Franchisee’s Statement of Claim Struck Out for Insufficient Detail

Whether pursued in Ontario or in the United States, litigation begins with an exchange of pleadings. Pleadings serve crucial functions; these court documents define the scope of a dispute and give notice to the other side of what is being argued. If a plaintiff’s pleading—called a Statement of Claim under Ontario civil procedure—fails to effectively describe the allegations supporting the suit, or describes a claim without any basis in law, a defendant need not deliver a responding pleading and press forward. Instead, that defendant may ask the court to strike out some or all of the plaintiff’s pleading.

Careful and deliberate pleading is needed to navigate litigation in franchise law. Such was the issue in the recent Ontario decision of 1051214 Ontario Ltd v Vivo Pizza Pasta Franchise Inc (the “105” case). The plaintiffs were a franchisee (the “Franchisee”) and the Franchisee’s guarantor. The defendants included the corporate franchisor (the “Franchisor”) and an individual who was alleged to be the Franchisor’s “controlling mind”. These defendants brought a motion to strike out those parts of the plaintiffs’ Statement of Claim that (i.), sought rescission of the contract (ii.), alleged misrepresentation (iii.), and sought redress against the individual defendant in his personal capacity. The Court allowed the motion and ordered much of the pleading struck out, with permission given to the plaintiffs to correct some but not all of the pleading deficiencies. In this post, we summarize why, and explain the implications for franchisors and franchisees.

  1. When a pleading may be struck

In general, plaintiffs are required to plead all the material facts. On a motion to strike a statement of claim, or parts of it, the Court will read the pleading generously to allow for mere drafting deficiencies, and will presume all pleaded facts are true without considering evidence. The Court will only strike the pleading if (i) it is plain and obvious that a pleading discloses no reasonable prospect of success or no reasonable cause of action (an entitlement to a remedy) or (ii) the material facts to support the underlying claims have not been pleaded.

  1. The Statement of Claim in the 105 Case

The Franchisee’s Statement of Claim in the 105 case made the following general allegations. Before the plaintiffs came to operate a franchise, and before the Franchisor even had a franchise system, the Franchisor’s principal had allegedly represented to the individual plaintiff that, if that plaintiff would assist in establishing the Franchisor’s system, the individual plaintiff would be entitled to operate a restaurant within the Franchisor’s system but without having to pay any royalties. The plaintiffs claimed that they relied on that representation and assisted in establishing the Franchisor’s system, then built a restaurant conforming to the new system’s specifications at a considerable cost. The plaintiffs claimed that the Franchisor or its principal then demanded that the plaintiffs operate as franchisees. The plaintiffs claimed that they entered into a franchise agreement under duress, to protect their investment in building out the restaurant. They claimed that the Franchisor or its principal eventually terminated their franchise agreement improperly. The claim described a number of other representations, alleged various breaches by the Franchisor and the Franchisor’s principal of the duty of good faith, and claimed that the plaintiffs were entitled to “rescind” (unwind) the franchise agreement.   

  1. Plaintiffs seeking rescission should plead the legal grounds for their requested relief

Rescission is the remedy under contract law whereby a court restores the parties to their original positions as of when the contract was formed. In this case, the Court ordered the claim for rescission struck out from the Statement of Claim.

The Court distinguished between three legal bases for rescinding the contract, the first being statutory rescission available to franchisees under section 6(2) of the Arthur Wishart Act (the “Wishart Act”). This provision allows a franchisee to rescind if the franchisor has seriously failed to comply with the franchisor’s disclosure obligations, but only up to two years after entering into a franchise agreement; in the 105 case, the franchisee had commenced the lawsuit more than two years before entering into the franchise agreement. The Court accordingly struck the statutory rescission claim as being out of time, and did not permit the plaintiffs to amend their claim to correct this deficiency.

The other bases for rescission are found at “common law” and in “equity”, which are two distinct judge-made (as opposed to statutory) sources of authority that Canadian and U.S. courts can call upon to fashion appropriate remedies. The Court affirmed that these rescission remedies would only be available if the Franchisee had been induced to enter the franchise agreement by duress or fraud. Since the Statement of Claim failed to plead duress or fraud, the Court struck these claims but permitted the plaintiffs to revise their pleading in order properly to plead them.

  1. Misrepresentation pleading must specify what type of misrepresentation is alleged

The Court in the 105 case noted that, while the plaintiffs alleged misrepresentation, they did not specify whether they were claiming innocent, negligent, or fraudulent representation. The Court struck out the misrepresentation claim for two reasons. Firstly, given that different remedies are available for different types of misrepresentation, the Court struck out the misrepresentation claim for failing to specify the type of misrepresentation in issue; second, the Court struck out the misrepresentation claim for failing to plead to all elements of the wrongdoing that would support the misrepresentation claim. The plaintiffs were permitted to amend their pleading properly to plead the misrepresentation claim(s).

  1. Pleading to disregard corporate identity must specify how the individual acted independently from his or her corporate role

The Court canvassed the established law governing when a court may “pierce the corporate veil” to find a corporate officer or director liable in his or her personal capacity. The factual underpinning in the pleading must describe actions or omissions of an individual that fall outside of his or her corporate authority, exhibit a separate identity of interest from that of the corporation, or were independently tortious and actionable.

The Court held that whatever was pleaded against the corporate Franchisor appeared to be duplicated as against the Franchisor’s principal. The allegations that the Franchisor’s principal made false representations, had a personal animus towards the Franchisee’s principal, and deliberately caused damage to the plaintiffs, could not be read to be for the benefit of the Franchisor’s principal in his personal capacity. As such, the Court struck claims as against the Franchisor’s principal, but permitted the plaintiffs to amend their pleading properly to plead a basis for suing the Franchisor’s principal.

Key Takeaways

The 105 case affirms key principles in the franchise context:

  • When seeking rescission of a franchise contract or damages for misrepresentation a plaintiff must plead with sufficient particularity to describe all of the elements of the rescission and misrepresentation claims and, in some cases (for instance, when different types of misrepresentation or rescission are possibly being claimed) the legal grounds being relied on.
  • Allegations of an animus towards the plaintiff on the part of a corporate franchisor’s or franchisee’s officer or director are alone not sufficient to disregard the corporate identity he or she was acting under to find personal liability.

More generally, franchisees and franchisors must take great care in drafting their pleadings and ensure that the pleading is not vulnerable to an early challenge by their opponents.

Hoffer Adler LLP acted for the Franchisor and its principal in the 105 case.