On the coattails of the recent Supreme Court of Canada decision in Hryniak permitting the broader use of summary judgment motions, the franchisor of Caffé Demetre restaurants has won its motion for summary judgment against a former franchisee. (A Cassels Brock summary of the Hryniak decision can be found here.)
In the judgment of Caffé Demetre Franchising Corp v 2249027 Ontario Inc, Justice T.A. Heeney of the Ontario Superior Court of Justice dismissed the defendants' counterclaim seeking the statutory rescission of the franchise agreement. The Court ruled that the alleged deficiencies of the disclosure document did not amount to material facts that should have been included or were not so egregious as to amount to no disclosure at all.
In this case, after failing to cure a number of defaults, the franchisor terminated the franchise agreement. In the meantime, the defendants' served a notice on the franchisor rescinding the franchise agreement and demanding payment of $926,500 within 60 days.
The franchisor attempted to take possession of the restaurant but the defendants retook possession and continued to operate a competing business at the location under the name "Sugar'n Spice Café." As a result, the franchisor commenced litigation.
In the Statement of Defence and Counterclaim, the defendants sought the rescission of the franchise agreement on the basis that it failed to provide the requisite disclosure as per s.5(4) of the Arthur Wishart Act. The defendants alleged that the franchisor failed to disclose that it was involved in litigation with a former franchisee, contemplating modification of its "Tip Out Policy" and ice cream manufacturing policy and required the defendants to remodel and renovate the franchise store.
The defendants further counterclaimed for damages of $926,500 for misrepresentation, breach of contract and breach of fair dealing.
The franchisor moved for summary judgment with respect to the portion of the Counterclaim seeking rescission of the franchise agreement. The summary issue before Justice T.A. Heeney was whether there was a genuine issue for trial to the question: are the alleged defects in the disclosure document so egregious as to amount to no disclosure at all, thereby entitling the defendants to rescind the franchise agreement under s.6(2) of the Arthur Wishart Act?
In his decision, Justice T.A. Heeney surveyed the statutory disclosure requirements of a franchisor and the ability of a franchisee to rescind a franchise agreement. In light of the new summary judgment rules, Justice T.A. Heeney then analysed the facts and evidence against the applicable law to determine whether there was a genuine issue for trial as to the defendants' right to claim rescission.
The Court found that it was in the interests of justice to summarily adjudicate the matter and ruled that three of the four claimed deficiencies of the disclosure document did not amount to a material fact that should have been disclosed to the defendants. As for the undisclosed litigation, the deficiency was not so egregious to conclude that it amounted to no disclosure at all. Accordingly, the Court dismissed the Counterclaim for rescission of the franchise agreement.
While the parties may still proceed to trial to determine the merits of the defendants' claims for misrepresentation, breach of contract and breach of fair dealing, this case demonstrates the Court's willingness to summarily adjudicate matters in the franchise context in order to avoid lengthy and costly trials and to promote the resolution of disputes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
