Canada: Case Comment: T A & K Enterprises Inc. v. Suncor Energy Products Inc. and Suncor Energy Inc.

Last Updated: December 6 2011
Article by Sarah J. Armstrong and Zohaib I. Maladwala

The recent decision of the Ontario Court of Appeal in T A & K Enterprises Inc. v. Suncor Energy Products Inc. and Suncor Energy Inc. will be viewed positively by defendants in class actions, and particularly defendant franchisors, in light of a recent spate of class actions against franchisors in Ontario regarding franchise disclosure requirements. In T A & K, the Ontario Court of Appeal unanimously upheld the lower court decision of Justice Perell dismissing the plaintiff's summary judgment motion on behalf of the proposed class and granting summary judgment in favour of the defendant franchisor. The proposed class action against Suncor Energy Products Inc. and Suncor Energy Inc. (collectively "Suncor") was one of a number of recent franchise class actions brought against an array of franchisors regarding the disclosure requirements under Ontario's Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c.3 (the "Wishart Act").

Significance

The Suncor decision is significant for a number of reasons:

  1. in the franchise law and franchise class actions context, the decision provides clarity on the exemptions to disclosure requirements listed in the Wishart Act;
  2. the Ontario Court of Appeal has now confirmed that royalties and service/imaging fees will most likely not be considered a "franchise fee" under the Wishart Act; and
  3. the decision is also noteworthy because of its interpretation of the revised summary judgment rule in the 2010 amendments to the Rules of Civil Procedure. Although we continue to wait for the Court of Appeal to deliver rulings directly interpreting the revised summary judgment rule, the Suncor decision suggests that courts in Ontario may be more willing to consider summary judgment motions in class actions in which the central issue is one of contractual or statutory interpretation, there is an adequate evidentiary record and there are no serious issues surrounding credibility.

Background

The putative representative plaintiff, T A & K Enterprises ("TAK") entered into a series of one-year franchise agreements with Suncor to operate a gas station under the Sunoco banner.  The most recent of TAK's franchise agreements covered the period between November 15, 2008 and November 14, 2009.  TAK and the other members of the proposed class did not pay Suncor a fee to become a Sunoco franchise, but were required to pay royalties to Suncor, as well as additional fees for imaging and training. Suncor did not deliver a disclosure document to TAK or any of the proposed class members prior to the signing of their franchise agreements.

In the summer of 2009, a few months before the expiry of its 08/09 franchise agreements, Suncor merged with Petro Canada. To ensure that the merger did not run afoul of Canada's competition laws, the Commissioner of Competition required the newly amalgamated corporation to divest 194 retail gas stations in Ontario. Consequently, in October 2009, Suncor announced that it would not offer its current franchisees new one-year agreements when the 08/09 agreements expired in November 2009, and instead would extend the franchise agreements on a month-to-month basis following the end of their respective terms. In January 2010, Suncor delivered termination notices to approximately 125 franchisees, including TAK, advising them that their franchise agreements would terminate in seven months time. After receiving the termination notice, TAK sent Suncor a notice of rescission and served notice of the proposed class action.

Disclosure Requirements under the Wishart Act

Section 5 of the Wishart Act requires that all franchisors deliver a disclosure document to a prospective franchisee not less than 14 days before the earlier of (i) the signing of the franchise agreement or other agreement related to the franchise; or (ii) the payment of any consideration by or on behalf of the prospective franchise to the franchisor or franchisor's associate relating to the franchise. However, the section also provides for exemptions from the requirement to deliver a disclosure document in specific circumstances. One of the exemptions, central in this case, is if "the franchise agreement is not valid for longer than one year and does not involve the payment of a non-refundable franchise fee". However, the Wishart Act does not define the terms "valid" or "franchise fee".

If a franchisor does not meet one of the listed exemptions in section 5 and fails to provide a disclosure document to a franchisee, section 6(2) of the Wishart Act allows the franchisee to rescind the franchise agreement without penalty or obligation within two years of entering into the agreement. Upon such a rescission, the franchisor is obligated to make payments to the franchisee to compensate it for any expenses and losses that the franchisee incurred as a consequence of setting up the franchise. Under section 7 of the Wishart Act, the franchisee also maintains a right of action for damages against the franchisor, its broker, agent and/or associate if a disclosure document is not provided.

The Parties' Positions

In an attempt to obtain a swift result, both sides moved for summary judgment under the revised summary judgment rule in the 2010 amendments to the Rules of Civil Procedure.

TAK sought a summary declaration that Suncor breached its obligations under section 5 of the Wishart Act, by failing to deliver a disclosure document to each of its franchisees prior to the signing of their most recent franchise agreements. Accordingly, on behalf of the Sunoco franchisees, TAK sought to obtain the option to rescind their franchise agreement with Suncor and claim up to $200 million in damages.

TAK submitted that certain isolated and recurring fees paid to Suncor by its franchisees, including royalties, customer service dues, fees for store imaging and training program fees, constitute a "franchise fee" under the Wishart Act. TAK also argued that the agreement was "valid" for longer than one-year by virtue of the fact that the franchise agreement was signed a few days before it actually came into force on November 15, 2008 and continued until November 14, 2009. Alternatively, TAK argued that the franchise agreement was "valid" for longer than one-year after its month-to-month extension in October 2009. In the further alternative, TAK also relied on a specific term of the franchise agreement, which permitted it to continue operating as a Sunoco franchise on a month-month basis if TAK remained in possession of the store after expiry of the franchise agreement, as proof that the agreement was "valid" for longer than one-year.

Suncor moved to have the action dismissed in its entirety, on the grounds that a disclosure document was not required. Suncor contended that its franchise agreement with TAK and the other class members fell under the exemption listed in section 5(7)(g)(ii), which exempts a franchisor from providing a disclosure document if the franchise agreement is not "valid" for more than one year and does not involve the payment of a non-refundable franchise fee. Suncor also relied on a second exemption under the Wishart Act which exempted a franchisor from providing a disclosure document where there was a renewal or extension of a franchise agreement with no interruption in the operation of the franchisee's business and no material change since the previous franchise agreement.

The Motions Judge's Decision

At the outset, Justice Perell held that "there are no genuine issues that require a trial" and accepted both parties' submission that he, as a motions judge, was "in as good a position as a trial judge to decide this matter."

Justice Perell then went on to consider the exemptions listed under section 5(7) of the Wishart Act.  With respect to the definition of "franchise fee", Justice Perell rejected TAK's submission that any payment from a franchisee to franchisor, including dues, fees and royalties is a "franchise fee" under the Act. He held that "a franchise fee means a direct or indirect payment to obtain the right to purchase a franchise, to operate a franchised business, or to become a franchisee in a franchise chain." With this definition in mind, Justice Perell found that Suncor's franchise agreement did not impose a non-refundable franchise fee upon its franchisees, and consequently the first element of the exemption in section 5(7)(g)(ii) of the Wishart Act was met.

Justice Perell also rejected TAK's arguments on the term of its franchise agreement. The motions' judge held that the duration of an agreement was the defined term within which the rights and obligations of the parties were operational. Although a party is not precluded from bringing an action for anticipatory breach prior to the commencement of the actual term of an agreement, the enforceable and operational rights and obligations in a franchise agreement only exist for the duration of its term, which in Suncor's case was November 15, 2008 to November 14, 2009. Consequently the agreement was not "valid" for longer than one year according to Justice Perell.

Justice Perell also rejected TAK's alternative arguments that Suncor's option and decision to extend the franchise agreement on a month-to-month basis precluded it from relying on the s.5(7)(g)(ii) exemption. As Suncor was not obligated to extend or offer a new franchise agreement to TAK at the time the agreement was entered into, Justice Perell found that TAK could not rely on events or circumstances that occurred after the signing of the agreement to argue that Suncor was now unable to rely on the s.5(7)(g)(ii) exemption. To accept such an argument would practically render the s.5(7)(g)(ii) exemption ineffective, as the possibility of a future extension of the franchise agreement by the franchisor always exists. 

The Court of Appeal Decision

The Court of Appeal unanimously adopted Justice Perell's findings with regards to the exemption listed in s.5(7)(g)(ii) and dismissed TAK's appeal.

The Court accepted that the duration of the franchise agreement was twelve months even though it had been executed before the start of its term. The Court of Appeal also rejected TAK's suggestion that the franchise agreement remained 'valid' for longer than one-year because the indemnity and confidentiality provisions in the agreement survived the termination or expiration of the agreement. The relevant consideration was the length of the enforceable grant of a franchise, not the fact that other provisions in the agreement survived for longer. The Court unanimously rejected TAK's argument that the possibility of an extension at the time the agreement was entered into extends the duration of the agreement, holding that "a section that merely creates the possibility of a month-to-month tenancy after the [franchise agreement] expires cannot be taken to extend it." The Court added that the October 2009 letter extending the franchise agreements on a monthly basis created new monthly agreements following the expiry of the franchise agreement, and did not extend the prior agreement.

Finally, the court expressly rejected TAK's assertion that royalties constitute franchise fees. Instead, the court agreed with Justice Perell and held that "a franchise fee is in the nature of a fee paid for the right to become a franchisee. It does not include royalties or payments for goods and services."

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