Springdale Pizza: Eleven Decisions on Disclosure, Rescission and Damages (and Counting)

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Essential Facts

The plaintiffs purchased a franchise from an existing franchisee in October 2008 for $220,000. The plaintiffs began operating the franchise before signing various agreements with the franchisor in December 2008. The plaintiffs made a profit. However, more than six months later, the plaintiffs served a notice of rescission; shut down the business; and removed the leaseholds and equipment, which they stored in a barn for five years. A month after delivering the notice of rescission (in August 2009), they started the litigation that has resulted in 11 reported decisions, and they might not be done yet.

Disclosure and Rescission Principles

As we have previously reported in Osler Franchise Reviews (October 2010 and October 2011), these 11 reported decisions have elaborated on several principles governing disclosure and rescission in the resale context, including that

  • disclosure documents that are deficient may be so deficient as not to be disclosure documents at all;
  • franchisors cannot rely on documents provided by selling franchisees to purchasing franchisees to satisfy the disclosure requirement;
  • franchisees who sell their franchises are not responsible for providing disclosure documents to purchasing franchisees; and
  • the resale exemption to the disclosure requirement will be narrowly construed such that the franchisor can have only minimal involvement in a resale to successfully claim that the grant of the franchise was not affected by or through the franchisor.

Damages Principles

In addition, the Springdale Pizza decisions have provided guidance on how to calculate the amount franchisors must pay franchisees who properly rescind franchise agreements. Pursuant to s. 6(6) of the Arthur Wishart Act (Franchise Disclosure), 2000 (AWA) if rescission is granted, the franchisor must

  • refund money received other than money for inventory, supplies or equipment;
  • purchase inventory at a price equal to the purchase price paid by the franchisee;
  • purchase any supplies and equipment at a price equal to the purchase price paid by the franchisee; and
  • compensate the franchisee for any other losses the franchisee incurred in acquiring, setting up and operating the franchise.

In the Springdale Pizza cases, the Court has explained that under this s. 6(6):

  • Franchisors are not entitled to deduct profits earned by franchisees from the amounts franchisors are obliged to pay by s. 6(6) of the AWA.
  • Franchisors cannot reduce the amount paid for equipment even if the condition of the equipment has substantially deteriorated.
  • Although it is preferable to prepare a list of inventory on the date of closing, other evidence can support a franchisee’s claim related to inventory.
  • Compensation for perishable inventory may be ordered even if the inventory has perished.
  • Franchisees cannot claim losses that are not calculated in accordance with generally accepted accounting principles or that are merely “ballpark” or “speculative.”
  • Franchisees are not entitled to costs on a substantial indemnity scale simply because the object of the rescission remedy is to make franchisees whole.

Summary of Reported Decisions

If you need to rely on one of these principles, here is a guide to the 11 reported decisions:

  1. June 2010 Partial Summary Judgment Granted (2010 ONSC 3695): Wilson J. granted partial summary judgment against the Springdale Defendants, requiring them to pay the amounts required by s. 6(6) of the AWA, such amounts to be determined through a reference. Wilson J. held that the disclosure document was so deficient it was not a disclosure document at all.
  2. August 11, 2010 Costs of Summary Judgment (2010 ONSC 4427): Wilson J. awarded costs to the plaintiffs on a partial indemnity basis in the amount of $14,378.25.
  3. June 2011 ONCA Upholds Summary Judgment (2011 ONCA 467): The Court of Appeal upheld the partial summary judgment decision. In particular, the Court explained that the resale exemption to the disclosure requirement will be narrowly construed. As a result, the franchisor can only rely on the resale exemption in s. 5(7)(a) (which requires, in part, that the grant of the franchise not be effected by or through the franchisor) if the franchisor has little or no involvement in the resale.
  4. April 2012 Master’s Decision on Damages Reference (2012 ONSC 3344): Master Muir released the reference decision quantifying the payments owing under s. 6(6) of the AWA. Master Muir ordered the Springdale Defendants to pay $290,830.72 plus interest to the plaintiffs. Of that amount, $226,871.37 was contingent on the plaintiffs returning the equipment they had removed.
  5. July 2012 Master’s Decision on Costs of Reference (2012 ONCS 4122): Master Muir awarded the plaintiffs $25,000 in costs on a partial indemnity basis. The franchisees argued that they should be awarded costs on a substantial indemnity scale for the sole reason that the objective of the rescission provisions in the AWA was to make franchisees whole. Master Muir rejected this argument.
  6. October 2012 Master’s Decision on Amendment of Statement of Defence (2012 ONSC 6000): Master Muir permitted the Springdale Defendants to amend their Statement of Defence to add a defence of equitable set-off relating to damages caused by the plaintiffs removing the equipment.
  7. February 2013 Appeal from Amendment of Defence Decision (2013 ONSC 1251): Morgan J. dismissed the appeal from Master Muir’s decision permitting the Springdale Defendants to amend their Statement of Defence to add a defence of equitable set-off. However, Morgan J. made it clear that the defence applied only to the plaintiffs’ s. 7 misrepresentation claims and not to the s. 6 rescission claims. As a result, the Springdale Defendants could not claim a set-off from the amount ordered to be paid by Master Muir in the reference on s. 6(6) damages.
  8. March 2013 Lederman J. Confirms Report on Reference (2013 ONSC 1232): Lederman J. confirmed Master Muir’s Report on Reference, holding that franchisors are not entitled to set off the profits earned by franchisees against the amounts franchisors are obliged to pay by s. 6(6) of the AWA. In addition, Lederman J. held that the Springdale Defendants were not permitted to raise new issues on appeal to the prejudice of the plaintiffs.
  9. October 2013 ONCA Dismisses Appeal from Reference Confirmation & Amendment of Defence (2013 ONCA 626): The Ontario Court of Appeal dismissed appeals from Lederman J.’s confirmation of Master Muir’s Report on Reference and from Morgan J.’s dismissal of the appeal from Master Muir’s decision to permit the Springdale Defendants to amend their Defence.
  10. January 2014 Master’s Decision (2014 ONSC 530): In his July 2012 decision, Master Muir made the Springdale Defendants’ obligation to pay $226,871.37 of the damages contingent on the plaintiffs returning equipment. The Springdale Defendants brought a motion alleging that the plaintiffs could not “return” the equipment because they had not properly removed and stored it such that the condition of the equipment had substantially deteriorated. Master Muir rejected this argument, stating that the AWA requires franchisors to repurchase equipment regardless of its condition.
  11. March 2014 SCC Refuses Leave to Appeal (2014 CarswellOnt 2617): The Supreme Court denied leave to appeal to the Springdale Defendants from the Ontario Court of Appeal’s decision confirming the Report on Reference.

 

 

Topics:  Damages, Disclosure, Rescission, Restaurant Industry

Published In: Civil Procedure Updates, Civil Remedies Updates, General Business Updates, Franchise Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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