Licensee Gets Summary Judgment for Franchise Rescission Against “Dial a Bottle” Licensor

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Author: Robert Jones, Law Works P.C.
Editor: Ben Hanuka, Law Works P.C.

In Fyfe v. Stephens, an August 3, 2018, decision of the Ontario Superior Court of Justice, the court granted partial summary judgment to a licensee for rescission of an Exclusivity Agreement on the basis that it was a “franchise agreement” under the Arthur Wishart Act (Franchise Disclosure), 2000 (“the Act”).

The court dismissed the misrepresentation claim, awarded partial damages to the licensee, and ordered that the balance of the claimed damages be determined on an assessment.

Key facts

The defendant, Mr. Vardy, was the owner of the “Dial a Bottle” alcohol delivery service. The plaintiffs, Mr. Stephens and Ms. Fyfe, operated a Dial a Bottle business.  They sought to rescind their Exclusivity Agreement with Mr. Vardy. They also alleged that certain financial information that Mr. Vardy gave them at the outset was a misrepresentation under the Act.

Mr. Vardy provided a call intake and referral service. He divided the province into territories and then granted licensees the right to operate under his trademark in these territories. When a customer would call to place an order for alcohol, Mr. Vardy would refer the order to the licensee in that customer’s territory. Mr. Vardy charged fees for referring the call and on successful delivery to the customer.

Mr. Vardy, Mr. Stephens and Ms. Fyfe signed an Exclusivity Agreement which granted to Mr. Stephens and Ms. Fyfe the right to deliver alcohol in Ontario, conditional on acquiring a licence to distribute alcohol from the Alcohol and Gaming Commission of Ontario. Mr. Stephens and Ms. Fyfe paid an initial fee to Mr. Vardy when they signed the Exclusivity Agreement.

The case was appropriate for summary judgment

The court applied the established summary judgment motion test and concluded that Mr. Stephens’ and Ms. Fyfe’s rescission claim was appropriate for summary determination. The key factors were that the court was able to conclude, based on the evidence, that the Exclusivity Agreement was a franchise agreement, and that Mr. Vardy conceded that he never provided to Mr. Stephens and Ms. Fyfe a disclosure document that is required under the Act.

The Exclusivity Agreement was a franchise agreement

The court found that a paragraph in the Exclusivity Agreement that purported to treat it as something other than a franchise agreement did not legally affect the issue of whether the Exclusivity Agreement was a “franchise agreement” under the Act.

The court found that the Exclusivity Agreement was a franchise agreement for the following reasons, based on the definition of a “franchise” under s.1(1) of the Act:

1. Stephens and Ms. Fyfe were required to pay to Mr. Vardy a $40,000 initial fee to acquire their Dial a Bottle business. They were also required to pay to Mr. Vardy $3 each time he referred an order to them, and another $3 each time the order was successfully fulfilled. The court found the payment element of the franchise definition was met;
2. Vardy granted to Mr. Stephens and Ms. Fyfe the right to deliver alcohol under his trademark in certain territories. Although the Exclusivity Agreement was conditional on Mr. Stephens and Ms. Fyfe obtaining a license from the Alcohol and Gaming Commission of Ontario, the court concluded that the grant of a right to distribute in association with a trademark element of the franchise definition was met; and
3. Vardy retained control over, amongst other things, the website, order-taking, customer service, advertising and marketing. The court found that the control element of the franchise definition was met.

The financial model was not a misrepresentation 

The court held that the financial model which Mr. Vardy provided to Mr. Stephens and Ms. Fyfe was not a misrepresentation under the Act. The model envisioned a “potential business”, was based on sales volumes in Toronto territories, and stated that Dial a Bottle did not make any guarantees about income.  Based on these factors, Mr. Stephens and Ms. Fyfe should not have reasonably relied on the financial model as an accurate prediction of the income that they would generate in their business.

Partial damages were proven

Mr. Stephens and Ms. Fyfe claimed the following damages from Mr. Vardy:

1. The initial fee;
2. Lost income;
3. Start-up capital;
4. Business expenses;
5. Moving expenses; and
6. Temporary accommodations.

The court held that Mr. Stephens and Ms. Fyfe had to prove their damages claim by evidence. It found that Mr. Stephens and Ms. Fyfe were entitled to the return of their initial fee. The court also concluded that their personal tax returns were sufficient to prove the lost income claim. The moving expenses were also reasonable and supported.

However, Mr. Stephens and Ms. Fyfe did not establish that they needed temporary accommodations to set up their Dial a Bottle business. The court also held that their receipts did not account for some of the amounts claimed as business expenses. Similarly, Mr. Stephens’ and Ms. Fyfe’s bank statements did not show that they invested the entire amount claimed as start-up capital. The court held that an assessment of damages would be necessary to decide these disputed amounts.

Conclusion

This decision shows that a summary judgment application may be appropriate to determine rescission claims based on the legal characterization of an agreement, i.e. whether it is a franchise agreement, and that damages must be supported by sufficient evidence.

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