On September 27, 2011, the Court of Appeal for Ontario dismissed a $200 million proposed class-action lawsuit against Suncor Energy Products Inc. and Suncor Energy Inc. (“Suncor” or the “Defendants”).
The central question in TA & K Enterprises v. Suncor Energy Products Inc., was whether the Defendant franchisors failed to meet the disclosure requirements as mandated by the Arthur Wishart Act (Franchise Disclosure), 2000, (the “Wishart Act”). In result, the Court of Appeal for Ontario agreed with Justice Perell’s decision to grant summary judgment in favour of the Defendants on the basis that the nature of the franchise agreement exempted the Defendants from the disclosure requirements under the Wishart Act.
The Wishart Act was enacted to “redress the imbalance of power as between franchisor and franchisee.”[i] The principal means by which it does this is by requiring franchisors—in certain circumstances—to make full and fair disclosure to a franchisee before the franchisee enters into a franchise agreement. is entered into.[ii]
In this respect, the Wishart Act can be seen as somewhat analogous to provincial securities legislation: just as securities legislation requires issuers to provide full and fair disclosure of all material facts prior to offering shares for sale to the public, so too does the Wishart Act require franchisors to disclose all material facts, financial statements etc. to potential franchisees before entering into a franchise agreement.
However, as with provincial securities legislation, the Wishart Act exempts franchisors in certain situations from disclosing information that would otherwise be required. One of those situations is where the franchise agreement is not valid for longer than one year and does not involve the payment of a non-refundable franchise fee (See Wishart Act, s. 5(7)(g)(ii)).
But what happens when a franchise agreement was initially entered into for a period of one year and then is subsequently renewed on a month to month basis? Or when that same agreement was executed before the commencement of the one year term – is this a franchise agreement that “is not valid for longer than one year”? And what if that same agreement required a franchisee to make recurring payments over the course of the agreement? Would these constitute a “non-refundable franchise fee”? These were the central questions presented for determination by the Court of Appeal in this case.
The facts of this appeal were relatively straightforward. The Plaintiff (the franchisee), TA & K Enterprises Inc., (“TAK”) operated a Sunoco gas station under a retail franchise agreement (the “RFA”) with Suncor. The RFA was signed on November 11, 2011, but the term of the RFA was to commence on November 15, 2008 and end on November 14, 2009.
Prior to the expiration of the RFA, Suncor merged with Petro Canada. As a result of this transaction, Suncor was required by the Commissioner of Competition to divest a number of gas stations. Suncor then wrote to TAK to advise that when the RFA expired, there would be an extension of the RFA on a month-to-month basis on the same terms and conditions – presumably until Suncor had made the necessary arrangements to divest the gas stations. Shortly thereafter, Suncor wrote again to advise that the RFA would terminate on August 12, 2010.
At no point did Suncor provide TAK with a disclosure statement as contemplated by the Wishart Act.
On January 18, 2010, TAK commenced a proposed class action alleging that the Defendants had failed to deliver a disclosure document to 241 proposed class members and, thus had breached the Wishart Act. In addition to claiming the remedy of rescission, which is available under the Wishart Act to franchisees who have not been provided with the requisite disclosure, TAK also claimed aggregate damages of $200 million.
Both parties brought motions for summary judgment in the Ontario Superior Court of Justice. TAK sought a declaration that Suncor was required to deliver a disclosure document. Suncor, in turn, sought an order dismissing the action on the basis that they were exempted from providing a disclosure document because of terms of the RFA.
Justice Perell found in favour of the Defendants. TAK appealed.
The RFA was not valid for longer than one year
On appeal, TAK argued that Justice Perell erred by failing to find that the RFA was an agreement that was valid for longer than one year. TAK argued that the RFA was signed on November 11, 2008 and bound the parties at least until the term ended on November 14, 2009, a period of more than one year. In the Court of Appeal for Ontario, Justice Goudge rejected this argument on the basis that the Wishart Act’s one-year-or-less time frame applies to the time “during which the franchise agreement is valid,” regardless of when it was negotiated or executed. Indeed, Justice Goudge held that what the exemption is really driving at is “the duration of the rights and obligations under the contract.”
TAK also argued that when Suncor extended the RFA on a month-to-month basis it made the RFA valid beyond its expiry date and therefore converted it into a franchise agreement that was valid for longer than one year.
This argument is intuitively appealing but becomes less so when considered against the scheme of the Wishart Act. Recall, the purpose of the disclosure requirements is to protect franchisees before they enter into franchise agreements. This was not lost on Justice Goudge who noted that this would be unworkable if the obligation to provide disclosure could be triggered at the end of a franchise agreement once the parties had decided to extend on a month-by-month basis.
The RFA did not involve the payment of a non-refundable franchise fee
Justice Goudge also rejected TAK’s argument that Justice Perell erred in failing to find that various isolated payments to Suncor, including royalty fees, were a “franchise fee” within the meaning of the Wishart Act.
“Franchise fee” is not a defined term in the Wishart Act. In advocating for a broad definition of that term, TAK pointed out that the equivalent of “franchise fee” in the French version of the Wishart Act includes the word “redevances.” TAK argued that this translates into “any amount required to be paid at fixed intervals,” which, in turn, would capture the payments TAK was required to make under the RFA. Justice Goudge rejected this argument on the basis that TAK failed to read “redevances” in its proper linguistic context. Moreover, if TAK’s proposed definition carried the day it would prevent any franchise agreement from being caught by the exemption, which, according to Justice Goudge, could not have been the legislative intent.
Instead, His Honour reviewed the case law, regulations and the “Report of the Minister’s Committee on Franchising” to conclude that a franchisee fee is in the nature of a fee paid for the right to become a franchisee.
The decision is particularly helpful in that it further clarifies the situations in which franchisors will be exempt from providing disclosure to franchisees. For one thing, whether a franchise agreement is valid for less than a year will be determined from the outset of the agreement, regardless of whether it is subsequently renewed on a month to month basis. In addition, the decision helps to fill the void left by the fact that “franchise fee” is undefined in the Wishart Act.