In the case of Treats International Franchise Corporation v. 2247383 Ontario Inc., an Ontario court has dismissed a summary judgment motion for rescission against a franchisor commenced by former franchisees and its principals. The decision highlighted the need for parties to franchise litigation to preserve their documents or potentially face adverse judicial consequences.
The plaintiff in the action was a franchisor that grants franchises for its coffee and baked goods concept commonly known as "Treats." The franchisor commenced an action against the defendant franchisees and its principals for arrears of rent and damages owing after the franchisees abandoned the premises and claimed rescission of their franchise agreement.
The defendants brought a motion for summary judgment seeking damages as a consequence of the rescission and a declaration that the franchise agreement was validly rescinded.
Just days before the issuance of the statement of defence and counterclaim, an individual defendant (as principal of the franchisee) made an assignment in bankruptcy. Pursuant to section 71 Bankruptcy and Insolvency Act, an action commenced by an undischarged bankruptcy is a nullity.
Accordingly, the Court held that the statement of defence and counterclaim were a nullity. The Court declined to exercise any discretion it had to cure the nullity given the defendants' admission of spoliation: the affidavit evidence indicated that financial records of the franchisee had been intentionally destroyed. As a result, the defendants' motion for summary judgment was dismissed. A copy of the decision can be found here.
Though this is an extreme case, franchisors are reminded to take the necessary steps to maintain their records, which can both preserve and protect against claims for rescission.
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