In Caffé Demetre Franchising Corp. v. 2249027 Ontario Inc., the Ontario Court of Appeal has upheld the decision finding partial summary judgment in favour of the franchisor, Caffé Demetre, and denying the franchisees’ two-year rescission claim for failure to disclose litigation between the franchisor and a former franchisee who had opened a competing business. A copy of the decision can be found here.
The decision confirms the Court’s willingness to summarily adjudicate matters in the franchise context in order to avoid lengthy and costly trials and to promote the resolution of disputes. The decision also provides that not all litigation involving the franchisor is a “material fact” necessitating disclosure and that the issue of materiality is to be determined by a fact-specific analysis.
On the initial motion before the Ontario Superior Court of Justice, the Court summarily dismissed the defendants’ counterclaim seeking the statutory rescission of the franchise agreement, finding that the alleged deficiencies in the disclosure document were not sufficiently stark or material to warrant rescission. Our summary of the motion judge’s decision can be found here.
The narrow issues on appeal were: (i) whether a claim for rescission in a counterclaim can be determined by way of summary judgment; and (ii) whether the failure to disclose ongoing litigation commenced by the franchisor against the former franchisee’s competing business constituted a material deficiency such that the franchisees were entitled to rescission pursuant to s.6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000.
After reviewing the statutory framework under the Wishart Act and the Court’s now-broad summary judgment powers (as mandated by the Supreme Court of Canada in Hryniak), the Court confirmed that using the summary judgment mechanism to deal with the discrete matter of the franchisees’ right to rescission was an expeditious and effective approach to resolving an important issue. (Our summary of the Hryniak decision can be found here.)
The Court then considered the definition of “material fact” with respect to the facts to be disclosed in a disclosure document, as per section 5(4) of the Wishart Act, and found that ongoing or prospective litigation involving a franchisor is not, by definition, a material fact. However, the Court did note that while neither the Wishart Act nor the regulations require disclosure of this type of litigation, litigation against the franchisor or its associates based on claims of unfair or deceptive business practices, or violations of a law that regulates franchises, must be disclosed.
In dismissing the appeal, the Ontario Court of Appeal found that the disclosure document was not deficient by reason of the franchisor’s failure to reference the litigation and thus did not afford the franchisees the right to rescind the franchise agreement.
This decision is a helpful precedent for franchisors. It confirms that weak rescission claims can be addressed by way of summary judgment instead of through a trial, and contextualizes the type of litigation that ought to be disclosed by franchisees.