Court File and Parties

Court File No.: 8866/12 Date: 2017/03/21 Superior Court of Justice - Ontario

Re: 2212886 Ontario Inc., William Porteous and Kirsten Porteous, Plaintiffs And: Obsidian Group Inc., Obsidian Inc. and Gus Karamountzos, Defendants

Before: Justice M. A. Garson

Counsel: Daniel MacKeigan and Cole Vegso, for the plaintiffs John Polyzogopoulos, for the defendants

Heard: February 3, 2017

Endorsement

Introduction

[1] The plaintiffs bring a motion for partial-summary judgment for a declaration that the franchise agreement between the parties is rescinded as of September 5, 2012 and that the defendants are jointly and severally liable for damages under the Arthur Wishart Act (“AWA”).

[2] The defendants argue that not only should the plaintiffs’ motion for summary judgment be dismissed, but the court should go further and determine that the rescission claim has no merit and should be dismissed outright.

[3] For the reasons that follow, I am satisfied that there are genuine issues concerning the credibility of witnesses that require a trial with respect to the claim for rescission. However, I am convinced that the need for a trial can be avoided by relying upon the expanded powers under r. 20.04(2.1) and (2.2). In doing so, I am able to determine that the motion for partial-summary judgment can be granted and this will allow me to reach a fair and just result and serve the goals of timeliness, cost-effectiveness, and proportionality. For similar and obvious reasons, the defendants’ request to dismiss the claim for rescission outright is dismissed.

Background and Facts

[4] The plaintiffs, 2212886 Ontario Inc. (“221”) operated a Crabby Joe’s Tap and Grill (“Crabby Joe’s”) in Bradford, Ontario. William and Kirsten Porteous are the principals of 221.

[5] Obsidian Group Inc. is the franchisor for Crabby Joe’s. Obsidian Inc. is the sub-landlord to the plaintiffs pursuant to a sublease dated September 7, 2010, and Gus Karamountzos (“Gus”) is the sole director of the franchisor and the sub-landlord companies.

[6] The plaintiffs became interested in acquiring a Crabby Joe’s franchise in 2009. They communicated with an agent for the franchisor and were provided with generic disclosure documentation in April 2009 by the agent.

[7] On June 1, 2010, the franchisor provided further and more detailed disclosure. On June 16, 2010, the franchisor and franchisee entered into a franchise agreement.

[8] In late June 2009, the plaintiffs provided a deposit totalling $31,500 towards the franchise fee. Over the next year the parties worked together to identify a location suitable for the plaintiffs’ franchise.

[9] For reasons possibly relating to the franchisor’s desire to report the franchise sale in the following fiscal year, a new franchise agreement, dated September 7, 2010, was entered into at the request of the franchisor to replace the earlier June 16, 2010 agreement. [1] The plaintiffs only received the signing page for the new franchise agreement, as the remainder of the agreement was substantially the same as the earlier agreement.

[10] A franchise amending agreement was also executed on September 7, 2010, including a number of provisions for the benefit of the plaintiffs. The plaintiffs also signed a Certificate of Independent Legal Advice on that same day.

[11] The plaintiffs allege a number of deficiencies in the actions of the defendants pertaining to the sufficiency of the disclosure received, including that:

(i) They never received a copy of the head lease between themselves and Obsidian Inc. and 1714166 Ontario Inc., and only a copy of a draft sublease and an offer to lease, dated May 28, 2010, were included in their disclosure. This sublease was later replaced with a sublease dated September 7, 2010.

(ii) The defendants misrepresented the costs of establishing a “turnkey” franchise by representing them to be $550,000, when in fact, the actual costs incurred by the franchisee was $660,465.

(iii) The franchisor did not disclose that they offered any form of financing, but when the franchisor charged an additional 10 percent of the $550,000 development cost, the franchisee had insufficient funds to close the transaction and accepted financing from the franchisor of $58,965 in exchange for a promissory note, general security agreement and personal guarantee, dated March 8, 2011.

(iv) During a May 2010 meeting, a representative of the franchisee, Daniel Grammenopoulos (“Danny”) showed the plaintiffs an earnings projection table which predicted weekly sales of $37,500 - $44,000 for the franchise. These projections were later included in the business plan submitted by the franchisor to the lending institution, RBC, on the franchisee’s behalf. A November 21, 2016 affidavit filed by Danny denies preparing or providing the business plan to RBC and denies showing the plaintiffs an earnings projection in May 2010 because “it was not his practise” to show earnings projections to prospective franchisees. The plaintiffs achieved the predicted top-end of the weekly sales only once and the predicted low-end of the weekly sales only three times during its operation of the franchise. Actual sales were insufficient to maintain the operation of the franchise.

[12] The plaintiffs also argue that the training they received was rushed and incomplete and that there were numerous deficiencies in the construction and equipment of the franchise premises.

[13] On September 5, 2012, the franchisees served a notice of rescission of the franchise agreement and all related agreements on the franchisor and demanded payments of rescission damages. In turn, the defendants responded with a notice of landlord’s distress and notice of termination of the franchise and the sublease. The plaintiffs, at the franchisor’s request, continued to operate the franchise until September 18, 2012, and it was subsequently transferred to a third party in January 2013.

Positions of the Parties

[14] The plaintiffs seek a declaration that the franchise agreement is rescinded and damages in the amount of $964,805.33. They argue that the disclosure documents were so fundamentally deficient as to amount to no disclosure and thus permit an ongoing right of rescission for up to two years after the franchise agreement is signed, such date being the signing of the replacement franchise agreement on September 7, 2010.

[15] The defendants counter that there was proper disclosure and that there was no obligation to include earnings projections in a disclosure document. The defendants submit that the plaintiffs earlier testified in proceedings against RBC that they had never seen earnings projections for the franchise until RBC showed it to them the first time in July 2010 and that taking a contrary position in these proceedings is an abuse of process and barred by the doctrine of res judicate or issue estoppel.

[16] The defendants further argue that in any event, the plaintiffs are out of time as the original franchise agreement was entered into and signed on June 16, 2010, more than two years prior to the notice of rescission.

Preliminary Matter

[17] The plaintiffs seek an order for leave to amend the statement of claim to increase damages from $978,698.31 to $1,198,740.90. On consent, the plaintiffs late filed a revised Damages Brief where they abandon their claim for losses under subsection 6(6)(d) of the AWA and seek a revised damages claim of $964,805.13. Accordingly, the order for leave appears moot in the circumstances and will not be granted at this point in time.

The Law on Summary Judgment

[18] On a motion for summary judgment, the Supreme Court of Canada in Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, requires that I first determine whether there is a genuine issue requiring trial based only on the evidence before me. Summary judgment should be granted where a court can make the necessary findings of fact and apply the relevant law to achieve a just result.

[19] On the facts before me, I am satisfied that I cannot make the necessary findings of fact at this stage and that there is a genuine issue that requires a trial. Simply put, there is extensive conflicting evidence between William, Danny and Gus as to what took place at a meeting in May 2010 and the materials before me do not allow me to have a full appreciation of this event or to make the necessary findings of fact to then apply the law and achieve a just result.

[20] Having reached this conclusion, I next turn to the enhanced powers under r. 20.04(2.1) and (2.2) which include:

a) weighing the evidence; b) evaluating the credibility of a deponent; and c) drawing any reasonable inference from the evidence.

[21] I must next determine whether the use of these expanded powers will allow me to achieve a fair and just result that is timely, affordable and proportionate to the action as a whole.

Arthur Wishart Act (Franchise Disclosure) 2000, S.O. 2000 c. 3 (“AWA”)

[22] The purpose of the AWA is to protect franchisees by imposing vigorous disclosure requirements on franchisors and strict penalties for non-compliance. Simply put, the AWA is intended to ensure that the franchisee receives full and accurate disclosure to permit an informed decision. The AWA attempts to address the imbalance of power and recognizes that the franchisor is in possession of all of the relevant information and often dictates the terms of the proposed franchise agreement. The AWA is also intended to provide a remedy for abuses stemming from this imbalance. The significant disclosure requirements are evened with equally significant remedies for breaching those standards. The AWA must be read and interpreted in light of this purpose: See 6792341 Canada Inc. v. Dollar It Limited, 2009 ONCA 385, 250 O.A.C. 280, at para. 72; and Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673, 268 O.A.C. 279, at para. 26. Disclosure must be sufficient to permit the franchise to make a proper and informed decision as to whether to enter into the agreement: See 1490664 Ontario Ltd. v. Dig this Garden Retailers Ltd., at para. 16.

[23] Section 5 of the AWA lists a number of requirements to be included in the disclosure documents which shall contain all “material facts” about the business. Material facts are defined in s. 1 of the AWA to include any information that “would reasonably be expected to have a significant effect on the value or price of the franchise”. The disclosure document must be one document, delivered at one time and include copies of all related agreements: See s. 1 and s. 5(1)(3)(4) and (6) of the AWA. The disclosure must be made no later than 14 days before signing the franchise agreement.

[24] Section 6(1) of the AWA provides a right of rescission, no later than 60 days after receiving disclosure, if the disclosure is incomplete. Section 6(2) of the AWA provides that the franchisee may rescind the franchise agreement no later than two years after entering into the agreement if the franchisor never provided the disclosure document.

[25] In 4287975 Canada Inc. v. Imvestor Restaurants Inc., 2009 ONCA 308, 98 O.R. (3d) 187, the Court of Appeal drew a clear distinction between the different rights under subsection 6(1) and 6(2) and indicated that 6(2) is not triggered where a disclosure document is provided. The extended two-year remedy speaks to a complete failure to provide a disclosure document.

[26] However, authority exists to suggest that even with a disclosure document, the absence of material deficiencies which render the franchisee unable to make an informed decision about entering into the franchise agreement are sufficient to constitute the complete lack of disclosure contemplated under subsection 6(2) of the AWA: see Dollar It Limited; and Dig this Garden Retailers Ltd.

[27] Fundamentally inadequate and deficient disclosure may therefore be tantamount to no disclosure under this section: See Sovereignty Investment Holdings Inc. v. 9127-6907 Quebec Inc. at paras. 24 and 25.

[28] The franchisor must update the disclosure document so that the franchisee has current information upon which to base its decision to exercise its right of rescission: See 2337310 Ontario Inc. v. 2264145 Ontario Inc., 2014 ONSC 4370, 243 A.C.W.S. (3d) 333, at para. 39.

Discussion

i. Date of the Franchise Agreement

[29] Under s. 6(2) of the AWA, the clock starts to run from the date the agreement is signed. In my view, the franchisor sought out and received consent from the franchisee to sign a new franchise agreement, dated September 7, 2010 and replaced the earlier agreement entered into on June 16, 2010. I reject the position advanced by Gus as to why a new agreement was signed. Nothing in the original agreement changed and nothing in the original agreement contemplated a further agreement being signed upon financing. In light of the intent of the AWA, which is clearly a form of consumer protection legislation for the benefit of potential franchisees and is designed to attempt to level the playing field between the two sides, I am satisfied that the operative date the agreement is signed for the purposes of the s. 6(2) AWA clock is September 7, 2010. The amendment was sought out by the franchisor for his benefit.

[30] Having chosen to require the franchisees to sign and enter into a replacement agreement, the franchisor cannot now argue that an existing franchise agreement is already in place such that the protections afforded under s. 6(2) are already partially diluted. As earlier referenced, this determination must be made under the canopy of the AWA, the intent and purpose of which is to protect franchisees and ensure they receive full and accurate disclosure: see 2256306 Ontario Inc. v. Dakin News Systems Inc., 2015 ONSC 566, 249 A.C.W.S. (3d) 90, aff’d by Court of Appeal – 2016 ONCA 74, 263 A.C.W.S. (3d) 371 at para. 8; and 2130489 Ontario Inc. v. Philthy McNasty’s (Enterprises) Inc., 2012 ONCA 381, 350 D.L.R. (4th) 326 at paras. 25-26 and 29-31. Interestingly, the issue in the Philthy McNasty decision, argued by the appellants (unsuccessfully) was that the only purpose of the second franchising agreement was to obtain financing from RBC.

ii. Danny’s Evidence

[31] I am troubled by the contents of Danny`s affidavit. Danny was the VP of franchising for the franchisor and was a very experienced member of the industry who sold or opened at least 1000 franchises prior to this matter. I agree with the plaintiffs that his affidavit is replete with speculation, opinion, argument and contradictory statements. It is abundantly clear that Danny does not have an independent recollection of his meeting with the plaintiffs in May 2010, and relies on his practise in over 25 years in the franchise business to reach the conclusion that he did not show the plaintiffs an earnings projection at the May 2010 meeting.

[32] I am concerned that Danny cannot locate email copies of a business plan he submitted to Ken Kaufman at RBC on June 22, 2010. Although Danny maintains that he has no specific recollection of sending this email and whether or not it had an attached business plan, he is nonetheless certain that if he sent the business plan to RBC, it was at the request of the plaintiffs to assist them with obtaining financing. [2]

[33] The evidence before me clearly shows that RBC received a business plan including weekly earnings projections for the franchise on June 22, 2010 from Danny, two days before the plaintiffs went to RBC to meet with Ken Kaufman. [3]

[34] The suggestion by Danny that he would have worked together with the plaintiffs in preparing the business plan, provided them with a template plan, helped them edit the language and come up with figures for the earnings projections is completely at odds with the position of the plaintiffs that they only became aware of the business plan through RBC. Even more troubling is Danny`s assertion, a few short paragraphs later, that even if he never worked with the plaintiffs on the business plan or they ever saw it before he submitted it to RBC on June 22, 2010, that this practise of not involving the plaintiffs in the preparation or review of the business plan is appropriate and not out of the ordinary and had been done by Danny on previous occasions while at Obsidian for previous franchisees.

[35] The email attachments to Danny’s affidavit reveal the following:

(i) On June 24, 2010, Danny sent an email to the plaintiffs providing Ken’s contact information at RBC; (ii) His July 9, 2010 email to Ken speaks to earlier Crabby Joe franchise deals with RBC where “ we provided the business plan and agreements to the bank ” [emphasis added]; and (iii) An August 5, 2010 email from Ken to Danny approving the financing for this deal which was not sent or even copied to the plaintiffs.

[36] I contrast these e-mails with Danny’s email of December 19, 2012 to Chris Sideries, where he provides details of the financing in this matter including that:

(i) the plaintiffs were active participants in the financing and were eager to take on the tasks of bank financing themselves; (ii) Danny forwarded the form business plan to the plaintiffs’ and they worked to prepare and present the plan to the bank; and (iii) William was in close contact with RBC throughout the process until the funding was approved.

[37] I do not accept the conclusions reached by Danny in the December 19, 2012 email. The earlier emails produced by Danny at the time of the financing clearly show that he prepared and submitted the business plan and that William was often left out of many exchanges between Danny and Ken regarding the progress of the financing, and more tellingly, left off of the actual approval email. Accordingly, I place little to no weight on the December 19, 2012 email.

iii. Gus’ Evidence

[38] I similarly reject the contention by Gus [4] that the plaintiffs created their own business plan. For similar reasons, his position is illogical and unfounded on the evidence before me. A review of the detailed figures contained in the two-page earnings projections document, coupled with the footer identifying the document as “proprietary information – do not disclose”, make it abundantly evident to me that the plaintiffs were not the authors of this document.

iv. William’s Evidence

[39] In the endorsement of Murray J. in the June 2014 proceedings commenced by RBC to recover monies loaned to the plaintiffs to acquire the franchise, Murray J. determined that RBC had nothing to do with the preparation of the business plan and quoted a deposition of William, at para. 24, in which he stated:

Kaufman presented the business plan and earnings projection to Kirsten and I during a meeting in or about July 2010.

[40] This earlier position from William that they had never seen earnings projections until the RBC showed it to them in July 2010, is at odds with the position they assert before me. The plaintiffs argue that the issue in the earlier RBC case was not whether they saw the earnings projections but whether RBC showed the plaintiffs the earnings projections in July 2010. William, in his supplemental affidavit of October 18, 2016, explains that he reviewed the earnings projections from the business plan in July 2010 but did not appreciate what it was until after receiving a copy of the business plan after rescission. I accept this explanation and the distinction that he draws in this regard.

v. Findings of Fact – May 2010 Meeting

[41] Having already determined that it is in the interests of justice to rely on the enhanced fact-finding powers, I find that notwithstanding any cross-examination on Danny’s affidavit, I have great difficulty accepting his evidence. His affidavit is heavy on speculation and general practise and light on direct knowledge. He fails to identify specific sources for his belief, other than a summary email of December 19, 2012 which I have already discussed. It is not enough that he speculate about what he may have done. Much of his affidavit consists of argument and allegations specifically made for the purposes of prejudicing the plaintiffs, and not actual facts within his knowledge. The absence of cogent and probative evidence from him leads me to conclude that there was a meeting in May 2010 and that he did show William an earnings projection that suggested a range of $37,500 - $44,000 in projected weekly earnings for the franchise.

[42] In reaching this conclusion, I also take into account:

(i) the following month after this meeting takes place, a similar earnings projection is provided by Danny to RBC and is not copied to the plaintiffs. In fact, many of Danny’s email communications with RBC are not copied to the plaintiffs; (ii) the denial by Gus [5] that no one from Obsidian provided RBC or the plaintiffs with the business plan or showed the plaintiffs’ earnings projections at a May 2010 meeting rings hollow. He wasn’t there and if he relies on what Danny told him, I reject that source. His further claim, that if he provided such a plan it was prepared by the plaintiffs and then given to RBC by Danny on their behalf, is equally incapable of belief on the evidence before me; and (iii) Ken Kauffman [6] confirmed that it was odd that the business plan came from Danny and not the plaintiffs and that it is the earnings projections that ultimately yield the financing.

[43] I acknowledge that the plaintiffs had a year to think about the agreement and almost another year to secure an acceptable location. I also accept that they brought a certain degree of sophistication and business experience to the table. The passage of time and the sophistication of the franchisee do not dilute the rights of a franchisee under the AWA: see Apblouin Imports Ltd. v. Global Diaper Services Inc., 2013 ONSC 2592, 229 A.C.W.S.(3d) 412, at para. 18.

[44] Although the parties agree on very little, they both accept the importance of Danny’s evidence on this motion. Where are the emails, notes, dates of meetings and specific documents that Danny relied upon in his purporting to have helped the plaintiffs prepare the business plan?

[45] The defendants fairly and properly concede that the only potential argument for material non-disclosure is the purported meeting in May 2010 between the plaintiffs and Danny and whether he showed or flashed them a copy of earnings projections for the franchise but didn’t provide them with a hard copy.

vi. The Effect of the May 2010 Meeting

[46] The May 2010 meeting took place before the signing of either franchise agreement. The franchisor had a continuing duty to disclose up until the signing of the franchise agreement. This is coupled with a duty to provide updated disclosure when additional material information becomes available. The earnings projection shown to William outside of the disclosure document was not part of the disclosure document. The disclosure document also lacked any basis for the projections.

[47] I recognize that William takes one position asserted in the 2014 proceedings, a second position in the cross-examination on his affidavit where he claims the first he ever heard of the business plan was not until at least after March 2011 [7], and a third position in the affidavit filed in these proceedings that he was shown earnings projections by Danny in May 2010.

[48] However, having accepted his explanation for the inconsistencies, and in light of my rejection of both Danny and Gus’ evidence in this regard, the inconsistencies in William’s evidence are not sufficient in the circumstances to create a triable issue.

[49] Having found that Danny was in possession of an earnings projection that he shared with William in May, 2010, I find that the June 1, 2010 disclosure was deficient in not including this document.

[50] Further, I find that a failure to include the earnings projections and the underlying basis for such projections (which potentially are a misrepresentation of the actual expected sales) is a material, fundamental and stark omission. This information is potentially the single most important information that a potential franchisee would want to know. The suggestion by both Gus and Danny that this document never existed, and when it did come into existence was authored by the plaintiffs, is illogical, nonsensical and unfounded on the facts. The mere denial by each of them with no plausible explanation is insufficient to create a triable issue.

[51] There are omissions that constitute imperfect disclosure and omissions that are so significant and material as to constitute no disclosure. The earnings projection omission falls squarely in the latter category. Although I agree with the defendants that they did not have to disclose earning projections, once these projections are provided (both at the meeting in May 2010 and to the bank on June 22, 2010) they must be disclosed as part of or in addition to the disclosure document.

[52] In my view, to strictly enforce the franchise agreement in light of this material omission would be unfair and a breach of the duties of good faith and fair dealings in these circumstances: see Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494; and Machias v. Mr. Submarine at para. 106.

[53] Simply put, the disclosure document of June 1, 2010 did not contain all material facts, and was so fundamentally deficient in omitting such material facts as to constitute no disclosure as contemplated under s. 6(2) of the AWA. The franchisor did not update the disclosure with the earnings projections and the underlying basis and assumptions for such projections. This non-disclosure denied to the plaintiff the opportunity to substantiate the projections or permit them to have the information necessary to comply with the AWA and to determine whether to exercise their right of rescission. If material facts are not disclosed, the franchisor cannot simply escape the statutory requirements of the AWA by claiming that a franchise agreement is signed and such disclosure obligations are at an end. To hold otherwise would invite prospective franchisors to withhold material facts until an agreement is signed. The financial viability of the proposed franchise acquisition goes to the very core of the decision to enter into the franchise agreement and the statutory right of the franchisee to make an informed investment decision.

vii. Other Deficiencies Raised by the Plaintiffs

[54] As it relates to the other deficiencies raised by the plaintiff, I find there is no merit in these deficiencies sufficient to ground a claim in rescission under subsection 6(2). More specifically:

(i) The suggestion by the plaintiffs that the head lease was not disclosed, as a basis for the claim for rescission, is unfounded. There was no head lease in existence and the only lease in place was an offer to lease, which was disclosed when known. [8]

(ii) The claims by the plaintiffs that the franchisor did not advise them of financing offered to franchisees is also unfounded on the record before me. There was no requirement that the plaintiffs borrow from the defendants to acquire the franchise. In fact, it was reasonably unforeseeable, given the plaintiffs financial means coming into the agreement, that they would later find themselves short of funds. The offer by the defendant franchisor to loan them the shortfall to complete the deal did not create an obligation to make additional disclosure. The disclosure obligation ended before the loan and none of the financing documents were contemplated at the time of the disclosure requirements nor required in connection with the terms of the franchise agreement. Further, the loan operated to the benefit of the plaintiffs. In any event, the disclosure document of June 1, 2010 at Article 20.1 of the proposed franchise agreement did address the potential for personal guarantees.

(iii) The claim by the plaintiff that the disclosure was “piecemeal” and not “one document” as contemplated under subsection 5(3) of the AWA cannot succeed, having regard to the documents generated by the loan from the franchisor as neither party could have reasonably contemplated this at the time that disclosure was required under the AWA.

(iv) The claim by the plaintiffs that the franchisor did not disclose the actual development costs of the franchise must also fail. In section 10 of the June 1, 2010 disclosure materials, the franchisor estimates the costs of construction development (including leasehold improvements and equipment) to range from $475,000-$650,000. There is an additional reference to security deposits and other deposit fees and prepaid expenses of $10,000-$25,000, as well as an explanatory note indicating that all figures may vary further than the estimates provided, depending on (amongst other things) the actual size of the franchised outlet. [9] Section 3.1 of the Turnkey Development Agreement gave the franchisor the right to authorize variations in construction plans without approval from the franchisee provided such variations were not greater than 10 percent of the total projected costs (i.e. $550,000 x 10 percent = $55,000).

(v) The deficiencies raised by the plaintiff with respect to substandard training and the construction of the restaurant and operation of the equipment are all matters that relate to the claim for breach of contract and are not grounds to rescind the franchise agreement. Given that the current motion is limited to the rescission claim, these complaints should not form part of the rescission claim.

[55] The argument advanced by the plaintiffs for the first time, that the franchise agreement has only one signature of a duly authorized officer of the franchisor, but requires two signatures in accordance with subsection 22.14 of the franchise agreement [10] does not alter the validity of the agreements. I note that both the June and September signature pages of the franchise agreement contain one signature for the franchisor. I accept that the parties mutually agreed, in good faith, to have the contract be binding on them. This issue was not raised in the pleadings and did not have the benefit of discovery or other opportunities for the parties to challenge or test this position. Their post-agreement conduct and their respective claims before me make it abundantly clear that the parties’ mutual intention was to treat the franchise agreement of September 7, 2010 as an enforceable agreement.

viii. Issue Estoppel and Abuse of Process

[56] I do not accept the defendants’ argument that the plaintiffs are precluded by the doctrine of issue estoppel from advancing the position in this motion that the earnings projections were shown to them in May 2010. The issue in the earlier decision involving RBC dealt with when and whether RBC showed them these projections in July 2010, not Danny, and involved different parties to the proceedings.

[57] The plaintiffs did not allege that they never saw the earnings projections prior to July 2010, and that issue was not addressed in the RBC litigation. In my view, it would create an injustice to bar the plaintiffs from advancing their position in light of my findings regarding Danny’s evidence: see Toronto (City) v. C.U.P.E., 2003 SCC 63, [2003] 3 SCR 77; and Danyluk v. Ainsworth Technologies Inc., 2001 SCC 44, [2001] 2 SCR 460, at para. 25.

[58] The earlier ruling of Murray J. in the RBC litigation in 2014 dealt with the default by the plaintiffs on a $330,000 loan from RBC. At para. 12 of his decision, Murray J. references the affidavit of William and the business plan for the franchise which consisted of earnings projections estimating weekly sales in the range of $37,500 - $44,000, and that the plaintiff decided to proceed with the purchase of the franchise in light of these earnings projections.

[59] Murray J. notes in para. 27 that by the time the plaintiffs first met with RBC, they had already become franchisees and entered into a franchise agreement. More interestingly, at para. 39 of his decision he comments that:

It may well be that the franchisee has a cause of action against the franchisor. This is a matter separate and apart from the question of the defendants’ obligations to repay RBC pursuant to guarantees executed by them.

[60] The decision of Murray J. was not a decision on the merits of the issues before me. Similarly, the doctrine of abuse of process to bar relitigation of an earlier decision does not bar the plaintiffs from taking the position they claim with respect to the May 2010 meeting. In fact, fairness, the potential for an injustice, and the integrity of the adjudicative process require that I receive such evidence from the plaintiff: see Intact Insurance Company v. Federated Insurance Company of Canada, 2017 ONCA 73, 275 A.C.W.S. (3d) 97.

[61] For reasons I stated earlier, I also reject the argument that there was no obligation to include the earnings projections in the June 1, 2010 disclosure document. The evidence of Ken Kauffman clearly confirmed that the bank’s decision to advance finding was heavily based on the earnings projections which measured the ability of the debtor to service the debt coupled with the position that the bank would not advance financing in the absence of a signed franchise agreement.

[62] Ultimately, my decision turns on whether the defect in disclosure is so stark and significant as to constitute no disclosure under s. 6(2). In other words, is this determination sufficient to create a genuine issue for trial or can I make the necessary findings of fact on the record before me?

ix. Waiver

[63] I take into account the provisions in the franchise agreement in Articles 1.3 and 22.11 that indicate that the franchisee does not rely on any representations as to profit and that the franchisor disclaims any profit representations. However, it is equally clear to me that such provisions do not waive or diminish rights under the AWA: see 2176693 Ontario Ltd. v. Cora Franchise Group Inc., 2015 ONCA 152, 124 O.R. (3d) 776, at para. 67; and s. 11 of the AWA.

[64] The enforcement of these articles would undermine the express rights of the franchisee and the strict requirements and obligations imposed on the franchisor.

x. Conclusion

[65] Notwithstanding the inconsistencies in the evidence of William, I am satisfied that the non-disclosure of the earnings projections and the underlying basis for such projections denied the plaintiff franchisees the ability to make an informed decision before signing the franchise agreement and that such a material omission is tantamount in these circumstances to no disclosure under s. 6(2) and triggers the right of the plaintiffs to rescission.

Damages

[66] Rescission damages under the AWA are calculated in accordance with subsection 6(6) which reads as follows:

Franchisor’s obligations on rescission

(6) The franchisor, or franchisor’s associate, as the case may be, shall, within 60 days of the effective date of the rescission,

(a) refund to the franchisee any money received from or on behalf of the franchisee, other than money for inventory, supplies or equipment;

(b) purchase from the franchisee any inventory that the franchisee had purchased pursuant to the franchise agreement and remaining at the effective date of rescission, at a price equal to the purchase price paid by the franchisee;

(c) purchase from the franchisee any supplies and equipment that the franchisee had purchased pursuant to the franchise agreement, at a price equal to the purchase price paid by the franchisee; and

(d) compensate the franchisee for any losses that the franchisee incurred in acquiring, setting up and operating the franchise, less the amounts set out in clauses (a) to (c).

[67] The defendants concede that, if damages are awarded for rescission, they accept $720,163.50 as the amount of rescission damages payable.

[68] The plaintiffs seek $964,805.33 under subsection 6(6)(a)-(c) and abandons any claim for losses under subsection 6(6)(d) of the AWA. The following chart depicts the specific items in dispute and the defendants’ reasons for disputing the amounts claimed.

AWA Section	Item	Disputed Amount	Defendants’ Position
Section 6(b)(a)	Promissory Note	$51,846.63	Repayment of a loan
	Marketing Package	$6,330.28	Absorbed with development costs
	Rent	$131,024.26	See argument below
Section 6(6)(b)	Food and Liquor	$15,635.42	Unable to determine how amount was calculated
Section 6(6)(c)	Small wares	$23,000.92	Unable to verify amounts
	Contract Supply- Chairs/Bench	$15,199.11	Unable to verify amounts
	Greenhouses for Patio Baskets	$1,605.21	Unable to verify amounts
TOTAL		$244,641.83

[69] The largest item of disagreement between the parties relates to rent paid by the franchisee of $131,024.26.

[70] The defendants say that the claim for rent was never sought until now, but in any event, this is flow-through money that goes to the landlord and not the franchisee and that ordering damages for this amount would lead to a windfall and overcompensation to the plaintiffs. The defendants argue that the damages claimed can only relate to a benefit received by the franchisee.

[71] I disagree. I accept that Obsidian Inc. and Gus are franchisor’s associates as defined under the AWA and that the rent was paid to a franchisor’s associate and is appropriately recoverable: see 1159607 Ontario Inc. v. Country Style Food Services Inc., 2012 ONSC 881, 2 B.L.R. (5th) 315, at para. 117.

[72] The remaining claims are rejected by the defendant presumably due to a lack of a satisfactory proof or documentation upon reliance of the statement of adjustments. In the cross-examination of William on his affidavit, at Q. 864 – 868, the plaintiffs undertook to provide underlying and supporting documents requested by the defendants pertaining to the updated damages chart. No such requests were advanced by the defendants with respect to these specific items. All supporting documentation requested was provided. There is no evidence advanced by the defendants to challenge the amounts in dispute. If evidence is unchallenged or uncontradicted, a court may rely upon it: see Pye Bros. Fuels Ltd. v. Imperial Oil Limited, 2012 ONCA 153, 20 C.P.C. (7th) 1, at para. 6.

[73] The defendants must put their best foot forward on a summary judgment motion. The court is entitled to assume they have done so. Accordingly, on the evidence before me, including a recalculation of rescission damages and revised damages summary report by the plaintiffs, I am satisfied that the plaintiffs are entitled to recover the specific damage claims that are in dispute.

Conclusion

[74] In the result, judgment shall issue against the defendants, jointly and severally, in the amount of $964,805.33

[75] The plaintiffs shall be entitled to pre- and post judgment interest in accordance with the rates stipulated by the Courts of Justice Act.

[76] The counterclaim brought by the defendants is dismissed.

Costs

[77] The parties submitted Bills of Costs for both the earlier October motion to introduce further evidence before Rady J., (where she determined that costs be referenced to the summary judgment motion judge) and the summary judgment motion.

[78] The plaintiffs seek costs of $8968.06, inclusive of HST and disbursements, on a partial-indemnity scale, for the October motion and $32,357.94, inclusive of HST and disbursements, on a partial-indemnity scale, for the summary judgment motion.

[79] The defendants seek costs of $21,314.09, inclusive of HST and disbursements, on a partial-indemnity scale, for the October motion and $38,956.19, inclusive of HST and disbursements, on a partial-indemnity scale, for the summary judgment motion.

i. October Motion

[80] The defendants were successful on the earlier motion to introduce further evidence, namely, the affidavit from Danny, but were not permitted to continue the cross-examination of William, nor were they successful in compelling the plaintiffs to produce the evidence in the RBC action, or documents from the solicitor’s franchise file.

[81] I relied heavily on the information (or lack thereof) in Danny’s affidavit and found it sufficient to allow me to make certain necessary findings of fact. It was an important piece of the puzzle.

[82] The defendants are entitled to recover reasonable costs associated with the October motion. I take into account the factors set forth in r. 57.01, and more specifically the importance of the issue, the divided success, the amount the unsuccessful party could reasonably expect to pay and the complexity of the proceeding.

[83] In my view, the issue was straightforward, important and not complex. I find the costs sought by the defendants a tad excessive, particularly when contrasted with those sought by the plaintiffs.

[84] In all of the circumstances, I conclude that a fair and balanced award is an award of costs, against the plaintiffs, on a partial-indemnity scale, in the amount of $10,000.00, inclusive of HST and disbursements, payable by the plaintiffs within 90 days.

ii. Summary Judgment Motion

[85] Turning to the costs of the summary judgment motion, the plaintiffs were successful and are entitled to recover reasonable costs linked to this motion.

[86] This was a well-argued and complex matter. Neither party acted in a manner that unnecessarily lengthened the proceeding or was in any way improper. Both sides made cogent and well-reasoned arguments.

[87] Returning to the factors in r. 57.01, I note the significant importance of the issues, particularly in light of the dispositive nature of the motion, as well as the complexity. The materials filed were extensive and mostly of assistance to me.

[88] In all of the circumstances, I conclude that a fair and balanced award, taking into account what the unsuccessful party could reasonably expect to pay, is an award of costs against the defendants, and in favour of the plaintiffs, on a partial-indemnity scale, in the amount of $25,000, inclusive of HST and disbursements, payable by the defendants within 90 days.

[89] In the result, the offset leaves the defendants to pay $15,000 to the plaintiffs within 90 days.

“Justice M. A. Garson” Justice M. A. Garson Released: March 21, 2017

[1] I am mindful that the defendants suggest the new agreement was simply in response to the plaintiffs having been formally approved for financing in August 2010. [2] See Affidavit of Danny at Tab A of the Supplementary Responding Record at para. 17. [3] See Affidavit of Kenneth J. Kaufman at Tab 2 of the Supplementary Responding Record at para. 14. [4] See Affidavit of Gus at Tab 1 of the Responding Motion Record of the Defendants at para. 35. [5] See Affidavit of Gus at Tab 1 of the Responding Motion Record of the Defendants at paras. 35 and 37. [6] See Affidavit of Kenneth J. Kaufman at Tab 2 of the Supplementary Responding Record. [7] See Cross-examination of William Porteous dated August 9, 2016 – Q. 640-658, at p. 130-134. [8] See Tab 4 of the Motion Record of the Plaintiffs at pp. 304-326, and more specifically p. 316 at para. 26 which deems the offer to lease to form the basis of the tenancy agreement between the parties until a formal lease is executed. [9] See Tab 4 of the Motion Record of the plaintiffs at pp. 202-203. [10] See p.53 of Volume II of the Motion Record of the plaintiffs.