Motion to strike provides valuable franchise law reminders

By Kirsten McMahon, Associate Editor

An Ontario Superior Court ruling striking out many of the claims that disgruntled franchisees made in two separate legal actions provides some salient franchise law reminders, Toronto franchise lawyer Joseph Adler tells

In the matter, Justice Edward Morgan allowed the franchisees 30 days to amend their pleadings by dropping many of their claims against a popular coffee chain and its parent company and providing more details to back the allegations that remain.

Adler, partner with Hoffer Adler LLP, says independent of the actual resolution of the case, there are certain principles of law that the judge interspersed throughout the ruling, which he finds interesting from a franchise-law perspective.

“Justice Morgan went through the different grounds in the two claims and picked them apart one by one, indicating that there aren't sufficient grounds to meet the requirements of a breach of trust claim or to say that there is an oppression remedy or that there's any conversion or a breach of fiduciary duty,” he says.

“In almost every case, he's basically telling the plaintiffs to go back to the drawing board to redraft the claim in a way that asserts the grounds in a more proper manner,” Adler adds.

One of the arguments the plaintiffs made was that the franchisor breached its fiduciary duties, but the judge found the plaintiffs contracted out of that possibility by signing the franchise agreement, which contains a ‘no fiduciary’ clause.

“There is no reason that this clause should not be enforceable as against the Plaintiff and other putative class members. The parties were all sophisticated business people who knew what they were signing,” the judge ruled.

“If there is a ‘no fiduciary clause’ — which most franchise agreements have — then the franchisees can’t try to elevate the obligations of the franchisor,” Adler says. “There's a provision in the agreement.

“It's almost like we needed a reminder of sorts,” he adds.

The claims also name the franchisor’s parent company and its CEO, president and directors in the two actions. Morgan noted that s. 3 of the Arthur Wishart Act (AWA) augments the duties contained in franchise contracts but is premised on there being a contract between the parties. The AWA does not impose a duty of fair dealing in contract performance on non-parties to a contract, he stated.

Adler says while the plaintiffs attempted to cast the widest net possible to try to capture not only the franchisor but its parent company and others, the court had no tolerance for accepting the arguments that there was any privity of contract between those entities and the franchisee.

“You can't bring in the duty of good faith and try to impose that upon non-parties to the contract,” he says. “A parent company doesn’t necessarily have control over the subsidiary merely by virtue of being a parent company. You need to show facts that actually demonstrate that the parent is exercising control over the holding company.”

One of the actions alleges in a general way that s. 3 of the AWA has been offended but provides no details of which provisions of the contract or obligations of the franchisor that were alleged to have been carried out contrary to the duty to fair dealing, Adler says.

“What the claim suggests is that the very terms of the franchise agreement somehow amount to a breach of the duty of fair dealing under s. 3 of the AWA. However, this is not a claim that can be sustained. The statutory duty does not replace or amend the contract, but rather it reinforces the performance of the contract terms,” the judge wrote.

Adler, who was not involved in the matter and comments generally, says a franchisee can't say that the duty of good faith and fair dealing replaces the actual wording of the contract.

“Once again, this is a reminder of an important aspect of good faith and fair dealing as it relates to franchising,” Adler says.

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