The Appeal Decision in 1201059 V. Pizza Pizza

In the decision of 1201059 Ontario Inc. v. Pizza Pizza Limited, 2015 ONSC 1208, dated February 26, 2015, a three-judge panel of the Divisional Court (an appellate branch of the Ontario Superior Court of Justice that is higher than a trial level but lower than the Court of Appeal), upheld the trial judge’s dismissal of the franchisee’s action for damages based on an alleged failure to provide disclosure at the time of the franchise renewal.

The Divisional Court Findings

The action of the franchisee, 1201059 Ontario Inc., at the trial level was centered around the disclosure obligations of Pizza Pizza at the time of the franchise renewal.  The franchisee alleged that there were material facts in Pizza Pizza’s business between 1996 and 2001, which it did not disclose during the franchise renewal in 2011.

The trial judge dismissed the action of the franchisee.  The franchisee, which was self-represented by its principals (at least on the appeal), appealed the dismissal of its action to the Divisional Court. The Divisional Court dismissed the franchisee’s appeal.

On the issue of liability (the disclosure issue), the court held that there was no basis to interfere with the trial judge’s findings.  Those findings were that no material change occurred in the operation of Pizza Pizza’s business between 1996, when the franchisee entered into the original franchise agreement, and 2001 when it entered into a renewal agreement.  In fact, the Divisional Court held that in its view the trial judge’s findings were correct.

On the issue of damages, the court upheld the trial judge’s finding that the franchisee failed to mitigate his damages, and as a result, upheld the dismissal of the franchisee’s action.

Analysis

• Expressing the Standard of Appellate ReviewFrom an appellate review analysis, it is unclear why an appellate court states, as it did in this decision, that it agrees with the findings of a trial judge or that it finds those findings to be correct.Since the standard of review on a finding of fact or mixed fact and law is not “correctness”, but an “overriding and palpable error” of the court below, i.e., that absent an overriding and palpable error by the trial judge the appellate court will not intervene, in my opinion there is no principled basis for an appellate court to state that it also agrees with the findings below or that in its opinion the findings below are correct.  Doing so may blur the lines between the important distinctions of appellate review standards of “correctness” and “overriding and palpable error”.

  It seems to me that to maintain the lines of distinction, an appellate court should try to stay away from adding its views about the correctness of the trial judgment, where doing so is not required based on the appellate standard of review.

• Witness Credibility and Subjective KnowledgeThe trial judge, as upheld by the Divisional Court, relied in great part on its assessment of the credibility of the witnesses when he found that there was no material change in Pizza Pizza’s operation during the five-year period in question.  The trial judge found that the franchisee’s witness was not credible, and where his evidence contradicted that of the franchisor’s witness, the latter was preferred.Specifically on the issue of the cost of the required renovation to the restaurant, the trial judge found that the franchisee and its principal were “fully informed” before they entered into the original franchise agreement about the fact that Pizza Pizza was in the process of renovating its restaurants and that the cost was to be borne by the franchisees.

  Findings of witness credibility at trial may be important to various issues in a typical case.  However, it is unclear how a franchisee’s knowledge of a renovation issue, or credibility issues in that regard, negate a renewal disclosure requirement under the Arthur Wishart Act (Franchise Disclosure), 2000.

  Under section 1(1) of the Act, what constitutes a material change depends on a reasonable objective analysis of the business, rather than the subjective knowledge of a franchisee.

  Similarly, a franchisor’s obligation to provide disclosure at the time of renewal under subsection 5(7)(f) of the Act, where there has been material change, does not include an element about the subjective knowledge of a franchisee.

• Mitigation of DamagesThe Divisional Court upheld the trial judge’s finding that the franchisee failed to mitigate its damages by abandoning the store, as opposed to attempting to resell the store or otherwise attempting to recoup some of its losses.  As a result, the trial judge assessed the value of the franchisee’s business at nil, down from his otherwise assessed value of the store as a going concern in the amount of $50,000.This finding on the issue of mitigation of damages serves an important reminder to franchisees and their legal counsel to take all reasonable steps to mitigate damages in appropriate cases (this analysis may be different in rescission claims).

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