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CCCA_V7No3_Col-McCarthys-FIN_CCCA 13-09-24 2:24 PM Page 44 Legal Update – McCarthy Tétrault LLP Franchise system change and managing legal risk in-house By Adam Ship n order to stay competitive in their respec- case, the franchisor reversed its previous pol- courts that this process was both meaningful Itive markets, franchise systems continually icy of identifying on its product invoices to and transparent. As a testament to the impor- evolve and improve — not only their prod- franchisees the net rebate that was passed tance of this process, the Court of Appeal ucts and services, but also their supply along from their suppliers. This change in emphasized the “extent and fairness of [the chains and internal operations. While any invoicing practice led to a class action being franchisor’s] process for considering [the] significant corporate change raises legal certified against the franchisor, in which the franchisees’ position.” considerations, franchise system change rais- franchisees alleged a right to the rebates and Perhaps the best opportunity to mini- es the additional risk of litigation from to transparency in billing practices (1176560 mize system-change risk is when the system within the franchisor’s network of fran- Ontario Ltd. v. Great Atlantic & Pacific Company franchise agreement is under revision. This chisees. In-house counsel play a vital role in of Canada Ltd. (2002), 62 OR (3d) 535). is an opportunity for in-house counsel to managing this legal risk. In order to best dis- Once a particular system-change has been consult with the business on any potential charge this role, in-house counsel need to identified as carrying litigation risk, in-house system changes that may be considered dur- be at the table with their business colleagues counsel can develop a process for best ensur- ing the coming agreement term. The fran- during both the design and implementation ing (and documenting) the franchisor’s chise agreement should be reviewed and phases of any significant system change. compliance with the duty of good faith. A revised to ensure that it does not impede Most system changes involve the exercise recent decision in Ontario is instructive on any of the potential system changes. of discretion and judgment on the part of the the type of process that can mitigate legal The importance of taking this opportuni- franchisor. The common law requires fran- risk. The Ontario courts have now clarified ty cannot be overstated. In a recent class chisors to duly consider the interests of their that a franchisor making important system action certification decision, there was ambi- franchisees before exercising discretion under changes will act in good faith if it meaning- guity in a franchise agreement on the critical a franchise agreement. This is also a statutory fully considers the interests of its franchisees issue of whether the franchisor was able to requirement in Ontario, Alberta, Manitoba, as a whole (Fairview Donut Inc. v. The TDL take a margin on certain services provided to New Brunswick and P.E.I. Over the last Group Corp. 2012 ONSC 1252, affirmed the franchisees (Spina v. Shoppers Drug Mart decade, numerous class-action proceedings 2012 ONCA 867, leave to the SCC refused, Inc., 2012 ONSC 5563, 2013 ONSC 2559). have been brought by franchisees for griev- [2013] S.C.C.A. No. 47). In another case, unnecessary, lofty language ances relating to recent system changes and Whether a franchisor has met this in a franchise agreement assisted the court in the duty of good faith is often a key compo- requirement will depend on the facts of a imposing a freestanding duty on the fran- nent of these claims. In-house counsel are particular case. Nevertheless, Fairview Donut chisor to protect and maintain the franchise increasingly developing risk management provides a roadmap for a formal good faith brand against third party competition (Bertico strategies as a response to these cases. process that can assist franchisors. In-house inc. c. Dunkin’ Brands Canada Ltd., 2012 Early identification of litigation risk is counsel are in a unique position to facilitate QCCS 2809, currently under appeal). important. The earlier the risk is identified, this process for their business. Fairview Donut Franchise agreements should provide the sooner processes can be put into place to involved a significant expansion in the prod- franchisors with the necessary discretion to minimize the ultimate risk. Some system ucts offered by a large franchise system, as evolve and improve the franchise system. changes are obviously risky from the outset well as changes in the method of preparing Ambiguous or unnecessary language signif- (see Mont-Bleu Ford Inc. v. Ford Motor Co. of other products. Prior to making these icantly increases litigation risk and should Canada Ltd. 2004 CanLII 10552 (Ont. Sup. changes, the franchisor consulted extensive- be cleaned up at the next opportunity. Ct.), where the franchisor appointed a new ly with its franchisees, disclosing costs and class of franchisees that competed directly benefits and soliciting feedback. During the Adam Ship is an Associate and Vice-Chair, with existing franchisees). However, other litigation, the franchisor was able to assemble Franchise & Distribution Group, McCarthy times the risk may not be as obvious. In one an evidentiary record that persuaded the Tétrault LLP 44 CCCA Canadian Corporate Counsel Association FALL 2013