On January 14, 2016, the Ontario Court of Appeal overturned a
judgment for the franchisee class in the Pet Valu franchise class action. This
significant decision for franchisors resulted in the dismissal of
the class action in its entirety. Notably, the Court of Appeal
found any failure by the franchisor to disclose information in a
disclosure document does not amount to a breach of section 3 (the
duty of fair dealing) of the Arthur Wishart Act (the AWA).
As well, the Court of Appeal implicitly endorsed the earlier
decision in another franchise class action, Spina v. Shoppers Drug Mart
Inc., that held that franchisors do not have a
duty to disclose information to franchisees so that franchisees can
verify whether or not the franchisor is complying with the
franchise agreement. While the Pet Valu decision
highlights and provides important reasoning on certain class action
procedural points – perhaps most importantly on the role of
the case management judge in defining common issues – this
Update focuses on the Court's decision on substantive issues of
particular interest to franchisors.
The Pet Valu Proceedings
In January 2011, Justice Strathy certified a class action
against Pet Valu by current and former Pet Valu franchisees based
on allegations that Pet Valu failed to pass on the benefits of
volume rebates granted by their suppliers to their franchisees
(2011 ONSC 287).
Read our article in the February 2011 Osler Franchise Review
for our commentary on the certification decision.
Pet Valu subsequently moved for summary judgment. In October
2014, Justice Belobaba granted summary judgment in favour of Pet Valu on all
but one issue (and the related common issue of damages) and
deferred a decision on those issues.
In January 2015, Justice Belobaba granted judgment for the
franchisees on the remaining issues. In doing so, he held that Pet
Valu had breached its statutory duty of fair dealing by creating
the expectation that it had "substantial purchasing
power" that it would use to obtain volume discounts that could
be passed along, at least in part, to its franchisees, which
Justice Belobaba found was a misrepresentation that Pet Valu failed
Read our April 2015 Osler Update for our commentary on Justice
Belobaba's January 2015 decision.
Pet Valu appealed.
Court of Appeal Decision
The Court of Appeal allowed Pet Valu's appeal, finding that
it had not breached section 3 of the AWA. Although the decision
turns on the Court of Appeal's conclusion that Justice Belobaba
erred in considering the issue of whether Pet Valu had made a
misrepresentation to its franchisees when that issue had not been
certified, the Court of Appeal nonetheless commented on whether
there could have been a breach of section 3 if such a
misrepresentation had been made.
In doing so, the Court drew an important distinction between
misrepresentations in a disclosure document and misrepresentations
made in the course of the performance and enforcement of a
franchise agreement. The Court stated that a misrepresentation in a
disclosure document (or a failure to disclose material facts in a
disclosure document) cannot amount to a breach of section 3 because
that misrepresentation does not occur in the "performance and
enforcement" of the franchise agreement as required by the
clear wording of the AWA. The Court also noted that specific
remedies for a franchisor's failure to comply with its
disclosure obligation under section 5 of the AWA are provided for
by sections 6 and 7 of the AWA. The practical implication for
franchisors is that franchisees cannot rely upon section 3 to bring
claims concerning misrepresentations during the disclosure
In addition, the Court relied on the lower court's decision
in Spina, where the motion judge held that section 3 does
not require franchisors to disclose information to franchisees so
that franchisees can verify the franchisor's compliance with
the franchise agreement. The Court also indicated that section 3
cannot be relied upon to require franchisors to disclose
information so that franchisees can verify whether or not
statements made to the franchisees are correct. As Spina
was a lower court decision that was not appealed, the Court of
Appeal's endorsement of its reasoning will give it greater
authority in future cases.
The Court of Appeal's decisions in both Pet Valu
and Spina underline its commitment to a straightforward
interpretation of the clear wording of the AWA in determining the
scope of the section 3 duty of fair dealing owed between parties to
a franchise agreement.
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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