Published on January 1, 2000
Posted in: Blog
The Supreme Court’s finding in Jirna Ltd. v. Mister Donut of Canada Ltd. that the franchise relationship is contractual not fiduciary profoundly marked the evolution of franchise law in Canada. While Jirna has not been formally revisited by the Court, its underlying rationale appears at odds with recent Supreme Court decisions which have imposed fiduciary duties on independent contracting parties in commercial relations. In this article, David Sterns attempts to discern the true guiding principles of this important decision in light of the emerging law of fiduciary duties in Canada.
The Supreme Court’s seminal decision in Jirna Ltd. v. Mister Donut of Canada Ltd. found that the franchise relationship was essentially contractual, not fiduciary, in nature. Underlying that decision was the notion that a contractual relationship entered into by independent arm’s length parties is inconsistent with the imposition of fiduciary duties, even where one party is shown to have broad discretionary powers over the other. That reasoning, however, must now be reviewed in light of contemporary Supreme Court decisions which have extended the scope of fiduciary duties into purely commercial relationships. Whether Jirna will continue to influence the law of franchising depends in part on whether it can be reconciled with this emerging trend.
The facts of Jirna are by no means exceptional. The plaintiff franchisee operated three Mister Donut outlets in the City of Toronto under three separate but identical franchise agreements. The franchise agreements required the franchisee to purchase all ingredients and supplies from the defendant franchisor or other suppliers designated by it in writing. Although not expressly stipulated in the agreement, Mister Donut represented to the franchisee that one of the chief benefits of the franchise system was the franchisor’s mass purchasing power. The franchisee was told that it would reap significant savings from this; however, no representations were made to it about the rebates or commissions which were paid to the franchisor from its suppliers.
The case centered on whether the franchisor was required to pass the benefit of the undisclosed volume rebates or commissions onto the franchisee. The plaintiff claimed that it was entitled to these benefits on the basis that the franchisor stood in a fiduciary position to it when dealing with suppliers on its behalf. Under this interpretation, the franchisor would have been prevented from realizing any undisclosed profits or commissions from its food and beverage suppliers. The franchisor in turn insisted that no fiduciary relationship existed as the franchise agreement expressly stated that the parties were independent contractors and that “no partnership, joint venture or relationship of principal and agent is intended.”
“It appears to me that the relationship between the franchisor and the franchisee in the case at bar is much more than a simple vendor-and-purchaser relationship. In some respects it has at least some of the attributes of a partnership. To the extent that the arrangement requires the franchisor to purchase all supplies from persons of its own choosing, a principal-and-agency relationship has been established. Certainly, what has been created is a very close association, a venture in common, or a joint venture. If that be so, then what may be described as fiduciary obligations, or at least quasi-fiduciary obligations, have been created.”
It was because of this close association that the judge imposed on the franchisor a fiduciary duty to avoid realizing undisclosed profits and commissions from the relationship. In fact, he went even further by likening the franchisor’s conduct to “constructive fraud”, consisting of the usurpation of the trust reposed in it by the franchisee.
The trial decision was reversed by a Court of Appeal decision which was later upheld by the Supreme Court. Both appellate courts passed in silence over the trial judge’s observations about the vulnerability of the franchisee under the exclusive purchasing arrangement and the high degree of control and influence exerted by the franchisor under the franchise agreement. Instead, the Court of Appeal emphasized the fact that the franchisee appeared to be an established business with sufficient knowledge and resources to operate three separate locations. The Supreme Court in turn placed particular emphasis on the “independent contractors” clause in the franchise agreement and on the fact that the agreements were negotiated by parties “on equal footing and at arm’s length.” In essence, the franchise relationship was viewed by the Supreme Court as being no different from an ordinary commercial contract and therefore did not warrant the imposition of fiduciary duties or other special considerations.
Jirna can be criticized for its unduly narrow approach to the fiduciary issue. In particular, the reliance on the independent-contractor clause, to the virtual exclusion of all other evidence about the nature of the relationship, is ill-founded. What is troubling is that standard clauses such as the independent-contractor clause are known to be drafted by franchisors and rarely ever negotiated. The main purpose of such clauses is to prevent the franchisee from using the franchisor’s name to bind the franchisor in contracts with third parties. If other substantive results are to flow from such clauses, some consideration must be given to the purpose which they fill within the context of the entire agreement.
Moreover, as Professor Donavan Waters points out in the following passage, it is not for the parties themselves to decide whether they owe each other fiduciary duties; that determination rests with the court:
“… [I]n a transaction a solicitor enters into with his client, it may expressly be said that the parties intend to act towards each other as independent contractors only. But this would not deter a court from continuing to discover a fiduciary relationship in the fact that nevertheless the parties were solicitor and client. Thirdly, if parties apparently agree to a relationship which is not of itself fiduciary, there is the question as to how the allegedly injured party came to agree. Did one party have a stronger economic position and dictate that clause to the other?”
As the following passage of Martland J. indicates, the Jirna decision was also influenced by the finding that the franchisee was able to operate at a profit.
“It was not contended that the respondent used its position under this paragraph to make it impossible or even difficult for the appellant to carry on a profitable business. That would have raised other considerations which do not arise here because, on the evidence, the appellant’s franchise has been profitable, albeit not as profitable as it expected.”
It is difficult to understand this emphasis on profitability. The passage suggests that a fiduciary duty might have been found if the franchised business had been unprofitable. Fiduciary duties, however, are not a means of ensuring profitability but rather a remedy for the usurpation of trust and discretionary power over vulnerable parties. This reasoning demonstrates a rather unprincipled approach to the issue by suggesting that the imposition of fiduciary duties is determined by the magnitude of loss rather than the vulnerability or other circumstances of the party suffering the loss.
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