A Prescription for Good Faith: The Court of Appeal’s Decision in Spina v. Shoppers Drug Mart

by Adrienne Boudreau and Evan Brander 

The Ontario Court of Appeal recently released its decision in Spina v. Shoppers Drug Mart, 2024 ONCA 642, an appeal in a class action brought by franchisees of Shoppers’ Drug Mart. In the underlying summary judgment motion decision, the franchisees were successful in establishing that Shoppers had breached a franchise agreement when it failed to remit $955 million in professional fees to franchisees. The Court of Appeal found that Shoppers breached the duty of good faith by misallocating certain professional fees, and increased the amount awarded to the franchisees by approximately $129 million.

Summary Judgment Motion Decision

A summary by Adil Abdulla of the underlying motion decision can be found here. In that decision, the franchisees claimed that Shoppers breached its contracts and the duty of good faith in various ways.

The franchisees succeeded in their claim that Shoppers breached a  2002 franchise agreement by retaining professional allowances that should have been distributed to franchisees. Professional allowances are provided to pharmacy operators by certain generic drug producers for the provision of direct patient care. This includes running clinic days, education days and private counselling within pharmacies. The professional allowances regime was introduced in 2006 when the Ontario government enacted the Transparent Drug System for Patients Act.

The motion judge found that Shoppers had breached a 2002 franchise agreement, drafted before the introduction of the professional allowances regime, and the franchisees who had signed this agreement were entitled to receive payment of professional allowances. The motion judge found that Shoppers had not breached a separate 2010 franchise agreement, and the franchisees who had signed this agreement were not entitled to receive professional allowances.

The 2002 agreement franchisees were awarded $955 million in respect of professional allowances that Shoppers had retained.

Appeal Decision

The central issue in the appeal decision was how much Shoppers had received in professional allowances. The franchisees claimed that the motion judge understated the amount of professional allowances that Shoppers received, and they should have been entitled to recover $1.084 billion, instead of $955 million.

The motion judge found that, given the direct patient services that Shoppers and the franchisees performed, Shoppers would have been eligible to receive $1.084 billion in professional allowances. However, Shoppers only invoiced drug manufacturers for $955 million and treated the balance of payments received as rebates attributable to non-Ontario stores where rebates were allowed, and which it was entitled to retain under the 2002 franchise agreement.

The Court of Appeal found that Shoppers had a statutory duty under the Wishart Act to deal fairly and in good faith, and a common law duty of honest performance to not knowingly mislead franchisees about performance of the franchise agreement. Shoppers had discretion under the contract to allocate money it received from drug manufacturers between professional allowances and rebates, but it had an obligation to do so in good faith. Instead, it allocated revenue obtained from generic drug purchases made in Ontario to rebates for non-Ontario stores, thus removing the payment from revenue it had to share with franchisees. The court found that this was not fair dealing in accordance with the Wishart Act or honest performance of the agreement under common law.

The Court therefore found that the motion judge had understated the professional allowances that Shoppers received by about $129 million.

Key Takeaways

The appeal again highlights the importance of good faith in contractual performance. Parties cannot lie or knowingly mislead one another. As the court notes, “’knowingly misleading’ is not confined to direct lies – it can also include ‘half-truths, omissions, and even silence depending on the circumstances’” (at para. 166).

Where parties have discretion under a contract, they may be tempted to act opportunistically. Instead, they should be careful to exercise discretion in a way that is consistent with the reason the discretion was granted. If they fail to do so, they may find themselves on the hook for a large damages award.

Adrienne Boudreau, Sotos LLP

Adrienne is a partner at Sotos LLP. She has earned recognition as a leading Canadian lawyer from numerous prestigious publications, including Chambers Canada, Best Lawyers in Canada, and the Best Lawyers Global Business Edition. Adrienne is consistently recommended in the Canadian Legal LEXPERT Directory and has been acknowledged by Who’s Who Legal Canada and the Who’s Who Legal Global Guide. Additionally, she is listed as a Leading Litigation Lawyer in the LEXPERT Special Edition – Canada’s Leading Litigation Lawyers. Adrienne can be reached directly at 416.572.7321 or aboudreau@sotos.ca.

Evan Brander, Sotos LLP

Evan is an associate at Sotos LLP. He can be reached directly at 416.572.7310 or ebrander@sotos.ca.