Hepburn v. AlarmForce, 2017 ONSC 6012
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Robert Hepburn and 1154300 Ontario Inc.
Plaintiffs
– and –
AlarmForce Industries Inc.
Defendant
COUNSEL:
Paul Bates and Michael Polvere, for the Plaintiffs
Randy C. Sutton and Michael Bookman, for the Defendant
HEARD: August 23, 2017
Raikes J.
1The plaintiffs move for partial summary judgment seeking the following declaratory relief:
a. A declaration that the plaintiffs were franchisees under the Franchise Agreement, within the meaning of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (hereafter the “AWA”), throughout the term of their dealings with the defendant.
b. A declaration that the defendant failed to provide the plaintiffs with a disclosure document as defined in and required by the AWA and that, as a result, the defendant failed to comply with the requirements of, and is in breach of, the AWA.
c. A declaration that the plaintiffs were entitled to be dealt with at all times fairly, in good faith, and in a commercially reasonable manner and that the defendant breached its duties of good faith, fair dealings and the standard of commercial reasonableness expected with and toward the plaintiffs throughout the duration of the business relationship between the parties as particularized in the Motion Record.
2The plaintiffs also seek directions for determination of the quantum of the monetary remedies to be awarded to the plaintiffs.
3The specific grounds enumerated in the notice of motion for the alleged failures/breaches are set out at paras. (g), (h), (i), (j) and (l).
4In their factum, the plaintiffs submit that there are no material facts in dispute and no genuine issue requiring a trial to determine the liability of the defendant franchisor. The plaintiffs indicate that the specific questions to be answered are:
a. Is the franchisor in breach of the AWA for failing to provide the franchisee a disclosure document as requested?
b. Is the franchisor in breach of the duty of fair dealing, either pursuant to the AWA or the Franchise Agreement?
5In their notice of motion, the plaintiffs assert at para. (l)(iv) and (v) that the defendant withheld products and services as well as support including advertising for the plaintiffs’ franchise territory to the detriment of the plaintiffs’ business and franchise, and failed to take steps to rectify those breaches although they were aware of same. Although the affidavit material filed on the motion provided some evidence in this regard, plaintiffs’ counsel advised in oral submissions that the plaintiffs do not rely upon that ground as it relates to the determination of the question in para. 4b above. Plaintiffs’ counsel indicated that the plaintiffs would address those issues as part of causation and quantification of damages at the next stage if summary judgment on liability is granted.
6I pause at this point to note that with respect to the declaration sought by the plaintiffs in para. 1a above, the defendant acknowledged in oral argument that the parties were in a franchisor / franchisee relationship from November 1995 until their relationship ended in December 2015. The defendant maintains that the AWA did not come into force until 2000, and the Act did not apply retrospectively to their franchise relationship between 1995 and 2000. I agree. There is nothing in the AWA which expressly makes the Act apply retrospectively.
Facts
Franchise Agreements
7On November 16, 1995, 1154300 Ontario Inc. and AlarmForce Industries Inc. entered into two agreements: a Franchise Agreement and a Franchise Amending Agreement. For ease of reference, I will refer to these parties as 115 and AlarmForce in these reasons.
8The Franchise Agreement granted 115 the right to operate an AlarmForce franchise in the territory located in southwestern Ontario comprised of Huron, Lambton, Middlesex, Elgin and Oxford counties. That territory was subsequently expanded by a Second Franchise Amending Agreement on August 12, 1997 to include Essex and Kent counties.
9The Franchise Agreement specified in section II.A that the term of the agreement and the right, franchise and license granted was for a period of 10 years commencing August 1, 1995 and ending July 31, 2005 unless terminated sooner in accordance with the terms of the Agreement.
10The Franchise Agreement gave 115 the right to renew the franchise agreement provided certain conditions had been satisfied. Section II.B stated:
Renewal. Following expiration of the initial term of this Agreement, Franchisee shall have the option to renew the franchise granted herein for an additional term of Ten (10) years, provided, all of the following conditions have been fulfilled:
II.B.1. Franchisee gives written notice of Franchisee’s intention to so renew no later than one hundred and twenty (120) days prior to the expiration of the term of this Agreement, provided this Agreement has not otherwise been terminated;
II.B.2. Franchisee is in full and satisfactory compliance with all of the material terms, conditions and obligations of this Agreement; and
II.B.3. Franchisee executes no later than ninety (90) days prior to the expiration of the term of this Agreement a renewal agreement in the form and on the terms and conditions then being offered to new franchisees (save as to any further right of renewal), and agrees to pay an amount equal to the greater of forty per cent (40%) of the Franchisor’s then current Initial Franchise Fee as defined in Section II or ten thousand dollars ($10,000); and
II.B.4. Franchisee, either in the year immediately preceding the expiration date of the renewal option hereby provided, or on an annual basis averaged over the last two (2) years preceding the expiration date of the renewal option hereby provided, has made monitoring connections for Alarmphone or other AlarmForce proprietary products in residential application of no less than One Hundred.
II.B.5. Franchisor and Franchisee acting in good faith agree on adjusted sales quotas for the renewal term.
11The Franchise Amending Agreement dated November 16, 1995 amends the Franchise Agreement to give 115 an additional ten-year term of renewal. Section II.B states:
London’s [115’s] right of renewal will extend to two (2) ten-year terms (for an aggregate term of 30 years) provided all of the conditions of renewal have been fulfilled.
12The Franchise Amending Agreement also states: “AlarmForce agrees to act fairly and in good faith in all dealings with London.”
13The plaintiffs paid the previous owner of the territory covered by the Franchise Agreement and paid $25,000 to AlarmForce for the franchise fee.
14The plaintiff, Robert Hepburn, deposed that he would not have purchased the franchise and entered into the Franchise Agreement without the second ten-year renewal that was negotiated in the Franchise Amending Agreement. The long-term commitment was important to Hepburn because it would take him to his planned retirement age (65).
15115 paid an additional $25,000 to AlarmForce in 1997 to increase the size of its territory pursuant to the Second Franchise Amending Agreement.
First Renewal
16By letter dated March 3, 2005, counsel for 115, Peter Dillon, sent a letter to the then President of AlarmForce, providing notice of 115’s intention to renew the franchise agreement and requesting a renewal agreement. In his letter, Dillon wrote:
As no renewal agreement has been forwarded to us for review, we anticipate receiving same in accordance with the terms of our client’s existing franchise agreement. We expect that such renewal agreement shall reflect material terms that are consistent with the franchise agreement under which the franchisee currently operates.
17The March 3, 2005 letter reiterated that 115 had one further renewal which could be exercised in 2015.
18There is no issue that the notice of intention to renew was made by 115 in a timely fashion.
19On March 8, 2005, Mr. Pizzonia, the Chief Financial Officer and Director of AlarmForce, wrote an email to Hepburn and Dillon advising that AlarmForce’s counsel, David Chong, would forward a copy of the Franchise Renewal Agreement “in due course”.
20In the meantime, 115 provided $10,000 in trust to Dillon to pay the renewal fee once the Renewal Agreement was completed.
21By July 14, 2005, neither the plaintiffs nor their counsel had received any Franchise Renewal Agreement from Chong. As a result, Dillon wrote to Chong asking whether he had received instructions “… to provide us with some form of renewal - either a new renewal agreement or an acknowledgement of the extension of the term of the current agreement”.
22Chong responded the next day. He advised that he would be preparing a renewal agreement and that he would get it to Dillon in the next two weeks. Despite that representation, no renewal agreement was provided to the plaintiffs or their lawyer until August 15, 2007, more than two years later.
23That Renewal Agreement was preceded by a telephone call from AlarmForce’s then President, Joel Matlin, on December 11, 2006 – eight months earlier. Matlin inquired whether 115 would entertain selling its business. Hepburn advised that he had no interest in selling; that he had insisted on the two ten-year renewals so that it would be thirty years in business to take him to age sixty-five. Hepburn reminded Matlin that he was still waiting for the draft Renewal Agreement and Matlin promised to find out what was happening with his contract.
24There is no explanation provided by AlarmForce for the failure to provide the Renewal Agreement in a timely fashion in 2005. There is no evidence to explain the more than two year delay. I note that the Franchise Agreement expressly made time of the essence at section XV.L.
25In any event, 115 continued to operate the franchise business between 2005 and receipt of the Renewal Agreement on August 15, 2007
Renewal Agreement Terms
26The plaintiffs provided a schedule by way of answer to an undertaking given on Hepburn’s cross-examination which details what the plaintiffs contend are the “material changes” between the terms in the earlier Franchise Agreements under which the plaintiffs had been operating and the Renewal Agreement. Those changes are set out at para. 55 of the plaintiffs’ factum on this motion. Briefly, the changes are:
a. the obligation on AlarmForce to act fairly and in good faith in all dealings with 115 is omitted;
b. the franchise fee payable for the second ten-year renewal was increased to $50,000;
c. 115’s annual net additional monitoring accounts in residential applications were increased;
d. if 115 failed to meet the higher monitoring accounts quota, 115 could cure its default by payment of an amount calculated according to a formula, and if it failed to do so, AlarmForce could terminate the agreement;
e. 115 was required to attend training programs and all expenses incurred by 115 or its personnel in attending the sessions were to be borne and paid for by 115;
f. the response time for customer service and public inquiries was reduced from 48 hours to 24 hours;
g. business operating hours were specified, including Saturdays; and
h. 115 was required to pledge and grant to AlarmForce a continuing security interest in its present and future personal property.
27With respect to these changes, I note:
a. The AWA came into force on July 1, 2000. All parties acknowledge that the Act applied to the renewal.
b. Section 3(1) of the AWA in 2005 – 2007 provides that every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement. Subsection 3(3) clarifies that the duty of fair dealing includes the duty to act in good faith and in accordance with reasonable commercial standards.
c. The Franchise Agreement and Franchising Amending Agreement are silent with respect to the renewal fee for the second ten-year renewal. As indicated above, the renewal provisions in the Franchise Agreement specified that the amount payable on renewal was the greater of 40% of the Franchisor’s then current initial franchise fee or $10,000.
d. The Franchise Amending Agreement specified at section I.B that 115 would make 50 monitoring connections in years 1 to 5, and the parties would agree on an adjusted monitoring connection quota for years 6 to 10. There is no evidence as to the quotas agreed upon for years 6 to 10. The number of connections required for years 1 to 5 is half that specified in section I.B. of the Franchise Agreement.
e. In any event, section II.B.5. of the Franchise Agreement required the parties on renewal to negotiate an agreement on adjusted sales quotas for the renewal term, and in doing so, both were to act in good faith.
f. The net additional monitoring accounts required of 115 during the term of the Renewal Agreement start in year 11 at 217 and steadily increase to 487 by year 20, the last year of the first renewal term.
g. The requirement of annual monitoring connections in section I.B. of the Franchise Agreement is found in the provision dealing with territorial rights; specifically, AlarmForce covenants not to grant to anyone else the right or license to use its names, marks, methods or systems in the operation of a retail residential security alarm sales and service business in 115’s geographic area so long as 115 was in full compliance with the Agreement. Achievement of the annual quota simply ensures exclusivity of operation in the territory granted.
h. By contrast, in the Renewal Agreement, the annual monitoring connection quotas are not in the section on exclusivity of territory and, as above, are subject to an obligation to pay or be terminated.
i. Neither the Franchise Agreement nor the Franchise Amending Agreement require 115 to provide a security interest in the personal property.
j. The Franchise Agreement contemplates initial training but does not address ongoing the training by AlarmForce of 115’s personnel. The travel and living expenses for the initial training was to be borne by 115.
Correspondence Between Counsel
28Following receipt of the Renewal Agreement, Dillon wrote the following in an email to Chong on September 11, 2007:
If we are just renewing the old agreement without a change in its terms, that’s one thing. Our initial position is that we are not required to sign a new form of agreement. If your position is that we are, then, without admitting our requirement to do so, we’ll need to see your Disclosure Document under the Wishart Act.
29Chong responded on September 12, 2007. He pointed out that 115 was required by section II.B.3. of the Franchise Agreement to sign the current franchise agreement then in use. He also indicated that there was no obligation to provide a Disclosure Document for this renewal.
30Dillon responded to Chong’s email and took the position that AlarmForce was not entitled to an exemption from delivery of a Disclosure Document under s. 5(7)(f) of the AWA because the renewal agreement was “a new form of agreement” and significant material changes had occurred since the Franchise Agreement was entered into.
31It is undisputed that no Disclosure Document was ever provided to the plaintiffs and 115 never signed the Renewal Agreement or any renewal agreement. The parties were at a stand-off.
32No negotiations took place to resolve this impasse.
33115 continued to operate its franchise as before and AlarmForce continued to act as Franchisor.
34AlarmForce’s President, Matlin, called Hepburn on October 4, 2011. Matlin offered to purchase 115’s territory. 115 declined to sell.
Fall of 2014
35In the Fall of 2014, Hepburn received a telephone call from Pizzonia’s assistant for the purpose of arranging a conference call. Pizzonia was by this point the President, CEO and Director of AlarmForce. Hepburn was told that the purpose of the intended conference call was to discuss the wind-up of his franchise in July, 2015. I note that that date would correspond with the expiry of the first ten-year renewal term.
36On November 12, 2014, Hepburn and Dillon participated in a conference call with Pizzonia and Chetna Kapadia, then the Chief Financial Officer at AlarmForce. Pizzonia indicated that because the Franchise Agreements were due to expire in July, 2015, AlarmForce wanted to discuss Hepburn’s orderly transition out of the business.
37Hepburn advised Pizzonia that 115 was still awaiting theRenewal Agreement for the first of the two ten-year renewals pursuant to the Franchise Amending Agreement, and he was waiting for AlarmForce to comply with its disclosure requirements under the AWA.
38The conference call was briefly adjourned so that AlarmForce could confirm the information provided by Hepburn. According to Hepburn, when the phone call resumed, Pizzonia confirmed that Hepburn and Dillon were correct and he immediately inquired whether 115 would be “interested in selling”. Hepburn advised that he was not interested in selling.
39During their discussion, Pizzonia reiterated AlarmForce’s position that it did not have to provide 115 with a Disclosure Document. He also indicated that AlarmForce did not want to provide 115 with a Disclosure Document because it did not want to pay to produce one. Pizzonia offered to waive the $10,000 renewal fee if 115 would waive provision of a Disclosure Document.
Notice of Termination
40On December 2, 2014, counsel for AlarmForce wrote to Dillon to provide notice of termination of the business relationship between 115 and AlarmForce effective December 31, 2015. Ms. Kilby wrote:
…As you are aware the term of the Agreement was ten years, expiring on July 31, 2005. Based on our client’s records, the Agreement was not renewed in accordance with its terms. In particular, to be eligible for a renewal option, 1154300 Ontario Inc. was required to meet certain conditions set out in Article II.B of the Agreement. These conditions were not fulfilled and no renewal agreement was executed.
Accordingly, because the fixed term Agreement expired on July 31, 2005, and no renewal agreement was executed, as of July 31, 2005, the parties continued in a month-to-month business relationship which at law can be terminated by AlarmForce on reasonable notice.
In the circumstances, and given the changes at AlarmForce we hereby provide notice that the relationship between 1154300 Ontario Inc. and AlarmForce is being terminated on notice with effect on December 31, 2015, and you should consider this letter formal notice of termination of the business relationship with AlarmForce effective December 31, 2015.
41Dillon responded by letter dated January 14, 2015. In that letter, Dillon wrote:
…In the circumstances, we are of the view that what was created was an indefinite holding over arrangement pursuant to which all of the respective rights and obligations of each party continued indefinitely. My client’s right to exercise its first (and second) right of renewal was in effect suspended, and remains suspended, until your client complies with its obligations under the Wishart Act.
Your client cannot escape its statutory obligations by burying its head in the sand and refusing to comply with the Wishart Act prior to negotiating an acceptable form of renewal agreement (or simply renewing the term using the existing form of agreement). The law with respect to a franchisor’s obligation to provide disclosure at the time of renewal is, as you know, quite clearly established. Mr. Pizzonia’s statement, in our November 12, 2014 conference call, that Alarmforce [sic] did not want to spend the money to create a compliant disclosure document, is not a valid basis for non-compliance.
Accordingly, once our client is in receipt of your client’s disclosure document, we will review the disclosure and renewal franchise agreement, negotiate its terms, pay the renewal fee, and commence my client’s initial 10 year renewal term.
Should your client be unwilling to satisfy its obligations under the Wishart Act, we would view this not only as a breach of its statutory obligations, but as a breach of its duty of fair dealing to our client. Accordingly, we will seek instructions for the commencement of proceedings in London to enforce our clients renewal rights under the Franchise Agreement.
As for the offer of compensation in consideration of early termination of the franchise agreement, please know that your client has made several offers to purchase back my clients franchise rights. My client intends to operate his franchise for the full 20 years he is currently entitled to, and accordingly, his business is not for sale.
42On March 31, 2015, Hepburn wrote Pizzonia. He reminded Pizzonia of their November 12, 2014 telephone call and the information imparted by Pizzonia that AlarmForce had looked into the price to comply and produce the documentation required under the Wishart Act, and decided not to have that documentation prepared. He further wrote:
Our position has not changed since 2005. We have been and continue to work under the original contract with AlarmForce. We expect AlarmForce to comply with Ontario’s Arthur Wishart Act and to respect our renewal rights as set out in our agreement with AlarmForce.
We intend to proceed with our renewal rights on a commercially fair and reasonable basis including fair remuneration for us and enable us to provide all current products and services to all customers of AlarmForce in Southern Ontario.
43The plaintiffs received no reply to Hepburn’s letter of March 31, 2015.
44Hepburn wrote again on July 13, 2015, this time to the new President and CEO of AlarmForce, Graham Badun. He referred to his letter of March 31, 2015 above and the lack of any response. He wrote:
We appreciate that you would like to find a timely resolution to a situation that was not of your making. We will do our best to work with you, keeping in mind that our company has done nothing against AlarmForce, has forgone considerable revenue over the past twenty (20) years and has the right to Southern Ontario for the next twenty (20) years.
45This letter also went unanswered.
46On November 11, 2015, Hepburn wrote Badun again. He continued to assert that 115 could not sign a renewal agreement until AlarmForce fully complied with the AWA. In the first paragraph of that letter, he indicated: “We have continued to work on a month to month, year to year basis servicing AlarmForce’s customers in Southwestern Ontario under the terms of the original contract.”
47On November 17, 2015, Dillon wrote to counsel for AlarmForce acknowledging the “early” termination of the Franchise Agreements and advised that that termination was under extreme protest. He reserved all rights of action against AlarmForce for breach of its obligations as franchisor.
48115 ceased operation of the franchise on December 15, 2015.
49This action was commenced by statement of claim issued April 21, 2016. The pleadings are complete. The plaintiffs claim damages of $17 million in addition to punitive, aggravated and exemplary damages in the amount of $1 million.
Defendant’s Evidence on Motion
50In response to the present motion, the defendant has filed an affidavit of Graham Badun sworn February 6, 2017, which attaches various documents that he or someone at the defendant brought to his attention. Mr. Badun joined AlarmForce in May, 2015. Thus, he has no first-hand knowledge of the events and communications that occurred before he joined AlarmForce.
51Curiously, the defendant did not file any affidavit evidence from those who were involved in its prior dealings with the plaintiffs. There is no affidavit from any of Matlin, Chong or Pizzonia. Mr. Badun’s affidavit contains no reference to information obtained from any of those individuals and, in cross-examination, he indicated that he did not consult with Chong or former AlarmForce employees.
52During oral argument, I specifically asked whether the Renewal Agreement provided by Chong in August 2007 was the same as or consistent with the “then current” form of Franchise agreement being offered to new franchisees in 2005 or 2007. Was there a difference? Counsel for AlarmForce candidly advised that they did not know but believed that the Renewal Agreement was in the form of franchise agreements then being offered to 2007 prospective franchisees. Of course, I do not have evidence from Chong as to whether there was a form of 2005 franchise agreement or 2007 franchise agreement, or whether the 2007 Renewal Agreement was something prepared by him especially for this transaction.
53Badun deposed at paras. 15 and 16 of his affidavit:
Pizzonia is no longer employed by AlarmForce and Chong is no longer AlarmForce’s lawyer. Accordingly, I am not aware of the reasons why Chong only provided the Renewal Agreement in August 2007, or whether the Plaintiffs ever followed up to advance this process.
To date we have not located any correspondence relevant to this question between July 2005 and August 2007. In any event, a renewal agreement in the “form currently being offered to franchisees” was provided to Hepburn in August 2007, pursuant to Provision II.B.3 of the Franchise Agreement.
54Badun provides no source of information for his statement that the Renewal Agreement provided in August 2007 was in the “form currently being offered to franchisees”. The defendant’s motion materials contain no other franchise agreements from 2005 or 2007 as a comparator. Badun does not say that he has compared the Renewal Agreement to franchise agreements from 2005 or 2007 and the terms are the same. If the statement in paragraph 16 of his affidavit is intended to reflect his belief, it is a bald statement without source or foundation.
Change in Business Model
55In his affidavit sworn September 7, 2016, Hepburn deposed that he believes that AlarmForce’s refusal to provide Disclosure Documents, their offers to buy him out of the franchise, and their refusal to renew his Franchise Agreement was connected to AlarmForce’s internal decision to shift from a franchise business model to one of direct corporate operations. This gradual shift began soon after he signed his Agreements in 1995. By 2005, when he was trying to renew, that movement to corporate and head office serviced territories was clear. That is why there were few, if any renewals, or new franchises sold.
56Hepburn also deposed that his franchise territory did not get the same level of advertising, corporate support or product opportunities as corporate territories did. AlarmForce effectively reduced the profitability of franchise territories to make buy-out more likely and, one might conclude, less expensive.
57As indicated at para. 5 above, the plaintiffs do not rely on this alleged lack of support to establish a breach of the duty of fair dealing under the provisions of the AWA on this motion. However, I avert to this evidence because it may be relevant to whether there was an obligation to provide Disclosure Documents at all as part of the renewal in 2005.
58In his responding affidavit, Badun acknowledged that its current business model “is less centered on the franchise model than it once was” (para. 68). Despite this change, he indicates that this “transition away from the franchise model did not impact AlarmForce’s treatment of existing franchisees.”
59Badun deposed that AlarmForce did not change its business model until January 2011 when, at that time, it decided not to enter into new franchise agreements. This change is confirmed in its January 25, 2011 Annual Information Form which it issued as required of a publicly traded company. He pointed out that new franchise agreements were signed for franchise territories in various parts of Canada in 1998, 1999, 2001, 2003 and 2005. The 2005 agreement was for the greater Victoria area.
60I observe parenthetically that the 2005 Victoria franchise agreement was not one of the exhibits to his affidavit. That agreement might have shed some light on whether the 2007 Renewal Agreement was indeed consistent with the franchise agreements in play in 2005 when the 115 Franchise Agreements were supposed to renew.
61In cross-examination, Badun testified that AlarmForce was in the process of diminishing the franchise distribution channel in favour of a direct consumer marketing model – a corporate operated business, for many years.
62Badun deposed that to the best of his knowledge, the nature of AlarmForce’s business did not change between 1995 and 2005. Further, the information that one would find in a Disclosure Statement was available to 115 in 2005 and 2007 through public documents available on SEDAR, the notices 115 regularly received from AlarmForce about new products and services offered, and the terms of the Renewal Agreement provided by Chong.
63In his Reply affidavit, Hepburn deposed at paras. 55-59;
With respect to paragraphs 67 – 74 of the Badun Affidavit, whereby the Franchisor claims that its business model did not change, I can advise that that is simply not the case. Firstly, it was a common practice of the Franchisor that after the first 10 year or subsequent renewal period, if the franchisee did not renew, and the territory was profitable, the Franchisor would consider not offer [sic] the territory up for sale, but would attempt to absorb into the Franchisor territory by having it become a Franchisor territory.
Secondly, by way of example of the above, I have become aware, since the premature termination of my Franchise Agreement and Amendments, post December 15, 2015, that since my territory was absorbed by the Franchisor, there has been a significant increase in advertising and promotion in the AFWO area. That type of support, products and services, was never available in my Territory while I was servicing it as a Franchisee.
Thirdly, I can advise that by 2005, contrary to any assertion of the Franchisor, only 16% of AlarmForce subscribers were in territories serviced by franchisees. The vast majority – 84% – were Franchisor/Head Office customers. There was a clear shift by this time to push out franchisees. Attached hereto and marked as Exhibit “P” is a copy of a portion of the AlarmForce 2005 Annual Information Form which illustrates this percentage.
In fact, the last new franchise to enter the AlarmForce Franchise system or the last franchisee to renew an existing Franchise Agreement and Amendments was in 2005.
The material changes in the practice and business model of AlarmForce were evident to all franchisees over the last 15 or so years. It also became clear that the Franchisor was not enthused that it had AWA obligations to franchisees. [bold in original]
64Many of the assertions of fact made by Hepburn above suffer from the same shortcoming referenced in my observations of Badun’s affidavit; they are made without reference to any source or basis for the statement.
Law – Summary Judgment
65The law applicable on a summary judgment motion is well-established at this point. Perhaps that is why the plaintiffs made no more than passing reference to it in either written or oral submissions. The defendant at least provided some submissions, although they were far from fulsome. Therefore, I take the liberty to state the law on summary judgment motions including reference to several leading cases not cited or put before me.
66Summary judgment motions are governed by r. 20.04 which states:
(2) The court shall grant summary judgment if,
(a) the court is satisfied that there is no genuine issue requiring a trial with respect to a claim or defence;…
(2.1) In determining under clause (2) (a) whether there is a genuine issue requiring a trial, the court shall consider the evidence submitted by the parties and, if the determination is being made by a judge, the judge may exercise any of the following powers for the purpose, unless it is in the interest of justice for such powers to be exercised only at a trial:
Weighing the evidence
Evaluating the credibility of a deponent
Drawing any reasonable inference from the evidence.
(2.2) A judge may, for the purposes of exercising any of the powers set out in subrule (2.1), order that oral evidence be presented by one or more parties, with or without time limits on its presentation.
67The leading case on summary judgment is Hryniak v. Mauldin, 2014 SCC 7. At para. 66, Karakatsanis J. for the court wrote:
On the motion for summary judgment under Rule 20.04, the judge should first determine if there is a genuine issue requiring trial based only on the evidence before her, without using the new fact-finding powers. There will be no genuine issue requiring a trial if the summary judgment process provides her with the evidence required to fairly and justly adjudicate the dispute and is a timely, affordable and proportionate procedure, under Rule 20.04(2)(a). If there appears to be a genuine issue requiring a trial, she should then determine if the need for a trial can be avoided by using the new powers under Rules 20.04(2.1) and (2.2). She may, at her discretion, use those powers, provided that their use is not against the interest of justice. Their use will not be against the interest of justice if they will lead to a fair and just result and will serve the goals of timeliness, affordability and proportionality in light of the litigation as a whole.
68Thus, the judge hearing the summary judgment motion must ask:
On the basis of the evidentiary record alone, are there genuine issues that require a trial?
Does the evidentiary record provide the evidence needed to “fairly and justly adjudicate the dispute”?
69In Hryniak, the test for summary judgment was stated at para. 49 as follows:
There will be no genuine issue requiring a trial when the judge is able to reach a fair and just determination on the merits on a motion for summary judgment. This will be the case when the process (1) allows the judge to make the necessary findings of fact, (2) allows the judge to apply the law to the facts, and (3) is a proportionate, more expeditious and less expensive means to achieve a just result.
70The onus of establishing that there is no genuine issue requiring a trial rests on the moving party. Where the moving party establishes that there is no genuine issue requiring a trial, the onus shifts to the responding party to establish that there is a genuine issue requiring a trial: Sweda Farms Ltd. v. L.H. Gray & Son Ltd., 2014 CarswellOnt 11926 (ON CA) at para. 26; New Solutions Extrusion Corp. v. Gauthier, 2010 ONSC CarswellOnt 913 at para. 12; Bhakhri v. Valentim, 2012 ONSC 2817 at para. 7.
71A responding party must set out in affidavit material or other evidence the specific facts that establish that there is a genuine issue requiring a trial. The responding party cannot rest on mere denials of allegations of a party’s pleading: Sweda, para. 27 (See also John Deere Financial Inc. v. 1232291 Ontario Inc. (c.o.b. Northern Haul Contracting), [2015] O.J. No. 6503 (S.C.J.) at para14; O’Laughlin v. Byers, [2014] O.J. No. 4221 (S.C.J.) at para. 40, upheld [2015] O.J. No. 1559 (C.A.). It is not enough to allude to evidence that may be adduced in the future.
72The judge hearing the motion must:
Determine the motion on the pleadings and evidence actually before the court on the motion. The judge is entitled to assume that the record contains all the evidence that would be adduced at trial; and
Take a hard look at the evidence and the merits of the action at this preliminary stage: Sweda, paras. 26-28.
73Where a party seeks partial summary judgment, the motion judge must assess the advisability of the summary judgment process in the context of the litigation as a whole: Baywood Homes Partnership v. Haditaghi, 2014 ONCA 450 at paras. 35. The motion judge must consider whether the factual findings necessary to determine the motion are so intertwined with the remaining issues that those determinations on the motion risk inconsistent findings later and substantive injustice: Baywood Homes Partnership, para. 37. Given what remains to be determined, it may be more fair, efficient and just for those findings to be made once in the context of the trial.
Law – Duty to Disclose Under AWA
74By contrast to the submissions made regarding the law on summary judgment, both parties were full measure for their submissions as they relate to whether there was a statutory obligation under the AWA to provide a disclosure document to 115 in 2007.
75The AWA came into force July 2000. The purpose of the legislation is to protect franchisees through the imposition of rigorous disclosure requirements and strict penalties for non-compliance: 1159607 Ontario Inc. v. Country Style Food Services Inc., 2012 CarswellOnt 2382 (S.C.J.) at para. 71 citing Beer v. Personal Service Coffee Corp., 2005 CarswellOnt 3099. The legislation must be considered and interpreted in light of this purpose: 6792341 Canada Inc. v. Dollar It Ltd., 2009 ONCA 385 at para. 72.
76The AWA applies to both an initial franchise agreement entered into after the Act came into a force and to “a renewal or extension of a franchise agreement entered into before or after the coming into force of this section, and with respect to a business operated under such an agreement, renewal or extension.”: AWA, s. 2(1). Neither party contended that the Act did not apply to the franchise relationship between the parties in 2005 – 2007; rather, they diverged on its application.
77A franchisor’s obligation to disclose is found in section 5(1) of the AWA which states:
- (1) A franchisor shall provide a prospective franchisee with a disclosure document and the prospective franchisee shall receive the disclosure document not less than 14 days before the earlier of,
(a) the signing by the prospective franchisee of the franchise agreement or any other agreement relating to the franchise; and
(b) the payment of any consideration by or on behalf of the prospective franchisee to the franchisor or franchisor’s associate relating to the franchise.
78Section 5(4) details the contents of the disclosure document. It provides:
(4) 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 as prescribed.
79The information provided to the franchisee must be accurate, clear and concise: s. 5(6). That applies equally to any written statement of material change the franchisor is required to provide pursuant to s. 5(5) which must be provided as soon as practicable and before the earlier of the signing of the franchise agreement or “any other agreement relating to the franchise” or the payment of any consideration by the franchisee relating to the franchise.
80Both “material change” and “material fact” are defined terms in s. 1(1) of the Act. A “material change” is defined as:
…means a change in the business, operations, capital or control of the franchisor or franchisor’s associate, a change in the franchise system or a prescribed change, that would reasonably be expected to have a significant adverse effect on the value or price of the franchise to be granted or on the decision to acquire the franchise and includes a decision to implement such a change by the board of directors of the franchisor or franchisor’s associate or by senior management of the franchisor or franchisor’s associate who believe that confirmation of the decision by the board of directors is probable”
81A “material fact” is defined as:
…includes 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.
82These definitions are significant because s. 5(7)(f) exempts a franchisor from the obligation to provide disclosure. That section states:
(7) This section does not apply to,
(f) the renewal or extension of a franchise agreement where there has been no interruption in the operation of the business operated by the franchisee under the franchise agreement and there has been no material change since the franchise agreement or latest renewal or extension of the franchise agreement was entered into. [Emphasis added]
83Therefore, a franchisor is obligated to provide a disclosure document containing “material facts” and to provide a written statement of a “material change” unless the franchisor can fit within one of the exemptions in s. 5(7). In the case of a renewal, there are two pre-conditions that must be met to fit within the exemption:
No interruption in the operation of the franchisee’s business under the franchise agreement; and
No material change since the franchise agreement or last renewal was entered into.
84In 1490664 Ontario Limited v. Dig This Garden Retailers Ltd. (2005), 2005 25181 (ON CA), 256 D.L.R. (4th) 451 (ON CA), Justice Horkins explained the rationale and import of the disclosure requirement at para. 18:
…The requirement that disclosure occurred in the form of a single document is not an empty formal requirement. The legislature clearly envisioned that the purpose of the legislation – i.e., ensuring that a decision to enter into a franchise agreement is an informed one – would best be fulfilled by giving prospective franchisees the opportunity to review a single document or documents, so that all the information is before them at the same time. It is simple common sense that people have more difficulty processing and assessing information given at different times, some of it orally, then they do information provided in a single, written document.
85The AWA provides a franchisee with remedies for non-compliance with the disclosure obligations under the Act including in the event of non-disclosure, late disclosure and misrepresentation in the disclosure provided. These remedies are found in sections 6 and 7. Any purported waiver or release by a franchisee of a right under the Act or of an obligation or requirement imposed on a franchisor under the Act is void: s. 11.
86For clarity, all references in this decision to the provisions and wording of the AWA are to the Act in force between July1, 2005 and December 14, 2009.
Analysis
87As mentioned at the outset, the plaintiffs seek declaratory relief on this partial summary judgment motion. It is undisputed by the defendant that the plaintiffs were franchisees throughout the term of their dealings with the defendant. It is also undisputed by the defendant that upon the AWA coming into force in 2000, the plaintiffs were franchisees under the Franchise Agreements within the meaning of the AWA from that point to the end of their relationship. Thus, with that clarification, the factual finding which underlies the declaration sought in para 1a above is admitted by the defendant.
88I turn to the balance of the relief sought on this motion; specifically, whether I am in a position where I can fairly and justly adjudicate the issues on the evidentiary record before me- viz., the issues raised can be determined at this stage and do not require a trial. I am mindful that I may assume that each party has put its best evidentiary foot forward on the motion.
89The plaintiffs argue that the defendant failed to provide a renewal agreement in a timely fashion as required by the Franchise Agreement, eventually provided a Renewal Agreement containing material changes to the contractual relationship, and failed to provide a disclosure document which it was required to provide under the AWA. With respect to the latter contention, the plaintiffs submit that the material changes to the contractual relationship evidenced by the terms of the Renewal Agreement on their own, or in conjunction with the defendant’s shift away from a franchise service delivery model and lack of support of his franchise, is a material change.
90The plaintiffs also argue that the defendant breached its duty of good faith and fair dealing under the Franchise Amending Agreement and/or s. 3 of the AWA. I note that the declaration sought in para 1c above is extremely broad – “as particularized in the Motion Record”. The Motion Record addresses acts and omissions of the defendant during the course of their business relationship that go well beyond the terms of the Renewal Agreement.
91With respect to the declaration sought in para 1b above, there is no dispute that the defendant did not provide the plaintiffs with a disclosure document as defined in the AWA. The issue is whether the defendant was required to do so. If it was required to do so, the defendant clearly breached its obligation under section 5 of the AWA.
92The critical issue is, therefore, was the defendant required to provide a disclosure document to the plaintiffs in 2007 or was the defendant exempted from having to do so by s. 5(7)(f). I do not agree that that issue can be or should be determined solely by examining the differences between the terms found in the Renewal Agreement and those in the Franchise Agreements that governed the parties’ relationship during the initial term.
93First, the renewal conditions in the Franchise Agreement required 115 to execute “a renewal agreement in the form and on the terms and conditions then being offered to new franchisees”. The starting point for the analysis of this issue is whether the Renewal Agreement provided by Chong in August 2007 was in the form and on the terms and conditions then being offered to new franchisees in 2005, when the initial term of the franchise relationship expired. Mr. Badun’s bald statement is wholly inadequate. By the same token, there is no evidence by the plaintiffs that the Renewal Agreement provided by Chong was, in fact, not on the same terms and conditions.
94The affidavit of Mr. Badun refers to a 2005 franchise agreement for the greater Victoria territory. Neither party touched on the terms and conditions in that agreement in their written or oral submissions for the purpose of demonstrating consistency or inconsistency with the renewal terms.
95Second, the plaintiffs contend that the terms of the Renewal Agreement are materially different from the terms of the Franchise Agreements. They argue that those changes per se constitute a material change under the AWA. It seems to me, however, that the materiality of the changes cannot be looked at in isolation. They must be considered in the context of the surrounding circumstances.
96The plaintiffs assert that soon after 115 entered into the 1995 and 1997 agreements, the defendant changed course; the defendant moved away from a franchise based customer service delivery model to a corporate focused service delivery model. This change was manifest in the level of support, advertising and even the range of products available to the plaintiff. If that is so, the increase in the annual additional monitoring accounts in the Renewal Agreement takes on a different perspective. The addition of the clause permitting the defendant to terminate the agreement if 115 fails to achieve its quota and does not pay may have a greater import or materiality.
97The defendant acknowledges that by at least 2011, the defendant had made the decision to pursue a corporate service model. When was that decision made? Was the defendant, by its actions, already moving in that direction earlier? Was that evident in 2005 – 2007? This information is part of the factual context in which the Renewal Agreement must be considered. The materiality of the changes to the terms of the franchise arrangement may be perceived differently in an environment where the franchise program is active and growing versus an environment where the franchisor is freezing franchise expansion with a view to eventually getting out of the franchise business altogether.
98The decision to refocus to an emphasis on corporate expansion over franchise operations may, of itself, be a material change which would require a disclosure document or statement of material change.
99Third, 115 asserts that the defendant failed to properly support its franchise territory regardless whether that was because of the change in corporate direction. Again, whether that is the case seems to me relevant to the surrounding circumstances and the question of of the materiality of the Renewal Agreement terms. If, as the plaintiffs allege, the defendant franchisor was not providing proper support and was, in effect, undermining 115’s ability to generate new accounts, the provisions that substantially increase the number of new accounts that have to be signed, the obligation to pay or be terminated, and the granting of a security interest take on a different hue.
100In short, it is my view that the determination of whether the defendant owed an obligation to provide a disclosure document under the AWA is best determined in the context of a trial where these various factual findings and related issues can be determined.
101I am mindful of the admonition of the Court of Appeal in Baywood Homes Partnersship that I must consider how the determination of the issue on a summary judgment motion fits with the overall litigation. If I were to find, for example, that the terms of the Renewal Agreement on their own do not constitute a material change, the plaintiffs would still have the opportunity at trial to argue that in the context of the surrounding circumstances in 2005 – 2007 that I have outlined above, those terms do constitute a material change. Would my decision at this stage give rise to the risk of inconsistent findings? It might.
102With respect to the declaration sought in para 1c above, I am satisfied that there is a genuine issue requiring a trial. The declaratory relief sought is overbroad. The grounds set out in the notice of motion are inextricably intertwined with the findings necessary for the determination as to whether there is an obligation to disclose. It may be that at trial, the court could find a breach of the duty of good faith and fair dealing but no duty to provide a disclosure document. However, those findings are best made at a trial.
103In addition, the defendant has raised limitation defences with respect to its alleged breach of its obligation to disclose and/or breach of the duty of fair dealing and good faith. It also argues that the remedies available to the plaintiffs for any failure to disclose or breach of the duty of fair dealing, which it denies, are quite limited under the AWA assuming those remedies are available at all. Those issues are likewise factually intertwined with the issues raised by the plaintiffs on this motion.
104In summary, I am not satisfied that I can fairly and justly adjudicate the issues raised by the plaintiffs at this stage on the evidentiary record before me. I find that there are genuine issues requiring a trial and I am not satisfied that the use of the additional powers available to me under r. 20.04 (2.1) would permit me to adjudicate these issues fairly.
105I have set out in some detail the facts and some of the applicable law as it relates to the disclosure obligations under the AWA. My purpose in doing so is to provide context for the analysis immediately preceding, but also to provide what I hope will be helpful to the parties and the court if and when this matter goes to trial.
Conclusion
106I conclude as follows:
a. The plaintiffs’ motion for summary judgment is dismissed.
b. If the parties cannot agree on costs, they may make written submissions not exceeding 3 pages within 15 days.
“Justice R. Raikes”
Justice R. Raikes
Released: October 6, 2017
CITATION: Hepburn v. AlarmForce, 2017 ONSC 6012
COURT FILE NO.: 1052/16
DATE: 20171006
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Robert Hepburn and 1154300 Ontario Inc.
Plaintiffs
– and –
AlarmForce Industries Inc.
Defendant
REASONS FOR JUDGMENT
Raikes, J.
Released: October 6, 2017