The ‘refusal to deal’ section of the Competition Act was amended in 2002 to allow private parties to apply to the Competition Tribunal, with leave, for an order restoring the supply of products following a termination or refusal to supply.  A recent decision of the Tribunal suggests that this section of the Act may soon see a rebirth in the franchise/distributorship relationship.  The Tribunal’s liberal approach to the granting of leave and interim relief highlights the potential role of the Tribunal as an alternative to a court injunction following a termination or expiry of a franchise or distributorship relationship.

An often overlooked aspect of the sale of goods to franchisees and distributors is the role which competition law can play in ensuring fairness and competitiveness in the supply relationship.  To appreciate the importance of this role, one need only consider that one of the stated purposes of the Competition Act, R.S.C. 1985, c. C-19 (the “Act”) is “to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy.”[1]

Thus, Parliament has arguably indicated that, in addition to promoting competition among businesses for the benefit of the consumer, the Act is intended to ensure that small and medium-sized businesses are accorded fair and equitable treatment by their suppliers.  Since the Act is concerned with more than consumer protection, it should be considered as a possible tool in assisting franchisees and distributors in disputes with their franchisors and suppliers over the supply of goods. This is true even where the franchisor/supplier is acting within its contractual rights in limiting or terminating the supply relationship.

Competition issues can arise whenever a franchisor supplies goods to its franchisees pursuant to an exclusive arrangement in a franchise agreement, or whenever a franchisor designates third-party vendors as the sole source of supply of products to its franchisees.

The recent case of Quinlan’s of Huntsville Inc. v. Fred Deeley Imports Ltd.[2] marks the first attempt by a franchisee/dealer to use the Act to obtain speedy and effective relief following the non-renewal of its dealership agreement by its franchisor/distributor.  Even though the franchisee was only partly successful in obtaining an order for the continued supply of its products, the case is well worth reviewing for its creative approach to a common franchise and distributorship scenario.

Restrictive Trade Practices

The case began with an application by the dealer to the Competition Tribunal under Part VIII of the Act entitled “Restrictive Trade Practices”.  This Part deals with matters such as refusal to deal, exclusive dealing, tied selling and market restriction.  These practices – also known as ‘reviewable trade practices’ – are a unique feature of the Act because, unlike matters falling within Part VI of the Act (entitled “Offences in relation to competition”), they are not considered criminal offences or even offences at all until the party engaging in such them is brought before the Competition Tribunal and made the subject of an order.  Until such an order is made, the conduct may be perfectly legal.

The unusual nature of a restrictive trade practice has several practical consequences:

 

  • A practice characterized as a reviewable trade practice does not give rise to a civil cause of action.[3] A challenge under Part VIII of the Act must therefore be brought before the Competition Tribunal either by the Commissioner or by a person with leave of the Tribunal.
  • An order under Part VIII does not entitle the complainant to damages or compensation.  Accordingly, it cannot be used to ground a class action or even an individual damages claim.
  • The Competition Tribunal can only make an order restoring supply or prohibiting certain trade practices by a particular person.  The Tribunal does not have the power to declare a practice “unlawful” under Part VIII of the Act.  An order against one supplier does not directly affect other suppliers who may be engaged in the same practice.

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