Arbitration Provisions, the Right to Associate and Franchisee Class Actions

The Superior Court of Justice recently concluded in 1146845 Ontario Inc1. v. Pillar to Post Inc. that the right to associate contained in s. 4 of the Arthur Wishart Act (Franchise Disclosure), 20002 (“AWA”) does not negate an arbitration provision in a franchise agreement in the context of a yet to be certified class proceeding commenced by franchisees. This decision will have far reaching implications for franchisees and their counsel contemplating class actions to remedy system-wide issues.

The Facts

The facts are straightforward. The proposed representative plaintiffs commenced a class proceeding claiming relief arising from breaches of ss. 3, 4 and 7 of the AWA, among other things. The system’s franchise agreements all contained arbitration provisions in which the parties agreed that “all controversies, claims or disputes … of whatever kind or nature” would be submitted to arbitration. The plaintiffs brought a motion for a determination that the class proceeding was the preferable procedure for the resolution of the common issues in the action. The defendants sought a stay of the class proceeding, relying on s. 7(1) of the Arbitration Act, 19913 (“AA”), which provides:
  • 7.--(1) If a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court in which the proceeding is commenced shall, on the motion of another party to the arbitration agreement, stay the proceeding.
The plaintiffs argued that, despite the mandatory language of s. 7(1) of the AA requiring a court to stay an action in the face of an arbitration agreement, which under the AA can be an independent agreement or part of another agreement, the right to associate under s. 4 of the AWA includes the right to join in a class action that cannot be defeated by an arbitration provision in a franchise agreement. In this regard, s. 4 of the AWA states:
  • 4.
    1. A franchisee may associate with other franchisees and may form or join an organization of franchisees.

    2. A franchisor and a franchisor's associate shall not interfere with, prohibit or restrict, by contract or otherwise, a franchisee from forming or joining an organization of franchisees or from associating with other franchisees.

    3. A franchisor and franchisor's associate shall not, directly or indirectly, penalize, attempt to penalize or threaten to penalize a franchisee for exercising any right under this section.

    4. Any provision in a franchise agreement or other agreement relating to a franchise which purports to interfere with, prohibit or restrict a franchisee from exercising any right under this section is void.

    5. If a franchisor or franchisor's associate contravenes this section, the franchisee has a right of action for damages against the franchisor or franchisor's associate, as the case may be.
The plaintiffs also relied on the decision in 405341 Ontario Ltd. v. Midas Canada Inc.4 (“Midas”), in which Cullity J. expressed his opinion that “the right of association in section 4 does encompass the right of franchisees to participate in a class action for the purpose of enforcing their rights against the franchisor under the statute or otherwise” (¶ 17).

The Decision

Referring to Seidel v. TELUS Communications Inc.5 (“Seidel”), Justice Perell stated that the Supreme Court of Canada has unanimously confirmed “that absent legislative language to the contrary, courts must enforce arbitration agreements” (¶ 65). The particular issue for the court in this case therefore was whether, as the plaintiffs argued, “the AWA manifests a legislative intervention mandating court proceedings and preempting resort to arbitration” (¶ 73). Put another way, the question to be decided was whether the legislature in enacting the AWA, and in particular the right to associate, intended that franchisees could pursue a class action notwithstanding the fact that the franchise agreements at issue contained arbitration provisions.

Perell J. rejected the plaintiffs’ arguments. In reaching that decision, the court cited s. 5 of the General Regulation6 under the AWA, which refers to mediation and other alternative dispute resolution processes, as an indication that the AWA envisions that parties may arbitrate their disputes (¶ 75). Furthermore, the AWA does not contain express language precluding arbitration (¶ 83) or protecting any right to bring a class action (¶ 85). This is to be contrasted with ss. 7 and 8 of the Consumer Protection Act, 20027, which do contain such express language (¶ 83).

The court also distinguished the decision of Cullity J. in Midas. First, that case did not involve a motion to stay a class action (¶ 94). Second, the issue there was whether, in the context of a class proceeding that was already certified, the franchisor’s requirement that renewing or assigning franchisees execute a general release as a pre-condition for renewal or assignment infringed the right to associate so as to render the releases invalid (¶ 95). As to the relevance of Midas to the issues before him, Justice Perell stated:
  • [97] … Strictly speaking, [Cullity J.’s] judgment has nothing to say about the enforceability of an agreement to arbitrate, which unlike the release in [Midas] is not an agreement that would deny the franchisee any forum for access to justice. An agreement to arbitrate does not take away a vested right to participate in a certified class action. Put differently, [Midas] did not address the circumstance where there was a legislative tension between a right to participate in a court proceeding and a statutory imperative and jurisprudence that supports resort to arbitration by agreement even in a contract of adhesion.

  • [98] Put differently again, and the point is subtle, [Midas] presupposes that there was an available class action for a franchisee to associate with and the case begs the question about whether an agreement to arbitrate, which provides an alternative route to access to justice, albeit not collectively, and which is supported by public policy, is made illegal by s. 4 of the AWA and counts as legislative intervention pre-empting an agreement to arbitrate.
Lastly, Perell J. cited the Ontario Court of Appeal’s decision in MDG Kingston Inc.8 v. MDG Computers Canada Inc. as authority for the proposition that,
  • [100] … the AWA does not limit or restrict the right of parties to a franchise agreement to agree to resolve disputes by arbitration, which is another of saying that there is not legislative intervention to relieve the court of its obligation to give effect to the terms of an arbitration clause.
Accordingly, the defendants’ motion for a stay of the class action was granted. In light of that conclusion, it was not necessary for the court to determine whether the class proceeding was the preferable procedure for resolving the common issues.


The import of this decision is significant. Simply by inserting an arbitration clause into its franchise agreement, a franchisor can preclude its franchisees from commencing a class proceeding to enforce their statutory and other rights. No doubt franchisors that have not already done so will amend their franchise agreements to include binding arbitration provisions. Franchisees will thus have to resort to individual arbitrations to vindicate their rights, a costly and time consuming prospect that may be beyond the capacity of many. Such an apparent curtailment of the rights of franchisees is inconsistent with earlier and repeated interpretations of the AWA as being remedial legislation aimed squarely at the protection of franchisees. Perhaps it will be up to the legislature to clarify what is and what is not encompassed by the right to associate under the AWA.

David N. Kornhauser, Corporate Counsel, Macdonald Sager Manis, LLP
  1. 2014 ONSC 7400.
  2. S.O. 2000, c. 3.
  3. S.O. 1991, c. 17.
  4. [2009] O.J. No. 4354 (S.C.J.).
  5. 2011 SCC 15.
  6. O. Reg. 581/00.
  7. S.O. 2002, c. 30.
  8. [2008] O.J. No. 3770.

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