British Columbia Court of Appeal Class Action Decision Provides Important Insight into Potential Franchise System Consumer Liability Issues

A recent appeal decision of the British Columbia Court of Appeal highlighted two important issues for franchise parties in respect of potential liability in consumer class actions. First, the existence of franchise agreements may be sufficient to ground a claim for a civil conspiracy between franchisors and franchisees. Second, the use of a class action waiver provision in standard form consumer contracts that are used across a franchise system could be found to be unconscionable and unenforceable.

It is rare that franchisors and franchisees find themselves on the same defendant side of proposed class proceedings. The majority of franchise-based class proceedings have generally involved franchisee actions against franchisors in respect of breach of contract and duty of good faith actions. However, due to the complex interrelationship between franchisors and franchisees and those parties’ interactions with consumers in consumer protection and product liability matters, it appears that Canadian courts now appear to be reckoning with franchisors and franchisees as potential joint defendants in class proceedings.

The case, Pearce v. 4 Pillars Consulting Group Inc.,[1] involved a proposed consumer-based class action against members of the “4 Pillars” franchise system, which offered debt advisory services to people on the brink of insolvency who sought debt restructuring. In this action, the representative plaintiff consumer, Pearce, claims that the defendants are unlicensed, charge excessive fees, and operate illegally. Pearce sought a return of fees paid and damages on behalf of the class. The defendants are the franchisor, various franchisees, and directors of the franchisor business. On the initial hearing before the British Columbia Supreme Court, the action was certified as a class proceeding. The defendants appealed the certification decision.