The second case: The liability for costs
The Ontario Court of Appeal dismissed a class action brought against a pet store franchisor on behalf of all franchisees. The case took more than seven years until it was finally concluded.
In the final decision, the Ontario Superior Court awarded costs to the franchisor in an amount of more than $1.7 million (plus interest). The original class representative franchisee plaintiff, a corporation, had no assets and the franchisor would be unable to recover its costs. The franchisor brought an action against the sole officer, director, and shareholder of the class representative who had personally signed the franchise agreement and provided a continuing guarantee of the corporation’s performance of its obligations to the franchisor, included under the franchise agreement.
The franchisor brought an application for summary judgment in respect of the liability for costs. The court then determined the individual franchisee was personally liable. The franchisee had agreed in the franchise agreement to indemnify the franchisor for costs incurred in defending any action or claim. The court held that the clause included costs incurred in defending a class action.
The court found the individual franchisee was bound by the indemnification clause and rejected the argument that the agreement was a contract of adhesion because there was no ambiguity in the indemnification provision.
The court also considered the provisions of a fairly typical personal guarantee given by the individual franchisee in which the guarantor guaranteed payment of all debts and liabilities of the corporate franchisee to the franchisor, and held that the provision applied to cover the costs of the class action.
This case has important consequences to franchisors and franchisees. It confirms the enforceability of indemnification provisions and guarantees in franchise agreements, and that an individual franchisee who agrees to an indemnity or a guarantee will not easily escape those obligations where the individual has benefitted from the franchise agreement. It also points out the risks to a franchisee who is a representative plaintiff in a class action which is decided in favour of the defendant franchisor of incurring personal liability for costs of the action. In these situations, a representative plaintiff should ensure he or she obtains a valid and enforceable indemnity from counsel for the class, especially where the action is taken on a contingency basis, the class proceeding fund, or a third party who may be funding the litigation.
The importance of independent counsel
Both cases illustrate the importance to franchisees, particularly in those systems where the franchisees are involved in a franchisee association or a franchise advisory council, to have independent counsel advising them of the appropriate protections they should take to eliminate or limit personal liability and obtain indemnification or insurance for losses they may suffer as a result of negligent performance by their franchisor.
Frank Zaid practiced franchise law for 40 years, was involved with more than 400 franchise systems, and appeared as an expert witness in various franchise disputes. Today, he is a franchise mediator, arbitrator, and private franchise system ombudsman with ADR Chambers in Toronto; operates his own business, Frank Zaid FRAN legal Support Services; and is a principal with Total Franchise Solutions, a consulting firm. For more information, contact him at (416) 322-8300 or via e-mail at firstname.lastname@example.org.