A&P Canada lost its appeal of an Ontario Superior Court of Justice Judge's decision to grant class certification of the franchisees' action against A&P Canada. Three "Food Basics" franchisees brought the action against A&P Canada alleging that A&P Canada was withholding from the franchisees the rebates that were payable to them under their franchise agreement. The franchisees sought to certify their action as a class proceeding under s. 5(1) of the Ontario Class Proceedings Act, S.O. 1992, c. 6 (the "Act") and the Divisional Court, in their decision dated March 8, 2004, affirmed Justice Winkler's December 9, 2002, decision to grant the franchisees' certification motion.
A franchisor typically receives rebates from its suppliers as a result of the high volume of purchases for the franchisees who are often obligated, under their franchise agreement, to purchase exclusively from the franchisor-approved suppliers. It is an increasingly common area of dispute between franchisors and franchisees as to how the rebates should be distributed between them.
The Great Atlantic & Pacific Company of Canada Limited ("A&P Canada") has established a franchise system under the name "Food Basics" for discount grocery supermarkets. There are sixty-six franchisee-operated stores and twenty corporate-operated stores in Canada, and the Plaintiffs are three of the sixty-six franchisees.
The franchisees operate their stores under a standard form franchise agreement with A&P Canada which obliges them to purchase product inventory exclusively from A&P Canada. This enabled A&P Canada to receive volume discounts or rebates from its suppliers.
The franchise agreement provided for a system of distribution of the rebates to the franchisees. However, since early 1997, A&P Canada stopped disclosing the specific information of the rebates it received. The franchisees were concerned that A&P Canada was withholding the rebates that should have been passed onto the franchisees according to the terms of franchise agreement. As a result, three franchisees brought the class action forward.
The Plaintiffs brought a motion on November 18 and 19, 2002 to certify the action as a class proceeding. Justice Winkler allowed the Plaintiffs' motion and appointed the Plaintiffs as Representative Plaintiffs on behalf of the following class:
All corporations which carry on or have carried on business in Ontario at any time under a Food Basics Franchise Agreement with the defendant [A&P Canada], excluding any of those which may have signed a full and final release in favour of the defendant [A&P Canada] at the expiry or termination of the last term of their franchise agreement.
Winkler J. identified the following "common issues":
A&P Canada obtained leave to appeal Winkler J.'s judgment on the following issues:
The Divisional Court adopted the Supreme Court of Canada's decisions in Housen v. Nikolaisen, [2002] 2 S.C.R. 235 and in Stein v. "Kathy K" (The Ship), [1976] 2 S.C.R. 802 which respectively set the standard of review as that of correctness for a question of law, and as that of a "palpable and overriding error" for a finding of fact. The Divisional Court also adopted the Ontario Court of Appeal's deferential approach in Anderson v. Wilson, (1999) 44 OR (3rd) 673 towards Superior Court Judges' expertise in class certification, where the Court of Appeal's commented that an appellate court's intervention at the certification level "should be restricted to matters of general principle".
A&P Canada argued that the Representative Plaintiffs could not fairly and adequately represent the interests of the class due to the divergent incentives between those franchisees who are indebted to A&P Canada and those who are not. In particular, A&P Canada claimed that the Representative Plaintiffs who have no indebtedness to A&P Canada would have no incentive in either accepting or advocating on behalf of the class a financial settlement involving debt forgiveness. A&P Canada cited American authorities to support their position that, to the extend that the divergent interests from some or other members of the class, the Representative Plaintiffs would be put into a conflict of interest situation that would disqualify them from acting on behalf of the class in a class proceeding.
A&P Canada also alleged that the Representative Plaintiffs would have a very strong incentive to disrupt the financial balance between A&P Canada and the franchisees in relation to the availability of future subsidies, assistance and other extra-contractual financial arrangements for franchisees.
The Divisional Court rejected A&P Canada's submissions as there was no evidence that each of the franchisees, as class members, had a different contractual relationship with A&P Canada that would result in different financial obligations and rights in relation to A&P Canada. According to the Divisional Court, the different circumstances of the Representative Plaintiffs do not represent a conflict on the "common issues" and do not mean they cannot fairly and adequately represent the class. Neither can the extra-contractual aspects identified by A&P Canada be characterized as representing a conflict of interest nor a conflict with the fair and adequate representation of the interests of the class at the certification motion stage.
The Divisional Court found no evidence to indicate the Representative Plaintiffs would not "carry out their obligations as representative plaintiffs in an even-handed manner towards the class members". The Divisional Court stated that it should give deference to the factual findings of the certification motion judge and accepted Justice Winkler's finding that the Representative Plaintiffs were equipped and suited to "vigorously and capably prosecute the interests of the class".
The Divisional Court also cautioned against the use of American authorities cited by A&P Canada's counsel given the differences between the American class action regime and the Ontario regime.
In summary, the Divisional Court found no error in Justice Winkler's finding either on a question of law, a question of mixed law and fact, or a question of fact.
This case stands for the position that franchisees can bring class actions against the franchisor despite the franchisees' different economic interests and extra-contractual matters as long as the franchisees do not have different contractual relationships with the franchisor. This case opens the door for franchisees who typically have standard form franchise agreements to bring actions against the franchisor as a class for disputes over the terms of the franchise agreement that are common to the class members.
For a copy of the decision, please visit: http://www.canlii.org/on/cas/onscdc/2004/2004onscdc10233.html.
Heydary, Javad
(416) 972-9001 Ext. 201
clientservices@heydary.com
Hosseini, Ruzbeh
(416) 972-9001, Ext. 207
clientservices@heydary.com
