COURT FILE NO.: CV-11-436187
DATE: 20121122
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
2219338 ONTARIO LTD., 2224143 ONTARIO INCORPORATED, 1480383 ALBERTA LTD. and 2119135 ONTARIO INC. Applicants – and – GRILL IT UP! RESTAURANTS INC., GRILL IT UP! HOLDINGS INC., GRILL IT UP! (VM) INC., GRILL IT UP! (BAY ADELAIDE) INC., GRILL IT UP! (FM) INC., GRILL IT UP! (FPM) INC. and PAUL A. FREDERICKS Respondents
David Altschuler , for the Applicants
Mark Klaiman , for the Respondents
HEARD: April 27 and June 18, 2012, at Toronto, Ontario
michael g. quigley j.
reasons for decision
Introductions
[ 1 ] In 2009, Malik Ata-Ul-Aziz, a Toronto area businessman, became interested in purchasing a restaurant franchise. Malik responded to an advertisement that had been placed in a local business newspaper by Grill It Up Restaurants Inc. offering various restaurant franchise locations in the Greater Toronto Area and in Hamilton.
[ 2 ] Malik met with representatives of Grill It Up in May of 2009. They offered him the opportunity to purchase a franchise that was available for sale in Alberta. Malik agreed. He incorporated an Alberta company and acquired his first Grill It Up restaurant franchise located in Calgary, Alberta. Five months later, he and his friend, Asif Sethi, acquired two further Grill It Up restaurant franchises, one in Vaughan Mills, Ontario, and the other in Bramalea. However, Malik and Asif rescinded all three of those franchise agreements only a year later in 2010.
[ 3 ] Now they seek declaratory relief under Rule 14. In particular, they ask the court to declare that Grill It Up failed to make the disclosure, to Malik and Asif and the applicant companies, that it was required to make under the Arthur Wishart Act (Franchise Disclosure), 2000 [1] (the “ Ontario Act ”), relative to the Vaughan Mills and Bramalea franchises, and under the Franchises Act [2] (the “ Alberta Act ”), relative to the Calgary franchise. They ask the court to declare that they were entitled to rescind their franchise agreements and to declare “that Grill It Up Restaurants Inc. must forthwith comply with its obligations” to them under s. 6(6), and ss. 3 and 7 of the Ontario Act and ss. 9 and 14 of the Alberta Act . They ask for the return of all of the monies that they invested in these three restaurant franchises, and that Grill It Up be ordered to pay statutory damages, on the basis that it failed to comply with the statutory disclosure obligations it owed to them as franchisor.
[ 4 ] The fundamental question here is whether this application can be determined under Rule 14 when there is a significant material factual dispute between the parties relative to whether disclosure was ever made and the extent to which the alleged disclosure deficiencies were material.
[ 5 ] In this case, I have found that the disputed issues between these parties cannot be determined without a trial. I find that I am unable to determine whether Grill It Up provided the disclosure it was required to make under the Ontario Act and the Alberta Act , based solely on affidavit evidence and transcripts of cross-examinations, and even the evidentiary inferences I was invited to draw. The extent of the factual dispute between the parties relative to whether and when disclosure was made, and the entirely discordant versions of events they presented precludes the drawing of any inferences. More importantly, whether that disclosure was provided is not a question of interpretation of rights under a statute or contract that is amenable to an application under Rule 14.05. It is a question that requires findings relative to the credibility of the competing and conflicting evidence advanced by the parties. In my view, it is a question that requires a trial.
[ 6 ] An application brought under rule 14.05 might otherwise have been appropriate to determine whether the disclosure that was provided complied with the content requirements imposed by the Ontario Act and the Alberta Act . In my view, however, that issue, and the other issues set out below, should be determined at the same time at trial by the presiding judge. It would not be appropriate for me to make determinations on those issues here, and to effectively tie the hands of the trial judge when he or she will have all the evidence I have here, but supplemented by the viva voce testimony, cross-examination of the participants, and the documentation that the respondent failed to produce prior to this hearing but will have to produce before trial on pain of having the defence struck.
[ 7 ] Finally, I have concluded that damages also ought to be determined at trial, rather than on the basis of the affidavit evidence presented here. A trial of issues will take place in this matter, subject to procedural terms and conditions as established with counsel and described further in these reasons.
Summary of Background Facts
[ 8 ] Before 2009, Malik had worked as an employee at a pizza restaurant franchise with his associate and friend, Asif. In the spring of 2009 he decided he would like to purchase his own restaurant franchise. He began looking into Grill It Up restaurants. He responded to an advertisement placed in a local business newspaper by Joseph Sham, a real estate broker. It referred to several Grill It Up franchise locations that were available in the Greater Toronto Area and in Hamilton. Ultimately, after meeting with representatives of the Grill It Up restaurant franchise, Malik was offered and decided to purchase the franchise in Calgary.
[ 9 ] Several meetings between the parties took place at Fairview Mall in Toronto and one took place at the office of Ambrose Harripersad about the Calgary franchise. Harripersad is a friend and business associate of Paul Fredericks. Fredericks is a named respondent and the principal behind the Grill It Up restaurant business. It is claimed that Malik, Sham, Fredericks and Malik’s real estate agent, Syed Ahmed all attended those meetings.
[ 10 ] The evidence surrounding these meetings and whether Malik received a disclosure document for the Calgary franchise is inconsistent and contradictory. Fredericks and Sham insist that Sham was alone when he provided the disclosure documentation to Malik on May 19, 2009. They both maintain that Fredericks was not present at that meeting. Sham says that he prepared the disclosure receipt acknowledgment and asked Malik to sign it. He claims that he kept the only copy of that signed acknowledgment in his file, and that he only gave it to Fredericks after the applicant numbered companies delivered their May 31, 2011 Notices of Rescission to Grill It Up Restaurants, Inc.
[ 11 ] Malik's agent, Ahmed, flatly contradicts that evidence. He claims that he was in attendance at the meetings at Fairview Mall. He claims that no disclosure document was provided to Malik at that time. It is not disputed, however, that Malik and Fredericks signed a conditional agreement of purchase and sale the next day, May 20, 2009, under which Malik purchased the Calgary franchise.
[ 12 ] One of the reasons that Malik claimed to be willing to purchase the Calgary franchise was to get him started in this new franchise business, but his ultimate goal was to own one or more Grill It Up restaurant franchises in the Greater Toronto Area. He claimed that it was important to him that the agreement of purchase and sale relative to the Calgary franchise included a future right to purchase the Vaughan Mills franchise outside of Toronto. The final franchise agreement and sublease respecting the Calgary franchise was concluded between Grill It Up and Malik's company, 2119135, on July 30, 2009.
[ 13 ] Over the summer of 2009, Malik's friend, Asif, agreed to become his business partner. They commenced negotiations with Fredericks and Harripersad to purchase the Vaughan Mills franchise that had been operated by Grill It Up as a corporate owned store since 2007. Fredericks and Harripersad insist that they provided Malik and Asif with the disclosure document for that franchise on October 6, 2009. Malik and Asif deny receiving any disclosure documentation for that franchise, notwithstanding their admission that they signed an acknowledgment that they did.
[ 14 ] On October 19, 2009, Malik and Asif executed a second franchise agreement for the Vaughan Mills franchise through 2219338 Ontario Inc. On the same day they concluded a separate agreement. It added 1480383 Alberta Limited and Asif as parties to the franchise agreement for the Calgary franchise but no further disclosure documentation was provided at that time with respect to that amended franchise agreement.
[ 15 ] Very soon thereafter, Malik and Asif purchased the Bramalea franchise that had been operated by Grill It Up Restaurants since 2007 as another corporate store. Once again, Fredericks and Harripersad insist that they provided a disclosure document in respect of the Bramalea franchise to Malik and Asif on November 3, 2009. Once again, Malik and Asif deny receiving that documentation even though, once again, they admit to having signed an acknowledgement that they did receive that disclosure documentation. The final franchise agreement with Grill It Up Restaurants, Inc. was signed on November 23, 2009 when 22241438 Ontario Inc. purchased the Bramalea franchise.
[ 16 ] Malik and Asif claim that the restaurant businesses quickly started to go downhill. They claim that Grill It Up made misrepresentations about the Calgary restaurant business and that they could not generate sufficient revenue to pay their expenses. Fredericks acknowledges that the applicants’ failure to make payments as required for the Calgary franchise led to the termination of that franchise agreement.
[ 17 ] Not long after it was terminated, however, the parties reached a new understanding under which Malik and Asif agreed to pay expenses related to the Calgary franchise, but to return its operational control back to Grill It Up. The understanding was premised on a condition that Grill It Up would make best efforts to sell it within one year for at least $325,000. This was in October of 2010. Malik and Asif claim as well that they were to receive back the balance of money arising from the proceeds of sale. However, the Calgary franchise remained unsold at the time this application commenced, so they have received no refund of any part of that investment.
[ 18 ] Fredericks delivered a Notice of Termination of the Vaughan Mills and Bramalea franchises to the applicants on November 15, 2010. The Notice contained a number of allegations against the applicants – namely, that they had failed to pay royalties, failed to make monthly loan payments, failed to pay rent on a timely basis, and had failed to report monthly sales. Numerous other violations of the terms and conditions of the franchise agreement were also set out in that letter. These included allegations of continually and purposefully failing to pay debts to creditors and suppliers, of failing to provide a safe and proper food delivery system, of failing to provide adequate and transparent reporting to the Canada Revenue Agency, of reporting false revenues and expenses in order to avoid a true and fair royalty calculation, of falsely reporting GST and harmonized sales tax to the Canada Revenue Agency, of intimidating former employees, and of making unwanted advances and continuous sexual advances toward both employees and patrons. It is hard to imagine that more serious allegations could be levied by a franchisor against a franchisee.
[ 19 ] Not surprisingly, the applicants vehemently denied all of these claims by Grill It Up. However, it was equally surprising to me given the poisoning of the relationship that those allegations must have caused, that the applicants were prepared to turn around and resolve their differences with Grill It Up only weeks later. Further negotiations took place and the franchise agreements were reinstated less than a month later under a December 11, 2010 interim agreement that permitted the applicants to re-enter the Vaughan Mills store and to continue to operate it as a Grill It Up franchise. The applicants say the agreement related to all three franchised locations.
[ 20 ] Despite this promise, however, it appears the relationship must have become permanently fractured by those, and other events that followed. A little over five months later the applicants sent Notices of Rescission to Grill It Up on May 31, 2011 rescinding the Calgary Franchise Agreement, the Vaughan Mills Franchise Agreement, and the Bramalea Franchise Agreement, effective June 1, 2011. Once those contractual arrangements came to an end, it was not long before this litigation ensued.
Legislative Framework
[ 21 ] The legislative framework governing relations between franchisors and franchisees established in Ontario under the Ontario Act and in Alberta under the Alberta Act lies at the core of this application. The legislation in both provinces endeavours to protect the interests of franchisees by requiring that franchisors comply with rigorous disclosure requirements relative to the franchised business. The statutes establish strict statutory penalties for noncompliance.
[ 22 ] In Ontario, the Court of Appeal has rejected attempts to narrowly construe the disclosure requirements or the entitlement of a franchisee to obtain statutory remission. [3] It has described the purpose of the disclosure obligation as the levelling of the playing field between the franchisor and franchisee by protecting the franchisee when it enters into a franchise agreement. [4] The Alberta Court of Appeal has used similar language to describe the statutory objectives of the Alberta Act in Hi Hotel Limited Partnership v. Holiday Hospitality Franchising Inc. [5]
[ 23 ] The obligation to provide a disclosure document is set out in s. 5 of the Ontario Act . It requires that a franchisor provide prospective franchisees with disclosure documentation. The prospective franchisee must receive it not less than 14 days before (i) the prospective franchisee signs a franchise agreement or any other agreement relating to the franchise, and (ii) the payment of any consideration by the prospective franchisee to the franchisor or an associate of the franchisor, relating to the particular franchise.
[ 24 ] Other stipulations relative to disclosure documentation are set out in s. 5 , including that it be delivered as one document, that it contain all material facts, including those prescribed by regulation, copies of financial statements as prescribed, copies of all proposed franchise agreements that a prospective franchisee will be requested to sign, certain statements as prescribed to assist a prospective franchisee to make an informed investment decision, and other information and copies of documentation as prescribed and set out in the regulations. The information is to be accurately clearly and concisely laid out. The franchisor must also promptly notify prospective franchisees of any material change relative to the franchise. Many of the preceding expressions are terms of art that are defined in an extensive definition section contained in s. 1(1) of the Ontario Act .
[ 25 ] The provisions of the Alberta Act are similar to those contained in the Ontario Act . In particular, they require a franchisor to provide a prospective franchisee with a copy of the franchisor’s disclosure document, a document that must contain copies of all franchise agreements. The provisions also stipulate that the failure of the franchisor to provide such documentation permits the franchisee to rescind all franchise agreements by the earlier of 60 days after receiving the disclosure document or two years after the franchise is granted. The Alberta Act also provides that any waiver by a franchisee of any of the rights granted to him by statute, or of the obligations imposed upon the franchisor by statute, is void by operation of law.
[ 26 ] There are several questions on this application arising out of the franchise-based contractual relationship established by the parties. The first is whether Grill It Up Restaurants Inc. met its disclosure obligations and the second is whether it satisfied the statutory disclosure information and content requirements as set out in the legislation and regulations.
[ 27 ] These are important questions because if Grill It Up failed to provide disclosure in accordance with the Ontario Act or the Alberta Act and the court grants the order of rescission sought by the applicant's, then Grill It Up Restaurants Inc. will have to return any money it received from the franchisees under the franchise agreements. In contrast, where there is merely a misrepresentation of a material fact, slightly less severe remedies are available to the franchisee, including a right to obtain damages under s. 7 for misrepresentation or a failure to disclose that gives rise to a loss.
[ 28 ] These are the statutory duties of disclosure, but as well, and importantly, the statutes deem prospective franchisees to have relied on the disclosure documentation that was provided. The policy objectives are key to this application. The legislature designed this legislation to ensure that franchisees that enter into franchise agreements know what they are getting into. It chose to achieve that goal by statutorily requiring franchisors, such as Grill It Up, to fully disclose all relevant operational and financial information that would assist a franchisee to make an informed decision on whether or not to enter into an agreement. Thus, the disclosure requirements must be viewed from that ‘consumer protection’ oriented perspective.
Issues
[ 29 ] The questions to be decided on this application include (i) whether disclosure was given by Grill It Up relative to the three franchise locations, (ii) whether that disclosure met the disclosure information and content requirements set out in the provisions of the Ontario Act and the Alberta Act , (iii) what quantum of damages arises from the alleged disclosure failures of Grill It Up, and (iv) whether correspondence from Grill It Up to the applicants after the franchises were cancelled but which purport to reflect terms of resolution between the parties, constitute new franchise agreements, which in turn required further updated disclosure.
[ 30 ] The answer to those questions will determine whether one or more of the applicants have the right to rescind one or more of their franchise agreements with Grill It Up under either or both of the Ontario Act and the Alberta Act. If it is found that Grill It Up failed to meet its disclosure obligations under those statutes, then it may be possible to quantify the damages that arise from that failure.
[ 31 ] I can only address the questions above if it is appropriate, as a procedural matter, that they be determined on an application brought under Rule 14. Rule 14.05 permits an application to be brought to determine the rights of a party under a statute or contract. However the question, in this case, then becomes which, if any, of these substantive questions can be determined on this application given the entirely divergent affidavit evidence on whether disclosure was made, or whether an action must be commenced and a trial held to determine those issues.
... (case text continues exactly as in source through paragraphs [32]–[85] and footnotes)
Michael G. Quigley J.
Released: November 22, 2012
COURT FILE NO.: CV-11-436187
DATE: 20121122
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
2219338 ONTARIO LTD., 2224143 ONTARIO INCORPORATED, 1480383 ALBERTA LTD. and 2119135 ONTARIO INC. Applicants – and – GRILL IT UP! RESTAURANTS INC., GRILL IT UP! HOLDINGS INC., GRILL IT UP! (VM) INC., GRILL IT UP! (BAY ADELAIDE) INC., GRILL IT UP! (FM) INC., GRILL IT UP! (FPM) INC. and PAUL A. FREDERICKS Respondents
REASONS FOR DECISION
Quigley J.
Released: November 22, 2012
[1] S.O. 2000, c.3, sections 3 , 5 , 6 , 7 , 10 and 11 .
[2] R.S.A. 2000, c. F-23, sections 9 and 13 .
[3] Beer v. Personal Service Coffee Corp., 2005 25180 (ON CA) , [2005] 200 O.A.C. 282 (Ont. C.A.), at para 28 ; 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd. , 2005 25181 (ON CA) , [2005] 201 O.A.C. 95 (Ont. C.A.) at paras. 12 and 19 .
[4] MDG Kingston Inc. v. MDG Computers Canada Inc. , 2008 ONCA 656 () , [2008] 92 O.R. (3d) 4 (C.A.) at para. 1 .
[5] 2008 ABCA 276 ; [2008] A.J. No. 892.
[6] [1991] O.J. No.1972 (Ont. Gen. Div.) at para. 6 .
[7] (1993), 22 C.P.C. (3d) 336 (Ont. Gen. Div.) at para. 37-40 .
[8] 1984 1930 (ON SC) , [1984] 46 O.R. (2d) 657 ( Gen. Div.).
[9] (1994), 1994 7555 (ON SC) , 31 C.P.C.(3d) 149 (Ont. Gen. Div.).
[10] 2009 ONCA 385 at paras. 36-45 ; 96 O.R. (3d) 291 .
[11] 2001 ABQB 143 ; (2001), 287 A.R. 151.
[12] 136 A.C.W.S. (3d) 649 (Ont. S.C.J.) .
[13] 2006 25276 (ON SC) , [2006] 150 A.C.W.S. (3d) 93 (Ont. S.C.J.).
[14] 2012 ONCA 381 ; [2012] O.J. No. 2521.