Court of Appeal for Ontario

Date: January 25, 2018

Docket: C62744

Justices: 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

Counsel

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.

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 Disclosure), 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 Franchisee's notice of rescission. The parties brought motions for summary judgment to, among other things, determine the validity of the Franchisee's decision to rescind the agreement.

[3] The motion judge held that the franchise agreement had been validly rescinded and dismissed the Franchisor's claim for damages.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

[4] For the reasons that follow, I would allow the appeal, except for part of the Franchisor's 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 Franchisor's 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 Franchisor's 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 notice's 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 Franchisee's 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 Franchisee's 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 franchisor's 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 franchisee's 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 Franchisor's disclosure. 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 judge's 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 Franchisor's breach of its disclosure obligations was "egregious", as the FDD contained "stark and material deficiencies" with respect to the Franchisee's 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 Franchisee's 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 Franchisor's 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 Franchisor's corporate counsel stating that Mr. Costidis' name had been left on the CPR through inadvertence.

[30] The motion judge also held that Mr. Maisonneuve's 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 judge's view, did not require the sole director of a franchisor to sign a certificate twice. The motion judge also noted that the certificate's purpose of "bring[ing] home" personal responsibility was not engaged, as Mr. Anastopoulos was not trying to disclaim responsibility for the FDD's 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 Franchisor's "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 Franchisee's s. 3 and s. 7 claims, finding that they had not been "the subject of any significant attention" in the Franchisee's oral argument, attracted "no attention in [the Franchisee's] 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 Franchisee's 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 Franchisor's view, the motion judge's 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 judge's 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 judge's 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 Franchisee's view, the motion judge's 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 judge's ruling is narrow in scope, affecting only a limited range of franchise agreements. The Franchisee also supports the motion judge's 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 franchisor's 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, aff'd 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.L.R. (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 judge's 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 franchise's 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 Franchisee's active participation in the selection of the premises to which the head lease would apply, and constrained the Franchisor's ability to enter into a lease without considering the Franchisee's 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 Franchisor's failure to disclose the head lease justified rescission under s. 6(2). The absence of that information had little impact on the Franchisee's 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 director's 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 Franchisor's three prior conversions, I do not believe disclosing those figures would have significantly improved the Franchisee's 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 Franchisee's 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 judge's 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 Certificate's Validity

[58] Seeking a secondary route to justify rescission, the Franchisee cross-appeals the motion judge's 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 Franchisee's submissions.

[63] I would not disturb the motion judge's finding that Mr. Costidis had effectively resigned before the franchise agreement was signed. The motion judge's 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 Appeal's 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 judge's 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 Franchisor's 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 Franchisee's notice of termination.

[70] In my view, the Franchisor is entitled to damages arising out of the Franchisee's 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 Franchisor's 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 Franchisee's 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 Franchisee's 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 judge's 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 Franchisee's 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 Franchisee's 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 Franchisor's position. I see no reason to interfere with the motion judge's 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 Franchisee's submissions regarding rescission raise a genuine issue requiring a trial in respect of its allegations of misrepresentation.

Issue 5 – The Franchisee's 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 franchise's (former) location, dated April 12, 2017. The Franchisee's 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 Franchisor's disclosure was premature and misleading. The Notice, in the Franchisee's 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, 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 Franchisor's 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 Franchisor's submissions.

Released: January 25, 2018

"Gloria Epstein J.A."

"I agree. Robert J. Sharpe J.A."

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

Footnote

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