Individual to Group to Class Disputes in Franchising – Considerations for Resolution

10. Court-Enunciated Principles affecting Franchise Class Actions

As mentioned above, according to a recent unanimous decision of the Ontario Court of Appeal, class actions involving hundreds of franchisees suing their franchisor over a common franchise agreement are “exactly the kind of case for a class proceeding.”[17]

The Ontario Court of Appeal also recently confirmed that the statutory right of association contained in Section 4 of the Arthur Wishart Act includes the rights of franchisees to bring a class action in relation to alleged systemic breaches by their franchisor.[18] Thus, the Ontario Court of Appeal has indicated that the legislature intended to accord special status of protection to franchise class actions.

In an action on behalf of a group of franchisees alleging improper withholding of supplier monies by their franchisor, Justice Winkler (as he then was) found that case to involve “overwhelming commonality” and “judicial economy” which was “patently obvious” despite their being only 60 franchisees in the system.[19]

11. Test for Certification

In order to be certified as a class proceeding in the various provincial jurisdictions that have class action legislation, a proposed representative plaintiff must satisfy the legislative test for certification. In Ontario, the test for certification is contained in Section 5(1) of the CPA and involves five key parts, as set out in the statute:

5. (1)       The court shall certify a class proceeding on a motion under section 2, 3 or   4 if,

(a)           the pleadings or the notice of application discloses a cause of action;

(b)           there is an identifiable class of two or more persons that would be represented by the representative plaintiff or defendant;

(c)           the claims or defences of the class members raise common issues;

(d)           a class proceeding would be the preferable procedure for the resolution of the common issues; and

(e)           there is a representative plaintiff or defendant who,

(i)            would fairly and adequately represent the interests of the class,

(ii)           has produced a plan for the proceeding that sets out a workable method of advancing the proceeding on behalf of the class and of notifying class members of the proceeding, and

(iii)          does not have, on the common issues for the class, an interest in conflict with the interests of other class members. [20]

In applying the test for certification in the franchise context, courts take into account considerations that arise in light of the unique relationship between franchisee and franchisor. As set out above, in Ontario, the four most prominent certification decisions involving a class of franchisees suing a franchisor are 1176560 Ontario Ltd. v. Great Atlantic & Pacific Co. of Canada,[21] Landsbridge Auto Corp. v. Midas Canada Inc.,[22] 2038724 Ontario Ltd. v. Quiznos Canada Restaurant Corp.[23] and the recent decision in 578115 Ontario Inc. v. Sears Canada Inc.[24] The following is an examination of each stage of the certification test in light of these decisions as well as other cases outside of the franchise context.

A. Cause of Action (Section 5(1)(a)):

According to the Ontario Divisional Court in Abdool v. Anaheim Management Ltd., the application of section 5(1)(a) of the CPA involves the same test as Rule 21 of the Ontario Rules of Civil Procedure,[25] meaning:

(a)        all allegations of fact in the statement of claim, unless patently ridiculous or incapable of proof, must be accepted as proved;

(b)        the defendant, in order to succeed, must show that it is plain, obvious and beyond doubt that the plaintiff cannot succeed;

(c)        the novelty of the cause of action will not militate against the plaintiff; and

(d)       the statement of claim must be read as generously as possible, with a view to accommodating any inadequacies in the form of the allegations due to drafting deficiencies.[26]

Expert evidence is clearly inadmissible to rebut the existence of a cause of action. Just as at trial, parties cannot call expert evidence as to the meaning of a contract, even when the expert is genuinely knowledgeable about an industry. As the Alberta Court of Appeal recently stated:

For example, the respondent proposes to tender evidence to demonstrate that the industry would expect that if the methodology in the M & M Report changed, the price marker would change. This is an attempt to provide direct evidence on what the parties intended Article 5.8 to mean, in the guise of “context”. What the industry would have intended to contract for is an attempt to have the court draw an inference of subjective intent from external evidence. It goes one step further, because it suggests that the expectations of the industry as a whole could override the intentions of these two parties as expressed in the wording of this particular contract.[27] (Emphasis added)

B. Identifiable Class (Section 5(1)(b)):

In order to satisfy the requirement under Section 5(1)(b) of the CPA that there is an identifiable class, the proposed class definition: (i) must be objective and not merits based; (ii) must contemplate a rational relationship between the class and common issues;  (iii) must identify the person to have a potential claim against the defendant who will be bound by the court’s judgment on the common issues; and, (iv) must establish a class which is not unlimited.[28]