COURT OF APPEAL FOR ONTARIO

2015 ONCA 236

DATE: 20150409

DOCKET: C58100

Doherty, Epstein and Tulloch JJ.A.

BETWEEN

2240802 Ontario Inc., Niraj Patel, Riteshkumar Sheth and Kinu Snehal Amin

Respondents

and

Springdale Pizza Depot Ltd., 2220731 Ontario Inc., Ranjit Singh Mahil and Dilawar Singh Khakh

Appellants

David Altshuller and Kristina Davies, for the appellants

Shane P. Murphy, for the respondents

Heard: October 30, 2014

On appeal from the judgment of Justice Susan Greer of the Superior Court of Justice, dated December 2, 2013.

Epstein J.A.:

[1] This is another appeal involving the sufficiency of a franchisor’s disclosure of information to a potential franchisee. In fact, this is at least the third appeal this court has heard concerning whether the appellant franchisor, Springdale Pizza Depot Ltd., complied with its statutory disclosure obligations associated with the sale of a franchise.[^1]

[2] Springdale is the franchisor of a franchise system known as Pizza Depot. The appellants, Ranjit Singh Mahil and Dilawar Singh Khakh, are the principals of Springdale. Both individuals are also directors of the company. The appellant, 2220731 Ontario Inc. (“222”), is a wholly owned subsidiary of Springdale. Springdale uses 222 to enter into sub-lease agreements with franchisees.

[3] The respondent, 2240802 Ontario Inc. (“224”), is a Pizza Depot franchisee. The respondents, Niraj Patel, Riteshkumar Sheth and Kinu Snehal Amin, are the principals of 224.

[4] In April 2010, Patel, Sheth and Amin advised Springdale that they had found a location for a new Pizza Depot franchise. On April 29, 2010, 222 leased the premises proposed by Patel, Sheth and Amin. On May 6, 2010, Springdale accepted the respondents as franchisees.

[5] On May 28, 2010, pursuant to s. 5(1) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3, Springdale provided 224 with a disclosure document (the “Disclosure Document”). On June 18, 2010, Patel, Sheth and Amin signed the franchise agreement and, on October 8, 2010, they started to run their new business.

[6] The franchise experienced financial difficulties and the respondents ultimately concluded the Disclosure Document was deficient. On February 16, 2012, the respondents delivered a notice of rescission and by statement of claim dated May 15, 2012, they commenced an action against the appellants for rescission and substantial damages. By statement of defence dated July 10, 2012, the appellants defended the action and in April 2014, they amended their defence to advance a counterclaim. The respondents delivered a reply and defence to counterclaim dated April 17, 2014.

[7] By notice of motion dated March 8, 2013, the respondents moved for partial summary judgment seeking, among other things, a declaration that the franchise agreement was validly rescinded and that the appellants were liable to them for damages.

[8] The motion judge found that the Disclosure Document was materially deficient. She therefore granted partial summary judgment declaring that the Disclosure Document did not comply with the statutory requirements, the franchise agreement documents were validly rescinded, and the appellants were liable for damages in an amount to be determined by a Master, in accordance with the parties’ agreement.

[9] The appellants raise two main grounds of appeal. First, they submit that there were material facts in dispute and other difficulties with the evidence such that the summary judgment procedure was not available. Second, the appellants contend that the motion judge erred in finding that the disclosure Springdale provided was sufficiently deficient to give the respondents a right of rescission.

[10] I would dismiss the appeal. While there was a conflict in the evidence as to the nature and contents of the Disclosure Document, that conflict was immaterial because the motion judge found that the respondents were entitled to rescission based on the appellants’ own evidence concerning the nature and extent of the disclosure they provided the respondents. Further, I agree with the motion judge that the disclosure provided fell so far short of the clear statutory requirements that the respondents were entitled to rescission pursuant to s. 6(2) of the Act.

THE STATUTORY FRAMEWORK

[11] Section 5 of the Act sets out franchisors’ disclosure obligations. It requires that a franchisor provide a franchise disclosure document to a prospective franchisee no fewer than 14 days before the earlier of the signing by the prospective franchisee of the franchise agreement and the payment of any consideration by the franchisee relating to the franchise. Section 5 also contains particulars pertaining to, among other things, the means for delivery of the disclosure document, the requirements for disclosure of material changes, and the contents of the disclosure document.

[12] Section 5(4) of the Act provides that the disclosure document shall contain:

(a) all material facts, including material facts as prescribed;

(b) financial statements as prescribed;

(c) copies of all proposed franchise agreements and other agreements relating to the franchise to be signed by the prospective franchisee;

(d) statements as prescribed for the purposes of assisting the prospective franchisee in making informed investment decisions; and

(e) other information and copies of documents as prescribed.

[13] Subsection 5(4)(a) requires the franchisor to include “all material facts” in the disclosure document. The Act defines “material fact” broadly in s. 1(1) to include any information about the business, operations, capital or control of the franchisor or 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.

[14] Regulations under the Act provide further details of the disclosure the Act mandates.

[15] Relevant to the issues in this case, pursuant to s. 3 of O. Reg. 581/00, every disclosure document shall include:

(a) an audited financial statement for the most recently completed fiscal year of the franchisor’s operations; [or]

(b) a financial statement for the most recently completed year of the franchisor’s operations, prepared in accordance with generally accepted accounting principles that are at least equivalent to the review and reporting standards applicable to review engagements set out in the Canadian Institute of Chartered Accountants Handbook; or

(c) [Inapplicable.]

[16] And s. 2 of O. Reg. 581/00 provides that every disclosure document shall contain:

5. A statement, including a description of details, indicating whether the franchisor, the franchisor’s associate or a director, general partner or officer of the franchisor has been found liable in a civil action of misrepresentation, unfair or deceptive business practices or violating a law that regulates franchises or businesses, including a failure to provide proper disclosure to a franchisee, or if a civil action involving such allegations is pending against the person. [Emphasis added.]

[17] Section 7 of O. Reg. 581/00 further provides that:

7. (1) Every disclosure document shall include a certificate certifying that the document,

(a) contains no untrue information, representations or statements; and

(b) includes every material fact, financial statement, statement and other information required by the Act and this Regulation.

(2) A certificate referred to in subsection (1) shall be signed and dated by,

(a) in the case of a franchisor that is not incorporated, the franchisor;

(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. [Emphasis added.]

[18] Section 6 of the Act provides the consequences for failing to strictly comply with the requirements set out in s. 5 and the regulations. These consequences include rights of rescission and compensation. Section 6 provides two separate time periods within which the franchisee can rescind:

6. (1) A franchisee may rescind the franchise agreement, without penalty or obligation, no later than 60 days after receiving the disclosure document, if the franchisor failed to provide the disclosure document or a statement of material change within the time required by section 5 or if the contents of the disclosure document did not meet the requirements of section 5.

(2) A franchisee may rescind the 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.

ISSUES

[19] As set out above, in challenging the motion judge’s conclusion that the respondents were entitled to rescission, the appellants advance two main arguments. They submit that the motion judge erred by:

1. finding that there was no genuine issue requiring a trial; and

2. concluding that the variations between the Disclosure Document and the requirements under the Act were deficiencies that entitled the respondents to rescind the franchise agreement.

ANALYSIS

1. Did the motion judge err in finding there was no genuine issue requiring a trial?

The Test for Summary Judgment

[20] Pursuant to Rule 20 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, the court shall grant summary judgment if there is no genuine issue requiring a trial.

[21] At the time the partial summary judgment motion was heard, Combined Air Mechanical Services v. Flesch, 2011 ONCA 764, 108 O.R. (3d) 1, governed the approach to be taken on a motion for summary judgment. Combined Air established the “full appreciation” test. In applying this test, the court had to determine whether it was possible to fully appreciate the evidence and issues by way of summary judgment, or whether a trial was required.

[22] Subsequent to the hearing of the motion, the Supreme Court in Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, broadened the test for summary judgment. Under Hryniak, there will be no genuine issue requiring a trial if the summary judgment process provides the motion judge with the evidence required to fairly and justly adjudicate the dispute and is a timely, affordable and proportionate procedure: para. 66. Even if there appears to be a genuine issue for trial, following Hryniak, the motion judge has the discretion to use the new fact-finding powers under rules 20.04(2.1) and (2.2) to avoid a trial in appropriate cases. These powers include weighing evidence, evaluating the credibility of a deponent and drawing reasonable inferences from the evidence.

The Appellants’ Complaints Regarding the Evidence

[23] Before this court the appellants renew the arguments they advanced before the motion judge by citing various problems with the record. They point out that Sheth, Amin and Amin’s husband failed to attend for examination for the purposes of the hearing of the motion and that Patel failed to comply with undertakings or questions taken under advisement arising from his cross-examination.

[24] I agree with the appellants that the motion judge erred in holding that Sheth, Amin and Amin’s husband had no obligation to be examined. Given that Sheth and Amin were served with notices of examination pursuant to rule 34.04, and Amin’s husband was served with a summons to witness, they were required to respond to attend for the purposes of being examined. As indicated by the certificates of non-attendance in the record before the motion judge, Sheth, Amin and Amin’s husband failed to do so. It is also true that Patel did not comply with various obligations arising out of his examination; however, like the motion judge, I note that the appellants did not pursue the remedies available to them under the rules.

[25] That said, I do not see what relevance these problems have to the task before the motion judge. I agree with her view that, for the purposes of determining the issues raised on the motion for partial summary judgment, there was no requirement that the examinations take place or that Patel comply with his undertakings. What was required was a record that allowed the motion judge to determine the disclosure the appellants provided so she could evaluate the extent to which it met the requirements under the Act. As I have previously noted, in determining whether the disclosure the appellants provided met the statutory requirements, the motion judge relied on the appellants’ evidence concerning what was contained in the disclosure. In my view, by approaching the issue in this way, the motion judge had the evidence she needed.

[26] The appellants also contend that the motion judge made a number of evidentiary errors.

[27] The appellants submit, for example, that the motion judge erred by drawing an inference against them based on their involvement in other proceedings concerning allegations of improper disclosure. The appellants further argue that the motion judge failed to identify the basis upon which she found that the respondents were not provided with proper business information about Springdale’s operations. The appellants also submit that the motion judge erred in finding that there was no evidence that they did any research relating to the proposed new franchise location.

[28] I do not agree that the motion judge misapprehended the evidence. The motion judge did not infer that the Disclosure Document was deficient because the appellants had been involved in other summary judgment motions in which allegations had been made that they did not meet their disclosure requirements under the Act. Rather, at para. 60 of her reasons, the motion judge merely observed that Springdale had previously been found to have failed to meet its disclosure obligations under the Act. I do not read the motion judge’s reasons as implying that she drew any inference from these other proceedings.

[29] Further, the motion judge did not err in finding that there was no evidence that the appellants did any research about the respondents’ proposed franchise location. As the appellants say in para. 35(f)(iv) of their factum, “there was no evidence either way before her” on this issue. The record demonstrates that this is correct. And, in my view, no evidence going either way means “no evidence”. In any event, the motion judge’s observation in this respect is of little moment as it does not appear to have influenced her analysis.

[30] Finally, the appellants attach considerable weight to the fact that with respect to what was in the Disclosure Document, Patel’s evidence conflicted with Mahil’s evidence and Mahil was not cross-examined. The difficulty with this submission is that the motion judge considered whether the respondents were entitled to rescission based on the disclosure that the appellants admit to having provided. By proceeding in this fashion the motion judge rendered the conflict in the evidence on this point immaterial.

Dealing with Rescission by way of Summary Judgment Was Appropriate

[31] Based on the above analysis, I am of the view that the motion judge correctly applied the Combined Air test in concluding that the issue of the respondents’ right to rescission could be resolved by way of summary judgment.

[32] Under either the Combined Air test or the Hryniak test, the circumstances here are such that the summary judgment process provided the motion judge with the evidence required to effectively adjudicate the dispute. A trial was not required.

[33] Neither the respondents’ damages claim nor the appellants’ subsequent counterclaim detract from my conclusion that dealing with the issue of whether the respondents were entitled to rescission by way of partial summary judgment was appropriate.

[34] From a practical perspective, I note that the parties themselves agreed that the issue of damages would be resolved before a Master and that the counterclaim was commenced after the motion was heard and decided.

[35] Moreover, dealing with the discrete matter of the respondents’ right to rescission by way of summary judgment allowed the motion judge to expeditiously resolve an important issue, thereby benefiting the parties by narrowing their dispute and potentially paving the way to settlement on the remaining issues. This approach resonates with the spirit of Hryniak: see especially para. 60.

2. Did the motion judge err in concluding that the variations between the Disclosure Document and the requirements under the Act were deficiencies that entitled the respondents to rescind the franchise agreement?

[36] To answer this question, I first canvass the three main disclosure deficiencies the motion judge identified. I then outline the legal consequences of these deficiencies.

[37] As mentioned above, I agree with the motion judge’s conclusion that the appellants’ failure to meet the statutory disclosure obligations gave the respondents the right to rescind the franchise agreements.

Disclosure Deficiencies

(i) The Financial Statements

[38] The motion judge found that the financial statements appended to the Disclosure Document did not comply with the Act’s requirements. She noted that the form containing the financial statements is entitled “SPRING DALE (sic) PIZZA DEPOT LTD. Financial Statements March 31, 2009 (Unaudited).” The Notice to Reader on the front page contains cautionary language: “We have not audited, reviewed or otherwise attempted to verify the accuracy or completeness of such information. Accordingly, readers are cautioned that these statements may not be appropriate for their purposes.”

[39] The motion judge held that these notes meant that the preparer of the statements did not verify anything. She went on to identify an obvious error in the statements concerning the amount indicated for accumulated depreciation and concluded that the individual who prepared the statements did not carefully read either the statements or the regulations governing their preparation. The motion judge therefore held that the financial statements did not comply with either s. 3(1)(a) or 3(1)(b) of O. Reg. 581/00, reproduced above, and were deficient.

[40] The appellants submit that just because the financial statements are unaudited or fail to meet a review engagement standard, they are not necessarily deficient under the Act.

[41] I do not agree. Section 3(1) of O. Reg. 581/00 provides that “every disclosure document shall include … an audited financial statement” or “a financial statement … prepared in accordance with generally accepted accounting principles that are at least equivalent to the review and reporting standards applicable to review engagements set out in the Canadian Institute of Chartered Accountants Handbook”. The regulation is clearly worded and it is mandatory. The financial statements contained in the Disclosure Document did not meet either standard and were therefore deficient.

(ii) The Certificate

[42] The motion judge also found that the appellants failed to meet their obligations under s. 7 of O. Reg. 581/00, reproduced above. This section provides that if, as here, the franchisor is incorporated and has more than one officer and director, the disclosure document shall include a certificate, signed and dated by at least two individuals who are officers and directors of the franchise, certifying that the document is true and includes all information required by the Act.

[43] The Disclosure Document contained a certificate signed on May 28, 2010, solely by Mahil. The motion judge rejected the appellant’s effort to correct this deficiency by producing, in its responding materials, a second certificate purportedly signed by Khakh on May 28, 2010. The appellants argue that the motion judge erred by disregarding Mahil’s evidence that two certificates were, in fact, signed the same day.

[44] Even if I were to accept this argument it does not assist the appellants as the regulation is clearly worded. Section 7 mandates one certificate, not two. If Khakh did indeed sign a certificate on May 28, 2010, the requirements set out in s. 7 would still not be satisfied.

(iii) The Ongoing Litigation

[45] At the time the appellants provided the Disclosure Document to the respondents, another franchisee was involved in ongoing litigation against Springdale for rescission based on deficient disclosure. The motion judge noted that, on the appellants’ evidence about what was disclosed, their disclosure did not make any reference to this litigation. Further, the franchisee that commenced the rescission litigation was not identified in the list of former franchisees appended to the Disclosure Document. Finally, at para. 52 of her reasons, the motion judge observed that had proper financial statements been prepared, this ongoing litigation would have appeared as a contingent liability in a footnote to the statements.

[46] The appellants rely on Mahil’s evidence that information about other franchisees was provided in the Disclosure Document and that its inclusion was acknowledged by the respondents in the receipt they signed. This point, however, fails to address the more serious omission – the ongoing litigation the disclosure of which is necessary pursuant to s. 2(5) of the regulations.

[47] Moreover, the ongoing litigation falls within the category of information about the business that, in my view, would reasonably be expected to have a significant effect on a prospective franchisee’s decision to purchase the franchise. As such, this information amounted to a material fact that, pursuant to s. 5(4)(a) of the Act, had to be disclosed. It was not. This was another aspect of the appellants’ statutory disclosure obligations that required the appellants to disclose the ongoing litigation and that was not met by their failure to do so.

Consequences of the Disclosure Deficiencies

[48] To order rescission under s. 6(2), the motion judge had to be satisfied that the Disclosure Document was so defective that it effectively amounted to no disclosure. If, on the other hand, the disclosure deficiencies merely amounted to imperfect disclosure, it was too late for the respondents to rescind the franchise agreement.

[49] Having identified deficiencies in the Disclosure Document, the motion judge then went on to conclude that the respondents were entitled to rescission under s. 6(2) of the Act on the basis of these deficiencies. She wrote:

[61] The Act, itself, is in many ways consumer protection legislation. Franchisors are expected to comply with it and its Regulations. It is remedial legislation, which the Court may broadly apply. In examining what deficiencies are sufficiently material to conclude that the Disclosure Document fails to satisfy the substantial requirements of the Act, Mr. Justice Wilton-Siegel in Sovereignty Investment Holdings, Inc. v. 9127-6907 Quebec Inc., 2008 57450 (ON SC), [2008] O.J. No. 4450 (S.C.J.) found, in para.15 that out of 19 deficiencies in the case before him, there were at least 4 such deficiencies in the disclosure provided, “each of which, on its own, is fatal” to the Franchisor’s assertion that it complied with the requirements of the Act to deliver a disclosure document.

[62] One of those flaws is one of the same fatal deficiencies in the case before me. The Financial Statements provided by the Franchisor did not comply with the Act, as earlier noted by me. As well, as in this case, the documents provided were not collected in a single document. As well, the Certificate provided did not comply with S.7 Regulations and the list of names of other franchisees and the status of what happened to them was not part of the Disclosure Document received by the Plaintiffs.

[63] In my view, none of the deficiencies noted above are so minor that they would not qualify. They are major deficiencies. There were other minor deficiencies, as noted by me. The Financial disclosure, in my view, must comply with the Act, in every respect. To have a bookkeeper prepare a statement from the figures provided by the Franchisor, without any documents being examined or verified, with errors in its transcription and no Notes at the end about on-going or pending litigation, does not give the franchisee a true financial picture. See also: Melnychuk v. Blitz Limited, 2010 ONSC 566 at pp. 6 and 7.

[50] I see no error in the manner in which the motion judge applied the law to the deficiencies apparent from the record or in her conclusion that the Disclosure Document was materially deficient.

[51] In 4287975 Canada Inc. v. Imvescor Restaurants Inc., 2009 ONCA 308, 98 O.R. (3d) 187, at para. 43, this court identified the distinction between imperfect disclosure and disclosure that is so deficient as to amount to no disclosure at all as follows: “if the disclosure document that is provided turns out to be materially deficient, then no disclosure will be found to have been made” (emphasis added).

[52] The remedies for failure to comply with the strict disclosure requirements are intended to redress abuses by franchisors. As noted by MacFarland J.A. in 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd. (2005), 2005 25181 (ON CA), 256 D.L.R. (4th) 451 (C.A.), at para. 12, it “is evident… that the thrust of the Act is to set standards for adequate disclosure and to create significant penalties for failing to meet those standards.”

[53] I now turn to the disclosure deficiencies that have been identified in this case.

[54] I start with the financial statements contained in the Disclosure Document. There are three different levels of engagement associated with the presentation of financial statements. The most reliable level is known as an audit engagement. At this level a chartered accountant performs an independent verification of the numbers provided by management. The second most reliable level is known as a review engagement. At this level a chartered accountant verifies the numbers provided by management to satisfy himself or herself that they are reasonable. The third level is known as a compilation engagement. At this level the chartered accountant essentially organizes the numbers provided by management. Significantly, the accountant provides no assurance as to the accuracy or reliability of the numbers. Essentially, a compilation engagement requires nothing more than formatting financial information.

[55] Sections 3(1)(a) and 3(1)(b) of O. Reg. 581/00 specify that the financial statements that must be contained in a disclosure document be prepared in accordance with either the audit engagement standard or the review engagement standard.

[56] The Act is designed to address the perceived imbalance of power in the franchisor/franchisee relationship. The Act’s purpose is to protect both prospective franchisees and those already parties to a franchise agreement. This goal is achieved, in part, through the obligation imposed on franchisors to provide disclosure, the right given to the franchisee to rescind the franchise agreement in the absence of proper disclosure, and the franchisee’s right of action for damages based on a franchisor’s failure to comply with the disclosure requirements.

[57] The Act must be interpreted in a manner that advances this purpose. Prospective franchisees, often lacking in business experience (such as Patel, Sheth and Amin), must be able to rely on the information they are given – particularly information relating to the franchisor’s financial circumstances. Providing a prospective franchisee with financial information about the franchisor that has been independently verified is more than a technicality. It is a foundational part of disclosure.

[58] In my view, the failure to provide financial statements in accordance with s. 3(1) of the regulations – in other words, statements that have been independently verified to an audit engagement or review engagement level – by itself constitutes a material deficiency.

[59] The other two deficiencies discussed above – the failure to include reference to the ongoing litigation in which a franchisee was claiming rescission based on deficient disclosure and the failure to provide a certificate in accordance with the Act – serve to strengthen the conclusion that the respondents’ disclosure was not just deficient but materially deficient such that it amounted to no disclosure under s. 6(2) of the Act.

CONCLUSION

[60] I would not interfere with the motion judge’s decision to allow this matter to be determined by way of summary judgment. By assessing the sufficiency of disclosure based on the appellants’ evidence of what was disclosed to the respondents the motion judge identified undisputed deficiencies in the disclosure. From that vantage point the motion judge had no difficulty concluding that the appellants’ disclosure was so deficient as to amount to no disclosure and that the respondents were therefore entitled to rescission. I agree.

DISPOSITION

[61] I would dismiss the appeal. In accordance with the parties’ agreement, the respondents are entitled to their costs of this appeal fixed in the amount of $5,000 including disbursements and applicable taxes.

Released: April 9, 2015 (DD)

“Gloria Epstein J.A.”

“I agree Doherty J.A.”

“I agree M. Tulloch J.A.”

[^1]: See 2147191 Ontario Inc. v. Springdale Pizza Depot Ltd., 2015 ONCA 116, 2015 CarswellOnt 2261; see also 2189205 Ontario Inc. v. Springdale Pizza Depot Ltd., 2011 ONCA 467, 336 D.L.R. (4th) 234.