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:
- 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.
- Section 7 of the Arbitration Act, 1991, which mandates a stay of court proceedings where a valid arbitration agreement exists.
- 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.