Pleadings Under Attack in Franchise Disputes

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This article, written by Ben Hanuka, was originally published in The Lawyer’s Daily on October 7, 2019, under the same title.

Author: Ben Hanuka, Law Works

The past couple of years has seen a fair amount of pleadings attacks in franchise disputes.  These cases involved challenges by franchisors/defendants to statements of claims launched against them and related parties by franchisees/plaintiffs. 

The pleadings challenges mainly revolved around causes of action that go outside the four corners of the franchise agreement.  The causes of action, as pleaded, were alleged to lack the necessary factual and legal foundation. 

• Allegation of breach of the franchise agreement and duty of fair dealing

In 1523428 Ontario Group/JB&M Walker Ltd. v. TDL Group, a 2018 decision of the Ontario Superior Court of Justice involving a class proceeding against the Tim Hortons franchise, the court struck claims of breach of the franchise agreement and breach of the obligation of fair dealing under the franchise legislation, albeit with leave to amend.  Noting that the duty of fair dealing relates to the performance of the terms of a contract, the court held that the claim did not provide particulars about how the contractual terms were breached, why there was a breach of the duty of good faith and what damages flowed from the breach.

In Westeinde (FNP) Inc. v. Re/Max Core Realty Inc., a 2019 decision of the Ontario Superior Court of Justice, the court struck allegations of bad faith against the franchisor.  The claim failed to disclose how the franchisor allegedly failed to perform the terms of existing obligations in the franchise agreement in good faith.  It was insufficient to simply allege that certain conduct by the franchisor amounted to bad faith conduct. The conduct must be linked to specific provisions in the franchise agreement.

• Allegation of oppression

In JB&M, the court found that the pleadings did not particularize the conduct that was alleged to be oppressive, and did not explain why that conduct unfairly disregarded the plaintiffs’ interests.  The court also found that it lacked the jurisdiction to order the statutory oppression remedy under the British Columbia Business Corporations Act because the BCBCA expressly grants jurisdiction to the British Columbia Superior Court. 

• Allegation of intentional interference with economic relations

In Re/Max, the franchisee also alleged that the franchisor interfered with its economic relations with its landlord in that the franchisor first approved the location but later withdrew its consent, causing the franchisee to breach its lease agreement with the landlord.  

The court held that the franchisee’s allegation of intentional interference with economic relations against the franchisor was unlawful against the franchisee, not the landlord, and did not meet the legal requirements of this tort.

• Allegation of agreement to renew a franchise agreement

In 6646107 Canada v. The TDL Group Corp., a 2019 decision of the Ontario Superior Court of Justice involving the Tim Hortons franchise, the court struck a franchisee’s allegation that TDL breached the franchise agreement by failing to renew it, and therefore, that it breached its duty of fair dealing.  It was plain and obvious that allegations of breach of the franchise agreement would fail because the franchise agreement contained no renewal provisions. For the same reason, the allegations of duty of fair dealing failed because they were tied to contractual obligations.

But the court did not strike the franchisee’s allegations about an oral agreement to renew the franchise agreement in the course of the franchise relationship.  The franchisee provided adequate particulars about these allegations. It was not legally prohibited for the parties to enter such an agreement. 

• Allegation of breach of trust/fiduciary duty

In JB&M, the court struck allegations in a statement of claim about improper use of advertising fund contributions based on allegations of breach of trust and fiduciary duty. 

The court struck these allegations on the basis that the claim did little more than announce a trust relationship but failed to set out material facts in support of the existence of the trust relationship.  The claim also failed to particularize the alleged breach of trust. Similarly, the allegations about the existence of fiduciary duties stated mere conclusions and lacked particulars. 

• Claim against parties related to the franchisor 

In JB&M, the court also struck claims against related parties, which were the advertising fund company, another affiliate of the franchisor company, and various executives of the franchisor.  The claim provided no particulars about the factual and legal allegations against the individuals. 

• Whether amendments to a pleading are barred by a limitation period

In Taylor v. Blenz The Canadian Coffee Company Ltd., a 2019 decision of the Supreme Court of British Columbia, the court ruled that the franchisees’ proposed amendments may not be statute barred under British Columbia’s Limitation Act because the factual foundation of the proposed amendments were based on existing facts already pleaded.  The new allegations merely recast the nature of the legal wrong. 

• Conclusion

It is trite that pleadings must enable the opposing party to know the case it has to meet.  Pleadings must not be vague or speculative and must lay out a clear and satisfactory factual and legal foundation.  To withstand pleadings challenges in franchise disputes, counsel should investigate cases and put the time and effort to develop the factual and legal allegations in a sufficiently fulsome manner at the early stage of framing the case.

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