Appeal Court Overturns Partial Summary Judgment in a Franchise Rescission Claim

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

In 2212886 Ontario Inc. v. Obsidian Group Inc., a July 27, 2018 decision of the Court of Appeal for Ontario, the court set aside a motion judge’s decision to grant partial summary judgment to the franchisees in a rescission case. The Court held that the motion judge erred in determining the key contested factual issue – whether the franchisor showed an earnings projections table to the franchisee before the parties executed the franchise agreement – without hearing oral evidence.

Key facts

The franchisee, 2212886 Ontario Inc., and its two principals, William and Kirsten Porteous, operated a “Crabby Joe’s” restaurant in Bradford, Ontario. Obsidian Group Inc. was the franchisor.

The parties signed a franchise agreement on June 16, 2010, and a replacement franchise agreement on September 7, 2010. The replacement agreement was substantially the same as the first agreement.

On September 5, 2012, 221 and the Porteouses served a notice of rescission. Obsidian then terminated the franchise agreement and eventually transferred the franchise to a third party. 221 and the Porteouses moved for partial summary judgment for a declaration that the franchise agreement was rescinded.

In the face of conflicting evidence, the summary judgment motion judge determined that Obsidian’s representative – Danny Grammenopoulos – showed an earnings projections table to the Porteouses at a May 2010 meeting, before the parties entered into the franchise agreement. The motion judge held that Obsidian’s omission of the earnings projections and the underlying basis for the projections in the disclosure document constituted no disclosure at all, justifying rescission under section 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000.

The motion judge also held that the date of the franchise agreement from which the two-year limitation period under section 6(2) of the Wishart Act runs was the date of the replacement agreement (i.e. September 7, 2010; not June 16, 2010). 221 and the Porteouses thus served their notice of rescission within the limitation period.

Court of Appeal holds that motion judge erred in granting partial summary judgment

The central issue in the litigation was the whether Mr. Grammenopoulos showed the earnings projections to the Porteouses before the parties signed the franchise agreement at the May 2010 meeting. Only if this occurred would rescission under section 6(2) of the Wishart Act for no disclosure at all be available.

The parties disputed this key fact. Mr. Grammenopoulos categorically denied that he showed the earnings projections to the franchisees at the May meeting, stating determinatively that he had never in his 25 years of practice showed an earnings report before the execution of a franchise agreement.

Because of the dispute over this key fact, the Court of Appeal held that the motion judge erred by granting summary judgment without determining whether it was appropriate or necessary to hear oral evidence. The motion judge failed to critically assess the evidence and could not assess credibility without hearing oral evidence on the key earnings projections issue.

The motion judge dismissed Mr. Grammenopoulos’s evidence as “heavy on speculation” and “light on direct knowledge”. The Court of Appeal rejected this, saying it contained statements of fact based on Mr. Grammenopoulos’s prior experience. Since 221 and the Porteouses never cross-examined Mr. Grammenopoulos, his evidence was never challenged.

In addition, Mr. Porteous gave contradictory evidence about when he first saw the earnings projections. In cross-examination, Mr. Porteous stated that he first saw a business plan in March 2011. In separate litigation regarding an RBC small business loan, Mr. Porteous said that he first saw the earnings projections and business plan at a meeting in July 2010. In his affidavit, his position was that he first saw the earnings projections at the May 2010 meeting.

In explaining this contradiction, Mr. Porteous claimed that he did not know that the earnings projections were part of the business plan until after rescission.

Unlike the motion judge, the Court of Appeal did not accept Mr. Porteous’s explanation for the contradiction. It found that Mr. Porteous took one position at the RBC litigation, that he and Ms. Porteous decided to purchase the franchise because RBC’s representative showed them the earnings projections in July 2010, and another position at this litigation, that they decided to purchase the franchise after Mr. Grammenopoulos showed them the earnings projections at a May 2010 meeting.

The motion judge’s uncritical acceptance of Mr. Porteous’s explanation “decontextualized” the written evidence and did not ensure that this key issue was fairly resolved.

The Court of Appeal also held that the motion judge should have considered 221 and the Porteous’s decisions not to cross examine Obsidian’s affiants and not to produce evidence from Ms. Porteous. The motion judge should have considered the absence of evidence from Ms. Porteous when assessing credibility and determining the critical issues, especially because she was alleged to have attended the May 2010 meeting.

Earnings projections shown after execution of the franchise agreement not a ground for rescission

As an alternative, 221 and the Porteouses argued that the motion judge found that Obsidian was required to include the earnings projections in the June 1, 2010 disclosure document because Obsidian provided the projections to RBC. They claimed that this amounted to no-disclosure at all.

The Court of Appeal held that the motion judge structured his decision after determining that Obsidian provided the earnings projections in May. The only basis for which failure to provide the earnings projections could have amounted to no disclosure would be if 221 and the Porteouses received the projections before they signed the franchise agreement and the projection was not included in the disclosure document. The provision of earnings projections at a later stage may constitute a misrepresentation but cannot found a claim for rescission under the Wishart Act.

The effective date of the franchise agreement was September 7, 2010

Obsidian argued that the motion judge erred by concluding that the franchisee had a right of rescission when the parties signed the first franchise agreement on June 16, 2010, more than two years before the rescission.

The Court of Appeal held that, because the request to sign a new franchise agreement came from the franchisor, the proper effective date was September 7, 2010. The motion judge reached the same conclusion, and properly considered the intent and consumer protection purpose of the Wishart Act.

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