Canada: Court Of Appeal Provides Guidance On Common Issues And Franchisors' Duty Of Good Faith

On January 14, 2016 the Ontario Court of Appeal released its unanimous decision in 1250264 Ontario Inc. v. Pet Valu Canada Inc.1 granting summary judgment dismissing a class action brought against Pet Valu by its former franchisee and bringing the claim to an end after over six years of litigation. The decision is of interest to both the class action and franchise bars for its discussion of judicial recrafting of certified common issues, and for an elaboration on the scope of the duty of good faith and fair dealing.

Background

The action was certified in 2011 by Justice Strathy2 with a focus on whether Pet Valu was contractually obligated to share volume rebates with its franchisees and, if so, whether it breached that duty.

In October 2014, Pet Valu obtained summary judgment dismissing five of the seven certified common issues, dealing primarily with those contractual issues. The remaining common issues (6 and 7 respectively) related to (a) whether Pet Valu breached the duty of good faith and fair dealing stipulated by section 3 of the Arthur Wishart Act3 (the "AWA") by failing to disclose information concerning volume rebates to franchisees; and (b) any resultant damages. In the course of the motion the plaintiff sought to amend its claim and add a common issue addressing the franchisor's purchasing power. The decision on summary judgment concerning common issues 6 and 7 was deferred.

In January 2015, Justice Belobaba granted summary judgment in favour of the plaintiff on common issue 6. In so doing, he interpreted certified common issue #6, set out above with respect to a breach of section 3 of the AWA, so as to read into it the words "a significant level of " volume rebates. However, the motion judge declined to allow the plaintiff 's pleading amendment which, as discussed below, would have added an eighth common issue concerning "significant volume discounts".

Pet Valu appealed the motion judge's decision granting summary judgment for the plaintiff on common issue 6. The plaintiff cross-appealed the dismissal of its motion to amend to add an eighth common issue.

The Motion Judge Erred by Reading Language into the Certified Common Issue

The Court of Appeal reversed the motion judge. In so doing it held that the inclusion of the modifier "significant level" was "tantamount to an amendment" of the common issue. It further held that by reading-in terms to a common issue after certification, the motion judge effectively "gave judgment on an issue that was never certified". The motion judge did so without giving Pet Value an opportunity to make submissions on the modification. His basis for doing so was an inference from one sentence in Pet Valu's factum concerning the plaintiff's proposed eighth common issue, which stated the "reference to a 'duty of disclosure' duplicates existing common issues # 6 and 7". The Court held this was not sufficient to support a finding that Pet Valu could have anticipated reading-in "a significant level of" in relation to the volume rebates in common issue 6.

The Court held that by reading-in terms to common issue 6, the motion judge was "fundamentally unfair to Pet Valu". It re-affirmed the fundamental principle that p arties must have the opportunity to make submissions on a theory of liability, in order to ensure that it is "tested in the crucible of the adversarial process."

Amendment Motions in a Class Action Require "Caution and Restraint"

The Court also upheld the motion judge's dismissal of the plaintiff 's motion to amend its statement of claim and add an eighth common issue, being that Pet Valu had a duty to disclose whether it had substantial purchasing power and whether it received "significant volume discounts" offered by suppliers. At the time the plaintiff brought the motion, Pet Valu was "in a position to obtain complete summary judgment on the common issues as well as a probable cost award." Certifying a fundamentally different new common issue more than three years after certification was unfair. Moreover, the Court of Appeal held that the motion judge's role does not permit him to "descend into the arena and make a suggestion at the conclusion of an otherwise dispositive summary judgment motion as to how a plaintiff might improve its position." In the circumstances, allowing the amendment would have caused an injustice to the defendant not compensable in costs.

In this respect, the Court distinguished Keatley Surveying Ltd. v. Teranet Inc.4 In that case the Court allowed amendments to common issues on appeal from an unsuccessful certification motion after determining that the defendant had an appropriate opportunity to respond to the amendments such that there was no incurable prejudice. The Court held that the decision stands for the proposition that "at an appeal at the certification stage, a plaintiff should have some latitude to recast its case to make it more suitable for certification, provided that the defendant is afforded procedural fairness".

The Scope of the Duty of Good Faith and Fair Dealing and Pre-Contractual Disclosure

Of equal interest was the Court's conclusion that the rebate information that the motion judge found Pet Valu should have disclosed did not relate to the performance or enforcement of the franchise agreement, which is a requirement under section 3 of the AWA. Rather, it was information that, if in fact material, should have been disclosed under section 5 before the plaintiff became a franchisee.

The Court held that section 3 of the AWA does not include an ongoing duty to disclose information necessary for franchisees to verify whether a franchisor is meeting its obligations — a "pre-litigation oriented duty of disclosure" — and found that the motion judge erred on that basis.5

The Court drew a clear distinction between section 3 and the remedies available under the AWA with respect to pre-contractual disclosure. A failure to include all material facts in a disclosure document does not constitute unfair dealing in the performance of a franchise agreement. The franchisor is required to provide a disclosure document before a prospective franchisee signs a franchise agreement, and the AWA provides specific remedies for a failure to comply with that obligation.

Conclusion

The appellate decision provides procedural and substantive guidance to the class action and franchise law bar. The decision provides helpful guidance on the limits of judicial intervention in the crafting of class actions and serves as a reminder that procedural fairness cannot be compromised in order to achieve the objectives of the class proceedings legislation. It clarifies the scope of the duty of good faith and fair dealing under Ontario's franchise legislation. It also demonstrates the continued utility of summary judgment in disposing of certified class actions against franchisors.

Full text of the decision can be found here.

Footnotes

1. 1250264 Ontario Inc. v. Pet Valu Canada Inc., 2016 ONCA 24.

2. 2011 ONSC 287.

3. S.O. 2000, c. 3.

4. 2015 ONCA 248.

5. It was assumed but not decided that franchisor material non-disclosure during performance of a franchise agreement, in general, can breach section 3 notwithstanding the dicta in Bhasin v. Hrynew, 2014 SCC 71

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