In Landsbridge Auto Corp. v. Midas Canada Inc.,  O.J. No. 1279 (S.C.J.), the plaintiff franchisees (on behalf of the entire class of franchisees) claimed that the defendant franchisor made unilateral and fundamental changes to the franchise system that breached the franchisor’s contractual and statutory duties of good faith to the franchisees. While not making any findings of fact about the plaintiffs’ allegations, the court agreed that the case was suitable for a class proceeding and certified the action accordingly. One of the two representative plaintiffs (405) would represent the entire class of franchisees at trial.
Facts of Case and Claims of Franchisees
The dispute between the parties centred on royalties paid to the franchisor and discounts provided to the franchisees. Before 1981, the Midas Canada Inc. (Midas) franchise agreement provided that each franchisee would pay a royalty of 5% on its retail sales of products and services. However, in 1981, the royalty rate was increased to 10%. In exchange for the increased royalty payments to the franchisor, the franchisees were to receive a 14.5% discount on prices paid by them for products purchased from the franchisor; but, this discount arrangement did not form part of the franchise agreement.
For twenty years, this discount was included on all price lists and invoices that the franchisor provided the franchisees. However, in 2001, the franchisor stopped disclosing the discount, indicating that it was simply deducting the discount from the price. This allegedly meant that the franchisees lost the ability to verify whether a discount was, in fact, being applied. In their claim against Midas, the franchisees argued that Midas began eliminating the 14.5% discount, which caused the franchisees to lose a significant competitive advantage.
Additionally, between 2003 and 2006, the franchisor commenced and completed its withdrawal from the sale and distribution of products to its franchisees. A third party, Uni-Select, was named the exclusive supplier to the franchisees. The plaintiff franchisees claimed that Uni-Select was an inadequate substitute for the products previously supplied by Midas.
The franchisees claimed that the failure to properly disclose the discount, in concert with the elimination of the discount and the switching of suppliers, constituted breaches by Midas of the franchise agreement, the contractual duty of good faith owed to the franchisees and the statutory duty owed to the franchisees under the Arthur Wishart Act. The franchisees also claimed that Midas was unjustly enriched by its alleged conduct.
Findings at Trial
The court found that the plaintiffs’ claim did not disclose any breach of contract and was “certain to fail” on this basis. Specifically, the franchise agreement between the parties provided that Midas could set the prices at which it sold products to the franchisees, could change prices at any time without notice and could cease selling products. Also, the 14.5% discount was not included as a term of the agreement. However, the court did find that the issues of the breach of duty of good faith (statutory and contractual) and unjust enrichment were suitable for a class proceeding, and certified the plaintiffs’ action accordingly.
Significance for Franchisors
Franchisors should be extremely careful when making unilateral changes to their franchise systems that could “destroy the rights of the franchisees to enjoy the fruits of [their Franchise Agreements].” Franchisors must exercise their contractual discretion reasonably and with proper motives, and should not act in a manner inconsistent with the reasonable expectations of the parties. Although there has not been a finding of liability in this case, the franchisor is facing an action by a large group of franchisees claiming a breach of the duty of good faith. To avoid such potential liability, franchisors must act very prudently to ensure that their conduct is reasonable and compliant with their contractual and statutory duties to their franchisees.