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Springdale Pizza Depot is the latest instalment in the growing line of cases warning franchisors that a deficient disclosure document will be considered to be no disclosure document at all. However, there are two additional points of interest that arose from the case. The first is that the court rejected the theory maintained by some franchise practitioners that the vendor franchisee could be responsible for providing a disclosure document to the purchasing franchisee. The second is that franchisees may, under the relatively new court proceeding rules in Ontario, have more ready access to rescission claims for absent disclosure due to judges’ ability make conclusive findings relating to credibility and evidence on summary judgment motions.
The corporate plaintiff and its principals in 2189205 Ontario Inc. v. Springdale Pizza Depot Ltd. (pdf) sought, on a summary judgment motion, to rescind the franchise agreement for their Pizza Depot franchise. The facts are relatively straightforward; the plaintiffs purchased an existing Pizza Depot franchise from the previous franchisees in October of 2008. The plaintiffs began operating the franchise, later signing various agreements with the franchisor in December 2008. The plaintiffs served a notice of rescission on July 16, 2009 and began litigation in August. While the parties disputed whether the disclosure document was provided to the franchisee prior to the execution of the franchise agreement, the court determined that it did not need to decide the timing issue. Instead, it examined the contents of the document that was purportedly delivered, and cited sufficient deficiencies in the disclosure document to determine it was not a disclosure document at all, even had it been delivered in time. Among the deficiencies cited were no franchisor’s certificate, no audited financial statements, no head lease for the premises and no earnings projections (there is no discussion of why the court believed that an earnings projections was a mandatory disclosure item, however, there were enough remaining deficiencies that the document would have otherwise been determined to be deficient absent the earnings projection issue). This serves as yet another warning that franchisors must comply with all of the technical requirements of the legislation, and also be mindful of what else might be considered to be a “material fact” that is not expressly prescribed in the regulation (e.g., a copy of the head lease).
Interestingly, in determining whether there was a genuine issue for trial, the court considered the relatively new rules for weighing evidence and assessing credibility in a motion for summary judgment. The motion judge decided that she was in as good a position as a trial judge to determine whether the franchisor had complied with its disclosure obligations. She found that there was no genuine issue for trial and the franchisees had a right of rescission and properly exercised it. If this case is indicative of the willingness of courts to make conclusive findings on core issues, rather than deferring the matters for trial, not only will franchisees have more ready access to a court’s confirmation of a rescission claim, but franchisors must be aware that they may not get a second opportunity to convince a court that the disclosure document was not so deficient as to be considered to be no disclosure document at all. Accordingly, franchisors must be ready to present their best defense to such a case at the summary judgment motion.
The vendor franchisees were also named as defendants and, in a cross-claim by the franchisor, the franchisor claimed that the vendor franchisees carried the onus of providing a disclosure document to the prospective franchisee. The court dismisses this summarily, confirming that the legislation imposes this onus only on the franchisor. That puts to rest the theory maintained by some franchise practitioners that the vendor franchisee could be responsible to provide a disclosure document to the purchasing franchisee.
This case is another good illustration of the court’s willingness to find a disclosure document so deficient that it is no disclosure document at all. Further, given the apparent increased likelihood of a determinative finding on a motion for summary judgement, franchisors faced with claims of material deficiencies (e.g., missing head lease, financial statements or the franchisor’s certificate) would be well advised to evaluate the strengths of their case and consider settlement rather than pursue fruitless litigation.
About the author: Dominic is a partner at Ontario-based law firm Osler, Hoskin & Harcourt LLP. He provides practical and business-friendly advice to both established and emerging franchisors with respect to all facets of franchising in Canada.