Authors: Ben Hanuka and Robert Jones, Law Works P.C.
2018 was a busy year in Canadian franchise disputes. Based on the court decisions in 2018, the trend shows that franchisees’ claim are increasingly more difficult to prove. Law Works has analyzed 16 franchise court decisions that are summarized on the Law Works Franchise Law Blog in 2018 based on these types of claims: (1) rescission, (2) misrepresentation, (3) injunction, (4) damages and (5) class action. Here are the trends that we have observed:
1. the success of rescission summary judgment motions by franchisees is on the decline;
2. misrepresentation claims by franchisees are less successful than rescission claims;
3. injunction claims by either franchisors or franchisees continue to be difficult to prove;
4. claims of harm by franchisors or franchisees are met with increasing scrutiny;
5. in class actions, proving franchisees’ claims on the merits is difficult.
The ‘informed investment decision’ legal test for rescission has arguably raised the bar for success on a summary judgment motion for rescission. More rescission actions are proceeding to trial based on disputed evidence. Out of the six rescission actions that we have summarized on our Franchise Law Blog, franchisees succeeded in only two cases (25% success rate).
In one of the successful cases, the franchisor had never even attempted to give any form of disclosure.
In Giroux et al. v. 1073355 Ontario Ltd, a January 4, 2018 decision of the Ontario Superior Court, the motion judge followed the Ontario Court of Appeal decision of Mendoza v Active Tire, which established that failing to give financial statements that have been audited or prepared on a review-engagement basis amounts to “no disclosure” under s.6(2) of the Wishart Act. Although there were also issues about earnings projections and the timing of disclosure, the motion judge concluded that the financial statements alone justified a summary judgment finding of rescission. (Our blog article about the Giroux decision may be found here.)
In Raibex Canada Ltd. v. ASWR Franchising Corp, a January 25, 2018, decision of the Ontario Court of Appeal, the court overturned a summary judgment finding of rescission and clarified what amounts to “no disclosure” under s.6(2) of the Wishart Act. The absence of site-specific lease information and cost estimates was not a fatal disclosure deficiency. When considering the knowledge of the parties and terms of the franchise agreement, the franchisee was able to make an informed investment decision (Our blog articles about the Raibex decision may be found here and here.)
In Diduck v. Simpson, a May 10, 2018, decision of the Manitoba Court of Queen’s Bench, the court dismissed a summary judgment motion for rescission because Mr. Diduck failed to establish that he was a franchisee under Manitoba’s The Franchises Act. There was no evidence that Mr. Simpson exercised significant control over, or gave significant assistance to, Mr. Diduck (Our blog article about the Simpson decision may be found here.)
In 680960 Ontario Inc. v. Print Three, a May 14, 2018, decision of the Ontario Superior Court, despite significant disclosure deficiencies, including the absence of the head lease, purchase and sale agreement and financial statements, the motion judge followed Raibex and declined to order summary judgment for rescission. The motion judge concluded that there were significant disputes about the franchisee’s reliance on the documents that allegedly should have been provided. (Our blog article about the Print Three decision may be found here.)
In 2212886 Ontario Inc v Obsidian, a July 27, 2018 decision of the Ontario Court of Appeal, the court set aside a decision of a motions judge that granted partial summary judgment for rescission to a franchisee. The court had to make a credibility assessment to decide if the franchisor gave earnings projections to the franchisee before the parties signed the franchise agreement. (Our blog article about the Obsidian decision may be found here.)
In Fyfe v Stephens, an August 3, 2018, decision of the Ontario Superior Court, the court granted partial summary judgment for rescission to a franchisee because it was undisputed that the franchisor never gave any form of disclosure under the Act. (Our blog article about the Stephens decision may be found here.)
Misrepresentation claims appear to be more difficult for franchisees to establish than rescission claims. This trend may be because misrepresentation claims are poorly pleaded as a tag-along or catch-all claim. Out of the three misrepresentation actions we summarized on the Franchise Law Blog, the franchisees failed in each case (0% success rate).
In Raibex, the Court of Appeal for Ontario upheld the motion judge’s decision to dismiss the franchisee’s misrepresentation action. The franchisee did not particularize its misrepresentation allegations and did not seriously pursue the claim during oral argument. The court concluded that the franchisee’s failed rescission arguments could not merely “cascade” onto its claim under s.7 of the Wishart Act.
In re Asian Concepts Franchising Corporation, a June 21, 2018, decision of the British Columbia Supreme Court, a creditor of the franchisor’s estate challenged the provable value of a franchisee’s claims against the estate under the Wishart Act. The franchisee claimed loss of profit and opportunity under s.7 but submitted no supporting evidence. The court overturned the decision of the trustee and assigned no provable value to the franchisee’s s.7 claim (Our blog article about the Asian Concepts decision may be found here.)
In Stephens, the court found that a financial model that the franchisor gave to its franchisee was too general to support a claim of misrepresentation under s.7 of the Wishart Act. The financial model was based on a “potential business” and contained warnings that the franchisor made no guarantees about income. It could not reasonably be relied on.
Courts have applied a high legal test when deciding injunction claims to prevent termination or anticipated breach of franchise agreements. Out of the three injunction applications that we summarized on the Franchise Law Blog, franchisees succeeded in only one case (33% success rate.)
In 10313033 Canada Inc. v. 2418973 Ontario Inc., an April 11, 2018 decision of the Ontario Superior Court, the court refused to grant to the franchisor of the Laurier Optical franchise system an injunction to compel its franchisees to discontinue a royalty strike. The franchisor refused to produce its financial statements and did not provide any evidence that the nonpayment of fees would cause it irreparable harm. (Our blog article about the Laurier Optical decision may be found here.)
In Azmoon v Caffe Demetre, a May 15, 2018, decision of the Ontario Superior Court, the court found that an injunction claim by the franchisee was not warranted. There was only a limited term remaining on the franchise agreement, the franchisee already had ample opportunity to sell his business, and the existence of accurate store financial records meant that damages could readily be quantified. (Our blog article about the Azmoon decision may be found here.)
In 526901 B.C. Ltd v Dairy Queen, a June 29, 2018, decision of the Supreme Court of British Columbia, the court dismissed injunction applications by a franchisee about a mutual termination agreement. The weakness of the underlying case influenced the injunction analysis. The court accepted that the franchisee would lose its livelihood if the franchise agreement was terminated, but found that there was no evidence that a damages award would be inadequate compensation (Our blog article about the Dairy Queen decision may be found here.)
In no case reviewed in the Franchise Law Blog this year did franchisees get misrepresentation damages under s.7 of the Wishart Act. The court ordered an assessment of rescission damages in two cases (Giroux and Stephens). In one case, the court applied a novel approach to assess damages for breach of exclusive territory rights (Voyage-Vasco).
In Stephens, the franchisee failed to prove the full amount of its s.6(6) rescission claim. The court granted to the franchisee a refund of the original franchise fee, as well as damages for lost income and moving expenses. However, it ordered an assessment of damages about amounts claimed as business expenses, start-up capital and temporary accommodations.
In 9107-5382 Québec inc. c. Voyage Vasco inc., an August 24, 2018, decision of the Quebec Superior Court, the court held that a franchisor breached its franchisee’s exclusive territory rights by granting another franchisee the right to open a competing business in its protected territory. The court applied an accounting for profits approach to quantify the damages because it found that all of the profits of the competing business were direct losses of the franchisee (Our blog article about the Voyage Vasco decision may be found here.)
In Asian Concepts, the court reduced part of a franchisee’s provable claim for rescission damages against its franchisor’s estate. It held that amounts claimed as lease indemnity costs were not recoverable under s.6(6) of the Wishart Act because the franchisee had a valid limitations defence against its landlord for any liability under its lease.
e. Class action
Although courts certify franchise class actions, franchisees have experienced much difficulty in succeeding on the merits. Out of the four class action cases we summarized on the Franchise Law Blog, only one case (Sopropharm) can fairly be described as a victory (25% success rate.)
In Pet Valu Canada Inc. v. Rodger, A March 6, 2018, decision of the Ontario Superior Court, the court enforced a substantial costs award against the principal of the representative plaintiff in a franchise class action. It found that Mr. Rodger was liable to pay Pet Valu’s costs award under the terms of his personal guarantee and an indemnification clause in the franchise agreement. (Our blog article about the Pet Valu decision may be found here.)
In Trillium Motor World Ltd. v. Cassels Brock & Blackwell LLP, an October 10, 2018, decision of the Ontario Superior Court, General Motors franchisees failed to establish that the franchisor acted in bad faith by imposing tight timelines for the acceptance of wind-down agreements. However, they succeeded in a separate negligence action against the law firm that provided them with the certificates of independent legal advice (Our blog article about the Trillium decision may be found here.)
In 1523428 Ontario Inc./JB&M Walker Ltd. v. TDL Group, an October 22, 2018, decision of the Ontario Superior Court about two related class action proceedings, a motion judge struck nearly all of each representative plaintiff’s pleadings against the franchisor and affiliates of the Tim Hortons franchise system. Only the claims for breaches of the franchise agreement and the Wishart Act had any possibility of success (Our blog article about the TDL Group decision may be found here.)
In Sopropharm c. Jean-Coutu Group (PJC) Inc., a November 1, 2018, decision of the Quebec Superior Court, the court certified a franchise class action against a pharmaceutical company. It found that the franchisee’s allegations about illegal fee-sharing with non-pharmacists under the Quebec Code of ethics of pharmacists had a reasonable chance of success (Our blog article about the Sopropharm decision may be found here.)
We expect these trends to continue in 2019: less summary judgment motions for rescission and more rescission claims heading towards trial; challenges in proving misrepresentation claims; continued scrutiny in claims by either side for injunction relief; more proof in claims for loss or harm by either side; and challenges for franchisees to prove class action claims on the merits.
Our anticipated trend of how franchise disputes will fair in Canadian courts in 2019 shows that franchise cases are evolving away from simple rescission claims to more complicated and nuanced types of disputes, requiring more involved evidence and damages claims, and based on more complex legal theories.
For more information about Law Works’ expertise and how we may be able to help you, please contact Ben Hanuka at https://www.lawworks.ca/book-a-consultation or by phone in Ontario at (855) 978-5293 and in British Columbia at (604) 262-1711.