Franchise Class Proceedings and Arbitration

Can a franchisor avoid the possibility of a franchisee class action by including an arbitration clause in its franchise agreements? The Ontario Superior Court recently stayed a proposed class action in a case commenced by Pillar to Post franchisees alleging that the franchisor had made fundamental changes to its home inspection franchise system without complying with the statutory disclosure obligations under the Arthur Wishart Act (Franchise Disclosure), 2000 (the “AWA”). The franchisees claim damages of $25 million.

The franchisor sought a stay of the proposed class action on the basis that the parties had agreed to arbitrate their disputes. Under the Arbitration Act of Ontario, with very limited exceptions, courts must stay proceedings (including proposed class actions) where the parties have agreed to arbitrate their disputes.

In the case the standard form franchise agreement contained an arbitration clause in which the parties agreed that “all controversies, claims or disputes between Franchisor and Franchisee…[will] be resolved by arbitration before a sole arbitrator”. Although the franchise agreement also contained a waiver of the franchisees’ right to participate in class action proceedings, the franchisor did not rely on this provision in seeking the stay of legal proceedings.

The Pillar to Post franchisees attempted to avoid the stay. They argued that the right of franchisees to associate in the AWA extends to their right to participate in class actions. They argued that the scheme of the AWA – to protect franchisees from unfair treatment – overrode the mandatory directive for a stay contained in the Arbitration Act and is incompatible with mandatory arbitration of franchise disputes.

The Ontario Superior Court rejected this argument. Relying on an authoritative 2011 Supreme Court of Canada decision involving arbitration clauses, the Court stayed the proceeding. The Court held that in the absence of a clear statement of legislative intent to protect a party’s right to litigate or the application of one of the few exceptions found in the Arbitration Act, court actions should be stayed in favour of arbitration. With respect to the specific arguments advanced by the franchisees, the Court held that the AWA’s generalized public-interest objective was insufficient to invalidate the parties’ agreement to arbitrate. The Court held that a “clear intervention by the legislature to override an agreement to arbitrate” was required. To the contrary, the AWA Regulations expressly contemplate the use of arbitration and mediation in franchise disputes.

In considering the franchisees’ reliance on the right to associate provision in the AWA, the Court distinguished cases cited by the franchisees on the basis that they did not require a court to resolve a possible conflict between the mandatory language in the arbitration legislation and the right to associate in the AWA, and held that the arbitration provision in the franchise agreement did not “deny the franchisee any forum for access to justice.”

The Court also stated that class proceedings are not always preferable to arbitration for group claims. The Court also observed that class proceedings cannot function as a means of circumventing an arbitration agreement because class actions are procedural in nature and do not create substantive rights, modify existing rights or enhance the court’s jurisdiction.

Finally, the Court decided that the stay was not to be denied on public policy grounds, holding that enforceability of an arbitration agreement relates to whether the right to arbitrate must be enforced as opposed to whether arbitration is a preferable procedure.

The case clarifies that the exceptions to enforcement of an arbitration agreement are confined to clear statements in other legislation that the jurisdiction of the courts is to be preserved. This finding is consistent with the “contemporary approach” of “a policy supporting the resolution of disputes outside of court proceedings where parties have agreed to arbitrate their disputes.”

The case emphasizes the need for franchisors to give consideration in drafting franchise agreements as to whether they wish to include an arbitration clause precluding the initiation or participation in class proceedings. If so, the clause must be clearly and carefully drafted. Further, if the franchisor wishes to preclude submission of all claims to the courts and utilize arbitration as the preferred means of dispute resolution, the arbitration clause must use broad language to ensure that it includes all potential disputes that may arise between any parties.

Arbitration clauses and arbitration agreements in franchising require detailed knowledge of arbitration law and procedure as well as specific knowledge of franchise law and legislation, and should only be prepared by lawyers who have expertise in both areas.

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