Apr 21, 2015

Ontario Court of Appeal Summaries (April 13 – 17, 2015)

Caffé Demetre Franchising Corp. v. 2249027 Ontario Inc., 2015 ONCA 258 (CanLII)

[Doherty, Epstein and Tulloch JJ.A.]
Counsel:
D. S. Altshuller, for the appellants
J. H. McNair, for the respondents

Keywords: Franchise Law, Summary Judgment, Rescission, Arthur Wishart Act (Franchise Disclosure), 2000, ss. 5, 6(1), 6(2), Disclosure, Material Fact, Stark and Material Deficiency

Facts:

The respondent, Caffé Demetre Franchising Corp., was the franchisor of a franchise specializing in freshly made desserts and ice cream. The appellant, 2249027 Ontario Inc., purchased a Caffé Demetre franchise.

Approximately a year after the franchise was purchased in 2011, difficulties arose between the parties that led the franchisor to sue the franchisees claiming, among other things, a declaration that the franchise agreement was at an end and damages for breach of contract. The franchisees had failed to perform repairs requested by the franchisor and failed to provide information explaining why customer orders at their location were cancelled at point of sale roughly three times more often than at other outlets. Furthermore, the franchisees had failed to improve the appearance of the location, and failed to provide financial statements and tax returns, in breach of their obligations under the franchise agreement.

The franchisees counterclaimed, adding the principal of the franchisor to the action, and claiming rescission of the franchise agreement on the basis of alleged deficiencies in the disclosure document the franchisor had provided at the time of purchase of the franchise.

The motion judge granted partial summary judgment to the franchisor and dismissed the franchisees’ counterclaim for rescission. He found that three of the four alleged disclosure omissions relied upon by the franchisees were not disclosure deficiencies at all. With respect to the fourth alleged omission – the non-disclosure of ongoing litigation commenced by the franchisor against a competing business – the motion judge concluded that while the franchisor should have disclosed the ongoing litigation in which it was involved, this omission failed to “come anywhere close” to the type of deficiency that entitled the franchisees to rescind the franchise agreement under ss. 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”).

On appeal, the franchisees challenged the motion judge’s decision that the summary judgment procedure was appropriate in the circumstances as well as his conclusion that the undisclosed litigation did not entitle them to rescission under ss. 6(2) of the Act.

Issues:
(1) Did the motion judge err in concluding that the claim for rescission advanced in the counterclaim could be determined by way of summary judgment?

(2) Did the motion judge misapprehend the evidence and otherwise err in finding that the failure to disclose the existence of the litigation against the competing business did not give rise to rescission rights under ss. 6(2) of the Act?

Holding: Appeal dismissed.

Reasoning:
(1) No. The Court rejected the franchisees’ argument that it was not in the interests of justice to determine the rescission claim on a motion for summary judgment as other matters between the parties arising out of the franchise investment, including a claim for damages for misrepresentation under s. 7 of the Act, were proceeding to trial in any event.

The Court agreed with the motion judge’s conclusion that there was no risk of inconsistent findings of fact as the facts were essentially undisputed. Further, on appeal, the franchisees did not challenge the motion judge’s findings with respect to the three alleged deficiencies. The motion judge found the undisclosed litigation to be a material fact, leaving the franchisees free to pursue a claim for misrepresentation on the basis of that omission. Lastly, using the summary judgment mechanism to deal with the discrete matter of the franchisees’ right to rescission was an expeditious and effective approach to resolving an important issue.

(2) No. The Court rejected the franchisees’ argument that it was unreasonable for the motion judge to infer that the undisclosed litigation had no impact on their decision to purchase the franchise or on the price they agreed to pay for the franchise outlet. The Court further rejected the franchisees’ submission that the motion judge further erred by finding that the franchisees’ failure to complain about the litigation was relevant to whether the existence of the litigation could reasonably be expected to have affected their purchase decision.

Ongoing or prospective litigation involving a franchisor is not, by definition, a material fact. The litigation must be disclosed if it falls within the description contained in ss. 2(5) of O. Reg. 581/00. But if the litigation in issue does not fall within that description, then whether it is a material fact, as contemplated by the Act, will be a question of fact determined on a case-by-case basis. The analysis is highly fact-specific and no bright-line rule can be articulated. In light of the motion judge’s observations about the undisclosed litigation – that it was a protective measure taken by the franchisor at the request of and for the benefit of the franchisees – it did not constitute a potential liability that might attach to the franchise system and would not financially impact the franchisees’ Caffé Demetre outlet. The lawsuit was not a material fact. Thus, the disclosure document given to the franchisees was not deficient by reason of the franchisor’s failure to reference the litigation. Furthermore, even if the undisclosed litigation did amount to a disclosure deficiency, it was not sufficiently significant to entitle the franchisees to rescission under ss. 6(2) of the Act.

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