The recent Ontario Court of Appeal decision in 1250264 Ontario Inc. v Pet Valu Canada Inc.1 is good news for both Pet Valu Canada Inc. and Ontario franchisors.

The court dismissed the class action commenced by Pet Valu franchisees, in its entirety, reversing a lower court ruling that had favoured the franchisees. The court found that Pet Valu did not breach its duty at common law nor under section 3 of the Arthur Wishart Act2 (the AWA) to the class members by failing to disclose information about its volume rebate practices. 

While the decision itself is important, of significance is the Court of Appeal’s comments on the difference between a misrepresentation in a disclosure document and one in the ongoing performance of the franchise agreement. This bulletin will review the progression of this case through the courts and address the court’s significant comments.

Various Pet Valu proceedings

On January 14, 2011, a judge of the Ontario Superior Court certified the action commenced by 1250264 Ontario Inc. (125) as a class action. In a later motion, the judge limited the claims to those relating to volume rebates received by Pet Valu from its suppliers. The central question was: did Pet Valu have a duty to disclose information regarding its volume rebates and the amounts the company received from these rebates to the class members?

Issues identified included:

  • whether Pet Valu had breached its contractual duty to the class members by failing to share volume rebates with them
  • whether this failure was a breach of Pet Valu’s common law duty of fair dealing under section 3 of the AWA and
  • whether these alleged breaches entitled the class members to damages. 

In October 2014, Pet Valu moved for summary judgment on the issues that were certified3.  The motion judge determined that Pet Valu had shared the volume rebates on a reasonable basis as required contractually. The judge found that there were no unreasonable markups or distribution charges, no breach of the duty of fair dealing and no unjust enrichment of Pet Valu. As a result of these determinations, there was no need to consider the question of damages.

However, the Superior Court judge found that Pet Valu did breach the duty of good faith and fair dealing under the AWA by failing to disclose the financial information about its volume rebates and the manner in which they were calculated and paid.4 He reserved on the decision regarding the question of damages resulting from this breach, which was ultimately not decided due to the subsequent finding of the Court of Appeal.

Court of Appeal decision

The Court of Appeal completely dismissed the action commenced by 125 against Pet Valu. The court stated that the lower court judge had erred in deciding based on an issue that was not certified.  Pet Valu had not made a representation to the class members regarding “significant” volume rebates.

What is significant in this decision are the comments made by the Court of Appeal on the question of whether Pet Valu had breached its duty to its franchisees under section 3 of the AWA. The court drew an important distinction between a breach of section 5 and a breach of section 3 of the AWA.

The court stated that section 5 is the requirement to provide information before a prospective franchisee signs the franchise agreement and to disclose any material change. Section 3 imposes a duty of fair dealing in the performance and enforcement of the franchise agreement. 

The court found that the misrepresentation that 125 had alleged, if material, could not have been a breach of section 3 because it did not occur in the performance and enforcement of the franchise agreement. A failure to include all material facts in a disclosure document is not unfair dealing in the performance of a franchise agreement.

Further, the court noted, if the misrepresentation had resulted in a failure to comply with section 5, the appropriate remedies are set out in sections 6 and 7 of the AWA. 

With these comments, the Ontario Court of Appeal has indicated that the appropriate recourse for alleged misrepresentations in a disclosure document is not an action for breach of section 3 of the AWA.