1176560 Ontario Limited et al. v. The Great Atlantic & Pacific Company of Canada Limited [Indexed as: 1176560 Ontario Ltd. v. Great Atlantic & Pacific Co. of Canada Ltd.]
70 O.R. (3d) 182
[2004] O.J. No. 865
Divisional Court File No. 745/02
Court File No. 02-CV-227777CP
Ontario Superior Court of Justice
Divisional Court
O'Driscoll, Then and MacKenzie JJ.
March 8, 2004
Civil procedure -- Class proceedings -- Certification -- Qualifications of representative plaintiff -- Contention that representative plaintiffs had conflict of interest with class members not established -- Class action by franchisees of discount grocery chain against franchisor alleging breach of standard form franchise agreement -- Main allegation that franchisor had withheld rebates due under franchise agreement -- Representative plaintiffs able to fairly and adequately represent interests of class -- Class Proceedings Act, 1992, S.O. 1992, c. 6, s. 5(1).
The defendant, the Great Atlantic & Pacific Company of Canada ("A & P"), established a chain of discount grocery supermarkets in Canada. Twenty stores were corporate operations and 66 of the stores were operated by franchisees. The plaintiffs were three of the franchisees. In 2002, the plaintiffs commenced an action intended as a class proceeding. The plaintiffs sought payment of allowances and exclusive cost reductions as defined in the franchise agreements with A & P. The plaintiffs alleged that these rebates were not distributed to the franchises in accordance with the franchise agreement. On December 9, 2002, Winkler J. ordered that the action be certified as a class proceeding. Leave to appeal the order was granted on the issues of whether the [page183] plaintiffs could "fairly and adequately represent the interests of the class" as required by s. 5(1)(e)(i) of the Class Proceedings Act, 1992 and whether there was a conflict between the representative plaintiffs and other franchisees within the meaning of s. 5(1) (e)(iii) of the Act. The conflict was alleged to arise because some franchisees of the class were indebted to A & P but the representative plaintiffs were not. Winkler J. however, held that there was no merit to the contention that the independence of the plaintiffs disqualified them as representatives.
Held, the appeal should be dismissed.
On a certification motion, it is for the motions judge to accord weight to the evidence in arriving at factual findings. An appellate court must give deference to those findings, unless there has been demonstrable palpable or overriding error. No such error was demonstrated. Winkler J.'s findings and the applied legal principles demonstrated that the representative plaintiffs could fairly and adequately represent the interests of the class and that they were not in a conflict of interest on the common issues with the interests of the other class members. There was no evidence to indicate that the representative plaintiffs would not carry out their obligations in an even-handed manner toward the class members. If, in the course of the proceedings, a conflict were to develop on any matters other than the common issues, the Act provided for the creation of a subclass or for any class member to opt out of the class.
APPEAL of a certification order in an action under the Class Proceedings Act, 1992, S.O. 1992, c. 6, s. 5(1).
Cases referred to 1176560 Ontario Ltd. v. Great Atlantic & Pacific Co. of Canada Ltd. (2002), 2002 6199 (ON SC), 62 O.R. (3d) 535, 28 C.P.C. (5th) 135, [2002] O.J. No. 4781 (QL) (S.C.J.); Anderson v. Wilson (1999), 1999 3753 (ON CA), 44 O.R. (3d) 673, 175 D.L.R. (4th) 409, 36 C.P.C. (4th) 17 (C.A.) [Leave to appeal to S.C.C. refused (2000), 258 N.R. 194n]; Carom v. Bre-X Minerals Ltd. (2000), 2000 16886 (ON CA), 51 O.R. (3d) 236, 196 D.L.R. (4th) 344 (C.A.); Housen v. Nikolaisen, [2002] 2 S.C.R. 235, 219 Sask. R. 1, 211 D.L.R. (4th) 577, 286 N.R. 1, 272 W.A.C. 1, [2002] 7 W.W.R. 1, 30 M.P.L.R. (3d) 1, 2002 SCC 33, 10 C.C.L.T. (3d) 157; Stein v. Kathy K (The), 1975 146 (SCC), [1976] 2 S.C.R. 802, 62 D.L.R. (3d) 1; Western Canadian Shopping Centres Inc. v. Dutton, [2001] 2 S.C.R. 534, 94 Alta. L.R. (2d) 1, 201 D.L.R. (4th) 385, 272 N.R. 135, [2002] 1 W.W.R. 1, 2001 SCC 46, 8 C.P.C. (5th) 1 (sub nom. Western Canadian Shopping Centres Inc. v. Bennett Jones Verchere) Statutes referred to Class Proceedings Act, 1992, S.O. 1992, c. 6, ss. 5(1), 8(3), 30(2) Courts of Justice Act, R.S.O. 1990, c. C.43, s. 19(1)(b) Rules and regulations referred to Federal Rules of Civil Procedure (U.S.), FED. R. CIV. P. 23(a) (4) Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 62.02(4)(b)
J.M. Steiner and L.K. Fric, for appellant/defendant (plaintiff by counterclaim). T.G. Heintzman, Q.C., J.C. Lisus and D. Sterns, for respondents/plaintiffs (defendants by counterclaim). [page184]
MACKENZIE J.: --
Nature of Proceedings and Introduction
[1] On November 18 and 19, 2002, the respondents'/plaintiffs' motion to certify this action as a class proceeding under s. 5(1) of the Class Proceedings Act, 1992, S.O. 1992, c. 6 ("CPA") was heard by Winkler J. Judgment was reserved. On December 9, 2002, Winkler J. released written reasons, now reported: (2002), 2002 6199 (ON SC), 62 O.R. (3d) 535, [2002] O.J. No. 4781 (QL) (S.C.J.) ordering that this action be maintained as a class proceeding with respect to the common issues on behalf of the following classes [at p. 539 O.R.]:
All corporations which carry on or have carried on business in Ontario at any time under a "Food Basics" Franchise Agreement with the defendant [A & P], excluding any of those which may have signed a full and final release in favour of the defendant [A & P] at the expiry or termination of the last term of their franchise agreement.
[2] Winkler J. appointed the plaintiffs as representative plaintiffs on behalf of the class. The December 9, 2002 order states that the class seeks payment of Allowances and Exclusivity Cost Reductions, as defined in the Franchise Agreements, that were received by the Great Atlantic & Pacific Company of Canada ("A & P") from its suppliers and allegedly not distributed to the franchisees.
[3] Winkler J.'s order sets out the following "common issues" [at p. 543 O.R.]:
Does the Franchise Agreement require [the defendant] to distribute to the franchisees the Allowances and Exclusivity Cost Reductions (in total"Rebates") referred to in Paragraph 11 of the Franchise Agreement and Schedule A thereto, regardless of the other nomenclature used by the defendant or its suppliers?
If the answer to Question 1 is yes in whole or in part, what is the source, identity and amount of the Rebates which [the defendant] is required to distribute to the franchisees?
Has [the defendant] distributed those Rebates to the franchisees? If so, when, in what form and in what amounts were they so distributed?
If the answer to question (3) is no or in part no, does the Franchise Agreement permit the defendant to retain those Rebates? If so, when, in what form and in what amounts?
Does the plain meaning of the Franchise Agreement obligate the defendant to provide the franchisees with its internal financial and accounting information and access to its internal financial and accounting records as referred to in paragraphs 35, 37, 58 and 64 of the Statement of Claim? If not, what information and documentation [page185] is the defendant required to provide to the franchisees under the Franchise Agreement?
[4] On January 21, 2003, Winkler J. fixed the costs of the plaintiffs' on the certification application at $180,000 for fees and disbursements, plus G.S.T.
[5] Section 30(2) of the CPA states:
30(2) A party may appeal to the Divisional Court from an order certifying a proceeding as a class proceeding, with leave of the [Superior Court of Justice] as provided in the rules of court.
[6] On February 4, 2003 and February 18, 2003, Lane J., pursuant to s. 30(2) of the CPA, s. 19(1)(b) of the Courts of Justice Act, R.S.O. 1990, c. C.43 and rule 62.02(4)(b) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, heard the application of A & P for leave to appeal the orders of Winkler J., dated December 9, 2002 and January 21, 2003. On March 26, 2003, Lane J. granted leave to appeal [reported at (2003), 2003 36393 (ON SCDC), 64 O.R. (3d) 42] on the following issues [at p. 55 O.R.]:
(a) "Did the plaintiffs demonstrate that the representative plaintiffs will fairly and adequately represent the interest of the class as required by s. 5(1)(e)(i) of the Act [CPA]?";
(b) "Is there a conflict between the representative plaintiffs and other franchisees within the meaning of s. 5(1)(e)(iii) of the Act [CPA]?"; and
(c) Costs.
[7] In their factum, counsel for A & P state at p. 1: "The focus of this appeal is the requirements of sections 5(1)(e)(i) and 5(1)(e)(iii) of the Act, as well as their resulting impact on the preferability requirement."
Under Part IV of their factum, counsel for A & P state the issues on this appeal to be:
A. Do the named plaintiffs "fairly and adequately represent the interests of the class" as required by section 5(1) (e)(i) of the Act, and is there a conflict between them and other franchisees within the meaning of section 5(1)(e)(iii) of the Act?
B. Does the existence of opt-out rights under the Act cure the failure to satisfy section 5(1)(e)(i) or section 5(1)(e)(iii) of the Act?
C. How does proper consideration of the nature and extent of conflicting interests affect the "preferability" of a class proceeding over individual or joint actions of interested franchisees?
Although the factum of counsel for A & P notes in para. 1 that Lane J. granted leave to appeal costs, the term "costs" is not [page186] mentioned again until para. 77, the last paragraph under "Order Requested", where it is requested: (1) that an order go setting aside the January 21, 2003 order of Winkler J. and (2) that an order go "requiring the plaintiffs to refund the costs paid pursuant to the January 21, 2003 order". Because no argument was addressed to us about costs, either orally or in the appellant's Factum, it is assumed that counsel for A & P made a conscious decision not to pursue the issue of costs.
Background
[8] A & P is a wholly owned subsidiary of The Great Atlantic & Pacific Tea Company Limited, a major player in the North American retail food products industry. A & P has established, under the name "Food Basics", discount grocery supermarkets in Canada, sixty-six (66) stores being franchisee-operated and twenty (20) being corporate-operated.
[9] The respondents/plaintiffs are three (3) of the sixty-six (66) franchisee-operated stores. These franchisees operate their stores under rights and obligations created by a standard form franchise agreement. It is undisputed that A & P in its relations with its franchisees is: franchisor; sole supplier of product; landlord; lessor of operating equipment; financing source and secured creditor; and, significantly, in the circumstances of this action and appeal, the exclusive provider of accounting services to the franchisees.
[10] Franchisees under their agreements with A & P are obliged to purchase product inventory exclusively from A & P, pay A & P for accounting services deemed necessary by A & P for the franchisees' accounts and financial records. A significant feature of this arrangement is to enable A & P, as common purchasing agent for the franchisees, to obtain from product suppliers price discounts based on the volume of purchases. This feature is dealt with in para. 11 of the franchise agreement. The pertinent part of para. 11 provides:
11(a) A & P may receive Allowances from time to time which shall be calculated based on A & P best estimate of Allowances, which A & P receive solely in respect of the purchase of specific goods attributable to franchisees of the Food Basics System. A & P will establish a policy with respect to the distribution of Allowances, which may be amended from time to time but shall be the same for all franchisees of A & P and A & P will distribute such Allowances in accordance with such policy as amended from time to time.
[11] It is not in dispute that A & P alone had dealings with the suppliers of product inventory to the franchisees and that the franchisees received no information about A & P's dealings with [page187] the suppliers, including information about the amount of rebates (or, in the language of para. 11(a), the "Allowances") received by A & P from the suppliers.
[12] From 1995 to early 1997, being the early stages in the Food Basics franchise system, A & P's invoices to its franchisees, relating to warehouse purchases, indicated the amount of rebate given to each franchisee in volume purchase discounts covered by the invoices. Beginning in early 1997, the invoices no longer disclosed the specific amount of the rebate. The amount of the rebate began to be "recognized" by the use of the word "net" on A & P's invoices for warehouse purchases. This change was followed up in 1999 with similar "net" billing presentation for supplier purchases.
[13] Some of the franchisees began to complain to A & P about the lack of transparency respecting the rebates being passed on to them. In essence, some of the franchisees were concerned that all the Allowances in the form of rebates were not being passed on by A & P to the franchisees.
[14] There was no satisfactory resolution of these concerns and, in April 2002, this action was commenced. Pleadings were delivered in July 2002, the certification motion was heard by Winkler J. in November 2002 and the decision giving rise to the appeal was delivered in December 2002.
Analysis
[15] The standard of review on an appeal from a judge's order has been addressed by the Supreme Court of Canada in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, 211 D.L.R. (4th) 577. In summary, on a pure question of law, the standard of review is that of correctness.
[16] The standard of review for findings of fact is that such findings are not to be reversed unless it can be established that the trial judge made a "palpable and over-riding error": Stein v. Kathy K (The), 1975 146 (SCC), [1976] 2 S.C.R. 802, 62 D.L.R. (3d) 1.
[17] In Anderson v. Wilson (1999), 1999 3753 (ON CA), 44 O.R. (3d) 673, 175 D.L.R. (4th) 409 (C.A.) at p. 677 O.R., Carthy J.A., addressed the different aspects of appellate review of certification orders in the following terms:
This is the first time this court has considered the certification of a class action and I am mindful of the deference which is due to the Superior Court judges who have developed expertise in this very sophisticated area of practice. The Act [Class Proceedings Act, 1992] provides for flexibility and adjustment at all stages of the proceeding and any intervention by this court at the certification level should be restricted to matters of general principle. [page188]
See also: Carom v. Bre-X Minerals Ltd. (2000), 2000 16886 (ON CA), 51 O.R. (3d) 236, 196 D.L.R. (4th) 344 (C.A.) at pp. 247-48 O.R., per MacPherson J.A.
[18] I turn to the positions of the parties on the issues in the appeal.
Section 5(1)(e)(i) CPA Requirement: Fair and Adequate Representation
[19] Winkler J. concluded, on the evidence before him, that the representative plaintiffs would fairly and adequately represent the interests of the class.
[20] A & P submits that the manner in which Winkler J. dealt with issues outside the interpretation of para. 11 of the franchise agreement constitutes error. A & P contends that Winkler J. failed to recognize that the divergence of incentives between those franchisees who stand indebted to A & P and those who have no indebtedness to A & P undermines the ability of the representative plaintiffs to represent fairly and adequately the interests of the class.
[21] This submission is rejected.
[22] The submission of the respondents is accepted that there was no evidence before Winkler J. to support the assertion that each of the franchisees, as class members, had a different contractual relationship with A & P, resulting in different financial obligations and rights relating to A & P. As well, Winkler J. rejected A & P's submission that the respondents had a "very strong incentive to disrupt the financial balance" between A & P and the franchisees in relation to "the availability of future subsidies, assistance and other extra- contractual financial arrangements for franchisees". (See: A & P's Factum, para. 63(i).)
[23] That submission by A & P serves only to divert attention from the central issue in the respondent's class proceeding, namely, to enforce on behalf of the members of the class, i.e. the franchisees, the provisions of para. 11 of the franchise agreement. Accordingly, having regard to the issues of the appeal set out in the order of Lane J., the extra-contractual aspects cannot be characterized as representing a conflict of interest nor a conflict with the "fair and adequate representation of the interests of the class at the certification motion stage".
[24] Counsel on behalf of A & P submits that the terms "fairly and adequately" in subparagraph (i) of s. 5(1)(e) of the CPA have separate meanings. He contends that representative plaintiffs who have no indebtedness to A & P would have no incentive in either accepting or advocating on behalf of all class members a financial settlement involving debt forgiveness. Accordingly, it is contended that the representative [page189] plaintiffs/franchisees cannot, by an objective standard"fairly" represent the divergent interests of the class members. Counsel cites an American authority in support of this contention. See: A & P's Factum at para. 65.
[25] Winkler J., in his reasons at paras. 45, 46 and 47, disposes of these contentions:
I find no merit in the contention that the independence of the plaintiffs disqualifies them as representatives. The fact that their circumstances may be different from some or all of the balance of the class does not represent a conflict "on the common issues" as that term is used in s. 5(1)(e) of the CPA. Nor do their different circumstances mean that they cannot fairly and adequately represent the class. In fact, the evidence is to the contrary.
A & P also contended that there is a conflict because certification of the action would upset the existing arrangement with the franchisees and cause A & P to revisit each of these arrangements. In my view, this is effectively an argument that there should be no litigation at all rather than an attack on either the adequacy of the plaintiffs as representatives or the preferability of a class proceeding as opposed to individual actions. . . .
. . . It [A & P] contended that the representative plaintiffs ought to be disqualified from acting because they cannot be counted on to advise class members fairly and accurately as to what it will mean for them to remain in the class if the action is certified.
[26] With respect, there is no error by Winkler J. in reaching these conclusions.
[27] Even assuming that the words "fairly and adequately" mean what A & P's counsel contends they mean, there is no evidence to indicate that the representative plaintiffs would not carry out their obligations as representative plaintiffs in an even-handed manner towards the class members. At the certification motion stage, there is an information vacuum in which the class members find themselves respecting the central question in the proceeding, that is, the proper interpretation of para. 11 of the franchise agreement.
[28] The record before Winkler J. does not indicate such information as at the date of the certification motion being made available to the class members. In fact, the record before Winkler J. displays a consistent and continuing disinclination by A & P to make such disclosure.
[29] In the end, Winkler J. found the representative plaintiffs were equipped and suited to "vigorously and capably prosecute the interests of the class" in the proceeding, applying the test set out in Western Canadian Shopping Centres v. Dutton, 2001 SCC 46, [2001] 2 S.C.R. 534, 201 D.L.R. (4th) 385, at para. 41. [page190]
Section 5(1)(e)(iii) of CPA Requirement: No Conflict of Interest on the Common Issues for the Class
[30] A & P contends that the divergent interests, described above, must include consideration of economic interests of the class members. According to A & P, to the extent that some class members have significant divergent interests from some or other members of the class, the representative plaintiffs are put into a conflict of interest situation that would disqualify them from acting as representative plaintiffs in a class proceeding.
[31] In support of this contention, A & P cites various U.S. authorities, including the Supreme Court of the United States and various federal and district court decisions.
[32] In response, counsel for the respondents submits that when referring to the U.S. authorities relied upon by A & P, it is necessary to take into account the differences between the American class action regime and the Ontario equivalent, i.e. the CPA. In this regard, counsel for the respondents points out that under U.S. Rule 23(a), item 4, the words utilized are "fairly and adequately protect the interests of the class", whereas the CPA equivalent (s. 5(1)(e)(i)) utilizes the words "fairly and adequately represent the interests of the class" (my emphasis). The respondents also submit that the American authorities cited by A & P all involve conflicts on the common issues. The respondents submit that if, in the course of the proceeding, conflict were to develop on any matters other than the common issues that were the subject of the certification motion (such as claims or defences), the CPA provides for the creation of a subclass pursuant to s. 8(3) of the CPA or for any class member to opt out of the class.
[33] The respondent's submissions on the conflict of interest issue are accepted. There is no merit in A & P's submissions on that issue.
Conclusion
[34] As noted above under the standard of review, it is for the certification motion judge to accord weight to the evidence before him in arriving at his factual findings. It is for this court, an appeal court, to give deference to those findings unless there has been demonstrated palpable or overriding error by the certification motion judge.
[35] A & P has failed to demonstrate such error. The findings of Winkler J. and the legal principles applied demonstrate that (1) the representative plaintiffs could fairly and [page191] adequately represent the interests of the class and (2) that they were not in a conflict of interest on the common issues with the interests of other class members. No error is found in the impugned order of Winkler J. on a pure question of law or a question of mixed law and fact, or fact.
Disposition
[36] In the result, the appeal is dismissed. The costs of (1) the leave application before Lane J., (2) the motion to expedite the appeal and (3) the costs of this appeal -- are payable forthwith by A & P, all on a partial indemnity basis, to the respondents/plaintiffs.
[37] If the parties are unable to agree upon the quantum of costs, each party may file written submissions (not to exceed ten (10) pages, exclusive of supporting materials), according to the following schedule:
(1) by the respondents, within 21 days of the release of these reasons,
(2) responding submissions by A & P within ten days of receipt of the submissions of the respondents, and
(3) reply, if any, by the respondents within ten days of receipt of A & P's responding submissions.
Appeal dismissed.