Fallon’s article in Canadian Lawyer discusses why Bertico has limited application outside the Québec context.
Clarification of scope of duty of fair dealing
In late 2015, the Ontario Court of Appeal heard an appeal of a judgment for the franchise class in a class action against Pet Valu by current and former Pet Valu franchisees based on allegations that Pet Valu failed to pass on the benefits of volume rebates granted by their suppliers to their franchisees. In January 2016, the Court of Appeal released its decision, allowing Pet Valu’s appeal and finding that it had not breached section 3 (the duty of fair dealing) of the AWA. The decision resulted in the dismissal of the class action in its entirety.
The Court of Appeal stated that any failure by the franchisor to disclose information in a disclosure document does not amount to a breach of section 3 of the AWA because that misrepresentation does not occur in the “performance and enforcement” of the franchise agreement as required by the clear wording of the AWA. As well, the Court of Appeal implicitly endorsed the earlier decision in another franchise class action, Spina v. Shoppers Drug Mart Inc., that held that franchisors do not have a duty to disclose information to franchisees so that franchisees can verify whether or not the franchisor is complying with the franchise agreement.