Court File and Parties

COURT FILE NO.: CV-09-8313-00CL DATE: 20161007 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

2122994 Ontario Inc. and Raisa Baila Plaintiffs – and – John Lettieri, Jim Papadopoulos and Lettieri Bars Ltd. Defendants

And Between:

Lettieri Bars Ltd. Plaintiff by Counterclaim – and – Raisa Baila Defendants to the Counterclaim

Counsel: Adrienne Boudreau and Krishana Persaud, for the Plaintiff, 2122994 Ontario Inc., and the Plaintiff (Defendant to the Counterclaim), Raisa Baila Morris Cooper, for the Defendant, John Lettieri and the Defendant (Plaintiff by Counterclaim), Lettieri Bars Ltd.

HEARD: September 26 to 29, 2016

Penny J.

[1] This is an action for rescission under the Arthur Wishart (Franchise Disclosure) Act, 2002, S.O. 2000, c.3. The issues in this case are:

(1) Was the disclosure document provided by the franchisor under s. 5 of the Act materially deficient?

(2) If yes, could material deficiencies in the disclosure document be cured (and if so, were they cured) after the delivery of the disclosure document?

(3) Was the disclosure document given to the “prospective franchisee” in the required manner, or at all?

(4) Does the franchisee’s acknowledgement in the franchise agreement that it received a copy of the disclosure document within the prescribed time frame constitute a bar to this action?

(5) Did the plaintiffs fail to deal with the defendants fairly? and

(6) Assuming the plaintiff has a right to rescind under s. 6(2) of the Act, what is the amount of proven damages suffered by the franchisee under ss. 6(6)(a), (b) and (c) of the Act?

Background

[2] Raisa Baila and Jim Papadopoulos lived together in a common-law relationship in 2006. Baila and Papadopoulos were exploring the possibility of running a café or other food franchise together. Baila is a mechanical engineer. She was employed in that capacity in 2006. Papadopoulos had some business experience and knew John Lettieri. Lettieri was the president of Lettieri Bars Ltd., a franchisor of Lettieri brand café operations.

[3] Papadopoulos took the lead in negotiations with Lettieri over buying a Bars franchise to run a Lettieri Café at Adelaide and Victoria in downtown Toronto.

[4] A disclosure document was provided to Papadopoulos on October 2, 2006. Franchise documents were signed by Baila on November 22, 2006 on behalf of a franchisee corporation to be incorporated which became 2122994 Ontario Inc. It is common ground that Baila was the sole officer and director of 212 and the only person who entered into personal covenants with the franchisor.

[5] The café premises were renovated over the following winter and spring. The deal closed in the fall and the café opened October 1, 2007.

[6] Baila worked in the café for a short time but she and Papadopoulos almost immediately began having relationship problems. The café did not do well. Baila withdrew from operations at the café and, within months, she and Papadopoulos had a very serious falling out (both business and personal).

[7] By May 2008, the café was in default of its obligations to the franchisor. Baila paid rent personally for several months, trying to keep the business alive, but she ran out of money and the café could not survive on its own. Baila served a notice of rescission on September 28, 2008.

[8] Bars took over operations. Papadopoulos continued to run the café for several years. Bars closed down operations at this location in 2015.

The Relevant Legislative Framework

[9] The disclosure obligations of the franchisor are set out in s. 5 of the Act:

5. (1) A franchisor shall provide a prospective franchisee with a disclosure document and the prospective franchisee shall receive the disclosure document not less than 14 days before the earlier of,

(a) the signing by the prospective franchisee of the franchise agreement or any other agreement relating to the franchise; and

(b) the payment of any consideration by or on behalf of the prospective franchisee to the franchisor or franchisor’s associate relating to the franchise.

(2) A disclosure document may be delivered personally, by registered mail or by any other prescribed method

(3) A disclosure document must be one document, delivered as required under subsections (1) and (2) as one document at one time.

(4) The disclosure document shall contain,

(a) all material facts, including material facts as prescribed;

(b) financial statements as prescribed;

(c) copies of all proposed franchise agreements and other agreements relating to the franchise to be signed by the prospective franchisee;

(d) statements as prescribed for the purposes of assisting the prospective franchisee in making informed investment decisions; and

(e) other information and copies of documents as prescribed.

[10] Sections 6(1) and (2) of the Act create a statutory right of recission:

6(1) A franchisee may rescind the franchise agreement, without penalty or obligation, no later than 60 days after receiving the disclosure document, if the franchisor failed to provide the disclosure document or a statement of material change within the time required by section 5 or if the contents of the disclosure document did not meet the requirements of section 5.

(2) A franchisee may rescind the franchise agreement, without penalty or obligation, no later than two years after entering into the franchise agreement if the franchisor never provided the disclosure document.

[11] It is the obligation of the franchisor, within 60 days of the effective date of rescission, to refund certain amounts to the franchisee. Section 6(6) of the Act provides:

The franchisor, or franchisor’s associate, as the case may be, shall, within 60 days of the effective date of the rescission,

(a) refund to the franchisee any money received from or on behalf of the franchisee, other than money for inventory, supplies or equipment;

(b) purchase from the franchisee any inventory that the franchisee had purchased pursuant to the franchise agreement and remaining at the effective date of rescission, at a price equal to the purchase price paid by the franchisee;

(c) purchase from the franchisee any supplies and equipment that the franchisee had purchased pursuant to the franchise agreement, at a price equal to the purchase price paid by the franchisee; and

(d) compensate the franchisee for any losses that the franchisee incurred in acquiring, setting up and operating the franchise, less the amounts set out in clauses (a) to (c).

[12] The provisions of O. Reg. 581/00 are of importance in this case. Section 3 deals with the need to provide financial statements of the franchisor:

3. (1) Every disclosure document shall include,

(a) an audited financial statement for the most recently completed fiscal year of the franchisor’s operations, prepared in accordance with generally accepted auditing standards that are at least equivalent to those set out in the Canadian Institute of Chartered Accountants Handbook;

(b) a financial statement for the most recently completed fiscal year of the franchisor’s operations, prepared in accordance with generally accepted accounting principles that are at least equivalent to the review and reporting standards applicable to review engagements set out in the Canadian Institute of Chartered Accountants Handbook; or

(c) if a regulation has been made under subsection 13 (2) of the Act in respect of the franchisor, a declaration that the franchisor is exempt from the requirement to provide the financial statement described in clause (a) or (b), and that the franchisor meets the criteria prescribed for the purpose of that exemption.

(2) Despite subsection (1), if 180 days have not yet passed since the end of the most recently completed fiscal year and a financial statement has not been prepared and reported for that year, the disclosure document shall include a financial statement for the previous fiscal year that is prepared in accordance with the requirements in clause (1) (a) or (b).

[13] Section 7 of the Regulations requires the franchisor to provide a certificate of truth and accuracy:

7. (1) Every disclosure document shall include a certificate certifying that the document,

(a) contains no untrue information, representations or statements; and

(b) includes every material fact, financial statement, statement and other information required by the Act and this Regulation.

(2) A certificate referred to in subsection (1) shall be signed and dated by,

(a) in the case of a franchisor that is not incorporated, the franchisor;

(b) in the case of a franchisor that is incorporated and has only one director or officer, by that person;

(c) in the case of a franchisor that is incorporated and has more than one officer or director, by at least two persons who are officers or directors.

Was the Disclosure Materially Deficient?

[14] The plaintiffs rely on essentially three critical deficiencies in the disclosure document:

(1) The complete absence of the most recent financial statements and failure to provide even out-of-date statements with the disclosure document;

(2) the failure of the franchisor’s associate, John Lettieri, to sign the certificate required by the regulations attesting to the truth and accuracy of the disclosure; and

(3) the failure of the franchisor to include the head lease as part of the disclosure document.

The Financial Statements

[15] The evidence is that Lettieri and Papadopoulos met at a cigar lounge on October 2, 2006 where Lettieri provided Papadopoulos with Bars’ disclosure document. Papadopoulos signed an acknowledgement of receipt of this franchise disclosure document on that day. Lettieri testified that he fastened Bars’ 2005 financial statements to the back of the disclosure document with a clip when he gave it to Papadopoulos. Lettieri did not retain a copy of the disclosure document he gave to Papadopoulos. Papadopoulos testified that he could not recall seeing the 2005 financial statements. Papadopoulos almost immediately provided the disclosure document he had been given to Anton Katz, the solicitor retained by Papadopoulos, Baila and, ultimately, 212.

[16] In the course of these proceedings, Katz produced a copy of his file to the parties. No one appears to have asked for the original to be brought to the trial or to be produced for inspection. In any event, the evidence is that the only person who ended up with the original disclosure document given by Lettieri to Papadopoulos was Katz.

[17] Trial Exhibit 31 contains the disclosure document given to Katz by Papadopoulos. Exhibit A to the disclosure document in Katz’ file, headed “Financial Statements” says, “Annexed Hereto” but there are no financial statements whatsoever attached to the disclosure document.

[18] There is email correspondence from Katz to Christian Piersanti, counsel for Bars, on October 18, 2006 indicating that there were no financial statements included with the disclosure document. This was brought to Lettieri’s attention. Lettieri’s assistant, Sylvana Galati, told Katz she would “scan the financials” and “email them to you.” Her message to Katz went on to say, “We will be receiving year end for 2006 in a week from our accountant.”

[19] The 2005 financial statements were faxed to Katz on October 31, 2006. These appear in his file. Katz’ dockets from October 31, 2006 refer to “receipt” of financial statements and “forward same to client for review.” There is no evidence to determine whether “client” refers to Papadopoulos, Baila or both or whether the 2005 financial statements were forwarded to Papadopoulos, Baila or both. Katz’ evidence revealed some uncertainty about who he believed his client was at the time, but in the end, Katz agreed that his clients were Papadopoulos, Baila and 212.

[20] Katz testified that he never received any 2006 financial statements. Baila testified that she never received any financial statements at all. Papadopoulos testified that he never received 2006 financial statements. There is no evidence to establish that Lettieri or Bars ever provided 2006 financial statements to Papadopoulos, Baila or Katz at any time.

[21] It is clear from the provisions of O. Reg 581/00, ss. 3(1)(b) and 3(2), that the financial statements required to be included in Bar’s disclosure document were “for the most recently completed financial year of the franchisor’s operations.” The Bars year end was January 31. Therefore, the most recently completed fiscal year for Bars was the year ended January 31, 2006. By October 2016, more than 180 days had gone by since that date. As a result, by virtue of s. 3(2) of the regulations, the financial statements required to be included in the disclosure document were Bars’ financial statements for the year ended January 31, 2006. As Matheson J. said in Raibex Canada Ltd. v. ASWR Franchising Corp., 2016 ONSC 5575, “if it is simply impossible to make proper disclosure because material facts are not yet known, then the franchisor is not yet ready to deliver the statutorily required disclosure document. The franchisor must wait – it does not get excused from its statutory obligations.” I agree with that statement.

[22] The evidence is clear, and I find, that at no time were Papadopoulos, Baila or Katz provided with Bars’ 2006 financial statements; neither with the disclosure document required by s. 5(3) of the Act nor at any time thereafter. I conclude, therefore, that Bars and Lettieri failed to comply with s. 5 of the Act in that they failed to include the required financial statements in the disclosure document.

[23] Even if provision of the out-of-date 2005 financial statements could constitute compliance with the franchisor’s disclosure obligations (which I find in these circumstances they could not), Lettieri’s statement that the 2005 financial statements were attached to the disclosure document given to Papadopoulos on October 2, 2006 is unsupported by any documentary evidence. There are no financial statements at all attached to the disclosure document given to Papadopoulos which ended up in Katz’ file. When Katz advised Piersanti and Lettieri that there were no financial statements attached to the disclosure document later in October (October 18), Lettieri did not contradict that statement. Rather, he instructed Galati to provide them. The evidence is that the 2005 financial statements were provided to Katz on October 31, 2006.

[24] I do not accept Lettieri’s evidence that the 2005 financial statements were clipped to the disclosure document provided to Papadopoulos on October 2, 2006. That evidence is based solely on Lettieri’s memory and is contradicted by the contemporaneous documentary evidence concerning the disclosure document itself and the parties’ subsequent conduct.

[25] To the extent there was any suggestion that Papadopoulos purposely removed the financial statements, I find this is not supported by any evidence. There was no evidence of motive. There was no explanation for why Papadopoulos would do such a thing at that particular time. The suggestion that Papadopoulos tampered with the disclosure document before giving it to Katz is no more than idle speculation.

[26] Thus, the evidence is, and I find that, the out-of-date 2005 financial statements were not provided to Papadopoulos or Baila until October 31, 2006, almost a month after delivery to Papadopoulos of the disclosure document.

The Certificate

[27] Lettieri testified that he gave Papadopoulos a disclosure document with a signed certificate. As noted above, Lettieri did not retain a copy of the disclosure document he says he gave to Papadopoulos.

[28] Section 7 of the disclosure document, page 33, is called “CERTIFICATE.” It reads:

The undersigned, hereby certifies that this disclosure document:

a. contains no untrue information, representations or statements; and

b. includes every material fact, financial statement, statement and other information required by the Arthur Wishart (Franchise Disclosure) Act and Regulation.

This day of , 200 LETTIERI BARS LTD.

per:

John Lettieri - President

[29] The evidence is that the only copy of the disclosure document given by Lettieri to Papadopoulos on October 2, 2006 is the document in Katz’ file, which was produced as part of Exhibit 31. The certificate in the disclosure document in Katz’ file is not dated or signed. Papadopoulos, Baila and Katz all testified that they never saw a certificate signed by Lettieri, or anyone else.

[30] Again, I do not accept Lettieri’s evidence. It is based purely on recollection from a routine transaction in a cigar lounge 10 years ago. It is unsupported by the contemporaneous document, which has resided in Katz’ file since October 2006. There is no evidence to support the allegation of tampering. Lettieri cannot explain why page 33, section 7 of the disclosure document produced at trial as Exhibit 31 is not signed. The suggestion that the signed page may have been lost while being photocopied at Katz’ office is, again, idle speculation and makes no sense. Page 33 of the disclosure document was not lost. It is in the disclosure document between pages 32 and 34. It is not signed.

[31] I find, therefore, that Lettieri never signed the certificate contained in the disclosure document given to Papadopoulos on October 2, 2006.

The Head Lease

[32] The evidence is uncontested that the lease obligations of the franchisee were a flow-through. Lettieri Properties leased the premises at Victoria and Adelaide from the owner, and subleased them to the franchisee with no financial or other adjustment. It is conceded that the head lease was a material document because it represented one of the more significant financial obligations being undertaken by the franchisee. It is also conceded that the disclosure document did not contain the head lease.

[33] Lettieri testified, however, that the “offer to lease” was available, contained all material terms of the lease and that it was disclosed to Papadopoulos. The problem with this evidence is that:

(a) the offer to lease is nowhere to be found in the disclosure document or elsewhere in the evidence adduced at trial; and

(b) there is no evidence about when or to whom the offer to lease was provided by the franchisor.

[34] In view of the admission that the head lease, a material document, was not included in the disclosure document, it was incumbent on the defendants to prove that all material terms of the lease obligations to be undertaken by the franchisee were otherwise fully disclosed in the disclosure document.

[35] Although Lettieri testified that the offer to lease contained all material terms of the lease, the offer to lease is not in the disclosure document provided to Papadopoulos on October 2, 2006. The offer to lease itself was never proved at trial and there was no evidence before me to prove the terms and conditions contained in the offer to lease or to prove when or to whom the offer to lease was disclosed. In the circumstances, I find that the material terms of the lease obligations were not provided in the disclosure document or at any time thereafter.

[36] Mr. Cooper, counsel for Bars and Lettieri, argued that he understood the disclosure of the offer to lease to the franchisee was “admitted” and argued that it would be “unfair” for the plaintiff to rely on the absence of the offer to lease from the disclosure document or from the evidence at trial generally. I cannot accept this argument.

[37] I was shown no such concession by the plaintiff in any correspondence or documentary record before the Court. The agreed statement of facts is clear that there was no head lease provided in the disclosure document. That concession highlighted the importance of the issue. The defendants were on notice that this was a material issue in play at the trial. If the defendants wanted to offer another, equivalent form of disclosure of this material information, it was up to them to prove it. They have not done so.

The Effect of Material Non-Disclosure

[38] The materiality of a failure by a franchisor to include financial statements, a signed certificate or a head lease in the disclosure document required under the Act is well-established.

[39] The question which has occupied a number of decisions of this and other courts is when inadequate disclosure (under s. 6(1) – which requires a notice of rescission within 60 days of entering into the franchise agreement) becomes so defective as to amount to no disclosure (under s. 6(2) – which permits rescission no later than two years after entering into the franchise agreement).

[40] In 4287975 Canada Inc. v. Imvescor Restaurants Inc., 2009 ONCA 308, at para. 43, the Court of Appeal for Ontario identified the distinction between imperfect disclosure and disclosure that is so deficient as to amount to no disclosure at all as follows: “if the disclosure document that is provided turns out to be materially deficient, then no disclosure will be found to have been made.”

[41] In 2240802 Ontario Inc. v. Springdale Pizza Depot Ltd., 2015 ONCA 236, the Court of Appeal considered whether the failure to provide financial statements as required by the Act and Regulations was a material defect in disclosure. The court found that it was. Epstein J.A., writing for the majority, said, at paras. 56 to 58:

The Act is designed to address the perceived imbalance of power in the franchisor/franchisee relationship. The Act’s purpose is to protect both prospective franchisees and those already parties to a franchise agreement. This goal is achieved, in part, through the obligation imposed on franchisors to provide disclosure, the right given to the franchisee to rescind the franchise agreement in the absence of proper disclosure, and the franchisee’s right of action for damages based on the franchisor’s failure to comply with the disclosure requirements.

The Act must be interpreted in a manner that advances this purpose. Prospective franchisees, often lacking in business experience (such as Patel, Sheth and Amin), must be able to rely on the information they are given – particularly information relating to the franchisor’s financial circumstances. Providing a prospective franchisee with financial information about the franchisor that has been independently verified is more than a technicality. It is a foundational part of disclosure.

In my view, the failure to provide financial statements in accordance with s. 3(1) of the regulations – in other words, statements that have been independently verified to an audit engagement or review engagement level – by itself constitutes a material deficiency.

[42] The court cited, with apparent approval, the decision of Wilton-Siegel J. in Sovereignty Investment Holdings Inc. v. 91276907 Québec Inc., 2008 O.J. No. 4450. In Sovereignty Investment, Wilton-Siegel J. concluded that from a number of deficiencies, “there are at least four such deficiencies in the disclosure provided by the Franchisor to Sovereignty, each of which, on its own, is fatal to 9187’s assertion that the Franchisor complied with the requirement of the Act to deliver a disclosure document”.

[43] First among these critical deficiencies was the failure to provide financial statements. The others were, lack of backup for financial projections, the failure of the franchisor to deliver a single disclosure document at one time as required by s. 5(3) of the Act, and the absence of a signed certificate. On the latter deficiency, Wilton-Siegel J. said:

The certificate is an important means of implementing the policy of the Act of ensuring complete and accurate disclosure of all material facts pertaining to a proposed franchise investment. It is also the mechanism for imposing liability for misrepresentations in the disclosure document on certain parties as contemplated by paragraph 7(1)(e) of the Act.

See also 6792341 Canada Inc. v. Dollar It Limited et al. (2009) 2009 ONCA 385, 95 O.R. 291 (C.A.) at para. 32.

[44] In concluding that the franchisor’s failure to deliver disclosure in a single document was a critical deficiency, engaging the two-year rescission under s. 6(2) of the Act, Wilton-Siegel J. relied on the decision of the Court of Appeal in 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd. (2005), 201 O.A.C. 95, where MacFarland J.A. wrote, at para. 18:

In my view, the facts as described by the appellants do not fulfil the requirements of the Act. There is no issue of “substantive” versus “procedural” compliance. The requirement that disclosure occur in the form of a single document is not an empty formal requirement. The legislature clearly envisioned that the purpose of the legislation – i.e., ensuring that a decision to enter into a franchise agreement is an informed one – would best be fulfilled by giving prospective franchisees the opportunity to review a single document or documents, so that all the information is before them at the same time. It is simple common sense that people have more difficulty processing and assessing information given at different times, some of it orally, then they do information provided in a single, written document.

[45] In 6792341 Canada Inc. v. Dollar It Limited, supra, at paras. 36 to 39, the Court of Appeal also held that failure to disclose a head lease constituted a material deficiency in disclosure. See also Raibex Canada Ltd. v. ASWR Franchising Corp., supra, at paras. 69 to 77.

Conclusion on Material Deficiency

[46] On the basis of the applicable statutory provisions, as interpreted by Ontario courts, and the findings of fact made above, I conclude that there were three material deficiencies in the disclosure document provided to the plaintiffs. Each of these deficiencies, and certainly all three taken together, constitute defective disclosure so material as to amount to no disclosure at all. The plaintiffs were entitled to rescind. The two-year limit for notice of rescission under s. 6(2) of the Act applied. The franchisee’s notice of rescission was delivered within the required statutory period and is, therefore, a valid notice of rescission under the Act.

Were Material Deficiencies in the Disclosure Document Cured?

[47] I have already found that the 2005 financial statements were not the financial statements required by the regulation and that the admitted failure of the franchisor to deliver the 2006 financial statements with the disclosure document required under s. 5 constituted a material failure of disclosure amounting to no disclosure at all for the purposes of engaging the two-year period for rescission under s. 6(2) of the Act.

[48] Had this not been the case, the question of whether delivery of the 2005 financial statements to Katz a month after the delivery of the disclosure document to Papadopoulos constituted disclosure might have been engaged.

[49] In my view, even if the 2005 financial statements would have been sufficient (and I have found that they were not), I find they were not delivered with the disclosure document as one document. As discussed above, this too would represent a material deficiency in disclosure sufficient to engage the provisions of s. 6(2) of the Act.

[50] I have already found that the evidence does not support the conclusion that an offer to lease containing all material terms of the head lease was provided with the disclosure document. I have also found that if an offer to lease was provided at some point thereafter, the evidence did not permit any conclusion as to when and to whom it was disclosed.

[51] This too might have engaged the question of whether, after the disclosure document was delivered, the provision of additional material information might still constitute sufficient disclosure to preclude reliance on s. 6(2).

[52] Obviously, the critical issue in this instance is the requirement under s. 5(3) that “a disclosure document must be one document, delivered as one document at one time”. Given the paucity of evidence on the offer to lease point, it would be speculative to opine on whether, if that information had been provided to the franchisee at the time of (if not with) the disclosure document, or shortly thereafter, such disclosure might have been sufficient to avoid the “materially deficient” threshold. For this reason, I declined to rule on this hypothetical. I observe, however, that the safe course for a franchisor, to avoid the “piecemeal” disclosure problem posed by the requirements of s. 5(3), would be to serve a new disclosure document when new information becomes available and defer signing any franchise agreement for an additional 14 days.

[53] I find that the materially deficient disclosure resulting from failure to provide 2006 financial statements, a signed certificate and a head lease (or to prove equivalent disclosure through an offer to lease) was not cured. I decline to opine, in the absence of the necessary evidentiary underpinnings, on the question of whether materially deficient disclosure of this kind might have been cured in other circumstances. On the basis of the evidence tendered at trial, it was not.

Was the Disclosure Document Given to the “Prospective Franchisee” in the Required Manner?

[54] A great deal of the trial of this action was consumed with evidence and argument over whether disclosure to Papadopoulos or to Katz was disclosure to the “prospective franchisee” (the corporation to be incorporated) or to Baila.

[55] The argument centred on principles of agency and the ‘indoor management rule.’ Was Papadopoulos held out as having authority to bind Baila and/or 212? Were Lettieri and Bars entitled to rely on delivery of the disclosure document to Papadopoulos or the subsequent delivery of the disclosure document and/or other disclosure information to Katz, who acted for Papadopoulos, Baila and, ultimately, 212? Once Baila was revealed to be the only officer and director of 212, the only shareholder, and the only one signing any of the documents or giving personal covenants, were the defendants obliged to re-serve a complete disclosure document on Baila?

[56] These are potentially difficult questions. However, I have found that the disclosure document provided to Papadopoulos on October 2, 2006 was materially deficient and that those material deficiencies were not cured. In light of that finding, it matters not whether provision to Papadopoulos of the disclosure document was provision to the “prospective franchisor.” Assuming it was, the disclosure document was still materially deficient. Because it is unnecessary to do so, therefore, I decline to rule on the issue of whether providing the disclosure document, had it not been materially deficient, to Papadopoulos or to Katz constituted appropriate delivery of the disclosure to the prospective franchisee.

What is the Effect of the Franchisee’s Acknowledgement in the Franchise Agreement that It Received a Copy of the Disclosure Document Within the Prescribed Time Frame?

[57] The franchise agreement in this case provided, at para. 18.19, that:

The franchisee acknowledges having received a copy of the Disclosure Document within the prescribed times pursuant to the Arthur Wishart Act.

[58] Mr. Cooper argued that this representation by the franchisee was relied on by the franchisor and constitutes a bar to any claim now that the disclosure document was not delivered to the franchisee within the prescribed time frame.

[59] The Act is consumer protection legislation. It would, therefore, seriously undermine the intended purpose and effect of the Act if a franchisor could, by clever drafting of the franchise agreement, eliminate the right of rescission for deficiency in disclosure or for material non-disclosure.

[60] Importantly, s. 11 of the Act contains a “no waiver of rights” provision:

Any purported waiver or release by a franchisee of a right given under this Act or of an obligation or requirement imposed on a franchisor or franchisor’s associate by or under this Act is void.

[61] It seems to me that s. 11 was included in the Act to foreclose exactly the argument now being made by Mr. Cooper on behalf of the defendants. The delivery of a disclosure document is largely a question of fact but, as can be seen in the case law cited earlier in these Reasons, the scope of the disclosure obligations is also a matter of statutory interpretation. The entire exercise of analysing the adequacy of disclosure, therefore, involves mixed questions of law and fact.

[62] Only the franchisor knows what should or should not be included in the disclosure document. Only the franchisor knows whether the information provided is or is not accurate. An acknowledgement by the franchisee of the receipt and timing of the disclosure document can, therefore, be of no more than evidentiary value in the assessment of the adequacy of disclosure. In other words, the fact that a franchisee has acknowledged the timing and receipt of a disclosure document is a fact that can be taken into account when assessing the sufficiency of disclosure. But it can by no means constitute a bar to the exercise, or be in any way dispositive, of the franchisee’s rights to rescission under the Act.

[63] While Baila’s acknowledgement in the franchise agreement of the timing and receipt of the disclosure document is a fact, it is a fact which is overwhelmed by other facts for all the reasons cited earlier in this decision. I therefore reject the defendant’s argument on this point as wrong in law and in fact. The one fact of Baila’s acknowledgement must yield to the substantive facts which I have found overwhelmingly support the conclusion that proper disclosure was never made.

The Defendants’ “Fair Dealing” Argument

[64] Section 3 of the Act provides that every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement. The duty of fair dealing includes the duty to act in good faith and in accordance with reasonable commercial standards.

[65] The defendants argue that relief ought not to be granted to the plaintiffs because the plaintiffs breached their duty of fair dealing. The breach is said to arise because, while the franchise agreement and other documents represented Baila as the sole shareholder of 212, there was a private trust agreement between Baila and Papadopoulos under which Baila held 50% of the 212 shares in trust for Papadopoulos.

[66] The evidence of Baila and Papadopoulos, which was not challenged by any other evidence or undermined in cross-examination, was that the trust agreement was prepared due to Papadopoulos’ poor credit rating and concerns that creditors, including Papadopoulos’ ex-spouse, might come after his assets.

[67] I am unable to see why this particular circumstance constituted lack of fair dealing. Lettieri testified that he always understood that Baila and Papadopoulos were partners and would share the café business 50/50. Lettieri offered no evidence that he was misled or in any way prejudiced by the existence of the trust agreement. Papadopoulos, in fact, with Lettieri’s consent and approval, stayed on at the café after the franchisee’s default and after the notice of rescission and ran it for several years.

[68] For these reasons, I reject the allegation of lack of fair dealing and find that it has no bearing on the outcome of this case.

What is the Amount of Proven Damages Suffered by the Franchisee Under Subs. 6(6)(a), (b) and (c) of the Act?

[69] The plaintiff’s evidence on damages was put in, on consent, by way of affidavit with documentary exhibits attached in support. Mr. Cooper had the opportunity to cross-examine on this evidence at trial. The evidence in chief was marked as Exhibit 2 (Volume I of III only, as Volumes II and III related to damage claims which were abandoned at the outset of trial).

[70] The plaintiff’s damages claim falls under the heads of damage specified in subs. 6(6)(a), (b) and (c) of the Act.

6(6)(a) – Refund of Money Received from Franchisor

[71] It is not in dispute that the franchisee paid the following amounts to the franchisor:

Franchise fee $1.00 License fee $1.00 Site selection fee $5,000 GST on license and site selection fee $300.06 Royalties (seven months) $12,495

[72] The disputed item under this head of statutory damage is amount paid for rent. Section 6(6)(a) requires the franchisor or franchisor’s associate to “refund any money received from or on behalf of the franchisee.” The rent claim falls into two categories. It is agreed that the franchisee paid $11,092.57 to Lettieri Properties, an affiliate of Bars, by way of rent deposit (for first and last months’ rent). The problem with the rent claim for the remaining $50,625.84 is that the evidence at trial was unequivocal that rent was paid, not to the franchisor but directly to the owner/landlord, 1239079 Ontario Limited via its authorized agent Davport Inc. 1239079 Ontario Limited, the owner of the café premises, was arm’s-length from the franchisor.

[73] No authority was cited to me concerning the interpretation of the language of subs. 6(6)(a), “the franchisor shall refund to the franchisee any money received from the franchisee.” Based solely on the language itself, and the logic of the “refund” remedy, the money paid by the franchisee for rent was not paid to the franchisor. “Refund,” of course, means pay back. You cannot pay back money if you did not receive it. The rent paid to the owner could not be “refunded” by the franchisor. The rent was money paid by the franchisee to an arm’s-length third party for valuable consideration (the exclusive right to occupy the café premises). This is not a case like 1159607 Ontario Inc. v. Country Style Food Services Inc., 2012 ONSC 881, para. 117, where a finding of fact was made that the rent had been paid to the head tenant which was a franchisor’s associate.

[74] A claim for the rental expenses paid to the landlord might well fall within a damage claim for damages for breach of contract under traditional contract damages principles laid down in Hadley v. Baxendale. But, for the reasons outlined above, I find the rental expenses do not, in circumstances where the rent was not paid to the franchisor (directly or indirectly), constitute a viable claim under the statutory rescission remedy established by subs. 6(6)(a) of the Act. The claim for rent paid to the landlord in amount of $50,625.84 is therefore dismissed. The claim for rent deposit paid to Lettieri Properties in the amount of $11,092.57 is allowed.

[75] I therefore assess rescission damages claimed by the plaintiffs under subs. 6(6)(a) at $28,889.60.

[76] Leasehold improvements of $163,000 were classified in the plaintiff’s claim under subs. 6(6)(c), “supplies and equipment.” I do not think leasehold improvements are properly categorized as supplies or equipment. Leasehold improvements do represent, however, “money received from or on behalf of the franchisor other than money for inventory, supplies or equipment” under subs. 6(6)(a).

[77] Mr. Cooper objected during oral argument to the plaintiff’s attempt to re-categorize leasehold improvements from subs. 6(6)(c) to 6(6)(a), but could point to no prejudice resulting from this alternative position. Indeed, an objection limited solely to which of three pigeonholes an admitted expense falls into, in the absence of any issue of substance going to the merits of the claim, strikes me as empty formalism.

[78] There was no objection to the amount of $163,000, which was clearly established by the documentary evidence filed in support as having been advanced by the franchisee.

[79] I find in total, therefore, that the sum of $191,889.63 shall be refunded to the plaintiffs in respect of the rescission claim under subs. 6(6)(a).

6(6)(b) – Inventory

[80] The plaintiff has no documentary, or even direct, evidence of what inventory remained on the premises when the notice of rescission was served in September 2008. By her own admission, Baila had not been in the café for quite a while at that point. Her claim for $5,000 on account of inventory was an estimate based on her recollection of how much inventory was customarily kept on the premises from time to time.

[81] Lettieri testified that while there was some inventory on the premises when the notice of rescission was served, the franchisee had not paid for it. There were arrears owing to suppliers (including related-party suppliers) as early as May 2008. This is reflected in the notice of default sent to the franchisee on May 9, 2008, showing an outstanding balance to suppliers of over $8,900. There is no evidence that this outstanding amount was ever paid by the franchisee. Baila’s evidence is that she ran out of money in the summer of 2008 and that 212 could not afford to pay the rent. It seems unlikely that it could afford to pay suppliers in such circumstances.

[82] I find it is unlikely there was any inventory on the premises by September 28, 2008 paid for by the franchisee. The claim for refund of amounts paid for remaining inventory has not been established and is therefore dismissed.

6(6)(c) – Supplies and Equipment

[83] The plaintiff claims $100,698.53 for equipment and supplies. It is not contested that the franchisee paid $95,400 to Bars for equipment for the café. The remaining $5,298.53, Baila says, was paid to other suppliers (not the franchisor) for supplies and equipment for the café. This includes items such as cutlery, trays, a juicer and fruit baskets acquired from third-party suppliers unrelated to the franchisor.

[84] Under subs. 6(6)(c), the franchisor is required to purchase from the franchisee any supplies and equipment that the franchisee had purchased “pursuant to the franchise agreement.” I was not directed to any provision of the franchise agreement that required the franchisee to purchase these items from third parties, nor was there any evidence of a direction or communication from the franchisor that would lend credence to any assertion that these expenditures were required by the franchise agreement. In the circumstances, I find entitlement to reimbursement for these items has not been proved and that they fall outside the scope of subs. 6(6)(c).

[85] I find therefore that the plaintiffs are entitled to reimbursement for supplies and equipment under subs. 6(6)(c) in the amount of $95,400.

Conclusion on Rescission Damages Under Subs. 6(6)

[86] The total of the amounts required to be repaid to the plaintiffs by the defendants Bars and Lettieri, as found above, is $287,289.63.

Other Matters

[87] It should be noted that, shortly before the trial of this action took place, the plaintiffs settled with the defendant Papadopoulos. As part of that settlement, the action against Papadopoulos was dismissed without costs.

[88] The defendants brought a counterclaim. At the trial, the counterclaim was not mentioned in the defendants’ opening, no evidence was put forward by the defendants with respect to their counterclaim and no argument was submitted to me at the end of trial concerning the counterclaim. In the circumstances, the counterclaim is dismissed without costs.

Costs

[89] Counsel asked that I defer the issue of costs to be addressed following the release of these Reasons. Accordingly, the plaintiffs may seek costs by filing a bill of costs together with a brief written submission (not to exceed three typewritten double-spaced pages) within 10 days of the release of these Reasons. The defendants may respond to any request for costs by filing a brief written submission (subject to the same page limit) within a further seven days.

Penny J.

Released: October 7, 2016