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"Summary Judgment and Evidence of 'Material Change' - Hepburn v AlarmForce"

In a recent case, Hepburn v AlarmForce, 2017 ONSC 6012 ("Hepburn"), the Ontario Superior Court of Justice considered the circumstances in which a "material change" may trigger the disclosure obligation in a renewal of, or extension to, an existing franchise agreement. The decision also addressed the evidentiary considerations engaged in the context of a motion for summary judgment.

The dispute in Hepburn arose when the defendant-franchisor, AlarmForce, resisted the plaintiff-franchisee's requests for a renewal agreement and franchise disclosure document upon exercising its right to renew under the agreement between the parties.

Upon receiving the proposed renewal agreement on August 15, 2007, counsel for Hepburn took the position that AlarmForce was obligated to provide a new franchise disclosure document because it was a "new form of agreement" and "significant material changes had occurred since the Franchise Agreement was entered into." This position was met with stiff opposition and no franchise disclosure document was provided. The renewal agreement was never signed and Hepburn continued operating the business according to the terms of the previous agreement.

Over the course of the next 8 years, the parties engaged in a series of negotiations. After having arrived at a stalemate in their negotiations, the franchise agreement was ultimately terminated on November 17, 2015. Counsel for Hepburn made it clear that the termination was "early," "under extreme protest," and reserved all rights of action against AlarmForce.

Hepburn commenced an action and subsequently brought a motion for summary judgment. The "critical issue" was whether the defendant was require to provide a disclosure document or whether they were exempted from doing so by operation of subsection 5(7)(f) of the AWA. This provision states that the disclosure obligation as set out in section 5 of the AWA does not apply to:

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

Hepburn's position was that the renewal agreement contained different terms than the previous agreement and that these different terms constituted "material changes." Its evidence centered on the theory that the defendant-franchisor's conduct was connected to their "internal decision to shift from a franchise business model to one of direct corporate operations." Hepburn deposed that this shift had a detrimental effect on his territory and "that the Franchisor was not enthused that it had AWA obligations to franchisees."

The court highlighted several inadequacies in the evidence of both parties. With respect to Hepburn, the court stated that many of his assertions were "made without reference to any source or basis."

With respect to AlarmForce, the court was concerned that the defendant did not file any evidence from the company presidents who were actually involved in the correspondence with the plaintiff during the time when the issues first arose.

Ultimately, the court held that it was not in a position to fairly and justly adjudicate the issues on the evidentiary record before it. Specifically, the court held that the issue ought not to be determined solely by examining the differences between the terms found in the renewal agreement and the original franchise agreement for the following reasons:

(1) The renewal conditions in the original franchise agreement required the renewal to be on the same terms then being offered to new franchisees. There was no evidence that established what terms were being offered to new franchisees.

(2) The materiality of the changes could not be evaluated in isolation. Rather, consideration of the surrounding circumstances was necessary.

(3) There was inadequate evidence to substantiate the plaintiff's assertion that AlarmForce failed to properly support its territory such that the court was unable to determine whether or not the changes contained in the renewal agreement were "material" in nature.

The court held that the relief sought by the moving party gave rise to genuine issues requiring a trial. Notably, the court commented that, "[i]t 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."

This case serves as a reminder of the importance of a party seeking summary judgment to put their best evidentiary foot forward. It would seem that if the assertions made by the plaintiff were true, the relief sought would be appropriate in the circumstances given the protective and remedial nature of the AWA. Regrettably for the franchisee, the court was not given the tools necessary to give effect to the rights to which it believed it was entitled.

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