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Q & A with Frank Zaid: Franchisor’s performance documents

Elegant adult male businessman sitting in his office and read fiBy Frank Zaid

Q: Do franchisees have a right to receive ongoing information or documents relating to their franchisor’s performance of its obligations under their franchise agreement?

A: The Ontario Superior Court of Justice recently addressed this issue in its class action decision in Spina v. Shoppers Drug Mart Inc. It ruled that unless the franchise agreement specifically requires the franchisor to provide such information or documents, franchisees do not have a right to receive these materials.

Claimed breaches
In this case, representative plaintiff franchisees—known as ‘associates’—who operated franchised Shoppers Drug Mart pharmacies commenced a proposed national class action against the franchisor. The causes of action included breach of contract, unjust enrichment, breach of fiduciary duty, breach of common law duty of good faith and breach of statutory duties of good faith and fair dealing.

The plaintiffs claimed compensatory damages or equitable damages of up to approximately $1 billion, the largest claims being related to rebates and so-called professional allowances that have been collected by Shoppers.

On a motion for certification of the action as a class action, the franchisor brought a cross-motion, submitting it is plain and obvious some of the claims in the proposed class action do not disclose a cause of action and should be dismissed.

The plaintiffs alleged Shoppers is operating its franchise system in breach of its duty of good faith and fair dealing both under common law and under franchise legislation in Alberta, Manitoba, Ontario and Prince Edward Island, all of which require the franchisor to have due regard for the associates’ legitimate interests and reasonable expectations when it makes decisions and takes actions.

Specifically, the plaintiffs alleged Shoppers is keeping money from rebates, professional allowances and overcharges for services that should be included in the revenue (i.e. gross sales) of the franchised stores, where after the payment of expenses the money would be shared among the associates and the franchisor. The plaintiffs submitted Shoppers was breaching its contracts and its statutory duties by not sharing the growing profits from its franchise system.

Shoppers’ defence was that it is not obliged to share any more than it has; and it is contractually and statutorily entitled to make its own profit under the franchise agreements and applicable franchise legislation.

The plaintiffs alleged Shoppers’ common-law duty of good faith and statutory duty of fair dealing require the franchisor to exercise its powers and discretion over the associates fairly, in good faith and in a commercially reasonable manner when collecting rebates and when charging advertising-contribution fees. They also alleged Shoppers had breached the same two duties by failing to provide sufficient financial information to the associates that would allow them to verify (a) they were not being charged excessive amounts and (b) the amounts charged were being properly used for advertising costs.

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