Court File and Parties

Court of Appeal for Ontario Date: 20211012 Docket: C68814

Before: Lauwers, Harvison Young and Sossin JJ.A.

Between: 2619506 Ontario Inc., Respondent (Plaintiff)

And: 2082100 Ontario Inc., Samuel Davis and Farhan Absar, Appellants (Defendants)

And: 2619506 Ontario Inc., Vaishali Paralekar and Jayesh Paralekar, Defendants to the Counterclaim

Counsel: Martin Diegel, for the appellants Alexander Hora, for the respondent

Heard: October 1, 2021 by video conference

On appeal from the judgment of Justice Shaun O’Brien of the Superior Court of Justice, dated November 13, 2020, with reasons reported at 2020 ONSC 6817.

Reasons for Decision

[1] This appeal arises from an order dated November 13, 2020, granting summary judgment to the respondent, finding that its notice of rescission was effective to rescind its franchise agreement with the appellants. The motion judge held that the financial disclosure document (FDD) the appellants provided was so deficient as to amount to no disclosure at all pursuant to s. 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 [the Act]. The motion judge also found that both Mr. Davis and Mr. Absar met the definition of franchisor’s associates under s.1(1) the Act and that they were jointly and severally liable for damages pursuant to s. 6(6).

[2] Briefly, the appellants and the respondent executed a franchise agreement in May 2018 pursuant to which the respondent 2619506 Ontario Inc, through its president, Vaishali Paralekar, became a franchisee of the franchisor’s “Fit for Life” chain of quick service restaurants. After Ms. Paralekar began operating, she found that the sales were much lower than expected. After trying to sell the franchise, she ultimately served a notice of rescission through her counsel in May 2019.

[3] The appellants raise two main grounds of appeal. First, they argue that the motion judge misapplied the “informed investment decision test” in finding that the deficiencies in the disclosure document amounted to absence of disclosure, thus allowing rescission pursuant to s. 6(2) of the Act within two years. In particular, they argue that Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62, 419 D.L.R. (4th) 53 obliged her to conduct a more detailed analysis of whether a potential franchisee is able to make a properly informed investment decision. The motion judge’s failure to do so constituted a reversible error of law.

[4] Second, they submit that the motion judge erred in finding that the appellants were “franchisor’s associates” pursuant to ss.1(1) and 6(6) of the Act. Third, and relatedly, they argue that the motion judge erred in imposing joint and several liability upon both Mr. Davis and Mr. Absar.

[5] For the following reasons, we conclude that that the appeal must be dismissed.

[6] We do not agree that the motion judge erred in her articulation or application of the test under s. 6(2). We do not agree that this is an extricable question of law attracting a correctness standard of review. Rather, it raises a question of mixed law and fact, thus attracting the standard of palpable and overriding error: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at paras. 36-37.

[7] In applying the informed investor test, the motion judge considered both the purpose of the Act and the evolution of the test. She began by observing that this court has repeatedly emphasized that the Act is intended to redress the imbalance of power between franchisors and franchisees and that it does so by imposing rigorous disclosure obligations on franchisors, with strict penalties for non-compliance: Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673, 268 O.A.C. 279, at para. 26; Mendoza v. Active Tire & Auto Inc., 2017 ONCA 471, 139 O.R. (3d) 230, at paras. 13, 26; 6792341 Canada Inc. v. Dollar It Limited, 2009 ONCA 385, 95 O.R. (3d) 291, at para. 13. She continued with the following statement:

Two guiding principles have emerged from the Court of Appeal with respect to the interpretation of s. 6(2) in particular. The first is that non-compliance with s. 5 of the Act does not always provide sufficient grounds for rescission under s. 6(2). As set out in Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62, at para. 46: “[a] franchisee that receives imperfect disclosure does not necessarily stand in the same position as a franchisee that was ‘never provided with a disclosure document.’ In Imvescor, at para. 73, this court warned that conflating those two scenarios would frustrate clear legislative intent….”

[8] The motion judge also correctly observed at para. 18 that a purported disclosure document may be so deficient as to effectively amount to no disclosure, thereby permitting rescission under s. 6(2): Raibex, at para. 47. There is no doubt that financial disclosure is of the “utmost importance” in enabling a prospective franchisee to make a properly informed investment decision: Dollar It, at para. 35. In short, she was alive to and set out the appropriate test to be applied.

[9] On the facts of this case, the only financial information provided to the respondents was unaudited 2016 financial statements, despite the clear requirement in the applicable regulation for the franchisor to include the 2017 financial statement, which it failed to do. Nor was there any evidence as to whether 2018 financial statements were available when the franchise agreement was executed. In any event, neither 2017 nor 2018 financial statements were ever provided. Nor was there any recent financial information at all, such as sales information for that location. The motion judge concluded that

…in the circumstances of this case, the absence of any recent financial information rendered the FDD so deficient as to amount to no disclosure at all. As a result, the Plaintiff was entitled to rescind under s. 6(2) of the Act.

[10] In our view, the motion judge concisely and accurately set out the considerations to be taken into account and applied those to the facts before her in reaching her conclusion that the FDD was so deficient as to amount to no disclosure at all.

[11] We also do not agree that the motion judge erred in finding that both Mr. Davis and Mr. Absar were “franchisor’s associates” as defined in the Act.

[12] As was the case below, the counsel for Mr. Davis did not seriously pursue the argument that he was not an associate under the Act. As the sole director and shareholder, as well as the president and CEO of the franchisor, he directly controlled the franchisor and clearly falls within clause (a)(i) of subsection 6(6) of the Act as a person who controls the franchisor. As the person who signed the FDD disclosure certificate, he was “directly involved in the grant of the franchise”, falling within the conjunctive provision of clause (b)(i)(A).

[13] The appellants argue that Mr. Absar, however, was merely an employee of the franchisor. Finding that Mr. Absar was a franchisor’s associate and imposing joint and several liability, would, they argue, open the door to finding that any employee, such as a receptionist answering telephone calls from potential franchisees could be found to be franchisor’s associates subject to joint and several liability.

[14] As the motion judge concluded, Mr. Absar was not a mere employee. First, she found that he was “controlled by another person who also controls directly or indirectly the franchisor”, that is Mr. Davis. She reached this conclusion on the basis of the appellants’ own documents. The franchisor’s own organizational chart, and Mr. Absar’s e-mail signature, identified him as the Director of Franchising and Development for the Davis Group of companies, which included Fit for Life. Although the Davis Group was not itself a corporation, Mr. Davis was the head of the Davis Group and owned all of the Davis Group of companies. We see no error in her finding that Mr. Absar fell within the first part of the definition as he was controlled by a person, Mr. Davis, who controlled the franchisor.

[15] In addition, we see no error with her finding that Mr. Absar met the second part of the definition in clause (b)(i)(B) because he made “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.” This finding was well grounded in the record. Mr. Absar advertised Fit for Life franchises to generate leads and met with potential franchisees to discuss their application. He acknowledged that he had been involved in the marketing of the specific franchise location in issue and that he had personal communications with Ms. Paralekar about the franchise. Her undisputed evidence was that she met with him to discuss her application and that he provided her with the FDD.

[16] Finally, we see no error in the motion judge’s imposition of joint and several liability on both appellants. The appellants contend that the liability can be imposed on the franchisor “or” franchisor’s associate pursuant to s. 6(6). However, there was no suggestion before the motion judge that liability for damages should be imposed on any basis other than joint and several liability. Although the appellants cite 2122994 Ontario Inc. v. Lettieri, 2016 ONSC 6209, aff’d 2017 ONCA 830, in support of its position, we do not find this case to be of any assistance them.

[17] Finally, the appellants submit that this matter should not have been determined on a motion for summary judgment because the affidavit evidence contained numerous inconsistencies. While it is true, as the motion judge recognized, that the parties did not agree on all factual matters, she found that there was no dispute about the primary facts upon which she decided the issues before her. Her reasons make it clear that she was careful to determine the issues before her on the basis of undisputed facts and we see no error in her determination that there were no genuine issues that required a trial: Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, at para. 49.

[18] The appeal is dismissed. Costs are payable by the appellants to the respondent in the amount of $8,600, inclusive of disbursements and HST.

“P. Lauwers J.A.”

“A. Harvison Young J.A.”

“L. Sossin J.A.”