A rescission case from the Ontario Superior Court of Justice confirms that franchisee rescission damages will only be awarded with some evidence to support the amounts claimed; however, a franchisor’s earnings projections may be sufficient to substantiate a loss of profits claim for statutory misrepresentation.

Overview of the Facts

In 8150184 Canada Corp. v. Rotisseries Mom's Express Ltd., 2014 ONSC 3256 (Rotisseries), the plaintiff franchisee brought an action against the defendant franchisor parties for losses and damages related to the rescission of its franchise agreement, breaches of the statutory duty of good faith and fair dealing and statutory misrepresentations.

The plaintiff franchisee met the defendant franchisor parties at a franchise show in February 2012.  In March 2012, the plaintiff franchisee met with the defendant franchisor parties for a second time to discuss the Mom’s Express franchise opportunity.  The defendant franchisor parties made a number of representations to the plaintiff franchisee during this second meeting, including, the location and size of the restaurant, an estimate of the initial investment to open the restaurant, the length of time to build out the restaurant and the resale value of the restaurant.  Subsequent to this meeting, the plaintiff franchisee paid the defendant franchisor parties an initial franchise fee and entered into a franchise agreement.   The defendant franchisor parties did not provide the plaintiff franchisee with a franchise disclosure document prior to entering into the franchise agreement, but did provide it with certain pro forma earnings projections.

The plaintiff franchisee encountered many difficulties over the next few months, including, delayed construction, issues with getting fixtures and lack of support from the defendant franchisor parties.  In October 2012, four months after the defendant franchisor’s projected opening date of the restaurant, the plaintiff franchisee rescinded its franchise agreement after having spent more than $100,000 over the defendant franchisor’s estimated start-up costs and the restaurant still not being operational.

Rule 51.06(2) Motion for Request to Admit Certain Facts

The plaintiff franchisee brought a motion, pursuant to Rule 51.06(2), for judgment at the commencement of trial based on a request to admit the truth of certain facts and the authenticity of certain documents made.  The defendant franchisor parties did not respond and were deemed to have admitted the facts and authenticity of the documents mentioned in the request to admit.  The facts admitted related to, identification of the parties, their roles, their pre-contractual discussions, the representations and disclosure made (or not made) and the termination of the franchise agreement between the plaintiff franchisee and the defendant franchisor. 

The court held on the motion that the plaintiff franchisee was entitled to rescission damages for amounts that had been quantified in the request to admit and which were corroborated by appropriate documentation, including, the initial franchise fee and certain other hard expenses for supplies, equipment and other losses incurred in acquiring, setting up and operating the franchise. The court, however, was unable to award the amounts claimed for the principals’ salaries, per diem meal and car expenses as there was not sufficient documentary support.  The court held that the defendant franchisor parties were entitled to challenge the recoverability and reasonableness of these amounts either at trial or on a motion for summary judgment.

On the plaintiff franchisee’s claim for loss of profits as a result of the statutory misrepresentations, the court held that such claim was calculated using a methodology and based on data that may be open to challenge.  The court also held that the deemed admissions resulting from the request to admit did not lend itself to the assessment of damages for breach of the statutory duty of good faith and fair dealing.   As a result, the court held that both the statutory misrepresentation and breach of the statutory duty of good faith and fair dealing claims should be heard at trial or a motion for summary judgment.

The Trial

At trial, the plaintiff franchisee sought to establish the following losses and damages:

Click here to view table.

After hearing the plaintiff franchisee’s testimony and reviewing evidence substantiating the claims, the court awarded all of the damages claimed with the exception of the meal expenses as there was not sufficient evidence to support these expenses.

On the plaintiff franchisee’s claim for loss of profits as a result of the statutory misrepresentations, the court found that:

“the plaintiff franchisee’s evidence of the loss of potential profits, based on the pro forma calculations as provided by the defendant franchisor parties and representations made, was reasonable and provided a sufficient basis to award the claimed loss of profits damages.”

The court also held that the defendant franchisor parties had “knowingly and willingly” breached their statutory duty of good faith and fair dealing in the performance and enforcement of the franchise agreement.  This finding was based on the defendants franchisor parties’ representations to the plaintiff franchisee with respect to the anticipated cost of opening the restaurant, the size of the restaurant and the resale value of the restaurant. The court also found that the defendant franchisor parties failed to provide the plaintiff franchisee with support and guidance required of a franchisor, including, failure to provide the plaintiff franchisee with adequate architectural drawings, menus, signage and training.

Practical Implications

The Rotisseries decision provides additional commentary on the quantification of rescission damages and highlights the danger of being unresponsive to request to admit motions.  The decision also serves as a warning to franchisors that pro forma statements or earnings projections may be a sufficient basis to award loss of profits damages and that “knowingly and willingly” breaching the statutory duty of good faith and fair dealing may be sufficient to yield the maximum amount historically awarded for such claims.  Franchisor’s, however, can take some comfort from the Rotisseries decision in that it also stands for the proposition that franchisors can challenge alleged rescission damages where there is an insufficient evidentiary basis to support the damages claimed.