The court decision in Butera v. Chown Cairns LLP, of May 27, 2016, demonstrates the need for litigation counsel to be careful and precise with the words that they choose to frame franchise misrepresentation claims.

In the case, a judge of the Ontario Superior Court dismissed parts of a claim against the defendant law firm and lawyer, in the context of a lawyers’ negligence case, for essentially not framing a franchise misrepresentation claim precisely enough.

Background: the franchise case and the lawyers’ negligence case

The decision relates to a negligence claim against a law firm and one of its lawyers.  For ease of reference, I will call this the “lawyers’ negligence case”.

The lawyers’ negligence case arose out of a failed franchise litigation action that Mitsubishi automobile dealers in the Niagara region brought against Mitsubishi for misrepresentation, negligence and franchise statutory claims under the Arthur Wishart Act (Franchise Disclosure), 2000, including alleged misleading financial projections.  For ease of reference, I will call this the “franchise case”.

In the franchise case, the dealers were represented by the law firm and lawyers who are now the defendants in the lawyers’ negligence case.  The dealers were their clients at the time.

The court had earlier dismissed the franchise case for having been brought outside the limitation period.  On appeal, the Court of Appeal upheld the dismissal based on the limitation period.

As a result of the dismissal of their franchise case based on the missed limitation period, the dealers brought the present lawyers’ negligence case against the law firm and lawyer for alleged negligence as their litigation counsel in allegedly missing the limitation period.

In essence, the former clients claimed in the lawyers’ negligence case that because the law firm and lawyer were negligent in missing the limitation period, the former clients lost the opportunity to bring a successful damages lawsuit against Mitsubishi.

The ruling in the present motion in the lawyers’ negligence case

In the present lawyers’ negligence case, the defendant law firm and lawyer brought a motion for partial summary judgment to dismiss the misrepresentation component of the damages claim against them.

Justice Belobaba of the Ontario Superior Court of Justice granted the motion for partial summary judgment.  In doing so, Belobaba J. dismissed the former clients’ claim against the law firm and lawyer for negligence in relation to their misrepresentation claim against Mitsubishi.

The ruling was limited to the misrepresentation claim.  The rest of the former clients’ claims against the law firm and lawyer are continuing to trial.

At the heart of the ruling was Belobaba J.’s determination that the former clients did not expressly appeal the dismissal of their misrepresentation claim against Mitsubishi: that they appealed in respect of the other claims, but not the misrepresentation claim.

Belobaba J. found that the misrepresentation aspect of the claim against Mitsubishi was not genuinely part of the former clients’ appeal.  Therefore, the law firm and lawyer could not be held negligent for causing the alleged lost opportunity in respect of the misrepresentation claim – since the former clients did not appeal this ground.

Analysis and commentary: did the former franchisees genuinely abandon their misrepresentation claim in the appeal against Mitsubishi?

It is important to first identify the key section in the Wishart Act, which is subsection 7(1).  This subsection imposes liability on various parties as a result of either (i) a franchisor’s misrepresentation, or (ii) a franchisor’s failure to otherwise comply with its disclosure obligations.

In the motion before Belobaba J., the former clients took the position that they did in fact appeal the misrepresentation claim to the Court of Appeal.

The former clients did, at least peripherally, address the misrepresentation claim in their appeal.

Here is an excerpt from the reasons from the decision of Belobaba J.:

In their Notice of Appeal in the franchise case, the former clients used the word ‘misrepresentation’ in two of the four grounds of appeal.

One of the grounds of appeal referred to the term ‘misrepresentation’ in connection with alleged disclosure omissions under the Wishart Act and also referred to subsection 7(1) of the Wishart Act …..

Yet, Belobaba J. held that this ground of appeal referred to the second aspect under subsection 7(1) of the Wishart Act – which relates to the “failure to disclose” – not to the misrepresentation component.

However, in its definition of ‘misrepresentation’, the Wishart Act deems an omission of any material fact to constitute a misrepresentation.  This is relevant here because Mitsubishi’s alleged failure to disclosure under subsection 7(1) of the Wishart Act – which the former clients raised in their ground of appeal – in fact constitutes legal misrepresentation.

Belobaba J. held that the claim here was really based on the alleged non-disclosure, rather than statutory misrepresentation.  He found that the former clients used the term ‘misrepresentation’ only for the purpose of framing the limitations argument or claiming a statutory damages remedy for non-disclosure under subsection 7(1) of the Wishart Act – not as a genuine misrepresentation claim, whether at common law or under the Wishart Act.

In my respectful opinion, this finding by the learned justice creates a distinction that is not necessarily apparent under subsection 7(1) of the Wishart Act.

While there are certainly differences between the ‘misrepresentation’ and ‘failure to disclose’ components under subsection 7(1), the latter is intertwined with the former: failure to disclose – if it relates to a material fact – by definition amounts to misrepresentation.

And conversely, misrepresentation of a material fact, when in the context of a disclosure and pre-sale, necessarily means there would be a failure to disclose.

When in the context of a pre-sale disclosure (as opposed to other scenarios), ‘misrepresentation’ and ‘failure to disclose’ go hand in hand.  To say that the former clients appealed on the basis of one and not the other is perhaps like splitting hair.

Another ground of appeal related to the inferences by the original motion judge in the franchise case in respect of the former clients’ legal and industry knowledge, as well as knowledge about Mitsubishi’s sales history and practices.

This ground of appeal certainly seems to relate to the overall misrepresentation claim against Mitsubishi.  Yet, Belobaba J. determined that these inferences did not relate to any alleged misrepresentations made by Mitsubishi.

It would appear that in this case a motion judge dismissed a negligence claim based on, what appears to be at best imprecise word crafting by litigation counsel.  It is possible that the litigation counsel in this case on behalf of the former clients were not fully versed in the terminology under the Wishart Act and this may seem to have created an unfair result for the former clients.

It is unclear if this court decision will end up being treated as a persuasive precedent for other cases.  If it does end up influencing other similar cases, it is important that litigation counsel in franchise and related cases be very meticulous in the choice of words and allegations that they articulate in respect of causes of action under the Wishart Act.