Canada: 2015 Theme #3: Franchise Law

This year has seen significant developments and clarifications in franchise law, particularly in the context of franchise class proceedings. Recent cases have emphasized the importance of careful and clear drafting of franchise agreements and releases in order to minimize the risk of litigation further down the road. In this post, we summarize some of the key franchise cases and themes of 2015.

Right to Class Action is Not Guaranteed

Earlier this year, the Ontario Superior Court clarified that the Arthur Wishart Act (Franchise Disclosure), 2000 (the "Wishart Act") does not guarantee franchisees the right to commence a class action. In 1146845 Ontario Inc. v. Pillar to Post Inc., Justice Perell stayed a proposed franchise class action in favour of enforcing the arbitration provision in the franchise agreement. The Court rejected the franchisees' argument that the legislature intended to override the parties' arbitration agreement to allow the franchisees to commence a class action.

The Court considered the intersection of the Wishart Act, the Class Proceedings Act, 1992, and the Arbitration Act, 1991. Under the Arbitration Act, courts must stay proceedings where the parties have agreed to arbitrate their disputes, unless the matter falls within a specific exception or the legislature has granted the court the exclusive jurisdiction to resolve the dispute. The franchisees argued that their right to associate in s. 4 of the Wishart Act implicitly gave them the choice of either compelling arbitration or commencing a class proceeding against the franchisor. Justice Perell disagreed, holding that where franchisors and franchisees mutually agree to arbitrate their disputes, effect will be given to their agreement.

Enforceability of Franchisee Releases

In 2176693 Ontario Ltd. and 2139679 Ontario Inc. v. The Cora Franchise Group Inc., the Ontario Court of Appeal reaffirmed that franchisee rights under the Wishart Act cannot be readily released. The issue before the Court of Appeal in Cora was whether a general release of any and all claims against the franchisor could be read down and enforceable in respect of non-Wishart Act claims. Applying s. 11 of the Wishart Act, the Court affirmed the decision of the Ontario Superior Court that the requirement to sign a general release contained in the franchisor's standard form franchise agreement was unenforceable. It also upheld the decision that it would be inappropriate in the circumstances to "read down" the clause to narrow it to the release of non-Wishart Act claims.

Franchisor Obligations in Quebec

In Dunkin' Brands Canada Ltd. c. Bertico Inc., the Quebec Court of Appeal relied on certain concepts contained in the Civil Code of Quebec (which are not mirrored in the law of other Canadian provinces) to find that a franchisor had an implicit duty to provide its franchisees with technical support and co-operation in the aim of maintaining the relevance of the franchise relationship. This duty was found to exist irrespective of the express contractual language contained in the parties' franchise agreements. The franchisor has sought leave to appeal to the Supreme Court of Canada.

Jennifer Dolman and Alexandre Fallon's article in Canadian Lawyer discusses why Bertico has limited application outside the Quebec context. See also our May 4, 2015 Osler Update for a summary of that article.

Lessons Learned from Canada's First Franchise Class Action Trial

This summer, the Ontario Superior Court released an important franchise law decision in the first franchise class action to go to trial in Canada. In Trillium v General Motors of Canada Ltd. ("GMCL") and Cassels, Brock & Blackwell LLP ("Cassels"), more than 200 dealers who had accepted "Wind-Down Agreement" to terminate their business brought a class action against GMCL, claiming that it had breached the Wishart Act and franchise legislation in Alberta and PEI. Osler, Hoskin & Harcourt LLP was co-counsel for GMCL.

After a 42-day trial, the Court dismissed all of the dealers' claims against GMCL. Some notable findings of the Court with respect to franchise issues include the following:

  • If a franchise agreement contains an Ontario governing law clause, the Wishart Act will apply even if the franchise operates in a province with its own franchise statute (this is consistent with Cullity J.'s 2009 decision in 405431 Ontario Ltd. v Midas Canada Inc., which was affirmed by the Court of Appeal).
  • The duty of good faith and fear dealing does not amount to a fiduciary duty. What the "single duty" will require depends on the context in which the franchise is acting and what is considered reasonable conduct.
  • In certain circumstances, the duty of fair dealing under s. 3 of the Wishart Act may give rise to an obligation to disclose important and material facts. This duty of disclosure is separate from the statutory duty to deliver a disclosure document to a prospective franchisee prescribed by s. 5 of the Wishart Act.
  • The right to associate under s. 4 of the Wishart Act does not require franchisors to facilitate the association with other franchisees or to do anything beyond refraining from activities that inhibit association: "It is a negative duty in the fullest sense".
  • A waiver or release by a franchisee of a right under the Wishart Act will generally be void and unenforceable, unless the release is given by a franchisee with the advice of counsel in settlement of a dispute for existing and fully known breaches of the Wishart Act. The form of release at issue in Trillium which contained a "high degree of specificity" and was accompanied by a certificate of independent legal advice, met the conditions of what is known as the "Tutor Time exception".
  • There is no duty to provide a disclosure document to franchisees in respect of an agreement that does not relate to a grant of a franchise. The phrase "any other agreement relating to the franchise" in s. 5(1) of the Wishart Act refers to ancillary documents signed by a franchisee in connection with entering into a franchise agreement such as an indemnity agreement, a general security agreement and sublease.

The decision is currently under appeal. For a more comprehensive discussion of Justice McEwen's findings in respect of the franchise issues, see Jennifer Dolman's post 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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