Ontario Court Enforces Costs Award Against Principal of Franchisee

Article Content

Author: Robert Jones, Law Works P.C.
Editor: Ben Hanuka, Law Works P.C.

In Pet Valu Canada Inc. v. Rodger, a March 6, 2018, decision of the Ontario Superior Court of Justice, the court granted Pet Valu Canada Inc.’s motion for summary judgment to enforce its costs award against Robert Rodger, the principal of the representative plaintiff in a failed franchise class action. The court concluded that Mr. Rodger was liable to pay Pet Valu’s costs award under the terms of the indemnification clause and the personal guarantee in his franchise agreement with Pet Valu.

Key facts

The plaintiff franchisor, Pet Valu Canada Inc., was a wholesaler and retailer of pet food, supplies and services. The defendant franchisee principal, Robert Rodger, was the sole officer, director, and shareholder of 1250264 Ontario Inc.

In 2005, Pet Valu and 125 signed a franchise agreement for the operation of a Pet Valu franchised business in Aurora, Ontario. Rodger signed the franchise agreement on behalf of 125 and in his personal capacity. The franchise agreement defined “franchisee” to include shareholders of the franchisee company. It also contained an indemnification clause and a personal guarantee by Rodger in favour of Pet Valu.

In 2009, 125, as the representative plaintiff for Pet Valu franchisees, commenced a $100,000,000 lawsuit against Pet Valu for breaches of the Arthur Wishart Act (Franchise Disclosure), 2000. The plaintiffs argued that Pet Valu was not sharing volume rebates from its suppliers and was overcharging its franchisees for certain items. The court certified the common issues about volume rebates.

Pet Valu brought a motion for summary judgment to dismiss 125’s class proceeding. Pet Valu was substantially successful, but the court allowed one common issue to proceed. On appeal, the class action was dismissed entirely.

In the costs decision, Pet Valu was awarded $1,703,897 against 125. Adding the previous costs orders brought the total to $1,736,675. At the date of the hearing, 125 had not paid any of this amount and was a shell corporation with no assets.

Rodger was liable for Pet Valu’s costs award under the indemnification clause

The court applied the ordinary principles of contractual interpretation to resolve Rodger’s liability for the costs award. The leading cases, Sattva Capital Corp. v. Creston Moly Corp. and Bhasin v. Hrynew, call for a practical, common-sense approach to give effect to the intention of the parties and avoid commercially unreasonable results.

The indemnification clause provided that, if 125 asserts any action or claim against Pet Valu in relation to the franchise agreement “and/or any other matter”, then 125 shall “save [Pet Valu] … harmless from any and all costs of defence”, in proportion to Pet Valu’s success in defending 125’s action or claim.

The court found that the indemnification clause was broad and open-ended, and that it could not reasonably be interpreted to exclude class action proceedings. The plain and ordinary meaning was that 125 agreed to reimburse Pet Valu for its legal costs incurred in defending the class action proceeding. Rodger was liable to pay Pet Valu’s costs.

The court rejected Rodger’s argument that, as a representative plaintiff, 125 should only be liable for a proportionate share of Pet Valu’s costs awards. It found that this position was inconsistent with the Class Proceedings Act, 1992 and the Courts of Justice Act. The court also noted that, in earlier proceedings, 125 did not share favourable costs awards with the other class members.

Rodger was liable for Pet Valu’s costs award under his personal guarantee

The court found that Rodger was alternatively liable for Pet Valu’s costs award under the terms of his personal guarantee.

Under the personal guarantee, Rodger guaranteed to Pet Valu:

a) performance by 125 of all the terms, covenants, conditions, and provisions of the franchise agreement;

b) timely payment of all present and future debts, liabilities and other amounts payable by 125 to Pet Valu; and

c) any ultimate unpaid balance of any of these above amounts.

The court held that the plain and ordinary meaning of each category was that Rodger guaranteed payment by 125 of Pet Valu’s costs award. It concluded that Rodger was liable to pay the costs award.

Conclusion

This decision demonstrates that courts will apply the ordinary principles of contractual interpretation to indemnity clauses and personal guarantees in franchise agreements. The power imbalance inherent in the franchisor-franchisee relationship is not a justification for departing from the ordinary principles of contractual interpretation.

***

For more information about Law Works’ expertise and how we may be able to help you, please contact Ben Hanuka at https://www.lawworks.ca/book-a-consultation or by phone in Ontario at (855) 978-5293 and in British Columbia at (604) 262-1711.