Summary judgment in Obsidian contested franchise disclosure case denied

Summary judgment in Obsidian contested franchise disclosure case denied

The Supreme Court has recently denied leave to appeal from the decision of the Ontario Court of Appeal in 2212886 Ontario Inc. v. Obsidian Group Inc., 2018 ONCA 670 (leave denied 2019 CanLII 16540 (SCC)) affirming the Court of Appeal’s decision that summary judgment may not be appropriate in cases where the central and determinative issues turn on conflicting evidence and questions of credibility.

The case involved a claim by a franchisee and its principals that the franchisee was entitled to rescind its franchise agreement under Ontario’s Arthur Wishart (Franchise Disclosure) Act, 2000 because the franchisor had failed to provide the required disclosure. In particular, the focus was on the requirement to disclose certain projections and underlying financial information.

The franchisee had become interested in operating a Crabby Joe’s in 2009 and entered into discussions with the defendant franchisor. Generic disclosure was provided in early 2009, with more detailed disclosure following in June 2010. The franchise agreement was executed shortly after the second disclosure was provided in June 2010. In September 2010 the franchisor requested that the parties enter into a new franchise agreement, cited as possibly being more convenient for the franchisor’s reporting requirements. An amending agreement was also executed at the same time, which included a number of provisions that were of benefit to the franchisee.

The franchisee alleged in its claim that the disclosure received in June 2010 was deficient in a number of materials respects, and claimed one of these deficiencies to be the franchisor’s failure to include earnings projections. The franchisee claimed the franchisor had shown the plaintiffs these projections in an early meeting prior to the first franchise agreement being executed.

The defendant franchisor claimed, inter alia, that the plaintiff’s claim was out of time as the notice of rescission was served in September 2012, outside of the two-year time period it argued had begun running in June 2010.

At first instance the motions judge made two key findings that resulted in a determination in favour of the franchisee.

First, the motions judge held the date from which the two-year right of rescission under the AWA began to run was the date of the second agreement. Because the franchisor had required the franchisee to sign a new agreement, it could not now claim the benefit of the earlier agreement for the purpose of limiting the franchisee’s time to exercise its rights under the AWA.

Second, the motions judge confirmed prior decisions interpreting and applying the AWA and Regulations. In particular, the motions judge found that, while the Act and Regulations do not require financial projections as an element of disclosure, if the franchisor elects to provide projections to a prospective franchisee, those projections and the financial basis for them must be included in disclosure. The motions judge confirmed that the failure to include this information if it is shown to a franchisee prior to the execution of the agreement amounts a failure of disclosure. The motions judge went on to find as a matter of fact that the projections had been given to the plaintiffs prior to the delivery of disclosure and signing the agreement.  

The contentious point about the motion judge’s latter finding was that it was based on contested evidence by both parties and primarily dealing with issues of the parties’ credibility. The motions judge invoked the new expanded powers of fact finding under Ontario’s summary judgment rules, but did not consider the need for oral evidence.

It was this point that caused the Court of Appeal pause, and ultimately grounded their decision to overturn the first instance finding. In holding that the motions judge had correctly determined that the case for rescission depended on a finding that the franchisee had seen the projections prior to signing the agreement, the Court of Appeal determined that the contradictory and inconsistent affidavit evidence on this central point rendered this a case in which credibility could not be determined by the documentary record.

The Court of Appeal’s decision falls into a growing line of cases in Ontario that have questioned the propriety of a summary judgment procedure either to determine contested issues involving credibility, or deciding a case on a partial basis.

Please follow this link for more information on our Retail and Consumer Markets Group.

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