The Reality of Franchise Rescission Summary Judgment Motions

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This article, written by Ben Hanuka, was originally published by The Lawyer’s Daily on October 11, 2017, under the title, “The Reality of Post-Hryniak Franchise Rescission Summary Judgment Motions”. Click here to view the published article.

Franchise rescission claims under provincial franchise disclosure legislation have been accelerating in recent years. The jurisprudence has been driven by Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000. Other provinces have adopted comparable legislation after conducting their own studies. British Columbia is the most recent one, whose Franchises Act, came into force in February 2017.

Rescission claims may vary substantially in their complexity – depending on the alleged grounds for rescission. The spectrum of complexity is very broad. It is ultimately based on the types of facts that are in dispute, the quality of the evidence, and the legal issues involved:

– Facts and evidence: is there a purported disclosure document on the record and are the relevant key facts ascertainable with reasonable evidentiary probing?

– Legal issues: has the jurisprudence settled the applicable legal test?

This wide spectrum ranges from straightforward facts to disputed evidence about key documents and events, and from established legal tests to novel issues that are far from fully developed.

In this article, I focus on the most common type of rescission case: franchise rescission claims based on a disclosure document that is allegedly materially deficient.

The legal test for this type of a case has developed over the past decade and has been settled by the Court of Appeal for Ontario. The focus is on the purported disclosure document, the disclosure process, and key surrounding facts.

Most rescission cases, at least in Ontario, appear to be framed as summary judgment motions in the context of an action. Some of these cases are also brought in Ontario as applications, which are subject to different evidentiary rules, but like summary judgment motions, are based on affidavit and out-of-court cross-examination evidence, and are heard in motion courts (note that an ‘application’ in Ontario is different from what the term means in some other provinces, such as Alberta).

Bringing these types of cases in a summary fashion seems to make a lot of sense, having regard to all the legal factors – complexity, proportionality, etc. In its 2014 seminal decision in Hryniak v. Mauldin, the Supreme Court mandated a “culture shift” in endorsing summary judgment motions as a legitimate way to resolve legal disputes. It held that motion judges must grant summary judgment if they can reach a fair and just conclusion on the motion.

Where assessing damages requires accounting with some complexity or on some contested evidence, the most efficient procedure is arguably to frame the motion for summary judgment for liability on the rescission claim, i.e., partial summary judgment, with damages to be determined separately on an assessment. The determination of the liability issue disposes of the bulk of the claim, leaving only damages to be assessed.

Some perceived issues arise where a franchisor files a parallel claim (whether by way of a counterclaim or otherwise, depending on who was first to the races) for breach of the franchise agreement.

Under the jurisprudence, a franchisee’s right of rescission is absolute. And if statutory rescission is granted, the franchise agreement is cancelled from the start, i.e., ab-initio. Therefore, no cause of action for breach of contract would exist in this scenario.

Other claims by a franchisor may survive rescission. For example, a claim against a franchisee for an alleged bad faith conduct. Under the jurisprudence, rescission of a franchise agreement does not absolve the franchisee from alleged tortious conduct.

How should this scenario, be resolved? We have a relatively straightforward rescission claim, pursued summarily for rescission liability and for an assessment of damages, and a franchisor’s claim for tortious conduct.

The easy way out for a court is to refer everything to trial. But is that the most efficient, expeditious and fair procedure, having regard to access to justice and the Hryniak requirements? Arguably not.

Is it fair to require that a rescission claim, even if it otherwise meets the test for summary judgment, be pursued through trial, together with the bad-faith or other tortious allegations? Or, does it make most sense to resolve the bulk of the claim, i.e., the rescission claim, through summary judgment, direct the franchisor’s bad faith claim to trial (if necessary)? Or, depending on the nature of the evidence, is it possible to resolve all these claims on summary judgment? And if the franchisee’s damages are to be assessed separately, does it further complicate the procedural analysis?

Vital here is the courts’ ability and willingness to take a good hard look at the evidence to determine whether a trial is really needed.

Unfortunately, because of systemic pressures on judges, including lack of time and resources, sometimes (to be fair to our courts, certainly far from always) the answer has been to throw the baby with the bath and just refer everything to trial.

In processing these types of franchise rescission claims, the administration of justice – through the work of counsel and courts – must apply what the Supreme Court has mandated the courts and parties to do, which is to take all reasonable steps to resolve cases summarily. The Supreme Court even acknowledged that the motion in Hryniak was itself complex and expensive, but noted that going to trial “would have cost even more and taken even longer.”

Alternate means to resolve cases should also be considered, such as pursuing a case by way of a hybrid trial (essentially a summary trial, with evidence in chief tendered mostly by way of affidavit evidence, with viva-voce evidence focused on cross-examination), or choosing to adjudicate the case by final and binding arbitration. In the latter case, the parties will have the option to fashion a cost-effective adjudication process custom-tailored to their case, and to choose an arbitrator with expertise in the substantive law and arbitration procedure.

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Ben Hanuka, J.D., LL.M., C.S., is principal of Law Works P.C. (in Ontario) and Law Works L.C. (in British Columbia). He is a member of the Ontario and British Columbia Bars and Certified by the Law Society of Upper Canada as a Specialist in Civil Litigation.

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.