The recent decision of the Ontario Court of Appeal in 1250264 Ontario Inc. v. Pet Valu Canada Inc., 2016 ONCA 24 clarifies and narrows the scope of the duty of good faith and fair dealing imposed on franchisors under section 3 of the Arthur Wishart Act (Franchise Disclosure) (“AWA”) and expressly cautions against zealous judicial intervention in the framing and amendment of common issues in class action proceedings.

In a unanimous decision released last week, the Court of Appeal ruled in favour of the franchisor, Pet Valu Canada Inc. (“Pet Valu”), dismissing the remaining common issue in a class action proceeding commenced by a group of former franchisees alleging, among other claims, that Pet Valu breached its duty of good faith and fair dealing in the performance and enforcement of its obligations under the franchise agreement, contrary to Section 3 of the AWA, by failing to disclose information relating to its receipt and sharing of volume rebates.

Background

In a summary judgment decision released October 31, 2014 (discussed here), the motion judge, Justice Belobaba, dismissed five of the seven common issues certified at an earlier hearing, holding that Pet Valu had, in fact, passed on and shared with its franchisees volume rebate discounts received from its suppliers. The plaintiffs’ arguments in the course of the initial certification hearing focused on the extent of the defendant’s purchasing power and the significance of the rebates received. As a result, Justice Belobaba suggested that the plaintiff consider amending the statement of claim to add an eight and new common issue to address this issue. In December 2014, on the basis of the judge’s earlier comment, the plaintiff franchisees brought a motion to amend the statement of claim and add a new common issue centered around allegations that Pet Valu had misrepresented the nature and extent of its purchasing power and that it, in fact, did not receive “significant volume discounts” from suppliers.

In reasons released January 7, 2015 (discussed here), Justice Belobaba declined to allow the plaintiffs’ motion to amend on grounds of prejudice occasioned, in part, by his misapprehension of certain affidavit evidence and judicial intervention in encouraging an amendment of the statement of claim.

Justice Belobaba proceeded to deal with the remaining two common issues, which raised the question of whether the duty of good faith and fair dealing provided by s. 3 of the AWA could be used to impose ongoing disclosure from a franchisor (common issue 6), and what damages, if any, a franchisor would be required to pay for breach of such a duty (common issue 7). Justice Belobaba answered both questions in the affirmative, but only after reading language into common issue 6, which modified the originally cast question of whether Pet Valu received volume rebates to whether Pet Valu received a “meaningful or significant measure of volume discounts”. On this basis, Justice Belobaba concluded that the duty of good faith and fair dealing in s. 3 of the AWA did impose on Pet Valu an ongoing duty to disclose the amount of volume rebates it received as part of the performance and enforcement of its obligations under the franchise agreement, and that Pet Valu had breached that duty. Pet Valu appealed this decision. On January 14, 2016, the Ontario Court of Appeal found in favour of Pet Valu, dismissing the class action in its entirety.

The Court of Appeal Decision

The Court highlighted the following key findings in support of its decision to dismiss the action:

Greater Restraint Required When Judicial Intervention May Unfairly Prejudice One Party Over Another or Unduly Curtail the Adversarial Process

  1. The motion judge’s dismissal of the plaintiffs’ motion to amend the statement of claim to add new allegations and an 8th common issue was correct; to have ruled otherwise would have been fundamentally unfair and prejudicial to Pet Valu given that, but for the motion judge’s suggestion that the plaintiff amend its pleading, Pet Valu was in a position to secure summary judgment on all common issues. On this instance of judicial intervention, the Court expressly noted that “while the… judge in a class proceeding unquestionably plays an important (and challenging) role in guiding the evolution of the proceedings, that role does not permit him to descend into the arena and make a suggestion at the conclusion of an otherwise dispositive summary judgment motion as to how a plaintiff might improve its position…” [para. 38]
  2. The motion judge’s affirmative answer to Common Issue 6 and finding that Pet Valu had breached s. 3 of the AWA was founded on an impermissible amendment of that common issue. By reading in the words “significant volume discounts”, the motion judge recast the question and effectively “gave judgment on an issue that was never certified. Doing so was fundamentally unfair to Pet Valu.” [para. 49]. Further, the Court held that by unilaterally reading in language that modified the theory of liability without affording the parties the opportunity to make submissions resulted in the theory, which was ultimately flawed, not being “tested in the crucible of the adversarial process”. [para. 52]

Non-Disclosure of Material Facts Does Not Automatically Equate to Bad Faith and Unfair Dealing in the Performance of a Franchise Agreement

  1. The motion judge erred by applying the pre-contractual disclosure obligation imposed by section 5 of the AWA to an assessment of the duty of good faith and fair dealing imposed on parties under s. 3 of the AWA in the discharge of their obligations under a franchise agreement. The Court clarified that the duty of good faith and fair dealing imposed on Pet Valu by section 3 of the AWA arises in the “performance and enforcement” of the franchise agreement. If information relating to the amount of volume discounts was material and ought to have been disclosed, that obligation arose under s. 5 of the AWA, which requires franchisors to provide a disclosure document before a franchisee signs the franchise agreement, not under s. 3 of the AWA, which deals with the parties performance under the franchise agreement once it has been signed. The Court noted that there are remedies available to franchisees under ss. 6 and 7 of the AWA if a franchisor fails to disclose material facts or otherwise comply with its obligations under s. 5 of the AWA.

In making this important distinction, the Court emphasized that there was no contractual or statutory obligation to provide ongoing disclosure, nor could a finding of bad faith and unfair dealing be supported in the absence of any evidence being adduced by the plaintiffs that the alleged non-disclosure adversely affected them in any way once they became franchisees. Thus, non-disclosure of material facts in a disclosure document will not automatically equate to bad faith and unfair dealing in the performance of a franchise agreement.

In the instant case, the Court found that the motion judge effectively ruled that Pet Valu had breached s. 3 of the AWA by failing to disclose information necessary for the franchisees to verify whether or not Pet Valu had breached a representation under the franchise agreement that it received “significant volume discounts”, which was akin to the pre-litigation oriented duty of disclosure rejected in Spina v. Shoppers Drug Mart Inc., 2012 ONSC 5563.

Conclusion and Takeaways

The Court circumscribed the duty of fair dealing and good faith under the AWA, emphasizing that a breach of section 3 arises only in the context of the performance and enforcement of a franchise agreement: this does not include disclosure that should have occurred before the franchise agreement was signed when there is no contractual obligation to provide ongoing disclosure and the non-disclosure does not have an adverse effect on parties once they become franchisees. Section 3 cannot be used to burden franchisors with a duty to disclose information that simply verifies whether they are meeting their franchise agreement obligations.

The Court also provided guidance on the amendment of common issues in class action proceedings, cautioning motion judges in class action proceedings to exercise restraint in amending the statement of claim and rewording certified issues.

Case Information

1250264 Ontario Inc. v. Pet Valu Canada Inc., 2016 ONCA  24

Docket: C59956

Date of Decision: January 14, 2016