Franchising in the Courts - April 2013

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Robert Moore Pharmacy Ltd. v. Shoppers Drug Mart Inc.: The Applicability and Limits of the Duty of Good Faith

Robert Moore Pharmacy Ltd. v. Shoppers Drug Mart Inc. 2012 ONSC 73511 (Moore Case) reaffirms key principles in the application of the duty of good faith and fair dealing in interpreting franchise agreements. The Moore Case confirms that section 3 of the Arthur Wishart Act (Franchise Disclosure), 2000 (the Wishart Act) cannot be used to imply a renewal right or a right to a new franchise agreement if such a term would be contrary to the parties’ bargained-for rights as clearly worded in the contract. The Moore Case further holds that good faith is not merely a one-way street, that franchisees must also perform their obligations under franchise agreements in good faith and that their failure to do so may weigh against them when they go to court to seek relief.

Introduction

On December 21, 2012, Justice Newbould, of the Ontario Superior Court of Justice, Commercial List, dismissed the motion of Robert Moore Pharmacy Ltd. and Robert Moore (collectively, the Moore Parties) for an injunction to displace Shoppers Drug Mart Inc. from the management of its store and pharmacy and to reinstate the Moore Parties for a 60-day period (the Moore Decision). The reasons were released on December 27, 2012.

Key Facts

The Moore Parties operated a Shoppers Drug Mart store and pharmacy in Uxbridge, Ontario, under a franchise agreement with Shoppers. The franchise agreement was set to expire on December 30, 2012, in accordance with a term that held that upon expiry “there shall be no further renewal of this agreement.” On December 5, 2012, Shoppers advised Mr. Moore that it would not be offering the Moore Parties a new franchise agreement upon the expiry of the existing franchise agreement, and exercised its right under the franchise agreement to assume absolute control of the store and pharmacy during the 60-day period prior to the expiry of the franchise agreement (the Management Period). The Drug and Pharmacies Regulation Act (the DPRA) requires that any operating pharmacy be managed by a qualified pharmacist, the “designated manager.” The plaintiff, Mr. Moore, was the designated manager for the store prior to the Management Period. Over the course of the Management Period, Shoppers replaced Mr. Moore with another managing pharmacist, but Mr. Moore refused to consent to the new pharmacist’s appointment as designated manager. The Moore Parties then tried to rely on this set of facts to argue that the pharmacy had been operating in violation of the DPRA.

The Moore Parties brought an injunction to displace Shoppers and its representatives from the store and to reinstate the Moore Parties for a 60-day period. The Moore Parties’ position on the injunction was that Shoppers breached its duty of good faith and fair dealing under the Wishart Act by failing to provide them with one year’s notice of the termination or non-renewal of the franchise agreement, and that they would suffer serious irreparable harm if they were not reinstated for a 60-day period.

Key Findings

Justice Newbould dismissed the Moore Parties’ motion, finding that they had not met any stage of the three-stage test required for the granting of an injunction.

First, he held that in order to succeed, the Moore Parties had to establish a strong prima facie case with regard to their interpretation of their rights because the injunction would result in a mandatory order removing Shoppers from the store and reinstating the Moore Parties. This is a higher threshold than the “serious issue to be tried” standard that generally applies on injunctions. He held that this standard applied because, among other reasons, the agreement at issue contained no renewal rights. However, Justice Newbould held that the Moore Parties’ case for an injunction could not meet either the higher threshold of strong prima facie case or the lower threshold of serious issue to be tried. He held that the Moore Parties’ interpretation of their respective rights under the franchise agreement made no commercial sense. He further held that the duty of good faith and fair dealing could not be used to imply terms that contradicted the express written terms regarding expiry and the Management Period agreed to by the parties in the franchise agreement.

Second, Justice Newbould held that there was no evidence of irreparable harm to the Moore Parties that would result from a failure to grant the injunction. The evidence of the Moore Parties on irreparable harm centred primarily on regulatory requirements placed on pharmacists with regard to the operation of pharmacies under various Acts. Specifically, counsel for the Moore Parties argued that irreparable harm could flow to Mr. Moore from his inability to adequately perform his role as designated manager following the implementation of the Management Period. Justice Newbould held that any evidence put forward by the Moore Parties of this harm was merely speculative. He further held that in trying to establish irreparable harm, Mr. Moore could not rely upon his own failure to consent to the appointment of the new designated manager put forward by Shoppers; “[t]o the contrary, his breach is reason to refuse the equitable remedy he seeks.”2

Third, while indicating that it was unnecessary given the Court’s findings on strong prima facie case and irreparable harm, Justice Newbould further held that on a balance of convenience, the failure to grant the injunction would not cause real risk of harm to the Moore Parties, and that granting the injunction would cause a risk of harm to Shoppers. The types of harm that Justice Newbould held might result to Shoppers from the granting of the injunction included confusion to the store’s customers, suppliers and employees. Justice Newbould also accepted Shoppers’ evidence that there were inherent risks in having an outgoing franchisee continue to manage a store, including damage to Shoppers’ brands caused by a disgruntled or demotivated franchisee, damage to employee morale and misappropriation of assets and redirection of customers to competitors.

The Application of the Duty of Good Faith and Fair Dealing to the Interpretation of Franchise Agreements

In holding that there was no serious issue to be tried with regard to Shoppers’ conduct being in breach of its duty of good faith and fair dealing, Justice Newbould found that the terms of the franchise agreement on expiry and Shoppers’ rights to implement the Management Period were clearly delineated. Relying on the 2001 Ontario Superior Court decision in 530888 Ontario Ltd. v. Sobeys Inc.,3 he held that while the duty of good faith and fair dealing under section 3 of the Wishart Act includes the duty to act “in accordance with reasonable commercial standards and applies to performance and enhancement of existing agreements, it does not compel one party to renew an expiring relationship when it considers it to be commercially unreasonable.”4 Relying on the 2001 decision of the Ontario Superior Court, Beaucage v. Grand and Toy Ltd.,5 he further held that a “general duty of fair dealing without more cannot turn a written term of expiry into a right to renew.”6

While not novel or unprecedented, this recent decision strongly confirms the law with regard to the application of the Wishart Act’s duty of good faith and fair dealing in a situation of non-renewal or termination where there is a clearly drafted franchise agreement between the parties. It should be of comfort to franchisors and franchisees alike that courts consistently refuse to apply the duty of good faith in such a way as to nullify the meaning of agreed-upon terms in their franchise agreements. Justice Newbould summarizes this succinctly in stating that the “implication of a duty of good faith has not gone so far as to create new unbargained for rights and obligations. Nor has it been used to alter the express terms of the contract reached by the parties.”7

Duty of Good Faith and Fair Dealing as a Two-Way Street

Justice Newbould held that Mr. Moore’s refusal to consent to the appointment of the new designated manager proposed by Shoppers breached his obligations under the franchise agreement to cooperate with Shoppers in carrying out the intent of the franchise agreement. The Court further held that this refusal ran contrary to Mr. Moore’s duty of good faith and fair dealing. As reviewed above, this provides additional confirmation that the duty of good faith and fair dealing in the execution of obligations in a franchise agreement is a two-way street, and that a franchisee who fails to exercise those obligations may suffer legal consequences, and may be perceived as not coming to the court with “clean hands.”

Practice Points:

  1. The duty of good faith and fair dealing cannot be applied to rewrite clear contractual terms in franchise agreements.
  2. A franchisee is equally required to perform its duties pursuant to the franchise agreement in good faith.

A party cannot be compelled to renew a franchise agreement if it believes it is commercially unreasonable to do so and it is not contractually obliged to do so, particularly in circumstances in which the relationship of trust between the parties has broken down.


1  Mark Gelowitz, Gillian Scott and Gerard Kennedy of Osler, Hoskin & Harcourt LLP acted as counsel to Shoppers Drug Mart Inc. in this matter.

2  Moore Case, para 27

3  (2001), 12 B.L.R. (3d) 267 (Ont. S.C.J.)

4  Moore Case, para 13

5  (2001) 17 C.P.R. (4th) 125 (Ont. S.C.J.)

6  Moore Case, para 13

7  Moore Case, para 12, with reference to Transamerica Life Inc. v. ING Canada Inc. (2003), 68 O.R. (3d) 457 (C.A.), at para 53

 

Topics:  Canada, Covenant of Good Faith and Fair Dealing, Franchise Agreements, Pharmacies

Published In: Civil Procedure Updates, Civil Remedies Updates, General Business Updates, Franchise Updates, Science, Computers & Technology Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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