Ontario Court Considers Franchise Class Action Challenging Scope Of Franchisors' Right To Profit From Franchisees

In Spina v. Shoppers Drug Mart Inc., 2012 ONSC 5563, Justice Perell for the Ontario Superior Court has given judgment in the first stage of a class action certification motion brought on behalf of franchisees of Shoppers Drug Mart. The decision addressed the threshold requirement for certification, namely whether the claim disclosed reasonable causes of action. In the process, the Court reviewed and determined the legal validity of the varied and interrelated causes of action asserted by the representative plaintiffs.

While only a pleadings motion, Spina provides useful guidance to franchisors and franchisees in Ontario. Although the decision addressed numerous issues, this comment focuses on the following three lessons:

Franchisors should review their standard form franchise agreements to ensure that the key financial terms are absolutely clear and leave no doubt regarding the scope of the franchisor's rights to earn profits from the franchise system. In Spina, the Court allowed the Franchisees' claim to proceed on the allegation that the Franchisor had improperly profited from certain services provided to the Franchisees. While the franchise agreement contained detailed provisions on these issues, it was not plain and obvious that the Franchisor could earn a profit on these services provided to the Franchisees.

The duty of good faith and fair dealing does not provide franchisees with the right to receive ongoing disclosure throughout the term of the franchise relationship. The Court struck the Franchisees' claim in this respect, rejecting the argument that such ongoing disclosure was necessary for the Franchisees to verify that the Franchisor was complying with its obligations under the franchise agreement. The Court held that imposing an ongoing...