Ontario Court Reinstates Case but Imposes Security for Costs Against Franchisee Corporate Plaintiff

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Author: Anthony Pugh, J.D., Law Works P.C.
Editor: Ben Hanuka

On November 2, 2017, the Ontario Superior Court of Justice released a decision of a master in 2176693 Ontario Ltd. v. The Cora Franchise Group Inc.  The master reinstated the case after it was earlier dismissed because the plaintiff did not schedule a trial in time, but it also imposed a security for costs order against a franchisee corporate plaintiff as a condition of moving forward.

Key Facts

The plaintiffs were a corporate franchisee and its principals, all family members. The defendant Cora Franchise Group Inc. is a Canadian franchisor.  At issue was a master’s earlier timetable order from 2014 requiring the court registrar to dismiss the action for delay if it was not set down (scheduled) for trial by November 2015.

In July 2013, the plaintiff franchisee signed an Asset Purchase Agreement to transfer its franchise to a third party. Cora refused to consent to the transfer unless it got a general release from the franchisee, as required in the transfer terms of the franchise agreement. The transaction never closed because the parties could not agree on the term and the interpretation of the franchise agreement.

The court later declared that the release requirement was legally unenforceable because of section 11 of the Arthur Wishart Act (Franchise Disclosure), 2000, and the decision was upheld by the Court of Appeal for Ontario.

In February 2015, Cora was successful on a partial summary judgment motion, dismissing many causes of action in the statement of claim, in what the court at time described as overreaching claims (claims such as misrepresentation about opening costs, profits, construction bidding, etc.).

In July 2015, the plaintiffs new lawyer refused to turn over their file materials to a new lawyer that they had retained, because of a dispute about fees.  At no point did either the plaintiff’s existing lawyer or Cora lawyer inform the new lawyer about the litigation timetable and deadlines. The dismissal order was incorrectly sent to the plaintiffs’ old lawyer, even though their new lawyer correctly field a Notice of Change of Lawyers with the court.

Also, the plaintiffs’ then-existing lawyer had not informed them about either the timetable or the deadline for setting the case down for trial.

Reinstating the Case

To decide whether the dismissal order of the case should be set aside (i.e., cancelled), to reinstate the case, a court applied the four factors set out in Reid v. Dow Corning Corp.  These are: the plaintiff’s explanation of the delay in litigation, inadvertence in missing the deadline, the motion to set aside the dismissal order is brought promptly, and no prejudice to the defendants. Courts take a contextual approach and weigh each factor in order to come up with a fair result. The court is concerned primarily with the rights of the litigants and not with the conduct of their counsel.

Master McGraw wrote that the plaintiffs had a fair explanation for the delay, given their problems with their lawyers and the many litigation steps to date (called ‘interlocutory’ steps).  A court should not attribute the disappearance of the plaintiffs’ first lawyer and the refusal of their second lawyer to turn over the file or advise their third lawyer about the litigation deadline. Nor should a court penalize the plaintiffs for changing lawyers.

Also, while the focus in this analysis is on the plaintiff’s conduct, a court may consider any conduct by the defendant that added to the delay. In this case, the defendants refused to consent to the transaction which may have settled the proceedings. Although this was within the defendants’ rights, it nonetheless was a cause of delay. The defendants’ aggressive litigation strategy, including multiple motions, appeals and related steps, also delayed proceedings.

The defendants claimed that the plaintiffs, as experienced litigants, should have diarized the trial scheduling deadline. Master McGraw rejected this argument on the basis that diarizing deadlines is a function normally done by lawyers. Obligating some clients to act as a back-up for their lawyers would punish clients for their lawyers’ conduct.

Master McGraw also found that there was no prejudice to the defendants because of the delay. Fading of memories and loss of institutional knowledge is less of a factor when the defendants take such an active and aggressive role in litigation. Also, the master was not willing to accept that Cora statutory obligation to disclose the action was a legitimate factor for prejudice.

Security for Costs

Having said that, the master agreed with Cora that the plaintiffs should post money into court as security for cost.

A court may order security for costs when there is good reason to believe that a corporate plaintiff has insufficient assets in Ontario to satisfy a costs award that a defendant may get at the trial, if successful.

The corporate plaintiff appeared to be without assets.  It stopped operating its only asset, the franchised restaurant, in January 2017.  And it owed significant amounts to Cora.

To counter these problems about its lack of assets, the corporate plaintiff had to disclose its financials with “robust particularity”, i.e., in a fulsome way, including the following: the amount and source of all income; a description of all assets (including values); a list of all liabilities and other significant expenses; an indication of the extent of the ability of the plaintiffs to borrow funds; and details of any assets disposed of or encumbered since the cause of action arose.

The plaintiffs relied only on the original setup costs of the restaurant, in the amount of $750,000 – and the fact that the restaurant was under Cora’s control now, and their original franchise application, over a decade ago, showing the principals’ significant net worth.  The plaintiffs did not provide any other evidence about the corporation’s financials, other than support statements.

The court held that unsupported statements on an affidavit were not sufficient.  Cora was successful on this issue because the plaintiffs provided no evidence about the nature and sufficiency of the plaintiff corporation’s assets.

About the amount of security for costs, the court held that the amount should be reasonable to the parties and should reflect what a successful defendant would likely recover in costs if it wins at trial.  The master ordered the plaintiffs to post security for costs in the amount of $30,000 for the litigation up to and including examinations for discovery.  This was without prejudice to Cora’s right to ask for additional security for costs for subsequent litigation steps.

The master held that this amount, for the completion of documentary and oral discovery, reflected the nature and status of this action, the steps taken to date, and efficiencies that might be gained from previous steps.

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