Directors, officers of restaurant franchisor sued by Hamilton, Ontario franchisee

Cora Franchise Group Inc., as well as four of its directors and officers, are being sued in an Ontario court by the operators of one of its franchises, who are alleging fraudulent misrepresentation.

None of the allegations have been proven, and the Ontario Superior Court of Justice last week ordered the plaintiffs to strike several paragraphs from their statement of claim.

The judge in the case also noted there is potential “personal liability” for directors and officers of franchisors under a 13-year-old Ontario law that imposes disclosure obligations on franchisors.

Mississauga, Ont.-based Cora Franchise Group, founded by Cora Tsouflidou, franchises the Cora’s Breakfast and Lunch restaurants in Ontario and the Chez Cora restaurants in Quebec.

Cora Tsouflidou — along with her son, company president Nicholas Tsouflidou — were named as individual defendants in the lawsuit. It was launched by 2130679 Ontario Inc., which began operating a Cora’s franchise in the community of Ancaster, at the west end of Hamilton, after signing a franchise agreement in 2007. The plaintiffs include six directors and officers of the franchisee.

“The crux of the dispute in this case revolves around the opening of another Cora’s franchise in Hamilton, Ontario,” Mr. Justice Robert Goldstein wrote in his ruling May 28, 2013. “The Hamilton franchise is in close proximity to the Ancaster franchise operated by” 2130679 Ontario Inc.

Judge Goldstein’s decision was not on the merits of the case but on a defence request to strike several paragraphs from the statement of claim. He ordered that some paragraphs be struck, without leave to amend, and for other paragraphs be struck with leave to amend. He gave the plaintiffs 60 days to amend their claim.

Court records indicate the plaintiffs alleged “they were led to believe that they had an exclusive territory and a right of first refusal on opening the Hamilton franchise.” The plaintiffs are seeking an injunction, damages and recission of the franchise agreement.  The defendants contend that their franchise agreement and disclosure documents “are very clear that there are no exclusive territories” for Cora’s franchisees, Judge Goldstein noted.

Also named as individual defendants were Cora Franchise Group executive director Yvan Coupal and former executive vice president David Polny.

“The status of the individual Defendants is important, as franchise associates have special responsibilities and potential personal liability under the (Robert) Wishart Act,” Judge Goldstein wrote, referring to an Ontario law requiring “fair dealing” between parties to franchise agreements.

The law, passed in 2000, is designed to give franchisees the right to associate with other franchisees. It also stipulates that franchisors must provide franchisees with disclosure documents 14 days or more before they sign agreements or pay money to the franchisor. Those documents must include, among other things, all “material facts,” financial statements and copies of agreements the franchisees would be required to sign.

It also imposes obligations on “franchisor’s associates,” which include people who control the franchisor or who are “directly involved” in granting franchises. By “directly involved,” this could include, according to the Arthur Wishart Act: being involved in reviewing or approving the grant of the franchise; making “representations to the prospective franchisee on behalf of the franchisor for the purpose of granting the franchise;” marketing the franchise; or “otherwise offering to grant the franchise.”

A franchisor’s associate can also include someone who “exercises significant operational control over the franchisee and to whom the franchisee has a continuing financial obligation in respect of the franchise.”

Judge Goldstein noted there were “no facts pleaded which suggest which individual Defendant (other than Polny) was responsible for each misrepresentation” and there were “no facts pleaded to suggest that the individual Defendants acted in their personal capacities.”

In explaining his order to strike certain paragraphs, with leave to amend, Judge Goldstein noted some paragraphs in the statement of claim “fail to plead the basis upon which individual liability should be founded,”  although each individual defendant is alleged to be a “franchisor’s associate.”

The Arthur Wishart Act, which received royal assent in June 2000, was introduced Robert Runciman, then the Progressive Conservative Minister of Consumer and Commercial Relations and MPP for Leeds-Grenville. The law was intended to “help small business investors make more informed decisions and encourage marketplace fairness,” Runciman stated in the legislature when he presented the bill for first reading in 1999.

Arthur Wishart, who represented Sault Ste Marie at Queen’s Park from 1963 until 1971, was Ontario’s Attorney General in the late 1960s and then Minister of Consumer and Commercial Relations when he commissioned the Grange Report, which dealt with referral sales, pyramid sales and franchises. Released in 1971, the Grange Report’s recommendations included disclosure laws for franchisors.