Court Uses Expanded Powers to Grant Franchise Summary Judgment

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Author: Gleb Matushansky, Student-at-Law, Law Works P.C. 
Editorial Committee: Law Works P.C.
Editor: Ben Hanuka

Overview

On March 21, 2017, the Ontario Superior Court of Justice released its decision in 2212886 Ontario Inc. v Obsidian Group Inc. (2017 ONSC 1643).  The decision dealt with a motion for partial summary judgment for a franchise rescission under the Arthur Wishart Act (Franchise Disclosure), 2000 (SO 2000, c 3) (the “Act”).

Justice M.A. Garson looked at whether the disclosure document met the requirements of the Act and whether the claim was time barred.  The decision is important because the motion judge decided to use his expanded powers to make a decision about the credibility of the parties on a motion for summary judgment.

Garson J held that the disclosure document was materially deficient because it did not contain the earning projections and their basis, and as such was not proper disclosure.  He also made findings of the credibility of the witnesses in deciding to allow rescission and award damages to 2212886 Ontario Inc. (“221”).

Facts

Obsidian Group Inc. (“Obsidian Group”) is the operator of Crabby Joe’s Tap and Grill, a franchise network of restaurants.  Obsidian Group’s associate, Obsidian Inc. was the sub-landlord to Crabby Joe’s operators.

When 221 became interested in operating a Crabby Joe’s restaurant in 2009, an agent of Obsidian Group provided it with generic disclosure documentation.  In a May 2010 meeting with 221, Obsidian Group’s representative showed an earning projections table with predicted weekly sales.  Obsidian Group later included the same projections in a business plan that they prepared and submitted to RBC on 221’s behalf.

In June 2010, Obsidian Group provided further and more detailed disclosure.  On June 16, 2010, Obsidian Group and 221 entered into a franchise agreement.  Because of Obsidian Group’s desire to report the franchise sale in the following fiscal year, it signed a new franchise agreement with 221 on September 7, 2010, to replace the original franchise agreement.

221 operated a Crabby Joe’s restaurant in Bradford, between September 2010 and September 2012. 

Analysis

Garson J outlined the framework set out in the Supreme Court’s decision in Hryniak v Mauldin (2014 SCC 7) and determined that there was a genuine issue requiring a trial because of conflicting evidence between the principals of Obsidian Group and 221.  He then applied the enhanced powers given to motion judges, which include weighing the evidence, evaluating the credibility of a deponent and drawing any reasonable inferences from the evidence.  Justice Garson decided that Obsidian Group’s credibility was “replete with speculation, opinion, argument and contradictory statements”, and believed the evidence of 221 about seeing the earning projections and Obsidian Group preparing the business plan.

The court held that there was one material deficiency in the disclosure document that Obsidian Group provided to 221, namely that the earning projections Obsidian Group’s representative showed 221 in May 2010 were not disclosed, nor the basis for them, in the June 2010 disclosure document.

Justice Garson found there was no merit in other disclosure deficiencies that 221 claimed, namely that:

• Obsidian Group did not disclose the head lease – there was no head lease in existence, and Obsidian Group disclosed the offer to lease when available;
• Obsidian Group did not disclose the financing arrangements – because 221 lacked the funds to complete the purchase, Obsidian Group offered it a loan. This did not create the obligation to make additional disclosure, as the disclosure obligation ended before the loan, and because the financing documents were not contemplated at the time of the disclosure requirements, and the loan was for the benefit of 221;
• That the disclosure document was not “one document at one time” – because the documents generated by the loan could not have been reasonably contemplated by either party at the time that disclosure was required under the Act;
• Obsidian Group did not disclose the actual development costs – the claim failed because Obsidian Group disclosed sufficient estimates; and
• Obsidian Group provided substandard training and did not correctly build the restaurant – these relate to a claim for breach of contract and are not grounds to rescind the franchise agreement.

Because 221 paid rent to a franchisor’s associate, Obsidian Inc., 221 was entitled to a refund of the money, even though the benefit did not flow to Obsidian Group.

Summary and Commentary

221 was successful on the motion for summary judgment.  The failure to include the earning projections and their basis in the disclosure document meant the disclosure document was not substantially complete, and as such, there was no proper disclosure.

Since the projections were provided during the meeting and to RBC, they must have been disclosed as part of the disclosure document, especially because the bank’s decision to advance funds to 221 was heavily based on the earning projections.  This decision reaffirms that if a franchisor does not disclose the earning projections and the basis for them, the franchisee may be entitled to rescission.

Justice Garson determined it was in the interest of justice to rely on the enhanced fact-finding powers to make decisions about the credibility of the parties, and negatively inferred the absence of emails, notes and specific documents given the importance of the evidence.  Despite concluding it was a complex matter, Garson J decided the damages 221 was entitled to, and the costs of an earlier motion and the motion for summary judgment.  The decision supports the notion that a motion judge can decide issues of rescission, damages and costs on a summary judgment motion, even in the case of an issue for trial.

Garson J held that because Obsidian Group wanted 221 to enter into the replacement franchise agreement, for its own benefit, given the consumer protection nature of the Act, the two-year rescission period ran from September 2010, and not June 2010.  Franchisors should be aware that if they want franchisees to re-sign a franchise agreement, this may extend the time for a rescission claim.

Given that 221 did not argue the claims about substandard training and construction of the restaurant in the motion, which only considered the rescission claim, 221 could not rely on them.  This should be a reminder to argue all causes of action, and not rely only on rescission under the Act.

Justice Garson also discussed the reasonable contemplation of the parties at the time the disclosure was required when deciding on the financing arrangements.  Because the documents arose after the disclosure obligations ended, this was not a disclosure deficiency.  This opens the door for an analysis of the reasonable contemplation of the parties, and the timing of the disclosure obligation, in determining what a deficiency is, which introduces ambiguity.

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 at (855) 978-5293.

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