Arbitration Agreement Results In Stay Of Franchisees’ Class Action ‎

In a recent Ontario franchise decision, 1146845 Ontario Inc. v. Pillar to Post Inc., three corporate franchisees brought a proposed class action against the franchisor, Pillar to ‎Post Inc., and related parties. The franchisees alleged primarily that Pillar to Post made ‎fundamental changes to the home inspection franchise system in relation to its exclusive ‎territories, without complying with its statutory disclosure obligations. The franchisees ‎alleged that these changes resulted in significant losses to current and former franchisees.‎

The franchise agreements between the parties contained an arbitration provision which ‎generally required that all disputes be resolved by way of arbitration.‎

The franchisees launched their proposed class action after one of them had already taken ‎initial steps to commence an arbitration claim against Pillar to Post.‎

Pillar to Post brought a motion in the court case to stay the class action proceeding on the ‎basis of the arbitration agreement.‎

The plaintiffs franchisees took the position that the arbitration clause was not valid because ‎of sections 4 and 11 of the Arthur Wishart Act (Franchise Disclosure), 2000 (section 4 provides ‎franchisees with the right to associate, and section 11 invalidates any release or waiver of a ‎right in the Act).‎

Specifically with respect to the franchisee who had earlier launched initial steps for the ‎appointment of an arbitration, it claimed that Pillar to Post did not cooperate in the ‎appointment of the arbitration proceeding. It also claimed that after it learned about the ‎other franchisees’ common complaints, it preferred a class proceeding over individual ‎arbitration.‎

The particular franchisee who had earlier started an arbitration proceeding, also claimed ‎that Pillar to Post was disingenuous in its preference for arbitration, as tactic to avoid a class ‎action. On the other hand, Pillar to Post claimed that this particular franchisee was ‎attempting to coerce it into a settlement by diverting from arbitration to a proposed class ‎action.‎

The Ontario Superior Court of Justice, in a decision of Justice Perell, held that based on the ‎arbitration clause in the franchise agreement and the provisions of Ontario’s Arbitration Act, ‎‎1991, the proposed class action must be stayed and the parties were required to refer their ‎dispute to arbitration.‎

Perell J. relied on the Supreme Court of Canada’s decision in Seidel v. Telus Communications ‎Inc., 2011 SCC 15, in holding that the issue was “essentially a matter of statutory ‎interpretation independent of the motives of the parties”. Perell J. noted that in Seidel, it ‎was held that courts should normally enforce arbitration agreements, absent some ‎legislative restriction, even in a contract of adhesion. In that case, it was a contract of ‎adhesion in the form of a consumer contract. In the case at bar, it was a contract of ‎adhesion in the form of a franchise agreement.)‎

Referring to a line of Ontario cases, Perell J. wrote the following about the legislative intent ‎of the Arbitration Act, 1991: ‎

‎67 The contemporary legislation is a shift away from a policy where courts had a broad ‎discretion about whether to stay a court action and toward a policy supporting the ‎resolution of disputes outside of court proceedings where parties have agreed to ‎arbitrate their disputes. Under the contemporary approach, the court must stay the ‎action, unless the matter comes within a limited list of exceptions. ‎

In addition, Perell J. referred to the arbitration doctrine known as “competence-‎competence”, under which an arbitral tribunal may rule on its own jurisdiction, as codified in ‎section 17(1) of the Arbitration Act, 1991: “if there is an arguable or prima facie case that the ‎arbitrator has jurisdiction, the court should defer the issue of jurisdiction to the arbitrator”.‎

Further, Perell J. cited the Supreme Court decision in Bisaillon c. Concordia University, 2006 ‎SCC 19, for the proposition that a class action, which is procedural in nature and does not ‎create substantive rights, cannot be used to circumvent an arbitration agreement.‎

Moreover, he ruled that the parties’ alleged motives were irrelevant to the issue of the ‎requirement to arbitrate. ‎

With respect to the application of the Arthur Wishart Act (Franchise Disclosure), 2000, Perell ‎J. held that the Act did not negate arbitration as a form of alternative dispute resolution for ‎the following reasons:‎

1. Section 5 of the Regulation to the Act, which requires a disclosure document to ‎describe any alternative dispute resolution mechanism in the franchise agreement ‎and the circumstances when the process may be invoked – this shows that the Act ‎recognizes arbitration as a valid mechanism for the resolution of disputes. ‎
2. Section 7 of the Arbitration Act, 1991, which mandates a stay of court proceedings ‎where a valid arbitration agreement exists.‎
3. Neither the scheme of the Arthur Wishart Act (Franchise Disclosure), 2000, nor the ‎related cases that dealt with franchisees’ right to associate under section 4, stood for ‎the proposition that section 4 of the Act barred an arbitration proceeding.‎

Based on these factors, Perell J. held that the court was not required to decide which ‎procedure was preferable, and that the franchisees were required to be held to their bargain ‎and adjudicate their dispute by arbitration.‎