The Franchise Memorandum

A Superior Court of Justice in Canada last week awarded a franchisor over $1.7 million in costs against the sole shareholder and guarantor of a franchisee that had been the named plaintiff in an unsuccessful class action against the franchisor. Pet Valu Canada Inc. v. Rodger, 2018 O.N.S.C. 3353 (Ontario Super. Ct. May 29, 2018). The class action had been commenced in 2009, seeking some $100 million, but was dismissed on summary judgment, with the franchisor receiving cost awards totaling $1,736,675 against the named plaintiff franchisee, a corporation. When the corporation failed to pay the costs, the franchisor commenced a separate action against the shareholder, Robert Rodger, who had guaranteed all debts and obligations of the franchisee at the time the franchise agreement was signed.

Rejecting all arguments by Rodger, the Superior Court found him liable for the entire costs claim. Specifically, the court held that the franchise agreement’s indemnification provision applied to costs incurred by the franchisor in defending class actions, not just individual actions by the franchisee. Further, the named plaintiff was liable for not just the costs associated with its individual claims in the case, but for the franchisor’s overall cost of defending the class action. Moreover, because the shareholder’s personal guaranty was not limited, the corporate franchisee’s indemnification obligation for unsuccessful litigation against the franchisor was one of the categories of costs guaranteed to be paid by the individual shareholder in buying the franchise.