In a recent decision of the Ontario Superior Court of Justice,
Spina v. Shoppers Drug Mart Inc. 2012
ONSC 5563 ("Spina"), the Honourable Mr. Justice
Perell heard a motion for certification of a franchise class action
as well as a cross-motion by the defendant under Rule 21 to strike
various elements of the plaintiffs' amended statement of
claim. Although the decision deals with a multitude of legal
issues concerning the striking of pleadings and certification, it
provides helpful guidance to franchisors in respect of typical
claims that are brought by franchisees in rebates-related claims.
Specifically, Justice Perell held that Ontario courts will take a
serious look at boilerplate claims concerning unjust enrichment,
breach of fiduciary duty and breach of the duty of good faith to
see if such claims pass muster in light of what the parties'
franchise agreement actually reads regarding the parties'
rights concerning rebates.
The plaintiff franchisees, who were drug store pharmacists,
brought a claim that asserted breach of contract claims against the
franchisor, Shoppers Drug Mart Inc. ("Shoppers"), arguing
that Shoppers had breached the terms of the "Associate
Agreements" with their franchisees in various ways. In
addition, the plaintiffs alleged that Shoppers breached the common
law duty of good faith and statutory duties of fair dealing under
section 3 of the Arthur Wishart Act (Franchise Disclosure),
2000 ("AWA"). The plaintiffs made
further claims for breach of fiduciary duties and unjust
enrichment. Finally, the plaintiffs alleged that Shoppers had
interfered with their right to associate, as prescribed by section
4 of the AWA.
These causes of action made by the franchisees were grounded in
various factual allegations, which included: failure by Shoppers to
remit professional allowances; failure by Shoppers to share the
advantages of bulk purchasing with associates; Shoppers'
collection of advertising contribution fees in excess of a 2% cap
prescribed by the Associate Agreements; making unauthorized changes
to the "Optimum Program"; imposing a budgeting system
that was biased against associates; imposing inventory practices
that were not reasonable; and failing to provide associates with
sufficient disclosure.
Although some of the plaintiffs' claims were permitted to
proceed, Justice Perell struck several of them, and the court's
reasoning regarding the decision to strike these claims
demonstrates that many causes of action must be examined in light
of the parties' contractual obligations in determining whether
or not they can proceed.
(a) The unjust enrichment claims
Justice Perell determined that it was plain and obvious that the
plaintiffs' unjust enrichment claim relating to volume rebates
would not succeed. Although the plaintiffs could establish an
economic loss and corresponding enrichment to Shoppers, the
franchise agreement provided a juristic reason for the
enrichment. Justice Perell's decision on this point
illustrates that when franchisors are faced with an unjust
enrichment claim, the governing agreement may provide a full stop
to the cause of action. This highlights the need to conduct a
thorough contractual review at the pleadings stage of
litigation.
In contrast, Justice Perell held that Shoppers' failure to
remit professional allowances might support an unjust enrichment
claim because the associate agreement did not provide such juristic
reason. However, he further held that this claim (as well as
the plaintiffs' claims for cost recovery fees and inventory
practices) was "redundant" or "superfluous" of
the claim for breach of contract.
(b) The breach of fiduciary duty claims
Justice Perell declined to decide the issue of whether Shoppers
was in a fiduciary relationship with its franchisees, but intimated
that the Associate Agreement might preclude such a finding.
More particularly, Justice Perell referred to the clause in the
Associate Agreement which states: "This Agreement shall not be
construed so as to constitute the Associate and/or Pharmacist as a
partner, employee, joint venture, agent or representative of the
Company for any purpose whatsoever, or to create any such
relationship or any trust or fiduciary relationship".
Whether dispositive or not, as a practice point for franchisors,
including such a clause in franchise agreements will often be
prudent.
Rather than focussing on the existence of a fiduciary
relationship, Justice Perell considered whether Shoppers
had breached a fiduciary duty. Quoting Justice
Keenan in Varcoe v. Sterling (1992), 7 O.R. (3d) 204,
Justice Perell noted that "not every wrong done by a fiduciary
is a breach of that duty. It must be a wrong which is a
betrayal of that trust component of the
relationship". Ultimately, Justice Perell
determined that it was not an "act of disloyalty, breach of
confidence or misappropriation of the Associates' property for
Shoppers to keep the rebates for itself". Therefore,
even if a fiduciary relationship existed, there was no breach of a
fiduciary duty.
Justice Perell determined that the plaintiffs could still
potentially rely on the common law duty of good faith and
Shoppers' contractual duties. Accordingly the claim for
breach of fiduciary duty was struck.
(c) The breach of the duty of good faith claims
Justice Perell struck out the plaintiffs' claim for breach of the duty of good faith as it related to volume rebates. Justice Perell noted that "it is a general principle that good faith is not intended to replace that contract with another or to amend the contract by altering the express terms of the franchise contract". This comment will be welcomed by franchisors facing attempts by franchisees to dress-up or elevate contractual obligations in the guise of good faith.
Justice Perell further explained that the plaintiffs' claims concerning volume rebates mirrored a claim for beach of an express term of the contract, but as a matter of interpretation, the Associates Agreement authorized Shoppers' conduct. Accordingly, Justice Perell determined that the claim had to fail.
(d) The interference with association claims
Lastly, the plaintiffs sought injunctive relief preventing Shoppers from interfering with an independent franchise association. Justice Perell noted that the plaintiffs "fear but have not actually suffered interference with their right to associate". In this respect, Justice Perell clarified that franchisees are not entitled to injunctive relief when interference is merely anticipated, but has not actually occurred.
Justice Perell determined that it was plain and obvious that the claim was not a genuine claim, but was an attempt by the plaintiffs to add colour to the amended statement of claim. However, Justice Perell granted the plaintiffs leave to amend their claim in the event that interference should later occur.
Conclusion
Justice Perell's decision in Spina illustrates the risk involved in pleading a multitude of causes of action, particularly where those claims overlap with breach of contract claims or are being attempted despite clear contractual language that undermines them. It is reassuring to franchisors that Ontario courts will carefully scrutinize franchise claims on motions to strike, as such motions can significantly pare down the claims a franchisor is forced to defend and can simplify matters before the court. This allows the parties to franchise litigation to better focus on the real issues in the lawsuit and to understand the case to be met.
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.