Jan 29, 2018

Ontario Court of Appeal Summaries (January 22 - 26, 2018)

Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62 (CanLII)

[Sharpe, Blair and Epstein JJ.A.]

Counsel:

Geoffrey B. Shaw and Christopher Horkins, for the appellants

David S. Altshuller and Lara Di Genova, for the respondents

Keywords: Contracts, Franchise Law, Rescission, Disclosure, Misrepresentation, Damages, Arthur Wishart Act, 2000, S.O. 2000, ss. 3, 5, 6 & 7, Caffé Demetre Franchising Corp. v. 2249027 Ontario Inc., 2015 ONCA 258, Canada Inc. v. Dollar It Ltd., 2009 ONCA 385, Fresh Evidence, Sengmueller v. Sengmueller (1994), 17 O.R. (3d) 208 (C.A.), Civil Procedure, Summary Judgment

Facts:

The central issue on this appeal is whether the franchise disclosure document (“FDD”) provided by the appellant franchisor was so inadequate that it entitled the respondent franchisee to rescind the parties’ franchise agreement under s. 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the “AWA”).

The franchise agreement in issue was between Raibex Canada Ltd. (the “Franchisee”) and ASWR Franchising Corp. (the “Franchisor”). It gave the Franchisee the right to acquire and operate an AllStar Wings and Ribs (“ASWR”) franchise in Mississauga. Neither the agreement nor the FDD specified a site for the prospective franchise. Rather, the agreement stipulated that a suitable location would be selected through the “reasonable best efforts” of both parties. The FDD included an estimated range of costs for constructing an ASWR franchise from a shell, but did not provide cost estimates for converting a pre-existing restaurant to an ASWR outlet (a “conversion”). The parties, working together, agreed upon a site for the franchise outlet that included an existing restaurant suitable for conversion. Differences arose after the costs of developing the franchise proved higher than the Franchisee expected. The Franchisee purported to rescind the franchise agreement on the basis of material non-disclosure. The Franchisor sought judgment for certain costs it incurred after taking over the restaurant following receipt of the Franchisee’s notice of rescission.

The parties brought motions for summary judgment to, among other things, determine the validity of the Franchisee’s decision to rescind the agreement. The motion judge held that the franchise agreement had been validly rescinded and dismissed the Franchisor’s claim for damages. The Franchisor appeals both aspects of her decision. The Franchisee cross-appeals certain related issues addressed in the motion judge’s reasons, and moves to admit fresh evidence.

Issues:

(1) Did the motion judge err in holding that the franchise agreement was validly rescinded?

(2) If the Franchisee did not validly rescind the agreement, is the Franchisor entitled to damages?

(3) Did the motion judge err in dismissing the Franchisee’s claims based on misrepresentation and breach of the duty of fair dealing?

(4) Should the fresh evidence be admitted?

Holding: Appeal allowed. Cross-appeal and motion to admit fresh evidence dismissed.

Reasoning:

(1) Yes. The inquiry into whether disclosure deficiencies are such that they justify rescission under s. 6(2) ultimately focuses on whether the franchisee has been “effectively deprived … of the opportunity to make an informed [investment] decision”: Caffé Demetre Franchising Corp. v. 2249027 Ontario Inc., 2015 ONCA 258, at para. 63. The seriousness of any given failure to comply with s. 5 must be measured by reference to the underlying purposes of s. 5 and the AWAmore broadly in order to “obligate a franchisor to make full and accurate disclosure to a potential franchisee so that the latter can make a properly informed decision about whether or not to invest in a franchise”: Canada Inc. v. Dollar It Ltd., 2009 ONCA 385 at para. 16.

The lengthy and detailed FDD in this case should have put the Franchisee on notice as to the potential risks associated with pursuing a conversion opportunity.

The AWA draws a clear distinction between imperfect disclosure (or deficient disclosure) and situations where a franchisor provides “no disclosure”, thereby entitling the franchisee to rescission within a two year window. The motion judge erred in law by failing to give effect to this important legislative distinction.

(2) Yes. The Franchisor is entitled to damages arising out of the Franchisee’s failure to fulfill its financial obligations under the franchise agreement. However, these damages should account for the financial benefits the Franchisor derived from operating the franchise outlet. The matter was therefore remitted back to the Superior Court for a determination of this issue.

(3) No. the motion judge correctly dismissed the s. 3 and s. 7 misrepresentation claims. They were not particularized in the Franchisee’s statement of claim and were largely ignored in its oral and written argument. By not mounting a defence to the cross-motion, the Franchisee failed to “put its best foot forward”.

(4) No. The proposed evidence did not exist at the time of the hearing. This is not one of those rare cases where admission of such evidence would further the interests of justice (see: Sengmueller v. Sengmueller (1994), 17 O.R. (3d) 208 (C.A.), at paras. 8-10), and the motion was not brought in a timely fashion. There is no basis to assess the reliability of the proposed evidence.

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