



COURT OF APPEAL FOR ONTARIO

CITATION: Raibex Canada Ltd. v. ASWR Franchising Corp., 2018
    ONCA 62 DATE: 20180125

DOCKET: C62744

Sharpe, Blair and Epstein JJ.A.

BETWEEN

Raibex Canada Ltd., Ashraf Habashy, Ihab Lawandi
    and Ramy Bastaros

Plaintiffs/Defendants by counterclaim (Respondents/Appellants
    by way of cross-appeal)

and

ASWR Franchising Corp.*
,
ASWR
    Developments Inc.*
, Hellenic International Holdings Inc., Leontian Holdings
    Inc.,
Athanasios Anastopoulos aka Tom Anastopoulos
and J. Perry
    Maisonneuve

Defendants (
Appellants
/Respondents
    by way of cross-appeal)

*Plaintiffs
    by counterclaim

Geoffrey B. Shaw and Christopher Horkins, for the
    appellants

David S. Altshuller and Lara Di Genova, for the
    respondents

Heard: October 4, 2017

On appeal from the judgment of Justice Wendy M. Matheson
    of the Superior Court of Justice, dated September 7, 2016, with reasons
    reported at 2016 ONSC 5575.

Epstein J.A.:

OVERVIEW

[1]

The central issue on this appeal
    is whether the franchise disclosure document (FDD) provided by the appellant
    franchisor was so inadequate that it entitled the respondent franchisee to
    rescind the parties franchise agreement under s. 6(2) of the
Arthur Wishart Act (Franchise Dis
closure), 2000
,

S.O. 2000,
    c. 3 (the 
AWA
).

The franchise agreement in issue was between Raibex
    Canada Ltd. (the Franchisee) and ASWR Franchising Corp. (the Franchisor). 
    It gave the Franchisee the right to acquire and operate an AllStar Wings and
    Ribs (ASWR) franchise in Mississauga.
Neither
    the agreement nor the FDD specified a site for the prospective franchise. 
    Rather,
the agreement stipulated that a
    suitable location would be selected through the reasonable best efforts of
    both parties. The FDD
included
an estimated range of costs for constructing an ASWR
    franchise from a shell,
but did
not provide cost estimates for converting a
    pre-existing restaurant to an ASWR outlet (a conversion).


[2]

The parties, working
    together, agreed upon a site for the franchise outlet that included an existing
    restaurant suitable for conversion. Differences arose after the costs of
    developing the franchise proved higher than the Franchisee expected. The
    Franchisee purported to rescind the franchise agreement on the basis of
    material non-disclosure. The Franchisor sought judgment for certain costs it
    incurred after taking over the restaurant following receipt of the Franchisees
    notice of rescission. The parties brought motions for summary judgment to,
    among other things, determine the validity of the Franchisees decision to
    rescind the agreement.

[3]

T
he motion judge held that the franchise agreement had
    been validly rescinded and dismissed the Franchisors claim for damages. The
    Franchisor appeals both aspects of her decision. The Franchisee cross-appeals certain
    related issues addressed in the motion judges reasons, and moves to admit
    fresh evidence.

[4]

For the reasons that
    follow, I would allow the appeal, except for part of the Franchisors claim for
    damages. I would dismiss the cross-appeal, largely for the reasons provided by
    the motion judge. I would also dismiss the motion to admit fresh evidence.

FACTS

The Parties

[5]

Ramy Bastaros is the
    sole director and officer of the Franchisee. Ashraf Habashy and Ihab Lawandi
    are shareholders in the Franchisee. These three individuals also acted as
    guarantors and covenantors in relation to the franchise agreement.

[6]

Athanasios (Tom)
    Anastopolous is a director and officer of the Franchisor. He controls, directly
    or indirectly, all four corporate defendants; specifically:

(1)

the Franchisor;

(2)

ASWR Developments Inc., a company
    that leases properties for the Franchisor and then subleases the premises to
    franchisees;

(3)

Leontian Holdings Inc., the owner
    of the trademarks used by the ASWR franchises. Leontian licenses those marks to
    the Franchisor for the purpose of sublicensing them to franchisees; and

(4)

Hellenic International Holdings
    Inc., previously the sole shareholder of the Franchisor, and now the
    controlling shareholder of ASWR Corp., the Franchisors current owner and a
    non-party to this action.

[7]

J. Perry Maisonneuve
    became a director and the chief financial officer of the Franchisor and of ASWR
    Developments in 2014. He was the sole sales representative dealing with the
    Franchisee during the parties negotiations.

Pre-Agreement Communications

[8]

In September 2012, Mr.
    Bastaros contacted Mr. Anastopoulos with a view to obtaining an ASWR franchise.
    His call was returned by Mr. Maisonneuve. During that call, Mr. Bastaros
    indicated that his maximum budget for acquiring a franchise was $400,000.

[9]

Mr. Maisonneuve sent
    Mr. Bastaros a preliminary information package on September 27, 2012. The information
    package contained cost estimates for constructing a restaurant from a shell.
    In his cover email, Mr. Maisonneuve mentioned that Mr. Bastaros could potentially
    reduce his costs by investing in existing restaurants that could be refurbished
    for $500,000 to $600,000. Mr. Maisonneuve estimated that Mr. Bastaros
    unencumbered cash investment in such a location would fall between $250,000 and
    $300,000. Mr. Bastaros and his business partners, Mr. Habashy and Mr. Lawandi,
    decided to purchase an ASWR franchise.

[10]

The
    Franchisee received the FDD on October 16, 2012. The document:

(1)

did not specify a location for the
    prospective franchise;

(2)

included a draft sublease, which
    indicated that the Franchisee was obliged to accept all terms in the head lease
    negotiated by the Franchisor and the landlord of the prospective franchise
    outlet;

(3)

did not contain a draft head lease;

(4)

provided an estimate of
    development costs to develop a franchise from a shell, in the range of $805,500
    to $1,153,286;

(5)

indicated that the cost to convert
    a pre-existing restaurant to an ASWR outlet was highly site-specific, although,
    in the Franchisor's experience, these costs had been significantly lower than
    the cost of building out from a shell;

(6)

cautioned that significant cost
    overruns could occur during a conversion due to infrastructure deficiencies
    that remain undetectable until reconstruction commences;

(7)

stated that the Franchisor had no
    reasonable means of estimating or predicting conversion costs with any certainty,
    and recommended the Franchisee maintain a significant contingency reserve;
    and

(8)

was signed only by Mr.
    Anastopoulos on behalf of the Franchisor. Mr. Anastopoulos did not sign
    separately for himself.

The Franchise Agreement

[11]

Mr.
    Bastaros formally applied for an ASWR franchise on October 30, 2012. The
    Franchisee was incorporated a week later. Mr. Bastaros then submitted a
    preliminary business plan that specified a development budget of $600,000, with
    an additional $50,000 for working capital.

[12]

Mr.
    Bastaros executed the franchise agreement and a general security agreement on
    behalf of the Franchisee on November 21, 2012. Mr. Bastaros, Mr. Habashy and
    Mr. Lawandi signed the agreements as guarantors and covenantors. Mr.
    Anastopoulos signed on behalf of the Franchisor.

[13]

The
    franchise agreement did not specify a site for the prospective franchise
    outlet, but did indicate that it would be located in Mississauga and that its
    territory would be reasonably determined by the Franchisor. Section 7.1 of
    the agreement required the parties to use their reasonable best efforts to
    find a suitable location for the [franchise] acceptable to the Franchisor. The
    franchise agreement also provided that if the Franchisor failed to negotiate a lease
    for a suitable location within 120 days of the agreement being signed, the
    Franchisee was entitled to terminate the agreement upon 20 days notice and
    receive a release and refund of all amounts paid to the Franchisor, less any
    costs and expenses reasonably incurred by the Franchisor in connection with the
    granting of the franchise.

Post-Signing Events

[14]

The
    Franchisor and Franchisee located a mutually acceptable restaurant in
    Mississauga, available for lease and conversion. The Franchisors affiliate,
    ASWR Developments, signed as head tenant and subleased the property to the
    Franchisee. The head lease required an initial deposit of approximately
    $120,000.

[15]

Mr.
    Bastaros signed the sublease on behalf of the Franchisor on October 23, 2013. As
    mentioned earlier, the sublease required the Franchisee to comply with all
    terms contained in the head lease  including the deposit requirement. Prior to
    signing the sublease, Mr. Bastaros had been informed of the deposit requirement
    but had not received a copy of the executed head lease. Mr. Bastaros consented
    to the deposit condition and asked the Franchisor to please accept [the
    lease], we want this deal to be done asap.

[16]

Construction
    of the franchise outlet was substantially completed in March 2014.
    Approximately one month prior to completion, Mr. Bastaros was informed that
    development costs exceeded $1 million. This amount fell within the range
    specified in the FDD for construction from a shell. However, as noted earlier,
    the franchise had been developed through conversion.

[17]

The
    Franchisor asked the Franchisee to resolve unpaid construction invoices
    totalling $110,361.79, and to pay the $120,000 deposit required under the head
    lease. The Franchisee refused and, on July 25, 2014, served the Franchisor with
    a notice of rescission. The Franchisor refused to accept the notices validity,
    terminated the franchise agreement, and assumed control of the franchise outlet
    on August 1, 2014

[18]

The
    Franchisee commenced this action in December 2014. It sought, among other
    things:

(1)

a declaration that it had validly
    rescinded the franchise agreement;

(2)

recovery of $1.28 million pursuant
    to its rescission;

(3)

a declaration that certain
    individuals and companies were the Franchisor's "associates" and
    therefore liable to the Franchisee; and

(4)

damages for misrepresentation and
    breach of the statutory duty of good faith and fair dealing.

[19]

The
    Franchisee moved for summary judgment on claims 1, 2 and 3. The Franchisor counter-claimed for, among other things, approximately $230,000 in damages. The Franchisor also brought a cross-motion for summary judgment, seeking to have the Franchisee's action dismissed in its entirety.

DECISION OF THE MOTION JUDGE

[20]

The
    Franchisor and Franchisees motions were heard and disposed of together. The
    motion judge considered five issues in her reasons:

(1)

whether the Franchisor failed to
    meet its disclosure obligations under s. 5 of the
AWA
;

(2)

If so, whether the disclosure
    deficiencies justified rescission under s. 6(2) of the
AWA
;

(3)

whether the certificate
    accompanying the FDD had been validly signed;

(4)

which parties, if any, were
    liable to the Franchisee for its claims under s. 6(6) of the
AWA
; and

(5)

whether the Franchisees claims
    under s. 3 and s. 7 of the
AWA
raised genuine issues requiring a
    trial.

1. Disclosure Obligations

[21]

Section
    5(4)(a) of the
AWA

requires a franchisor to provide a prospective franchisee with a disclosure
    document containing all material facts, including material facts as
    prescribed in the Regulations accompanying the
AWA

(the Regulations: O. Reg.
    581/00). A material fact is defined in s. 1(1) of the
AWA
as any
    information about the business, operations, capital or control of the
    franchisor or franchisors associate, or about the franchise system, that would
    reasonably be expected to have a significant effect on the value or price of
    the franchise to be granted or the decision to acquire the franchise. Section
    6(1) of the Regulations stipulates that every disclosure document must include
    a list of all the franchisees costs associated with the establishment of the
    franchise.

[22]

The
    motion judge first determined that the FDD was the only document relevant to
    assessing the adequacy of the Franchisors disclosure.
[1]
She went on to find that the FDD did not contain all material facts as
    required by s. 5(4) of the
AWA,
for two reasons
.
First, the
    FDD did not include the terms of the head lease to which the Franchisee would
    be bound. Second, although the FDD outlined estimated costs for developing a
    franchise from a shell, it did not provide cost estimates for converting an
    existing restaurant to an ASWR franchise.

[23]

In
    the motion judges view, the Franchisor could not be excused from its
    obligation to disclose these facts simply because they were unknown to both
    parties when the franchise agreement was signed. The motion judge determined,
    at para. 78, that until a franchisor is prepared to make proper disclosure of
    all material facts, it must wait  it does not get excused from its statutory
    obligations. To hold otherwise would, in her view, allow franchisors to make
    disclosure at a premature stage and avoid the
AWA
s rigorous disclosure requirements,
    undermining the purpose of the legislation.

[24]

The
    motion judge also noted that the
AWA
s

disclosure requirements
    were mandatory and could not be waived. Accordingly, she attached no weight to
    the fact that the Franchisee knew the franchise location had not been
    identified.

2. Rescission

[25]

Section
    6(2) of the
AWA

allows a franchisee to rescind [a] franchise agreement, without penalty or
    obligation, no later than two years after entering into the franchise agreement
    if the franchisor never provided the disclosure document.

[26]

The
    motion judge acknowledged that for a deficient disclosure document to justify
    rescission under s. 6(2), it had to be so inadequate that it amounts to no
    disclosure. She held that the Franchisors breach of its disclosure
    obligations was egregious, as the FDD contained stark and material
    deficiencies with respect to the Franchisees lease obligations and estimated development
    costs. The motion judge therefore concluded that the test for rescission under
    s. 6(2) had been satisfied
.


3. The Certificate

[27]

The
    motion judge did not agree with the Franchisees alternative route to justify
    rescission; namely, that the certificate accompanying the FDD was not valid.
    Section 7(2) of the Regulations

states that every disclosure document
    must contain a certificate signed:

(b) in the case of a
    franchisor that is incorporated and has only one director or officer, by that
    person;

(c) in the case of a
    franchisor that is incorporated and has more than one officer or director, by
    at least two persons who are officers or directors.

[28]

The
    Franchisee raised three issues regarding the certificate:

(1)

Stilianos Costidis, an officer and
    director of the Franchisor as of July 2007, remained an officer and director of
    the Franchisor as of the date the franchise agreement was signed. Mr. Costidis
    did not sign the certificate.

(2)

Mr. Maisonneuve was a
de facto
director of the Franchisor, and did not sign the certificate.

(3)

Mr. Anastopoulos signed for the
    Franchisor, but did not sign in his personal capacity as an officer and
    director.

[29]

The
    motion judge rejected all three objections.  She acknowledged that the
    Franchisors 2012 Corporation Profile Report (CPR) named Mr. Costidis as a
    director, giving rise to a presumption of directorship. However, she found the
    presumption to have been rebutted by proof that Mr. Costidis had effectively
    resigned by 2009 at the latest. The motion judge based this finding on (1) the
    evidence of both Mr. Anastopoulos and Mr. Costidis, (2) emails from 2009 in
    which Mr. Anastopoulos indicated to his lawyer that Mr. Costidis should not be
    in any of the companies, and (3) an affidavit from the Franchisors corporate
    counsel stating that Mr. Costidis name had been left on the CPR through
    inadvertence.

[30]

The
    motion judge also held that Mr. Maisonneuves failure to sign the certificate
    was immaterial. Even assuming a
de facto

director was obliged to
    sign the certificate, the motion judge concluded there was no evidence that Mr.
    Maisonneuve exercised control over the Franchisor or held himself out as a
    director.

[31]

Finally,
    the motion judge held that Mr. Anastopoulos failure to sign the certificate
    twice did not compromise its validity. The
AWA
, in the motion judges view, did not
    require the sole director of a franchisor to sign a certificate twice. The
    motion judge also noted that the certificates purpose of bring[ing] home
    personal responsibility was not engaged, as Mr. Anastopoulos was not trying to
    disclaim responsibility for the FDDs contents.

4. Parties Liable

[32]

Under
    s. 6(6) of the
AWA
,
    a franchisor and its associates are liable to a franchisee for damages following
    a valid rescission. The statutory definition of associate has two relevant
    requirements  control by or over the franchisor, and direct involvement in the
    grant of the franchise:
AWA
,
    s. 1(1).

[33]

Employing
    that test, the motion judge made the following findings about the Franchisors
    associates:

(1)

Mr. Anastopoulos was an
    associate, by agreement of the parties.

(2)

ASWR Developments was an
    associate. It was controlled by Mr. Anastopoulos, who indirectly controlled the
    Franchisor. It had also entered into the sublease with the Franchisee.

(3)

Hellenic and Leontian were not
    associates, as they had not been involved in the grant of the franchise.

(4)

Mr. Maisonneuve was not an
    associate. While the Franchisor contracted with his company, Northern Lights
    Franchise Consultants Corp., for sales and marketing services, the Franchisor
    did not exercise sufficient control over Northern Lights  let alone Mr. Maisonneuve
     for Mr. Maisonneuve to be considered an associate.

5. Claims under s. 3 and s. 7 of the
AWA


[34]

Section
    3(1) of the
AWA
imposes on franchisors and franchisees a duty of fair dealing in performing and
    enforcing a franchise agreement. Section 3(2) provides a party to a franchise
    agreement with a right of action for damages against another party who breaches
    their obligations under s. 3(1). Section 7 provides franchisees with a right of
    action for damages if they suffer a loss due to a misrepresentation contained
    in a disclosure document.

[35]

The
    motion judge dismissed the Franchisees s. 3 and s. 7 claims, finding that they
    had not been the subject of any significant attention in the Franchisees
    oral argument, attracted no attention in [the Franchisees] written argument,
    and were only referenced briefly in the statement of claim. The motion judge
    concluded that [i]n the absence of any focused argument by the [Franchisee]
    seeking to demonstrate that either of these claims have been proved ... or
    require a trial, the claims should be dismissed.

ISSUES

[36]

This
    appeal and cross-appeal give rise to the following issues:

(1)

Did the motion judge err in holding
    that the franchise agreement was validly rescinded?

(2)

If the Franchisee did not validly
    rescind the agreement, is the Franchisor entitled to damages?

(3)

If the franchise agreement was
    validly rescinded, did the motion judge err in holding that the Franchisee
    could claim damages only against the Franchisor, Mr. Anastopoulous and ASWR
    Developments Corp.?

(4)

Did the motion judge err in
    dismissing the Franchisees claims based on misrepresentation and breach of the
    duty of fair dealing?

(5)

Should the fresh evidence be
    admitted?

(6)

Did the motion judge err in
    declining to award costs?

ANALYSIS

Issue 1  Did the motion judge err in holding that the franchise agreement
    was validly rescinded?

[37]

Before
    this court, as it did before the motion judge, the Franchisee offers two
    possible routes to justify rescission: the first based on s. 6(2) of the
AWA
, and the
    second based on alleged deficiencies in the certificate accompanying the FDD. I
    address both possible routes to rescission, in turn.

Rescission Based on s. 6(2)

[38]

The
    Franchisor argues that the motion judge erred in (1) finding that it breached
    its obligations under s. 5 of the
AWA
, and (2) finding that these breaches
    were so serious that s. 6(2) applied. On the s. 5 issue, the Franchisor submits
    the motion judge erred by finding that the FDD should have included the terms
    of the head lease and more detailed conversion cost estimates. In the
    Franchisors view, the motion judges finding that it should have delayed
    disclosure until acquiring those facts is unsupported by authority,
    inconsistent with the text of the
AWA
, and commercially unreasonable. The
    Franchisor also takes issue with the motion judges focus on protecting
    franchisees from abuse, arguing that the duty of fair dealing imposed by s. 3
    of the
AWA
adequately addresses that concern. Alternatively, the Franchisor submits the
    FDD was not so deficient as to entitle the Franchisee to rescind the agreement
    under s. 6(2).

[39]

The
    Franchisee submits the motion judges s. 5 analysis is consistent with the text
    and purpose of the
AWA
,
    which imposes rigorous disclosure requirements on franchisors to protect
    franchisees from abuse. In the Franchisees view, the motion judges approach
    prevents franchisors from circumventing their disclosure obligations by
    entering into franchise agreements before obtaining all facts necessary for a
    franchisee to make an informed investment decision. The Franchisee emphasizes
    that the motion judges ruling is narrow in scope, affecting only a limited
    range of franchise agreements. The Franchisee also supports the motion judges
    conclusion that the disclosure deficiencies in this case were egregious and
    justified rescission under s. 6(2).

[40]

To
    resolve this appeal, I need not decide whether the Franchisor breached its
    disclosure obligations under s. 5 of the
AWA
. The Franchisee alleges deficiencies
    in the FDD primarily as a basis for rescinding the franchise agreement,
    approximately twenty months after the agreement was signed. To justify
    rescission in these circumstances, the Franchisee must not only demonstrate
    that the FDD was deficient, but also show that it was so deficient that the
    Franchisor effectively never provided [a] disclosure document.

[41]

Assuming, without deciding, that the FDD did not comply with s.
    5, I conclude that the deficiencies the Franchisee complains of, viewed
    individually or collectively, are not so serious that the FDD is tantamount to
    a complete lack of disclosure. It follows that the Franchisee was not entitled
    to rescind the franchise agreement under s. 6(2).

Governing Principles

[42]

Section 6 of the
AWA

provides franchisees with an
    extraordinary remedy if the franchisor fails to provide a disclosure document
    in compliance with s. 5: the right to rescind the franchise agreement with two
    different limitation periods, depending on when and whether the franchisor provides
    a disclosure document:
4287975
    Canada Inc. v. Imvescor Restaurants Inc
.
, 2009 ONCA
    308, 98 O.R. (3d) 187, at para. 25, leave to appeal refused, [2009] S.C.C.A.
    No. 244.

[43]

First,
    under s. 6(1), a franchisee may rescind a franchise agreement within 60 days of
    receipt of the disclosure document if the document is not provided within the
    time required by s. 5 or if [its] contents  did not meet the requirements of
    [s. 5]. Section 6(1) is not relevant to this appeal, as the Franchisee
    did not provide a notice of rescission within sixty days of receiving the FDD.

[44]

Second,
    under s. 6(2), a franchisee may rescind a franchise agreement within two years
    of entering into the agreement if the franchisor never provided the disclosure
    document.

[45]

This
    court has had several opportunities to interpret s. 6(2) of the
AWA
.
Two
    guiding principles have emerged.

[46]

On
    one hand, a franchisors failure to comply with s. 5 of the
AWA
does not always
    provide sufficient grounds for rescission under s. 6(2):
Imvescor
, at
    para. 43;
Vijh v.
    Mediterranean Franchise Inc
.
, 2012 ONSC 3845, at
    para. 6, affd 2013 ONCA 698.  A franchisee that receives imperfect disclosure
    does not necessarily stand in the same position as a franchisee that was never
    provided [with a] disclosure document. In
Imvescor
, at para. 37, this court warned
    that conflating those two scenarios would frustrate clear legislative intent:

The [
AWA
]  is clear that a
rescission remedy is
    available to the franchisee in two separate situations, and that the two
    situations are not to be blurred into one
. This interpretation is further
    bolstered by the purpose of the Act, which is in part to ensure that the
    franchisee has at least fourteen days to review a disclosure document before
    signing an agreement.
The legislature clearly chose to reserve the two year
    remedy for instances of a complete failure to provide a disclosure document
.
    [Emphasis Added].

[47]

On
    the other hand,
a purported disclosure document may be so
    deficient as to
effectively

amount
    to a complete lack of disclosure, thereby permitting rescission under s. 6(2).
As
    MacFarland J.A. observed at para. 74 of
6792341 Canada Inc. v. Dollar It Ltd
.
,
    2009 ONCA 385, 95 O.R. (3d) 291: [a] document does not become a disclosure
    document for the purposes of the [
AWA
] just because it is called a
    disclosure document. Put another way, calling something a disclosure document
    does not make it one.

[48]

Whether
    deficiencies in a disclosure document are so serious as to amount to no
    disclosure for the purposes of the
AWA
must be determined on the facts of
    each case:
Dollar It
,
    at para. 78. The necessary degree of deficiency has been described in several
    ways, including materially deficient (
Mendoza v. Active Tire & Auto Inc
.
,
    2017 ONCA 471, 414 D.L.R. (4th) 676, at para. 19;
Imvescor
, at para. 43;
2240802 Ontario Inc. v.
    Springdale Pizza Depot Ltd
.
, 2015 ONCA 236, 331
    O.A.C. 282, at para. 51), serious non-compliance (
Mendoza
, at para. 37),
    fundamentally inadequate and deficient disclosure (
2212886 Ontario Inc. v. Obsidian
    Group Inc
.
, 2017 ONSC 1643, 67 B.LR. (5th) 103, at
    para. 27), and stark and material deficiencies (
Dollar

It
, at para. 74).

[49]

Whatever
    terminology is employed, the inquiry into whether disclosure deficiencies are
    such that they justify rescission under s. 6(2) ultimately focuses on whether
    the franchisee has been effectively deprived  of the opportunity to make an
    informed [investment] decision:
Caffé Demetre Franchising Corp. v. 2249027 Ontario Inc.
,
    2015 ONCA 258, 125 O.R. (3d) 498, at para. 63. In my view, the seriousness of
    any given failure to comply with s. 5 must be measured by reference to the
    underlying purposes of s. 5 and the
AWA
more broadly: to obligate a
    franchisor to make full and accurate disclosure to a potential franchisee
so
    that the latter can make a properly informed decision about whether or not to
    invest in a franchise
:
1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd
.
,
    256 D.L.R. (4th) 451 (Ont. C.A.), at para. 16 (emphasis added);
Dollar

It
, at
    para. 16;
Mendoza
,
    at para. 14. For example, this court found that the disclosure document in
Dollar

It
amounted to a complete lack of disclosure because there was simply no way
    anyone reviewing [the] document could make an informed decision about whether
    or not to invest in th[e] franchise:
Dollar

It
, at para. 68.

Applying the Principles

[50]

The
    motion judge stated at para. 114 that this is not a case of disclosure that
    is simply deficient. She went on to describe the lack of disclosure as
    egregious, saying that the [FDD] had stark and material deficiencies with
    respect to the lease and costs obligations, such that it amounted to no
    disclosure.

[51]

In
    my respectful view, the motion judge erred in law in her interpretation and
    application of s. 6(2), both with respect to the head lease and the conversion
    cost estimates.

[52]

Turning
    first to the head lease,
the motion judges
    failure to consider the terms of the parties franchise agreement within her s.
    6(2) analysis constitutes an extricable error of law, justifying appellate
    intervention.
As noted above,
whether a
    breach of s. 5 is sufficiently serious to engage s. 6(2) should be determined
    on a case-by-case basis, with a view to all relevant circumstances bearing on
    whether the franchisee can make a properly informed decision about whether or
    not to invest. This inquiry requires, where appropriate, taking into account the
    terms of the parties franchise agreement.

[53]

In this case,
all parties involved knew the
    proposed franchises location had not been selected, and agreed that the
    Franchisor and the Franchisee would work collaboratively to select a site. This
    commitment was formally incorporated into the franchise agreement through a
    clause requiring the parties to exercise reasonable best efforts in selecting
    a location. The best efforts clause contemplated the Franchisees active
    participation in the selection of the premises to which the head lease would
    apply, and constrained the Franchisors ability to enter into a lease without
    considering the Franchisees legitimate interests. These protections were
    bolstered by the opt-out clause in the franchise agreement.  Had the Franchisee
    found the prepaid rent requirement to be too onerous or the location otherwise
    unsuitable, rather than urge the Franchisor (as it did) to accept the deposit
    term and sign the lease, it could have rejected the location and either
    searched for another site, or elected to receive its money back.

[54]

These
    safeguards, in my view, provide a complete answer to the complaint that the
    Franchisors failure to disclose the head lease justified rescission under s.
    6(2). The absence of that information had little impact on the Franchisees
    ability to make an informed investment decision. The site selection and opt-out
    clauses also distinguish this appeal from
Dollar It
,
another case where a
    franchise disclosure document failed to provide terms of a head lease.
The franchise agreement in
Dollar It
did not include a collaborative site selection clause
    or provide the franchisee with any opt-out rights if a satisfactory location
    could not be found. Moreover
, the
disclosure
    document in
Dollar
    It
included far more serious
    deficiencies: it failed to provide the Franchisee with financial statements, a
    signed directors certificate, or a description of the licenses required to
    operate the franchise, in addition to five other omissions: see
Dollar It
, at paras. 21, 33, 40, 46-47.

[55]

In
    relation to the conversion cost estimates, I observe that the lengthy and
    detailed FDD would have put the Franchisee on notice as to the potential risks
    associated with pursuing a conversion opportunity, by providing:

(1)

cost estimates for developing an
    ASWR franchise from a shell;

(2)

a strongly worded warning that cost
    estimates associated with a conversion could vary greatly from site to site;
    and

(3)

a warning to the Franchisee to
    maintain a significant contingency reserve.

[56]

The
    Franchisee submits that the Franchisor had prior experiences with conversions,
    and should have disclosed those costs in the FDD. Even accepting that argument,
    given the wide variance in the costs associated with the Franchisors three
    prior conversions, I do not believe disclosing those figures would have
    significantly improved the Franchisees ability to make an informed investment
    decision. Further, the FDD provided detailed cost estimates for construction
    from a shell, and presented a conversion as a development strategy offering
    potential savings over that model. While the Franchisor acknowledged that it
    had no reasonable means of predicting the extent of those savings, the shell
    cost estimates nonetheless provided the Franchisee with a useful reference
    point against which to measure the upper range of possible costs associated
    with a conversion. The shell cost estimates, as noted earlier, accurately
    reflected the Franchisees actual costs in constructing the franchise outlet.

[57]

For
    these reasons, even if the above-mentioned omissions amounted to breaches of s.
    5, the motion judges conclusion that the FDD amounted to no disclosure at
    all cannot withstand scrutiny. As I have noted, the
AWA
draws a
    clear distinction between imperfect disclosure and situations where a
    franchisor provides no disclosure, thereby entitling the franchisee to rescission
    within a two year window. In my respectful view, the motion judge erred in law
    by failing to give effect to this important legislative distinction.

Rescission Based on The Certificates Validity

[58]

Seeking
    a secondary route to justify rescission, the Franchisee cross-appeals the
    motion judges finding regarding the validity of the certificate accompanying
    the FDD.

[59]

The
    Franchisee submits that Mr. Costidis failure to sign the certificate rendered
    it invalid. Relying on
Chriss
    v. R
.
, 2016 FCA 236, 403 D.L.R. (4th) 569, the
    Franchisee argues that the presumption of directorship created by Mr. Costidis
    presence in the 2012 CPR could only have been rebutted by a signed letter of
    resignation. Mr. Costidis did not offer a resignation letter. He therefore
    remained a director of the Franchisor and was obliged to sign the Certificate.

[60]

The
    Franchisee further submits that the motion judge erred in her findings about Mr.
    Maisonneuve. The Franchisee argues Mr. Maisonneuve was a
de facto

director
    of the Franchisor in 2012, as he received significant financial compensation
    from the Franchisor, exclusively handled its franchise sales, and was
    controlled by Mr. Anastopoulos at all material times.

[61]

The
    Franchisee also contends that, in any event,
no

director of the Franchisor
    signed the certificate as Mr. Anastopoulos did not sign in his personal
    capacity.

[62]

I
    disagree with all three of the Franchisees submissions.

[63]

I
    would not disturb the motion judges finding that Mr. Costidis had effectively
    resigned before the franchise agreement was signed. The motion judges
    conclusion is owed deference and finds ample support in the record. Moreover, I
    do not agree that her analysis is undermined by the Federal Court of Appeals
    decision in
Chriss
.
    I would not apply the approach in
Chriss
to the present case, as I do not
    see how a rigid requirement of written resignation would further the purposes
    of the
AWA
s
    certificate regime. The facts of this case are illustrative. By 2012, Mr.
    Costidis was not in a position to verify or suggest changes to the contents of
    the FDD. Requiring someone in his position to sign a disclosure document would
    not impress upon [franchisors] the importance of ensuring the document is
    complete and accurate:
Mendoza
,
    at para. 24.

[64]

I
    would also uphold the motion judges conclusion that Mr. Maisonneuve was not obliged
    to sign the certificate. Even assuming a
de facto

director must sign a
    certificate accompanying a disclosure document, the motion judge found that Mr.
    Maisonneuve did not fulfill any of the duties of an officer or a director, and
    was acting as an independent contractor. She was entitled to make those
    findings on the evidence before her. I see no reason to interfere.

[65]

Finally,
    I agree with the motion judge that Mr. Anastopoulos did not need to sign the certificate
    twice. As the motion judge noted, Mr. Anastopoulos was not trying to disclaim
    personal responsibility for the contents of the FDD. Requiring his signature
    would not have furthered the purpose of the certificate provision.

[66]

For
    these reasons, I would not give effect to this ground of appeal.

Issue 2  Remedies Available to the Franchisor

[67]

Based
    on the above analysis, I conclude that the Franchisee was not entitled to
    rescind the franchise agreement. The only remaining question relevant to this
    issue concerns the Franchisors remedy.

[68]

The
    Franchisor claims $230,221.45 in damages  $119,859.66 for the deposit required
    under the head lease, and $110,361.79 in unpaid construction invoices. The
    Franchisor paid these amounts on behalf of the Franchisee and seeks
    reimbursement.

[69]

In
    oral argument, the Franchisee submitted that any damages awarded to the
    Franchisor should not include amounts paid to cover the head lease deposit. The
    Franchisee notes that the deposit allowed the Franchisor to assume control of 
    and derive benefits from  the ASWR outlet after receiving the Franchisees
    notice of termination.

[70]

In
    my view, the Franchisor is entitled to damages arising out of the Franchisees
    failure to fulfill its financial obligations under the franchise agreement.
    That said, I agree in principle with the Franchisee that these damages should
    account for the financial benefits the Franchisor derived from operating the
    franchise outlet. The record before this court does not disclose the extent of
    those benefits. If the parties are unable to agree on the amount, the
    quantification of the Franchisors damages should be remitted to the Superior
    Court, to be determined as follows. The Franchisor is entitled to $110,361.79
    as compensation for the amount it was forced to pay due to the Franchisees
    unpaid construction invoices. The Franchisor is also entitled to $119,859.66 on
    account of the head lease deposit, less any financial benefits it derived from
    operating the franchise outlet for the duration of the lease.

Issue 3  If the franchise agreement was validly rescinded, did the motion
    judge err in holding that the Franchisee could claim damages only against the
    Franchisor, Mr. Anastopoulous and ASWR Developments Corp.?

[71]

Given
    my conclusion that the Franchisee was not entitled to rescind the franchise
    agreement, I need not address this ground of appeal.

Issue 4  Did the motion judge err in dismissing the Franchisees claims
    based on misrepresentation and breach of the duty of fair dealing?

[72]

In
    its cross-appeal, the Franchisee submits the motion judge should not have
    dismissed its claims under s. 3 and s. 7 of the
AWA
. The Franchisee notes that the motion
    judge dismissed these claims only after

finding that the Franchisee was
    entitled to rescission. The Franchisee concedes that if the motion judges
    ruling on rescission is upheld, there may not be any further basis to claim
    damages for misrepresentation and breach of the duty of fair dealing. However,
    if that ruling is overturned on appeal, the Franchisee submits the arguments
    raised in respect of rescission cascade onto the s. 3 and s. 7 claims and
    should be remitted for trial.

[73]

The
    Franchisor contends that the motion judge correctly dismissed the s. 3 and s. 7
    claims. They were not particularized in the Franchisees statement of claim and
    were largely ignored in its oral and written argument. By not mounting a
    defence to the cross-motion, the Franchisee failed to put [its] best foot forward.
    Further, argues the Franchisor, the s. 3 claim does not cascade from the
    Franchisees rescission arguments. A failure to include material facts in a
    disclosure document does not constitute unfair dealing in the performance of a
    franchise agreement:
1250264
    Ontario Inc. v. Pet Valu Canada Inc
.
, 2016 ONCA 24,
    344 O.A.C. 222, at para. 62.

[74]

Alternatively,
    the Franchisor submits the s. 3 and s. 7 claims should have been dismissed for
    lack of merit. Addressing the s. 3 claim, the Franchisor submits it was honest,
    candid and forthright in its performance of the franchise agreement. It closely
    involved Mr. Bastaros in the location selection process and, by his own
    admission, used suitable best efforts to implement the agreement. The motion
    judge expressly stated that she was not suggesting that this Franchisor set
    out to abuse this prospective franchisee.

[75]

Turning
    to the s. 7 claim, the Franchisor notes that Mr. Bastaros admitted to acquiring
    the franchise with full knowledge that the location and lease details were unconfirmed.
    Section 7(4) of the
AWA
precludes damages under s. 7(1) where the franchisee acquired the franchise
    with knowledge of the [alleged] misrepresentation or of the material change.

[76]

I
    agree with the Franchisors position. I see no reason to interfere with the
    motion judges dismissal of these claims on the basis that the Franchisee
    failed to put its best foot forward. I also disagree with the Franchisee that
    its submissions on rescission cascade onto the claims under s. 3 and s. 7.
Pet Valu
is,
    in my view, dispositive of the cascade argument as it relates to the s. 3
    claim. I also fail to see how any of the Franchisees submissions regarding
    rescission raise a genuine issue requiring a trial in respect of its
    allegations of misrepresentation.

Issue 5  The Franchisees Motion to Introduce Fresh Evidence

[77]

The
    Franchisee filed a motion to introduce fresh evidence one week before the oral
    argument of this appeal. The proposed evidence is a notice of store closing
    posted by the Franchisor on the franchises (former) location, dated April 12,
    2017. The Franchisees motion factum relies on the following excerpts from the
    notice:

We regret to inform everyone that this location has closed its
    business permanently, effective April 12, 2017  Unfortunately our sales
    volumes, although respectable, were insufficient to cover our operating
    expenses - in particular our rent and occupancy costs. The store owners have
    therefore had no choice but to cease operations

[78]

The
    Franchisee submits that this notice provides further evidence that the
    Franchisors disclosure was premature and misleading. The Notice, in the
    Franchisees view, shows that the FDD contained grossly inaccurate earnings projections.

[79]

I
    would dismiss the motion. As the Franchisor notes, the proposed evidence did
    not exist at the time of the hearing.  This is not one of those rare cases where
    admission of such evidence would further the interests of justice:
Sengmueller v. Sengmueller

(1994), 17 O.R. (3d) 208 (C.A.), at paras. 8-10. The motion was not brought
    in a timely fashion. There is no basis to assess the reliability of the
    proposed evidence. Most importantly, I fail to see how the proposed evidence
    significantly advances any of the issues raised in the appeal or cross-appeal.

Issue 6  Did the motion judge err in declining to award costs for the
    proceedings below?

[80]

As
    I would allow the Franchisors appeal, it is not necessary for me to deal with
    this ground of appeal.

DISPOSITION

[81]

For
    these reasons, I would allow the appeal on the basis that the Franchisee was
    not entitled to rescission or damages under the
AWA
.  I would grant judgment against the
    Franchisee in favour of the Franchisor, and, failing the agreement of the
    parties, remit the determination of the precise amount to the Superior Court in
    accordance with paragraph 70 of these reasons. I would dismiss the cross-appeal
    and the motion to admit fresh evidence.

[82]

At
    the conclusion of argument, we were advised that the parties were not able to
    come to any agreement as to costs.  I would direct that the Franchisor make
    submissions as to costs of the motion below and of the appeal within 10 days of
    the receipt of these reasons, and that the Franchisee respond within 7 days of
    receipt of the Franchisors submissions.

Released: RJS JAN 25 2018

Gloria Epstein J.A.

I agree. Robert J. Sharpe J.A.

I agree. R.A. Blair J.A.





[1]
This finding, in my view, is dispositive of the Franchisees submission in oral
    argument that the Franchisor failed to provide disclosure in one document as
    required under s. 5(3) of the
AWA
.


