The Ontario Court of Appeal decision in 2212886 Ontario Inc. v. Obsidian Group Inc., 2018 ONCA 670, involved the appeal of a partial summary judgment decision in a dispute between the franchisor and a franchisee of Crabby Joe’s Tap and Grill. In this case, the franchisee operated a Crabby Joe’s franchise for a year and a half prior to serving a notice of rescission of the franchise agreement on the franchisor.
The franchisee claimed that the disclosure document provided was materially deficient and it was entitled to rescind the franchise agreement within two years of execution of the franchise agreement under section 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000 (“the Act”). The franchisee claimed for rescission damages under section 6(6) of the Act and also damages for breach of contract and breach of the fair dealing obligations under the Act. In response, the franchisor brought a counterclaim for a declaration that the franchise agreement was validly terminated and a claim for damages.
Partial Summary Judgment Motion Decision
The franchisee brought a partial summary judgment motion for a declaration that it was entitled to rescind the franchise agreement and for rescission damages. First, the motion judge found that the notice of rescission was served within the required two year period because the notice period started from the date of the replacement agreement, signed at the request of the franchisor, rather than the date of the original agreement. Secondly, the motion judge concluded that the disclosure document was materially deficient because it failed to include the weekly earnings projections that were shown to the franchisee at a meeting.
There was conflicting evidence in the motion record in respect to one of the key factual issues: whether the franchisor’s representative had shown a copy of earnings projections to the franchisee at a meeting that took place in May 2010. Earnings projections are not required to be included in a disclosure document, however, when an earnings projection is provided then it must be accompanied by a statement specifying the reasonable basis for the projection, the assumptions underlying the projections, and a location where information is available for inspection that substantiates the projection. The franchisee stated that he was shown an earnings projections table that predicted weekly sales of $37,500 to $44,000 prior to entering into the franchise agreement. The franchisor’s representative denied that he showed any earnings projections to the franchisee as it was not his practice in over 25 years in the business to show or provide any earnings projections to prospective franchisees.
In accordance with the directions provided in the seminal case of Hryniak v. Mauldin, 2014 SCC 7, the motion judge found that there was a genuine issue for trial but he was satisfied that the enhanced fact-finding powers would allow him to achieve a fair and just result that was timely, affordable and proportional to the matter. In determining one of the key issues, the motion judge rejected the franchisor’s evidence on the basis that it was “heavy on speculation and general practice and light on knowledge” and accepted the explanation provided by the franchisee for the inconsistencies provided in respect to the earnings projections. However, the motion judge did not order oral evidence to be presented by one or more parties under Rule 20.04(2.2) in order to weigh evidence, evaluate credibility and draw reasonable inferences from the evidence.
The Court of Appeal acknowledged that the motion judge’s decision to exercise the fact-finding powers was discretionary and entitled to deference provided their use is not against the interests of justice.
In this case, however, the Court of Appeal found that the motion judge did not properly consider whether it was necessary to hear oral evidence to fairly and justly make a finding on a key factual issue. The Court of Appeal concluded that the motion judge could not have adequately resolved credibility issues based on the affidavit evidence available. In particular, the franchisor’s representative was not cross-examined to explore any weaknesses and inconsistencies in his evidence, and the franchisee failed to tender evidence of the other principal in the meeting when the earnings projections were alleged to have been shown. Accordingly, the summary judgment granted based on non-disclosure was set aside.
In respect to the two year statutory rescission period, the Court of Appeal affirmed the motion judge’s decision that the notice of rescission was served within the time limit. Although there was conflicting evidence, it was not material to the main issue and the motion judge’s decision was reasonable based on the evidence.