On January 14, 2016, the Ontario Court of Appeal dismissed a $100 million class action brought against Pet Valu Canada Inc. by its former franchisee.
This class action was certified in 2011 with a focus on the issue of whether Pet Valu was contractually obligated to share volume rebates with its franchisees and, if so, whether it breached that duty.
In October 2014, Pet Valu obtained summary judgment dismissing five of the seven certified common issues, dealing primarily with those contractual issues.
The remaining common issues related to (a) whether Pet Valu breached the duty of good faith and fair dealing under s. 3 of the Arthur Wishart (Franchise Disclosure) Act, 2000 (Wishart Act) by failing to disclose information concerning volume rebates to franchisees (common issue 6) and (b) any damages that would result from this (common issue 7).
In January 2015, the motion judge granted summary judgment in favour of the plaintiff on common issue 6. Pet Valu appealed.
On January 14, 2016, the Ontario Court of Appeal found in favour of Pet Valu on its appeal, and dismissed the action against it.
The Court of Appeal held that the motion judge’s ruling against Pet Valu effectively “gave judgment on an issue that was never certified” and that doing so was “fundamentally unfair to Pet Valu.”
The certified language of the common issue in question asked, among other things, whether Pet Valu had a duty under common law or s. 3 of the Wishart Act (the duty of good faith and fair dealing) to disclose to class members whether Pet Valu or its affiliates received volume rebates from suppliers.
The motion judge interpreted the common issue so as to read into it the words “a significant level of” volume rebates.
The Court of Appeal held that the addition of these words was “tantamount to an amendment” of the common issue.
Notably, the motion judge recast the common issue after the completion of the summary judgment motion, without advising Pet Valu or affording it the opportunity to make submissions. The Court of Appeal emphasized that parties must have the opportunity to make submissions on a theory of liability, in order to ensure that it is “tested in the crucible of the adversarial process.”
The Court held that the information that the motion judge found Pet Valu should have disclosed did not relate to the performance or enforcement of the franchise agreement, which is a requirement under s. 3 of the Wishart Act. Rather, it was information that, “if indeed material,” should have been disclosed before the plaintiff became a franchisee. This is different from cases involving deliberate non-disclosure by a franchisor relating to a contractually-provided for renewal right of a franchisee, which, the Court held, “arose squarely within the ‘performance’ of the franchise agreement.”
The Court held that s. 3 of the Wishart Act does not include a duty to disclose information necessary for franchisees to verify whether a franchisor is meeting its obligations under a franchise agreement, which has been previously characterized as a “pre-litigation oriented duty of disclosure,” and found that the motion judge erred on that basis.
Further, a franchisor’s failure to include all material facts in a disclosure document does not constitute unfair dealing in the performance of a franchise agreement. The franchisor is required to provide a disclosure document before a prospective franchisee signs a franchise agreement, and the Wishart Act provides specific remedies for a failure to comply with that obligation.
Lastly, there can be no breach of the duty of good faith where an alleged non-disclosure has not adversely affected franchisees. The Court held: “And there was no indication that non-disclosure once the [class members] became franchisees adversely affected them in any way. How, then, can Pet Valu be said to have not dealt fairly or in good faith in the performance of the franchise agreement?”
The Court of Appeal also upheld the motion judge’s dismissal of the plaintiff’s motion to amend its statement of claim and add new common issues. At the time the plaintiff brought the motion, Pet Valu was “in a position to obtain complete summary judgment on the common issues as well as a probable cost award.” In the circumstances, allowing the amendment would have caused an injustice to Pet Valu not compensable in costs.
The class is seeking leave to appeal to the Supreme Court of Canada.
Sotos LLP acted for 1250264 Ontario Inc. with a team that included Louis Sokolov and Jean-Marc Leclerc.