Canada: The Top Ten Franchise Law Cases And Developments Of 2014

Last Updated: January 15 2015
Article by Derek Ronde

1. The Supreme Court of Canada Addresses The Duty of Good Faith

Although not a franchise-specific decision, the Supreme Court of Canada recently weighed in on what constituted the duty of good faith in its decision in Bhasin v. Hrynew. This is important to Canadian franchising because Canadian courts have already held that there is a duty of good faith and fair dealing in the franchise context, and this duty has been enshrined in legislation in five provinces.

The Court found that parties to a contract were under an obligation of good faith and that they should "perform their contractual duties honestly and reasonably and not capriciously or arbitrarily." It focused on the duty of honest performance, and held that parties to a contract should "not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract." However, the Court specifically held that the duty of good faith at common law did not contain a duty of disclosure.

Parties litigating franchise disputes in Canada will likely be faced with claims stemming from the reasoning in the Bhasin decision, in addition to the statutory duty of good faith found in all five provincial franchise laws, as parties will attempt to use to the Supreme Court's principle of honest performance as the basis of duty of good faith breaches.

A copy of the Cassels Brock e-Lert on this decision can be found here.

2. Cassels Brock Litigators Successful in Obtaining Partial Summary Judgment for Franchisor in $100 Million Class Proceeding

Cassels Brock litigators representing Pet Valu Canada Inc. ("PVCI") were successful on a partial summary judgment motion in a class proceeding between PVCI and some of its franchisees. The Ontario Superior Court dismissed five of the seven common issues of the action brought by the franchisees. The common issues dealt with claims of breach of contract; breach of the statutory duty of fair dealing under the Arthur Wishart Act (Franchise Disclosure), 2000 (Ontario's franchise legislation); unjust enrichment; and the relevant orders that should flow from affirmative answers to those claims.

On the motion for summary judgment, the central common issue related to whether PVCI was contractually obligated to share volume rebates that it received from suppliers and manufacturers and, if so, whether it complied with that duty. In arriving at his decision, the Court examined broad principles of contractual interpretation and earlier franchise cases. It concluded that while PVCI had a contractual obligation to share volume rebates, it had a wide-ranging discretion in determining the amount of the rebates it would share, so long as that discretion was exercised reasonably. It then found that there was "overwhelming evidence" that PVCI had indeed shared all of the volume rebates with its franchisees after adding a reasonable mark-up. The plaintiff conceded that it was within PVCI's rights to add such a mark-up.

A copy of the PVCI decision can be found here.

3. Potential Franchise Legislation in the Province of British Columbia

On March 31, 2014, and after months of consultation with industry stakeholders, the British Columbia Law Institute (BCLI) issued its "Report on a Franchise Act for British Columbia." This report recommended that the Government of British Columbia enact franchise legislation similar to the legislation already in force in Alberta, Ontario, New Brunswick, Prince Edward Island and Manitoba.

On September 10, 2014, the Government of British Columbia launched a consultation on a proposed Franchises Act. Parties had until December 10, 2014, to submit comment on proposed legislation. Upon reviewing the results of this consultation, Ministry of Justice staff will provide recommendations for proposed new legislation.

The Cassels Brock summary of the BCLI's recommendations can be found here.

4. Ontario Re-Introduces Menu Labelling Legislation

On November 24, 2014, the Government of Ontario reintroduced legislation regarding menu labelling for restaurants in Ontario. The Healthy Menu Choices Act, 2014 ("the Act") revives previous legislation (Making Healthier Choices Act, 2014) that was shelved in early 2014 due to the provincial election in Ontario. The legislation, if passed, would require food service chains with twenty (20) or more premises in Ontario to display the caloric information of their menu items. This includes bars, restaurants, convenience stores, grocery stores or other establishments which sell food or drinks prepared for immediate consumption either on the premises or elsewhere.

Liability for breaching the Act extends to persons (including corporations) that own or operate a chain with more than 20 premises in Ontario along with the directors and officers of corporations that own or operate such a chain, and can extend to both franchisees and franchisors. Penalties can be as high as $1,000 a day for individuals or $10,000 a day for corporations for second or subsequent offences.

A copy of the Cassels Brock summary of the previous iteration of this legislation can be found here.

5. Ontario's Franchise Legislation Declared Inapplicable to a Single Trademark License

The Ontario Superior Court of Justice confirmed that the province's franchise legislation, Arthur Wishart Act (Franchise Disclosure) (the "Wishart Act"), did not apply to the license of a single trademark.

In MGDC Management Group Inc. v. Estate of Marilyn Monroe, LLC1, the Applicants and Respondents were parties to a License Agreement, through which the Respondents licensed the trademarked name Marilyn Monroe to the Applicants for use in their restaurants. The Applicants brought an Application seeking rescission of the License Agreement and damages, arguing that the License Agreement was a franchise agreement, entitling them to the right of full disclosure as provided by the Wishart Act. The Respondents' position was that the License Agreement was not a franchise agreement and the rights and remedies granted by the Wishart Act did not apply. The Respondents brought a motion to dismiss the Application on that basis.

In granting the Respondents' motion and dismissing the Application, the Court determined that the Wishart Act does not apply to an arrangement of this nature, as it is not a franchise arrangement but rather a single trademark licensing arrangement. Accordingly, the parties were not subject to the obligations imposed and the remedies granted by the Wishart Act.

The Cassels Brock analysis of this decision can be found here.

6. Canada Introduces Anti-Spam Legislation

On July 1, 2014, certain provisions of Canada's Anti-Spam Legislation ("CASL") came into force and now govern how businesses can communicate with Canadian recipients. Given its scope, CASL is one of the most stringent commercial electronic messaging laws in the world. CASL also regulates the installation of computer programs. This law has been put into place to address issues related to (i) unsolicited electronic messages (colloquially known as "SPAM") and (ii) spyware/"phishing" issues. CASL is of particular interest to businesses operating in the Canadian marketplace due to its impact on electronic communications practices and the significant penalties for non-compliance (including Administrative Monetary Penalties of up to $10 million for businesses and $1 million for individuals).

The Cassels Brock summary of this legislation can be found here.

7. Summary Judgment Used By Franchisor To Defeat Rescission Claim

The Supreme Court of Canada's decision in Hryniak has ushered in the broader use of summary judgment motions as a means for parties to resolve disputes in the courts. We are now seeing summary judgment and the Hryniak principles being used by franchise litigants to obtain early and final resolution of matters before the courts. ( The Cassels Brock summary of the Hryniak decision can be found here.)

In the judgment of Caffé Demetre Franchising Corp v 2249027 Ontario Inc, the Ontario Superior Court of Justice dismissed the defendants' counterclaim seeking the statutory rescission of the franchise agreement. The Court ruled that the alleged deficiencies of the disclosure document did not amount to material facts that should have been included or were not so egregious as to amount to no disclosure at all.

The Cassels Brock summary of this decision can be found here.

8. Ontario Court Overturns Wrongful Termination of Franchise Agreement by Franchisor

Franchisee terminations for breach of contract often result in litigation between the parties due to the "bet the house" stakes involved. In the recent case of ANC Business Solutions Inc. v. Virtualink Canada Ltd. in the Ontario Superior Court of Justice, the Court examined what constitutes proper grounds for termination and the notice requirements for termination. Specifically, the Court considered whether Virtualink, the franchisor of a franchise system offering "executive office suites," had unlawfully terminated ANC, one of its franchisees.

The case illustrates the risk to a franchisor that terminates a franchisee without complying with the notice requirements in the governing franchise agreement. The case also shows that a settlement agreement will not supersede or modify the notice requirements in a franchise agreement, unless it is explicit.

The Cassels Brock summary of the decision can be found here.

9. Alberta Court Finds That Parties Must Preserve Arbitration Claims or Face Limitations Period Issues

Parties to an arbitration agreement may not always agree whether a dispute is subject to arbitration. However, a 2014 Alberta decision, Suncor Energy Products Inc. v. Howe-Baker Engineers, Ltd., has held that parties must take steps to identify the applicable limitation period for arbitration and bring an arbitration claim in time if there is even a possibility that a case is subject to arbitration. Doing so will allow the claimant to preserve its right to arbitrate and prepare the respondent to defend against a potentially stale claim – regardless of their respective positions regarding the applicability of the arbitration clause. In other words, a party's claims may be statute-barred under limitation period legislation if that party fails to commence an arbitration in time while disputing the arbitrability of the dispute.

The Cassels Brock summary of the decision can be found here.

10. Mixed Decisions on Whether a Franchisor is the Employer of its Franchisee's Employers

Joint employer liability in the franchise context is currently a hot topic in the American franchising community. There has been a variety of decisions in Canada that address this topic, and the findings have been mixed. A general discussion of the issue by Cassels Brock can be found here.

Other related decisions include the Kumon case (discussed below), the McDonalds Human Rights Tribunal of Ontario decision ( see the Cassels Brock summary here), the Best Western Human Rights Tribunal of Ontario decision (found here) and the Tim Hortons Québec personal injury decision (in relation to the court's willingness to impute the conduct of franchisees to franchisors – a summary can found here.)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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