In a big win for franchisors, the Ontario Court of Appeal recently dismissed the appeal of an important class action decision awarding summary judgment to the defendant franchisor in Fairview Donut Inc. v. TDL Group Corp.1
The case, which our group wrote about earlier this year, was a class action launched by a number of franchisees of the iconic Canadian quick service restaurant chain Tim Horton’s. The claim arose from the introduction of a new lunch menu and the switch from baking donuts and pastries from scratch on-site to a par-baking system known as the “Always Fresh Conversion”. The conversion features products being partially baked at a central facility, flash-frozen and shipped to stores where they are then finished in specialized ovens. This eliminated the need to employ professional bakers at all franchise locations and ensured consistency across the franchise system.
The plaintiff franchisees claimed that, as a result of these changes, the prices of ingredients they were required to buy from Tim Horton’s became commercially unreasonable, eroding their ability to make a profit. They alleged several causes of action including breach of contract, misrepresentation, unjust enrichment, price maintenance and breach of the duty of good faith under Ontario’s Arthur Wishart Act (Franchise Disclosure)2 and similar legislation in other provinces.
In the lower court decision, Justice George Strathy of the Ontario Superior Court of Justice gave extensive reasons granting summary judgment to Tim Horton’s and dismissing the action.3 In granting summary judgment, Justice Strathy acknowledged that despite the size of the record before the court, the case was not complex and essentially boiled down to the interpretation of the applicable legislation and franchise agreements. Justice Strathy found no basis for the plaintiffs’ claim that Tim Horton’s was obligated to offer the lowest available prices in the marketplace, writing:
What matters, at the end of the day, is whether the franchisee makes sufficient profit overall to justify his or her investment and to remain in the business. The suggestion by the plaintiffs that the franchisor has an obligation to price every menu item so that they can make a profit on that particular item is not supported by the contract, by the law or by common sense. It is simply not the responsibility of the court to step in to recalibrate the financial terms of the agreement made by the parties.4
The plaintiffs appealed Justice Strathy’s decision to the Court of Appeal only with regards to the dismissal of the breach of contract and duty of statutory duty good faith claims. Upon the conclusion of two days of argument, the three-judge panel dismissed the appeal from the bench.
The Court of Appeal was emphatic in their endorsement of Justice Strathy’s well-reasoned decision, stating they agreed completely with his conclusions on the breach of contract and duty of good faith claims. On the breach of contract claim, the Court of Appeal made particular note of Justice Strathy’s conclusion that, when enacting system-wide changes, “the franchisor is entitled to consider the profitability and prosperity of the system as a whole”. Turning to the good faith claim, the Court praised Justice Strathy for having “carefully and comprehensively reviewed the record on this issue which strongly documented the extent and fairness of Tim Hortons’ process for considering their franchisees’ position with respect to the transition to a new donut production system”.
The plaintiffs only avenue to appeal the decision further is to seek leave to appeal to the Supreme Court of Canada, which seems unlikely given the decisiveness of the Court of Appeal’s decision.
This decision should be seen as confirmation to franchisors that Ontario courts will enforce the written terms of their contracts so long as they are performed and enforced in good faith. It also signals that common franchise industry business practices, such as requiring purchases from a designated supplier and capturing profits in the supply chain, will not easily give rise to class action liability. The acknowledgement that these types of cases are appropriate for summary judgment also means that franchisors are less likely to get bogged down in protracted litigation and may be able to dispose of class action suits without the necessity of a trial.