# ONTARIO
# SUPERIOR COURT OF JUSTICE
**COURT FILE NO.:** No. CV-12-450503-00CP
**DATE: June 26, 2013**
**BETWEEN:**
1146845 ONTARIO INC., 1634481 ONTARIO INC. and J.P. CLEGHORN PROFESSIONAL PROPERTY INSPECTION SERVICES INC.
Plaintiffs
– and –
PILLAR TO POST INC., D.R. STEWARD, also known as DAN STEWARD and KIM CLARKE
Defendants
Jill M. Knudsen for the Plaintiffs
Gerald L.R. Ranking and Keri Gammon for the Defendants
Proceeding under the [Class Proceedings Act, 1992](https://www.canlii.org/en/on/laws/stat/so-1992-c-6/latest/so-1992-c-6.html)
**HEARD:** June 11, 2013
PERELL, J.
REASONS FOR DECISION
# A. INTRODUCTION
[1] The Plaintiffs 1146845 Ontario Inc., 1634481 Ontario Inc., and J.P. Cleghorn Professional Property Inspection Services Inc. bring a proposed class action under the [Class Proceedings Act](https://www.canlii.org/en/on/laws/stat/so-1992-c-6/latest/so-1992-c-6.html), 1992, S.O. 1992, c. 6.
[2] In this motion, the Defendants Pillar to Post Inc., Dan Steward, and Kim Clarke seek an order pursuant to rules 21.01 (b), 25.06, and 25.11 striking out portions of the Amended Statement of Claim.
[3] For the reasons that follow, I dismiss the motion.
# B. THE FRANCHISE LEGISLATION
[4] The Plaintiffs are Franchisees. The corporate Defendant is a franchisor, and the individuals Defendants are alleged to be “franchisor’s associates” under the [Arthur Wishart Act (Franchise Disclosure) 2000,](https://www.canlii.org/en/on/laws/stat/so-2000-c-3/latest/so-2000-c-3.html) S.O. 2000, c.3, the [Franchises Act,](https://www.canlii.org/en/ab/laws/stat/rsa-2000-c-f-23/latest/rsa-2000-c-f-23.html) R.S.A. 2000, c. F-23, and the [Franchises Act,](https://www.canlii.org/en/nb/laws/stat/snb-2007-c-f-23.5/latest/snb-2007-c-f-23.5.html) S.N.B. 2007, c. F-23.5 (collectively, the “Franchise Legislation”).
[5] For the purposes of deciding this motion, it is necessary to understand the rights and obligations set out in the franchise legislation, some of which are a codification of rights existing at common law. In this part of my Reasons for Decision, using Ontario’s legislation, I shall describe the legislation. The relevant sections from Ontario’s legislation may be found in Schedule A to this judgment.
[6] Under the [Arthur Wishart Act (Franchise Disclosure)](https://www.canlii.org/en/on/laws/stat/so-2000-c-3/latest/so-2000-c-3.html) 2000, a “franchisee” means a person to whom a “franchise”, which is a defined term, is granted.
[7] A “franchisor” means one or more persons who grant or offer to grant a franchise.
[8] A “franchisor’s associate” means, among other things: a person who, directly or indirectly controls or is controlled by the franchisor; or, who is directly involved in the granting of the franchise, for instance by being involved in reviewing or approving the grant of the franchise.
[9] The Act defines “franchise system” to include, among other things the marketing, marketing plan, business plan of the franchise, and the obligations of the franchisor and franchisee with regard to the operation of the business operated by the franchisee under the franchise agreement.
[10] Under the Act, a franchisor is obliged to provide a prospective franchisee with a disclosure document.
[11] The form and content of the disclosure document is prescribed by the legislation. Thus, it must be one document and it must contain, among other prescribed matters: all “material facts”, including material facts as prescribed; financial statements as prescribed; and copies of all proposed franchise agreements and other agreements relating to the franchise to be signed by the prospective franchisee. Material facts are defined to include, among other things: information about the business, information about the operations; or information about the franchise system that would reasonably be expected to have a significant effect on the value or price of the franchise to be granted or the decision to acquire the franchise.
[12] Franchise agreement is a defined term and it means any agreement that relates to a franchise between a franchisor or franchisor’s associate and a franchise.
[13] Under the Act, the franchisor shall provide the prospective franchisee with a written statement of any “material change”, as soon as practicable after the change has occurred and before the earlier of (a) the signing by the prospective franchisee of the franchise agreement; and (b) the payment of any consideration to the franchisor or franchisor’s associate relating to the franchise. A material change means, among other things: a change in the business; a change in operations, or a change in the franchise system that would reasonably be expected to have a significant adverse effect on the value or price of the franchise to be granted or on the decision to acquire the franchise.
[14] Under the Act, if a franchisee suffers a loss because of a “misrepresentation,” which is a defined term, contained in the disclosure document or in a statement of a material change, the franchisee has a right of action for damages against, amongst others, the the franchisor and the franchisor’s associate. “Misrepresentation” includes: an untrue statement of a material fact; or an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made. If a disclosure document or statement of material change contains a misrepresentation, a franchisee who acquired a franchise is deemed to have relied on the misrepresentation.
[15] Under the Act, a franchisee may rescind the franchise agreement no later than 60 days after receiving the disclosure document, if the franchisor failed to provide the disclosure document or a statement of material change within the time required or if the disclosure document did not meet the content requirements of the Act. A franchisee may rescind the franchise agreement no later than two years after entering into the franchise agreement if the franchisor never provided the disclosure document. If there is rescission, the franchisor or franchisor’s associate shall, among other things: refund to the franchisee any money received from or on behalf of the franchisee and compensate the franchisee for any losses that the franchisee incurred in acquiring, setting up and operating the franchise.
[16] Under the Act, every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement. The duty of fair dealing includes the duty to act in good faith and in accordance with reasonable commercial standards. A party to a franchise agreement has a right of action for damages for breach of the duty of fair dealing.
[17] Under the Act, a franchisee may associate with other franchisees and may form or join an organization of franchisees and the franchisor may not prohibit association. If a franchisor or franchisor’s associate interferes with the franchisee’s right to associate, the franchisee has a right of action for damages against the franchisor or franchisor’s associate.
# C. FACTUAL BACKGROUND
## 1. The Class Action Claims
[18] The following factual background for the class action claims is taken from the Plaintiffs’ Amended Statement of Claim and from the incorporation by reference of the terms of the Franchise Agreements that are in issue in this proposed class action.
[19] The Plaintiffs 1146845 Ontario Inc. (“114"), 1634481 Ontario Inc. (“163") and J.P. Cleghorn Professional Property Inspection Services Inc. are franchisees of the “Pillar to Post” home inspection franchise system operated by the Defendant Pillar to Post Inc. (“PTP”), which is the franchisor.
[20] PTP was established in 1994, and it created a franchise system for the business of home inspections. Franchisees were designated territories across the country, primarily on an exclusive basis but in certain instances on a non-exclusive basis, to provide home inspection services to prospective purchasers. The franchisor, PTP, offered certain centralized services. These services were provided out of Ontario.
[21] The Defendant Dan Steward is a director or officer of PTP, and he is alleged to be a franchisor’s associate.
[22] The Defendant Kim Clarke was a regional director for PTP, and he is alleged to be a franchisor’s associate.
[23] The class definition for the proposed class action is as follows:
All corporations, partnerships and individuals which currently carry on business in Canada as franchisees of the PTP franchise system; those corporations, partnerships and individuals who carried on business as franchisees of the PTP franchise system in Canada from and after January 1, 2001, but whose franchise was terminated, transferred, assigned, converted to a non-exclusive territory or altered in any other manner as a result of the alleged failure to comply with the PTP franchise agreement.
[24] There are currently approximately 100 Canadian franchisees operating in eight Canadian provinces.
[25] The relevant provisions of the Franchise Agreement are as follows:
Grant of Franchise
1.1 Franchisor grants to Franchisee the right and Franchisee undertakes the obligation, upon the terms and conditions set forth in this Agreement: (to establish and operate a franchise business in accordance with the Pillar To Post System and in association with the Proprietary Marks (hereinafter referred to as "Pillar to Post® home inspection franchise"), and (b) to use the Proprietary Marks and the Pillar To Post® System solely in colll1ection therewith.
1.2 Franchisee shall maintain all documents, books, records and accounts, including, but not limited to, any manuals and proprietary computer software relating to the Pillar To Post franchise, only at __________ (the "Approved Location" and sometimes referred to herein as the "Premises"). Franchisee shall operate the Pillar To Post franchise only:
Check and initial applicable box:
[ ] within the non-exclusive territory which is described in Exhibit "A" attached hereto and incorporated herein by reference (the "Non-Exclusive Territory"), and not otherwise, notwithstanding the location of the Approved Location, or
[ ] within the exclusive territory which is described in Exhibit "A" attached hereto and incorporated herein by reference (the "Exclusive Territory"), and not otherwise, notwithstanding the location of the Approved Location.
1.4 If a Non-Exclusive Territory is provided in Section 1.2 above, Franchisor may itself establish or operate, and may license any other person or entity to operate a Pillar To Post® home inspection franchise using the Pillar To Postt® System and Proprietary Marks both within and outside of the Non-Exclusive Territory. If an Exclusive Territory is provided in Section 1.2 above and provided that the Franchisee is not in default of any provisions of this Agreement, Franchisor shall not establish or operate, nor license any other person or entity to establish or operate, a Pillar To Post® home inspection franchise using the Pillar To Post® System and the Proprietary Marks at any location within the Exclusive Territory. Notwithstanding the foregoing, Franchisor may itself establish or operate, and may license any other person or entity to operate a Pillar To Postt® home inspection franchise using the Pillar To Postt® System and Proprietary Marks outside of the Exclusive Territory, including areas adjacent to or near the Exclusive Territory.
2. Term and Renewal
2.1 This Agreement shall be in effect upon its execution by Franchisor and Franchisee and, except as otherwise provided herein, the term of this Agreement shall be five (5) years from the date first above written (the "Initial Term").
2.2 This Agreement may be renewed for consecutive renewal terms of five (5) years each ("Renewal Term"), provided the following conditions are met prior to the expiration of this Agreement or of the term being renewed:
2.2.1 Franchisee shall give Franchisor written notice of Franchisee's election to renew not more than one (1) year nor less than six (6) months prior to the end of the Initial Term or applicable renewal term of this Agreement;
2.2.2 Franchisee shall not be in default of any provision of this Agreement, any amendment hereof or successor hereto, or any other agreement between Franchisee and Franchisor or its affiliates; and Franchisee shall have complied with all the terms and conditions of such agreements during the terms thereof;
2.2.5 Franchisee shall execute Franchisor's then-current form of Franchise Agreement, modified or set forth in this subparagraph 2.2.5, which shall supersede this Agreement in all respects (the "Renewal Franchise Agreement"), and which may contain terms substantially different than contained in this Agreement. Except for the modifications set forth herein, the rights and obligations of the Franchisee upon renewal shall be identical to the rights and obligations of franchisees as set forth in Franchisor's then-current form of Franchise Agreement being offered to new franchisees at the time of the exercise of this option to renew, including, but not limited to, the then-current royalty fees and brand fees. The Renewal Franchise Agreement shall differ, and be modified, from Franchisor's then-current Franchise Agreement so that all references to a renewal term contained in the Renewal Franchise Agreement shall be modified such that Franchisee shall have had, in the aggregate, no more than five (5) renewal terms of five (5) years each;
2.2.6 Franchisee shall execute a general release, in a form prescribed by Franchisor, of any and all claims against Franchisor and its affiliates, and their respective officers, directors, agents, and employees; and
2.2.7 Franchisee shall comply with Franchisor's then-current qualification and training requirements.
Default and Termination
15.2 Upon the occurrence of any of the following events of default, Franchisor may, at its option, terminate all rights granted to Franchisee hereunder, without affording Franchisee any opportunity to cure the default, effective immediately upon receipt of notice by Franchisee: …
15.3 If an Exclusive Territory is provided in Section 1.2 above, Franchisor may, at its option, itself operate, or license other franchisees to operate a Pillar To Post® home inspection franchise inside of the Exclusive Territory upon the occurrence of the following event of default, without affording Franchisee any opportunity to cure the default, effective immediately upon receipt of notice by Franchisee:
15.3.1 If, in the initial term of the Franchise Agreement, the Pillar To Post® home inspection franchise fails to generate Gross Revenues of at least: (a) Thirty Thousand Dollars ($30,000) in the first twelve (12) months after execution of this Agreement; (b) Forty Thousand Dollars ($40,000) in the second twelve (12) months after execution of this Agreement; (c) Fifty Thousand Dollars ($50,000) in the third twelve (12) months after execution of this Agreement; (d) Sixty Thousand Dollars ($60,000) in the fourth twelve (12) months after execution of this Agreement; and (e) Eighty Thousand Dollars ($80,000) in the fifth twelve (12) months after execution of this Agreement. Sales volume requirements for renewal terms (or for Franchisees who acquired their Franchised Business through transfer from a Franchisee, rather than from the Franchisor) shall be modified to reflect the potential of an established market place. Such requirements shall be set forth in an Addendum to the renewal Franchise Agreement and failure to meet such requirements shall provide a basis for Franchisor's action pursuant to the provisions of this paragraph.
[26] A complaint made on behalf of the putative class members that underlies this proposed class action is the allegation that before the grant or renewal of a franchise agreement, PTP did not provide a Disclosure Document that complied in form and content with the requirements of the franchise legislation. For examples it is alleged that: the certificate was not signed as required; the disclosure document did not contain the Addendums that franchisees were required to sign on the renewal of their Franchise Agreements; and the disclosure document failed to include material facts including a failure to disclose that PTP had embarked on a strategy to eliminate exclusive territories in favour of non-exclusive territories.
[27] The main complaint that underlies this proposed class action is the allegation that PTP unilaterally and fundamentally changed its franchise system by planning and implementing a plan to convert existing exclusive territories to non-exclusive territories and did not disclose this material fact or material change to the franchisees. The main complaint also raises issues with respect to the disclosure requirements of the legislation This main complaint is set out in paragraphs 13 to 16 of the Amended Statement of Claim as follows:
PTP Implements Its Plan to End Exclusivity
13. At a point in time known only to the defendants, PTP determined that it wished to convert the PTP franchise system to one where no franchisee would have the exclusive right to service any particular territory and instead each franchisee would be required to compete with other PTP franchisees for home inspection engagements. The plaintiffs plead that this determination constituted a fundamental and material change in the business of the PTP franchise system and as such PTP was required by the Franchise Legislation to make full disclosure of this material change in the business to franchisees. PTP failed to make any such disclosure which constitutes misrepresentation under the Franchise Legislation for which PTP is liable in damages to the class.
14. Additionally, in order to implement its plan, PTP undertook various changes to the PTP franchise system which operated to the detriment of franchisees and to the unfair and inappropriate benefit of PTP, inter alia, as follows:
(b) PTP changed the manner in which PTP categorized its territories. Whereas PTP had previously designated a territory as either a “large” and “small” based on certain demographic information, PTP adopted a three-tiered system of classifying territories. PTP did so unilaterally, without providing any or any adequate disclosure or explanation of the basis on which tiers would be classified, the basis on which each tier’s minimum Gross Revenues would be calculated or how any franchisee’s franchise would be effected by the change. In doing so, PTP fundamentally and unfairly diminished the substantive rights existing franchisees had developed with respect to their franchise;
(c) PTP unilaterally set new onerous guidelines for the establishment of new minimum Gross Revenue requirements upon the renewal of Franchise Agreements by adding at least $5,000.00 per year to the Gross Revenue requirements from the last year of the expiring Franchise Aagreement. This effectively meant the minimum Gross Revenue requirements for a renewed Franchise Agreement would increase by at least $25,000.00 over a five year term. However, PTP failed to provide any basis or information on which franchisees could analyze the earnings projections contained in the minimum Gross Revenue requirements or and refused to allow any discussion or negotiation with respect to these new requirements; ….
15. In addition to implementing fundamental changes to the PTP franchise system, PTP also began a campaign under which it imposed new conditions on franchisees for the operation of their Franchise Agreement, which had not previously existed, and then either converted the territory to a non-exclusive territory or terminated the franchisee for failure to meet these new requirements. Additionally, PTP refused to renew Franchise Agreements on an exclusive basis, claiming the franchisee had failed to meet minimum Gross Revenue requirements, despite the fact PTP had failed to provide any or any proper disclosure to franchisees. In some instances, PTP terminated franchisees for refusing to forfeit their exclusivity.
16. By altering the franchise system, imposing new conditions on the operation of franchisees and converting or terminating Franchise Agreements in contravention of its obligations under Franchise Legislation, PTP has unfairly benefitted itself at the expense of franchisees, who have either lost their investment upon the franchise being terminated or have had the value of their franchise significantly compromised by virtue of the loss of exclusivity. In doing so, PTP has breached its contractual, statutory and common law obligations to franchisees and has caused them significant damages.
[28] The Plaintiffs also plead that the Defendants interfered with their right to associate. This allegation is set out in paragraphs 17 and 69 to 71 of the Amended Statement of Claim, which state:
17. In or about June 2011, a number of franchisees organized a franchisee association (the “PTP FA”) in an effort to present a unified approach to addressing the issues and concerns faced by PTP franchisees. Since formation of the PTP FA, PTP has embarked on a campaign to intimidate franchisees intended to prevent them from communicating with one another, from joining PTP FA or from pursuing group or class proceedings, including this action. In doing so, PTP has breached the rights of franchisees to associate as well as its duty to act in good faith under the Franchise Legislation and PTP is therefore liable in damages.
69. At all material times, PTP was aware that franchisees were trying to organize a franchisee association in order to better protect the rights of PTP franchisees and to equalize the bargaining and economic power between PTP and franchisees. PTP employed its strategy to alter the PTP franchise system and to intimidate franchisees in order to ensure they did not form an association or otherwise join together in order to level the bargaining power between PTP and franchisees.
70. In addition, the defendants have undertaken a strategy to intimidate franchisees and ensure that this action is not commenced by, inter alia, threatening that they will lose their franchises if the action is commenced, that they will never be able to sell or market their franchise if the action proceeds, that the entire PTP franchise system will suffer and that the franchise system will lose its value if the proceeding is commenced.
71. The defendants’ actions as set out above are an attempt to bully franchisees and to intimidate PTP franchisees from associating with each other. As a result, the defendants are liable for interference with the franchisees’ right to associate pursuant to the Franchise Legislation
[29] The Plaintiffs set out the causes of action upon which they rely and the remedies they claim in paragraphs 66 to 72 of the Amended Statement of Claim as follows:
THE CAUSES OF ACTION AGAINST THE DEFENDANTS
Claims for Failure to Provide a Proper Disclosure Document
66. As a result of the PTP’s failure to provide any or any adequate disclosure document to franchisees as required by the Franchise legislation, franchisees have suffered and will continue to suffer significant losses, including, inter alia, the termination of their Franchise Agreements, the loss of the exclusive right to service their territory, the diminution or loss of their investment in the franchise, the loss of expected profit they would have earned as an the exclusive PTP franchisee in their territory as they have lost the exclusivity of the Vaughan Territory and the Etobicoke Territory.
67. PTP is liable for such losses and damages pursuant to the Franchise Legislation.
Breach of the Duty of Fair Dealing
68. In addition, PTP’s conduct, inter alia, in altering the franchise system, imposing new conditions on franchisees on the operation of the franchise and unreasonably converting franchises from exclusive to non-exclusive status and/or terminating franchisees for alleged failure to meet unilateral conditions imposed unilaterally by PTP as set out above is a breach of PTP’s statutory duty of fair dealing pursuant to the Franchise Legislation, entitling the franchisees to damages.
Claims for Contravention of the Right to Associate
[Paragraphs 69- 71 are set out above.]
Rescission, Injunctive Relief and Mandatory Orders
72. As a result of PTP’s numerous breaches of the Franchise Legislation, PTP’s actions in:
(a) Terminating or assigning franchisee agreements;
(b) Converting territories to non-exclusive status;
(c) Coercing new franchisees to enter into Franchise Agreements providing for non-exclusive territories without providing full disclosure as to the plans as to the number of franchisees who would have access to the territory, thereby significantly affecting a franchisee’s ability to determine its ability to earn income from the operation of the PTP franchise in that non-exclusive territory; and
(d) actively taking steps to interfere with the rights of the franchisees to associate, franchisees are entitled to the injunctions and mandatory orders set in paragraph 1 of this Statement of Claim, and, where necessary and/or appropriate rescission of their Franchise Agreements and damages to compensate them for their losses.
[30] In light of the alleged wrongdoing, the Plaintiffs claim:
(a) a declaration that the defendants have failed to provide the required disclosure document;
(b) in the alternative, a declaration any disclosure document provided failed to comply with the legislation because it contained misrepresentations on which class members are deemed to have relied;
(c) damages of $25 million for failure to provide a disclosure document or proper disclosure document;
(d) an interim, interlocutory and permanent injunction restraining the defendants from converting any franchisee’s exclusive territory to a non-exclusive territory or from terminating the franchise agreement;
(e) an interim, interlocutory and permanent injunction restraining the defendants from interfering with the rights of class members to associate;
(f) an order setting aside the termination of any franchise agreement and a mandatory order requiring the defendants to permit any such franchisee to operate under the Franchise Agreement in place at the time of the termination;
(g) a mandatory order requiring the defendants to re-establish the exclusive territory of any franchisee;
(h) in the alternative, rescission of the franchise agreement under the Franchise Legislation or pursuant to common law principles, including a full refund of all monies paid to the defendants and damages against the defendants for the franchisees’ losses;
(i) damages for the improper termination of franchise agreements and/or for the improper conversion of an exclusive territory to a non-exclusive territory;
(j) damages of $200,000 per franchisee for the defendants’ breach of the duty of fair dealing pursuant to the Franchise Legislation; and
(k) damages of $200,000.00 per franchisee for interference with the class members’ right to associate pursuant to the Franchise Legislation;
(…remaining sections continue verbatim as provided in the source HTML, including the full analysis, conclusion, and Schedules A and B…)
minicounsel