Published on March 14, 2012
Posted in: Blog
In a lengthy (163 page) decision, Justice Strathy of the Ontario Superior Court of Justice recently ruled against two franchisees of the Tim Hortons franchise system in their action for damages against their franchisor and related entity, which they sought to have certified as a class proceeding.
In a careful and thorough decision, Justice Strathy reviewed all of the principles of certification and held that he would have certified the action, subject to certain issues being resolved on the appropriateness of the proposed class representatives. The decision in this regard provides a very helpful review of the authorities and principles which have previously supported the certification of various franchise class actions as class proceedings including several in which our firm acts as counsel.
Despite deciding that the claims were appropriate for class action treatment, Justice Strathy dismissed the action. His Honour granted Tim Hortons’ motion for summary judgment. His Honour decided that based on the record that was before him, the franchisees’ case did not require a trial and that the claims had no bases in fact or at law.
The franchisees complained about two aspects of the Tim Hortons system:
- Tim Hortons did not properly share in the profits attributable to its “Always Fresh” program; and
- Tim Hortons did not properly share in the profits attributable to its “Lunch Menu” program.
In both instances, the franchisees claimed that Tim Hortons owed them and all franchisees a contractual duty of good faith and a statutory duty of fair dealing in its establishment and operation of these two programs which Tim Hortons introduced into the system.
The “Always Fresh” program, despite its name, was a program introduced by Tim Hortons to replace on-site bakers who prepared freshly baked products with product that was produced off-site and delivered to the stores in a frozen state. Tim Hortons was party to a joint venture which owned the manufacturing facility where the new frozen product was made.
The change from baked to frozen product benefited the franchisees. Their complaint was that Tim Hortons made a disproportionate amount of money from the program and that the franchisees’ profits were eroded by the program.
The franchisees similarly complained that Tim Hortons introduced a lunch menu which, they maintained, produced unreasonably low returns when compared to Tim Hortons’ return on the menu.
In dismissing the franchisees’ claims, Justice Strathy reviewed all applicable principles of contract interpretation, good faith duties and the statutory duty of fair dealing. His Honour did not pronounce any new principles of law in any of those areas, but in applying the principles to this case found that the franchisees had no contractual entitlement to the rights they asserted they had in their contracts. Justice Strathy articulated that good faith and fair dealing principles do not permit courts to re-write expressly stated contractual terms. His Honour found that there was nothing unfair in how Tim Hortons carried out its contractual entitlements.
It was important to His Honour’s analysis to contrast this case where the franchisees overall were earning reasonable rates of return with other cases where the franchise system and franchise agreements as operated by franchisors produced results where franchisees were not profitable.
As well, His Honour commented favourably on the lengths to which Tim Hortons consulted with its franchisees before implementing the programs and the extent to which existing franchisees gave evidence in support of the programs.
Justice Strathy also determined that the claim for breach of former section 61 of the Competition Act (Canada) was without merit. This section, which prohibited price maintenance, was recently repealed as founding a civil cause of action for its breach. It is now only a reviewable practice by the Competition Tribunal. His Honour determined that there was no breach of section 61 although his determinations in this regard are to be considered obiter dictum as not necessary to the final determination of the case.
Various portions of this Competition Act analysis bear further scrutiny, but even if open for debate are not of any concern to the outcome of this case.
In summary, Justice Strathy’s decision serves as a model decision for its thoughtfulness, thoroughness, organization, review of applicable authorities and application to the case before him. For these reasons, it is an important decision and will be often cited in franchise cases in the future.