Dominic Mochrie, Evan Thomas
A recent decision in the Pet Valuclass action found that the duty of good faith and fair dealing imposed on the franchisor an obligation to disclose material facts to its franchisees in contexts where a statutory disclosure document would not be required. The implications of this decision could complicate franchisors’ dealings with their franchisees.
The Pet Valu case arose out of claims that the franchisor failed to share volume rebates received by the franchisor for goods supplied to franchisees. The plaintiff also alleged that the franchisor failed to disclose information concerning volume rebates to franchisees. Both of these failures, it was alleged, were breaches of the franchise agreement and the Arthur Wishart Act(Franchise Disclosure), 2000. Interestingly, the plaintiffs claimed that the franchisor had an obligation to disclose this information not pursuant to Section 5 (disclosure) of the Wishart Act, but pursuant to Section 3 (the duty of good faith and fair dealing).
The franchisor and other defendants moved for summary judgment. In an October 2014 decision, Justice Belobaba found, based on the franchise agreement, that the franchisor was obliged to share the volume rebates with franchisees, and to do so in a reasonable manner. However, he also found there was no breach of contract because the franchisor had, in fact, shared the volume rebates with franchisees. The defendants were therefore successful on most of the common issues.
However, during the motion, the plaintiff’s focus shifted from the sharing of volume rebates to whether the franchisor had represented that it had significant purchasing power and that the franchisees would benefit from volume discounts. The court suggested that the plaintiffs bring a motion to add a new common issue to address these points. The plaintiff did so, basing the alleged disclosure obligation under both s. 3 and s. 5 of the Wishart Act. As a result, the court deferred a decision on two common issues.
In January 2015, Justice Belobaba released a further decision dealing with the plaintiff’s proposal to add a new common issue and to address the deferred common issues. Justice Belobaba did not allow the plaintiff to add its proposed new common issues due to prejudice to the franchisor, but he did analyze the issue of disclosure in the context of the original common issues. Justice Belobaba concluded that the franchisor had breached a duty under s. 3 of the Wishart Actto disclose to franchisees the amounts of volume discounts and rebates received by the franchisor and shared with franchisees.
In reaching this conclusion, Justice Belobaba found that in both its disclosure document and the franchise agreement, the franchisor had created the reasonable expectation that the franchisor had “substantial purchasing power” that would be used to obtain volume discounts that would be passed along, at least in part, to franchisees. Justice Belobaba also found that, in fact, the franchisor received “miniscule” volume discounts but had decided “for its own purposes” not to disclose this material information to its franchisees. Interestingly, Justice Belobaba focused not only on the misrepresentation, but also the failure of the franchisor to later correct that misrepresentation: “Pet Valu said one thing in the disclosure document… and then failed to advise its franchisees that this was actually not the case.”
Justice Belobaba went on to say that “the franchisor’s duty to disclose important and material facts that relate to the ongoing performance of the franchise agreement under s. 3 of the Arthur Wishart Act is not precluded by the existence of the comprehensive disclosure regime set out in s. 5 of the Act”, noting “there can indeed be situations where fair dealing requires that the franchisor tell the franchisee the truth about an important and material fact – particularly if the opposite was stated in the disclosure document and franchise agreement.”
Section 5 of the Wishart Actexpressly requires disclosure of all material facts to prospective franchisees in a disclosure document. A disclosure document, however, need only be provided in certain circumstances. The duty recognized by Justice Belobaba therefore appears to extend the franchisor’s disclosure obligations to situations to which s. 5 of the Wishart Actis not applicable.
Unfortunately, Justice Belobaba’s decision provides little guidance as to what precisely may have to be disclosed. In considering whether the undisclosed information in question in Pet Valuwas “material,” Justice Belobaba referred to the statutory definition of “material fact,” which includes certain information that “would reasonably be expected to have a significant effect on the value or price of the franchise to be granted or the decision to acquire the franchise.”
As well, Justice Belobaba appears to suggest that if information is material to the franchisee, the franchisor should disclose the information pursuant to s. 3 of the Wishart Act. In other words, the franchisor must disclose material information, regardless of any legitimate interests of the franchisor in maintaining the information confidential to itself. If so, that would have the clear potential of requiring franchisors to disclose information the franchisees could then use to sue the franchisor. A duty to disclose against self-interest certainly appears to be closer to a fiduciary duty than simply taking the franchisees’ interests into account. This would appear to be inconsistent with numerous decisions concerning the duty of fair dealing that state that the duty only requires a franchisor to consider the franchisee’s interests, not prefer the franchisee’s interests to its own.
Arguably, however, based on the facts as found by Justice Belobaba, the Pet Valucase is more appropriately classified as a case involving active misrepresentation, as opposed to a case establishing a new duty to disclose. The decision has been appealed by both parties, and the Ontario Court of Appeal may provide welcome clarification regarding the existence and scope of any new duty to disclose material information under s. 3.
Pending clarification or further elaboration of the duty apparently recognized by Justice Belobaba, franchisors should not assume that their disclosure obligations are limited to providing a comprehensive disclosure document. In particular, franchisors should:
- Take care, particularly in the disclosure document or franchise agreement, to avoid or otherwise qualify sales-type language that is open to interpretation (e.g., “substantial purchasing power”). Such statements will likely be interpreted from the perspective of a reasonable franchisee, not from the perspective of what the franchisor meant at the time.
- Where franchisees’ requests for information are refused, consider documenting the process by which the franchisor made its decision, including the manner in which it took into account the franchisee’s interests.