Ontario Franchise Legislation – Tough Times for Franchisors

As any Ontario franchisor will tell you, the last few years have not been a walk in the park for owners of franchise systems. The current legislation in Ontario, known as the Arthur Wishart Act (Franchise Disclosure), 2000, has very strict rules about the type of disclosure that a franchisor (one who grants a franchise) must make to a perspective franchisee (one who is granted a franchise).  While that is fair and understandable, the Act also contains provisions which impose a significant penalty or disadvantage on a franchisor for even the most technical violation.

As an example, if the disclosure material contains the slightest deficiency, a franchisee can operate its business for up to two years before deciding whether or not to terminate the franchise agreement.

If the franchisee decides to terminate on that basis, it is entitled to receive back from the franchisor all of the money paid to the franchisor for the franchise rights including any money paid for equipment purchased for use in the business. Obviously, that equipment has to be returned.

The recent case of 2189205 Ontario Inc. v. Springdale Pizza Depot Limited deals with the question of the franchisor’s obligation to re-purchase equipment when the equipment itself is in poor condition.

In this case, the franchisor was ordered to pay compensation to the franchisee in a substantial amount for certain supplies and equipment payable upon the return of that equipment.

The franchisee had kept almost all of these items in storage in a barn in rural Ontario since 2009. It was now prepared to deliver this material to the franchisor in exchange for payment.

The franchisor argued that the franchisee was “unable” to return the supplies and equipment because of their poor condition given that they had been in storage for almost five years. The franchisor argued that the poor condition was at least partially as a result of what it alleged was improper removal and storage by the franchisee.

The Court ruled in favour of the franchisee. It determined that under the legislation, equipment has to be repurchased regardless of its condition. The Court considered that the legislation is remedial in nature and contains no duty on a franchisee to mitigate its damages. As a franchisee is entitled to be made whole, and as there was no evidence in this case of any deliberate acts of damage to the equipment by the franchisee, it was entitled to repayment of the entire purchase price. Its condition was irrelevant.

The legislation is indeed remedial in nature. It came into force as a result of an enormous amount of abuse heaped on unwitting and vulnerable franchisees by unscrupulous franchisors. However, cases like this must make one wonder as to whether or not the legislation simply goes too far.

The Latest on the Duty of Good Faith Between Contracting Parties

The recent case of Ashbury Cleaners v. Crisolago Holdings may make the murky world of the law concerning the duty of good faith between contracting parties even murkier.

In this case, the Judge described the action as a claim “for damages for breach of contract and bad faith.”  The Judge went on to say that “in order to be successful, the plaintiff must prove on the balance of probabilities that the defendant was acting in bad faith in deceiving the plaintiff of its stated intention.”

The law is very clear: there is no independent duty of good faith upon which one can sue for breach.  Parties are obliged to act in good faith towards each other in the implementation of a contract but one cannot sue for damages for bad faith.  There is a distinction, and this case is very close to the line.

The plaintiff worked part-time at a dry cleaning business owned and operated by the defendant.  The plaintiff offered to buy the dry cleaning business from the defendant and the parties agreed to a purchase price of $250,000.  Since the defendant owned the premises in which the business was located, they also agreed on a lease for the use of the premises for five years at $4,000 per month in rent.  The lease included a right of first refusal for the plaintiff to lease the premises again after the end of the five-year term, exercisable if the defendant decides at that time to continue to lease the premises out.  It was expressed this way because the defendant wanted the freedom to take the premises back after the five-year term to operate it himself.

At the end of the five-year term, the parties discussed a renewal.  While the evidence of the parties differed with respect to their discussions, it appears that at the very least the defendant indicated that if the plaintiff wanted to lease the premises for a further term, the rent would be $4,500 per month. The plaintiff indicated that she could not afford to pay that much and asked the defendant whether or not he would be interested in buying the business back. The defendant expressed such an interest and offered the plaintiff $35,000 on a take it or leave it basis. She took it.

Several days later, another individual passed by the store and bumped into the defendant.  This person knew the defendant because her employer had been a tenant at the premises several years before.  The defendant asked this individual if she wanted to buy the dry cleaning business.  She expressed interest and ultimately they agreed on a sale of the business for $225,000.  A lease with the purchaser was entered into for a five-year term at $4,500 per month to start, increasing to almost $5,500 in the final year of the lease.

The plaintiff then sued, insisting that the defendant had deceived her into giving up her right of first refusal.  The plaintiff advanced the theory that the defendant had the new buyer (and new tenant) in mind all along and persuaded the plaintiff to walk away from the business and the lease for very little compensation so that the business could be flipped at a significant profit.

The trial Judge found in favour of the defendant.  The Judge was satisfied that there was no evidence that the defendant had intended anything other than to take the premises back and operate the business himself until, by coincidence, he bumped into a person who turned out to be a new purchaser and new tenant.  There was no evidence of premeditation.

The problem I have is the trial Judge’s suggestion that the defendant would have been liable for damages if the plaintiff had been able to prove that the defendant had “breached the duty of good faith it owed to the plaintiff as its bargaining partner and deceived [the plaintiff] into signing away her rights under the lease.”  In my view, even if the defendant had deprived the plaintiff of her right of first refusal by misleading her about his intentions, the fact is that the new lease entered into with the new purchaser provided for rental amounts which the plaintiff had clearly indicated that she simply could not afford.  In other words, even had the plaintiff been told that the defendant had an opportunity to lease the space to someone else at $4,500 per month to start, increasing annually thereafter, the plaintiff would never have been able to match that offer.  For that reason alone, in my view, there is some considerable doubt whether or not the plaintiff was deprived of her rights.  In those circumstances, there is no question that the plaintiff would have been mistreated.  However, shabby treatment does not amount to a cause of action in and of itself.

The Cruel World of Insurance Policies

In the recent case of Certain Underwriters at Lloyd’s of London v All Spec Home Inspections and Mario Lucciola, the Court considered the availability of insurance coverage to a home inspector who missed a critical electrical problem on a home inspection resulting in a contractor’s death. At the very end of the decision, the Judge made reference to the “cruel world of claims-made-and-reported policies of insurance.” While colourful language of this nature is not unusual for the particular Judge in this case, it is not language that one sees very often.  Nevertheless, the facts of this case show how appropriate they are.

Mr. Lucciola, a self-employed home inspector, conducted an inspection of a property in St. Catharines in July 2010.  At the time, Mr. Lucciola had professional liability insurance on the basis of a one-year term renewed annually through to 2011.

Mr. Lucciola produced a report and photographs, making no reference whatsoever to any electrical problems.

On August 16, 2010, a contractor was doing work in the attic of the property.  He came into contact with an exposed energized bare copper wire.  He was electrocuted and he died.

Three days later, on August 19, 2010, Mr. Lucciola signed an application for professional liability insurance as he had done every year since 2006.  His insurance application required him to indicate whether or not any claim had been made against him in the last five years, and whether or not he was aware of any situation or circumstance which may result in a claim in the future.  Mr. Lucciola answered “no” to both questions.

The policy was then issued for a further period of one year.

Several days later, Mr. Lucciola was interviewed by an investigator for the Ministry of Labour, at which time he was asked whether or not he had noticed the wire in the attic. He indicated first that he had not noticed it and subsequently that he had but that he had tested it with an electrical tester and received no response from it.  For that reason, he had not made any note of it in his report.

About a year later, the Ministry of Labour conducted an inquest.  Subsequently, Mr. Lucciola signed yet another application for insurance.  It contained the same questions and he answered them in the same way.  Accordingly, a policy was issued for a further one year.

All of these policies contained language to the effect that if the insurer subsequently became aware that if any of these questions had been answered incorrectly, there would be no coverage for any claim or action emanating from a fact or circumstance that the applicant failed to mention in his application.

A lawsuit was subsequently brought against Mr. Lucciola.  He notified his insurer of the claim.  The insurer brought this application for an order that it had no obligation to provide insurance coverage.

The Court had little difficulty concluding that Mr. Lucciola should have known of the potential claim against him when he made his application for the insurance policy that was in effect at the time that he was sued, and should have answered “yes” to that question on his application.  As a result, the Court ruled that the insurer was entitled to deny coverage.

The interesting point in this case has to do with the type of insurance policy that was in place.  Mr. Lucciola’s policy was a “claims-made-and-reported” insurance policy, rather than an occurrence policy.  These are very different.  In a claims-made-and-reported policy, it is the transmittal to the insurer of notice of the claim that invokes coverage.  In an occurrence policy, coverage goes into effect when the incident upon which the claim is based actually takes place.

In this case, the incident (the contractor’s death) took place in August 2010.  The policy in place at that time had been applied for by Mr. Lucciola in 2009.  In 2009, when he answered “no” to the questions as to whether or not he was aware of a possible claim, he was being entirely accurate.  Had his policy been an occurrence policy, the insurer would have had to provide coverage.

In this case, however, the policy in place when coverage was invoked was the policy in effect at the time that Mr. Lucciola notified his insurer of the claim.  In applying for that policy, Mr. Lucciola had answered “no” to questions that should have been answered “yes”.  For that reason alone, Mr. Lucciola was disentitled to coverage.

This is obviously a critical distinction.  If you have professional liability insurance coverage, and you are not aware of the type of policy that protects you, this case is a good lesson on the importance of finding that out and keeping it in mind.

Legal Proceedings and the Middle Class

In an article posted recently in the online version of Canadian Lawyer, Margaret Waddell put forward a proposal which she entitled “A Radical Idea for Giving the Average Person Their Day in Court”.

In her article, she suggested that asking whether or not the average person can afford a trial is the wrong question.  Instead, we should ask ourselves whether we can afford to maintain a judicial system that effectively bars the average person from being able to take his or her civil dispute to trial with the benefit of legal representation.

There is simply no question about the fact that the average person is going to have a lot of difficulty paying for a lawyer to take a matter to trial, assuming that by “average person”, we are talking about someone who earns at the level of Canada’s national income.

Litigation lawyers charge their time out at varying rates, generally dependent upon experience and, to some extent, geography. On balance, in my view, one gets what one pays for. That does not mean that a person will only be able to get proper or even adequate representation by paying top dollar.  I know many young litigation lawyers, including those at my own law firm, who can do an excellent job at a reasonably hourly rate.  My definition of “reasonable”, however, may not be shared by everyone.  Even young lawyers can be costly for average income earners.

For those whose incomes are below average but nowhere near the poverty line, the justice system approaches complete inaccessibility.  Family law courts in particular are inundated with cases where at least one of the two parties are unrepresented.  Where an unrepresented party must go into battle against a lawyer acting on the other side, the result can be devastating.  What may be even worse is that the unrepresented party will usually leave the courtroom without the first clue as to what just happened to him or her, or what he or she could have done prior to the hearing in order to increase the odds of success.

In smaller claims, an attempt has been made to address the point by increasing the Small Claims Court jurisdiction to $25,000.00.  The Small Claims Court is designed for people to be able to represent themselves without counsel.  While I do not have any statistics to offer, I have to believe that this has made a positive difference.

Ms. Waddell’s radical idea, incidentally, is that every lawyer ought to choose a case in which the client cannot afford to proceed and agree to act without charging a fee, or at a substantially reduced rate, or on a contingency.  By doing so, she suggests, the client can be shown that he or she is not a faceless commodity and that the legal profession is still prepared to help the average Canadian to obtain access to justice.

Ms. Waddell’s proposal is a laudable one but, I fear, unlikely to gain traction.  While many law firms would be prepared to consider acting without charge where doing so serves the public interest, or where humanitarian considerations exist, the idea of ignoring economic realities out of general principle is not likely to be viewed favourably by very many lawyers.

In my view, a better answer is to pursue the policy that gave rise to the increase in the Small Claims Court monetary jurisdiction by making it easier for people to represent themselves.  The first step to be taken in that process, as far as I am concerned, is to simplify the route which one must take to get to trial.

The need for simplification is nowhere clearer than in the family law context where, as I have indicated, many cases involve unrepresented parties.  Although I do not practice in the family law area, I have been present in Family Law Court and I have been astonished at the inability or the unwillingness of judges to take into account the fact that they are speaking to unrepresented litigants who are familiar with neither the procedure nor the jargon associated with court proceedings.  These are people who leave the courtroom completely mystified and, even worse, feeling as if they have no chance of ever receiving what they would consider to be their day in court.  I would bet that if the stakes were not so high, many would just give up.

I do not believe that lawyers are going to be increasing the number of pro bono cases they take on any time soon.  As Ms. Waddell points out and as many of us know, we do have a problem with access to justice.  In my view, the answer is to increase the opportunities for people to represent themselves where they choose to do so either because they cannot afford a lawyer or for any other reason.  This means, firstly, that the monetary jurisdiction of the Small Claims Court, with its enormously simplified procedures, should be increased even further.

Secondly, parties involved in disputes in that court should be expected to represent themselves.  Indeed, a party wishing to be represented by counsel should have to demonstrate a need for such representation by satisfying a judge, on motion, that the party is incapable of representing himself or herself.

Thirdly, and specifically with respect to parties involved in matrimonial disputes, the process must be simplified.  In that respect, I am not talking about even more steps designed to encourage or, as some might say, coerce parties into attending endless settlement conferences and discouraging them from ever actually entering into a courtroom to have a dispute resolved once and for all.  I am talking about simplifying the rules, eliminating unnecessary steps, and translating the rules into plain English so that people understand what they can expect in a courtroom, and what will be expected of them.

The New World of Summary Judgments: Are the Courts Going Too Far?

The recent case of King Lofts Toronto I Ltd. vs. Emmons involves the granting of a summary judgment where the remedy would never have been possible in the past.

This was a solicitor’s negligence case in which the law firm moved for summary judgment dismissing the claim and, without formally bringing a cross-motion for summary judgment, the former client requested a partial summary judgment against the law firm.

In 2005, a developer retained the Defendant law firm to act on a purchase of four commercial properties in downtown Toronto. The price was $22.5 million. The title indicated that the City of Toronto owned a strip of land and a laneway under the rear of one of the buildings.

The purchaser assigned its interest in the purchase agreement to the Plaintiff in this case, whose principal was described by the Court as an experienced businessman and investor in real estate. The Plaintiff retained the law firm to continue and to complete the transaction.

Before closing, the lawyer handling the file told the Plaintiff about the laneway. He also said that this was a minor issue that was covered by title insurance that was being obtained. He indicated that the problem would be solved by converting the property from the Registry System to the Land Title System, that this could be completed after closing, and that the cost of doing so would be relatively nominal. Subsequently, the law firm indicated that after closing they could approach the City and ask for a by-law to be passed to convey the lane to the Plaintiff. Alternatively, they could attempt to obtain a court order based on the length of time that the building had been located on the laneway itself.

In any event, it was clearly conveyed to the Plaintiff that the problem was a minor one and likely covered by title insurance.

What the Plaintiff was not told is that the City would request payment for a conveyance of the laneway even though it had been located under a building for about eighty-six years. He was also not told that the title insurance policy excluded coverage for City-owned laneways.

The deal closed with no holdback in respect of the laneway. After the closing, the Plaintiff did nothing about the laneway and several years passed.

In 2008, the Plaintiff received an unsolicited offer from a Real Estate Investment Trust to purchase the properties. An agreement was signed for the sale to the REIT for a purchase price of $31.5 million.

Before the closing of that transaction, the lawyer for the REIT demanded that the title be rectified so that the Plaintiff could convey the laneway. When the Plaintiff looked into it further, it discovered that it would cost $106,000 to get the City to convey the laneway. An application was made to the title insurance company for coverage but that was denied.

The Plaintiff had no choice but to pay the $106,000 for the laneway. It then closed the deal to sell the properties to the REIT for $31.5 million – $9 million more than it had paid four years earlier.

The Plaintiff then sued the law firm for negligence.

At this point, one might well take a step back and suggest that having achieved a profit of almost 50%, the Plaintiff might have better things to do than to chase its former law firm over $106,000. It may be the fact that the law firm had billed the Plaintiff more than $270,000.00 in fees for the purchase transaction, which the Plaintiff had apparently found excessive, played a role in the Plaintiff’s decision to pursue the matter.

In any event, the law firm brought a motion for judgment to dismiss the claim on a variety of grounds. The most interesting one, in my view, related to the issue of causation.

As the Court pointed out, for a lawyer to be liable for professional negligence, the client must prove that the misconduct caused the client’s loss and that the client has suffered damages as a result. Generally, the “but for” test is used, on a balance of probabilities. In other words, the client must show that the injury would have not occurred “but for” the negligence of the lawyer.

In this case, the Plaintiff argued that had he been made aware of the extent of the problem, and the cost of resolving it, he would have insisted on a reduction in the purchase price.

By way of contrary evidence, the original purchaser of the property (who had assigned the purchase agreement to the Plaintiff) provided evidence that the vendor was notoriously hard to deal with and would never have agreed to such a reduction.

If that is true, of course, it could be argued that the law firm actually did the Plaintiff a tremendous favour. If the Plaintiff had been told of the extent of the problem and asked for the reduction, and the vendor had refused, it is very possible that the Plaintiff would have lost the deal (and therefore, the handsome profit achieved upon resale four years later).

As a reflection of the current state of the law on summary judgments, however, what is particularly interesting is what the Judge did with this evidence.

The Judge simply accepted the Plaintiff’s evidence and disregarded the evidence of the original purchaser. He decided that it was “at least doubtful that the vendor…could have simply relied on the recession clause to withdraw from the transaction” and concluded on a balance of probabilities that likely, there would have been agreement between the parties on a holdback or an abatement of the purchase price.

The Judge went on to dismiss the law firm’s motion for summary judgment and to grant summary judgment in favour of the Plaintiff on liability, with a trial to follow on damages.

In my view, this is a surprising decision that may move the yardsticks for summary judgment a long way. The current jurisprudence does allow the judges to make some credibility findings in certain circumstances. Here there was a contest between written evidence from the Plaintiff as to what he would have done (with the benefit of hindsight) on the one hand, and written evidence from another individual with nothing to gain or lose in the transaction suggesting that what the Plaintiff would have done would not have worked. I would have thought that this would have required a trial in order to resolve. However, that was not this motion court Judge’s opinion.

Subject to review by the Court of Appeal, this case might well constitute a significant development in the law of summary judgment in Ontario.