Executive Summary: Key Legal and Evidentiary Issues

• Appellants argued they were exempt from disclosure obligations under s. 5(7)(a)(iv) of the Arthur Wishart Act, which the trial judge rejected.

• The trial judge found the franchise was granted “by or through” the franchisor, defeating the exemption defence.

• A valid rescission was delivered under s. 6(2), entitling the respondents to compensation under s. 6(6).

• The trial judge accepted unchallenged expert evidence in awarding $325,000 for unrecovered expenditures.

• Substantial indemnity costs were upheld based on a Rule 49 offer and serious litigation misconduct by the appellants.

• The appeal was dismissed, and the Court of Appeal awarded $20,000 in costs to the respondents.

Background and procedural history

The respondents operated a Wild Wing franchise and delivered a Notice of Rescission under s. 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000, on the basis that they had never received a disclosure document. They brought an action for statutory compensation under s. 6(6). The defendants included Savannah Wells Holdings Inc., 2239214 Ontario Inc., 1516081 Ontario Inc., and Rick Smiciklas, who was the directing mind of those corporations.

At trial, the appellants claimed an exemption under s. 5(7)(a)(iv), arguing the franchise was not granted “by or through” the franchisor. The trial judge rejected that defence, found the rescission valid, and awarded damages and substantial indemnity costs. The defendants appealed.

Disclosure exemption and findings at trial

The trial judge concluded that the franchise was granted “by or through” the franchisor. That finding was fatal to the appellants’ reliance on the exemption in s. 5(7)(a)(iv). The evidence established that the franchisor was actively involved in granting the franchise, which precluded exemption from disclosure.

In assessing damages under s. 6(6), the trial judge accepted the respondents’ unchallenged expert evidence from forensic accountant Ephraim Stulberg, who calculated $325,000 in unrecovered expenditures. The appellants did not provide any rebuttal expert evidence or documentation.

Court of Appeal’s analysis

The Court of Appeal affirmed the trial judge’s reasoning. It found no legal error in the conclusion that the franchise was granted “by or through” the franchisor and confirmed that the burden of proving an exemption rests on the franchisor. That burden was not met.

The Court also upheld the $325,000 damages award, noting it was grounded in accepted expert evidence and no competing evidence was offered by the appellants.

Costs and litigation conduct

The Court also upheld the trial judge’s award of substantial indemnity costs. The respondents had made a Rule 49 offer to settle for $400,000. The final judgment exceeded that amount, triggering Rule 49.10(1). The trial judge also found the appellants engaged in litigation misconduct by making unfounded allegations of fraud and perjury, threatening opposing counsel, and prolonging the proceedings unnecessarily.

The Court found no error in the trial judge’s exercise of discretion on costs.

Disposition

The appeal was dismissed. The Ontario Court of Appeal awarded the respondents $20,000 in costs for the appeal, inclusive of disbursements and HST. The ruling reinforces the burden franchisors face in proving disclosure exemptions under the Arthur Wishart Act, and confirms that substantial indemnity costs may be appropriate where Rule 49 is engaged and litigation conduct warrants it.