The case of Al-Harazi v. Quizno's Canada Restaurant Corp. concerned the hearing of motions for certification, approval of a settlement and approval of class counsel's fees, pursuant to the Class Proceedings Act, 1992,S.O. 1992, c. 6 (CPA) . The action related to franchise fees paid by class members to Quizno’s. The class consisted of all persons who had signed franchise agreements with Quizno’s within a five-year window and who had not obtained a site to operate a restaurant as of the date of the execution of the settlement agreement.
The franchise agreements signed by each class member granted a right to establish and operate a Quizno’s restaurant. Each agreement provided that Quizno’s must approve sites for the location of the restaurants and that the franchisees must secure sites no later than one year from the date the franchise agreement was signed, with a possible 3-month extension. On signing the franchise agreement, each franchisee was obliged to pay a fee of $25,000 for the first site and $15,000 for each additional site. The franchisor asserted that, pursuant to the franchise agreement, these amounts were not refundable in the event that sites were not obtained within the 12 or 15 months required
Right of Recission Claimed
Class members alleged that they were entitled to rescission of the franchise agreements on the basis that Quizno’s had never delivered a "disclosure document" within the meaning of the statute. This claim was based on an allegation that the documents purporting to be such failed to include contents required by the statute and associated regulations. The cause of action pleaded was limited to the particular breaches of the statute because of difficulties that would arise in satisfying the statutory requirements for certification under the CPA if other claims were pleaded.
The franchisor rejected the franchisees’ claims based on its interpretation of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000 (Act), and asserted that it was clear in the franchise agreements that the franchisees were obligated to find sites for their restaurants. The franchisor denied that the disclosure documents were derelict in any material respect, or that it was derelict in assisting franchisees to find suitable sites. Limitation Periods The franchisor was prepared to rely, in particular, on the limitation periods in the statute that apply to claims for rescission for failure to provide a compliant disclosure document. Section 6(1) of the Act provides that, if the disclosure document provided is deficient in its contents, the franchisees may rescind the franchise agreements "no later" than 60 days after receipt of the disclosure document. Section 6(2) provides that, if no disclosure document has been provided, the franchisee may rescind the franchise agreements "no later" than two years after the agreements were entered into. Section 6(3) provides that a notice of rescission shall be delivered in writing to the franchisor. It was not disputed that very few (if any) such notices were delivered by class members and that many class members had entered into the franchise agreements more than two years before the commencement of the action.
The franchisees were prepared to argue that no franchise agreements within the meaning of section 6 had been finalised by the class members because an essential part of the franchise agreement was missing – namely, a contract for an operational restaurant site. This argument was contested by Quizno’s counsel. In addition to possible defences on the merits, the franchisor also intended to challenge the claim to certify the proceedings on the grounds that the common issues would be overwhelmed by individual issues relating to the dealings between Quizno’s and each franchisee.
An agreement in principle for a settlement was reached which provided class members with two options. The first option entitled class members whose limitation periods had not lapsed under the Act to a refund of 50% of the total franchise fee. Class members who had failed to serve a notice of rescission under the Act within the limitation period would receive a partial refund of 25% of the fee. The second option entitled each class member to elect to remain a Quizno’s franchisee with Quizno’s approval. If approved, the class member would receive a credit in the amount of $26,630 towards the purchase price of equipment and supplies to open a restaurant.
A number of class members voiced strong objections to the proposed settlement and asserted their willingness to act as plaintiffs if it was not approved and the proceedings continued. Other putative class members indicated that they would prefer to take the financial benefits under the settlement and put the dispute with Quizno’s behind them.
Approval of Settlement and Appointment of Administrator
The court found that the objectors’ main issue was a question of principle – that Quizno’s should not be permitted to walk away from the litigation while retaining the greater part of the franchise fees it had received. The court rejected this approach and held that an objective and rational assessment of the pros and cons of the settlement was required. The court was satisfied that the settlement should be approved as fair and reasonable and in the best interests of the class.
The court noted that its approval of the settlement did not bind the objectors to its terms. They had the right to opt out and commence proceedings, taking a stand on the question of principle they had identified without denying to other class members the financial benefits contemplated by the settlement. The court also found that the smaller partial refund available to those who entered into their franchise agreements and failed to serve a notice of rescission within the limitation period was fair given the limitations defences available to Quizno’s in those cases.
In determining who should administer the settlement, the court held that, despite the ill feeling that existed between many of the class members and Quizno’s, the nature of the benefits provided, the continuing participation of class counsel and the provisions for arbitration and appeals outweighed concerns about the appointment of Quizno’s as the settlement administrator.
Certification of Class Action
The court found that the requirements of section 5(1) of the CPA were satisfied for the purpose of certification conditional on approval of the settlement. The court held that the questions of statutory interpretation involved were novel and that it was not plain and obvious that the franchisees had no chance of success on the cause of action they pleaded. The class definition was likewise acceptable to the court. It employed objective criteria, was not unnecessarily broad and did not beg the merits of the plaintiffs' claims. It also had the necessary commonality.
The court identified an additional common issue – whether the commencement of the limitation periods in Section 6(1) and 6(2) of the Act was affected by the principle of discoverability.
Finally, the court found that access to justice would be achieved by a class proceeding; individual proceedings would be prohibitively expensive for many of the class members and judicial economy and behavioural modification were also likely to be advanced via a class proceeding. As certification was required only for the purpose of the settlement, the court felt that this precluded problems of manageability relating to any individual issues. On this basis, the court found that the provisions of the settlement satisfied the requirement of a litigation plan in section 5(1)(e) of the CPA and certified the proceeding and approved the settlement.
Counsel for the class members requested approval of costs in the amount of $450,000 of which $350,000 was to be paid by Quizno’s. Amounts of $1,000 and $500 were to be paid from the 50% and 25% partial refunds respectively up to an amount of $100,000. The court found these fees were very reasonable and approved the request.