Court File and Parties
COURT FILE NOS.: CV-16-560612; CV-16-556369 DATE: 20190703 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN: 2352392 ONTARIO INC. and BRENT SHEARER Plaintiffs/Moving Parties – and – VUSUMZI MSI and VUSUMZI MSI, PROFESSIONAL CORPORATION Defendants/Responding Parties
COUNSEL: Stephany Mandin and Steven Goldman, for the Plaintiffs/Moving Parties Jean-Marc Leclerc, for the Defendants Vusumzi Msi and Vusumzi Msi Professional Corporation Jennifer Dolman and Sarah McLeod for the Defendants, The Works Gourmet Burger Bistro Inc. et al.
AND BETWEEN: 2352392 ONTARIO INC., BRENT SHEARER Plaintiffs/Moving Parties – and – THE WORKS GOURMET BURGER BISTRO INC., THE WORKS REALTY CORP., FRESH BRANDS INC., ANDREW O’BRIEN aka THOMAS ANDREW O’BRIEN, SEAN BELL and DAVID WILSON Defendants/Responding Parties
HEARD: May 24, 2019
JUSTICE S. NAKATSURU
[1] The issue is simple. Is a claim in a pleading by the Plaintiffs, notice under section 6 of the Arthur Wishart Act (Franchise Disclosure) 2000, S.O. 2000 c. 3 (“Wishart Act”)?
[2] The bedfellows on this rule 21.01(1)(a) motion are unusual. Both the franchisee and the franchisor argue that proper notice under subsection 6(3) of the Wishart Act has not been given. The former lawyer of the franchisee argues that this question of law should not be determined on this motion. Alternatively, he argues the pleadings that he issued on behalf of the franchisee is proper notice. The lawyer is being sued by the franchisee for negligence.
[3] There are three issues I must decide:
(i) Is a rule 21.01(1)(a) motion appropriate to decide this question of law? (ii) Can a Third Party Claim by the franchisee constitute notice under subsection 6(3) of the Wishart Act? (iii) If it can, is the Third Party Claim actually given sufficient notice under subsection 6(3) of the Wishart Act?
A. Overview of the Claims
[4] 2352392 Ontario Inc. was incorporated by Brent Shearer (together henceforth referred to as “Shearer”) on or about December 4, 2012, to acquire and operate a Works Gourmet Burger franchised restaurant on Queen Street East in Toronto from the franchisor, The Works Gourmet Bistro Inc. On December 6, 2012, Shearer entered into a Franchise Agreement to purchase the franchise.
[5] Prior to executing the Franchise Agreement, The Works Gourmet Bistro Inc. gave Shearer two disclosure documents purporting to comply with the franchisor’s disclosure obligations under section 5 of the Wishart Act. Shearer now takes the position that the disclosure documents were so materially defective that they did not amount to disclosure at all. As a result, Shearer takes the position that they were entitled to rescind the Franchise Agreement within two years of entering into it.
[6] The franchise opened in or about March 2013. It did not succeed. By July 2013, The Works Gourmet Bistro Inc. had re-taken possession of the franchise and by October 2013, it had terminated the Franchise Agreement. As a result, Shearer claims they have lost their entire investment. Shearer had signed a loan agreement with the Royal Bank of Canada (“RBC”) in connection with the acquisition and operation of the franchise that went into default. RBC sued Shearer on November 7, 2013.
[7] In or around November 2013, Shearer retained Vusumzi Msi, a lawyer, and his professional corporation, (collectively referred to as “Msi”) as their litigation counsel to defend against the RBC lawsuit and to commence a Third Party Claim against The Works Gourmet Bistro Inc., various franchisor associates, and the landlord (henceforth collectively “The Works”), and to defend any claims the franchisor may bring.
[8] On January 17, 2014, Msi served a Statement of Defence on behalf of Shearer in the RBC action.
[9] On May 14, 2014, the Third Party Claim by Shearer against The Works was issued. In the Third Party Claim, Shearer claimed, among other things, rescission of the Franchise Agreement under the Wishart Act and/or common law principles and a full refund of monies paid. On October 17, 2014, this Third Party Claim was served.
[10] On June 10, 2015, The Works issued a Defence to the Third Party Claim and plead that the claim of Shearer was statute-barred as they had never delivered a notice of rescission required under subsection 6(3) of the Wishart Act within the two-year limitation period.
[11] On July 8, 2016, after Shearer hired new counsel, Shearer issued a new claim (CV-16-556369) against The Works taking the position that the Third Party Claim itself was a notice of rescission under the Wishart Act.
[12] On September 15, 2016, Shearer issued a new claim (CV-16-560612) against Msi alleging that he was negligent and had failed to advise Shearer that to properly exercise their rescission right under the Wishart Act, they were required to deliver a written notice of rescission within two years of entering into the Franchise Agreement.
[13] On November 4, 2016, Msi filed his Statement of Defence. On February 23, 2018, Msi issued an Amended Statement of Defence also pleading that the Third Party Claim was a notice of rescission under the Wishart Act.
B. A Motion Under Rule 21.01(1)(a)
[14] This is a motion under rule 21.01(1)(a) of the Civil Rules of Procedure. It states:
(1) A party may move before a judge,
(a) for the determination, before trial, of a question of law raised by a pleading in an action where the determination of the question may dispose of all or part of the action, substantially shorten the trial or result in a substantial saving of costs;
[15] Rule 21.01(1)(a) is available where:
- there are no material facts in dispute, and;
- the issue is resolvable on a plain and obvious standard.
[16] Msi has submitted a determination under the rule 21.01(1)(a) is not appropriate as it would not “substantially shorten the trial or result in a substantial savings of costs”, and because there are potentially conflicting principles of law.
[17] Shearer and The Works argue that in a chambers appointment on September 17, 2018, Justice D. Wilson had already decided this issue and made an order. Alternatively, they submit that this requirement of rule 21.01(1)(a) has been met in this case.
[18] I do not accept Msi’s submissions. I find that determination of the issue of whether proper notice has been given is a question of law raised by the pleadings where the determination of the question may dispose of all or part of the action, substantially shorten the trial or result in a substantial saving of costs.
[19] First of all, I find that Justice Wilson did determine this issue. On September 17, 2018, counsel for Shearer, The Works, and Msi appeared before Justice Wilson on a chambers appointment to seek directions. Both Shearer and The Works advised that a motion under Rule 22 of the Rules of Civil Procedure should be heard to deal with the question of law regarding notice. However, counsel for Msi did not consent to such a motion. Justice Wilson concluded that a motion under rule 21.01(1)(a) was appropriate and that determining whether the Third Party Claim was a notice of rescission would dispose of these actions or substantially shorten the matters for adjudication. She held:
In my opinion, it is patently clear that the issue of the propriety of the notice of rescission may dispose of these actions or at least it will streamline the issues and substantially shorten the matters for adjudication.
The motions shall be brought pursuant to Rule 21. The motions judge shall determine the issue for all 3 actions.
[20] In the context of the chambers appointment, Justice Wilson had to decide the best route for determining what all parties agreed to was a key issue. The parties sought directions from her. In deciding that Rule 21 was appropriate, Justice Wilson clearly turned her mind to its requirements. She decided they were met. Her endorsement was not brief; it was five pages. Her order about how the motion was to proceed and what I am to decide are phrased in mandatory terms.
[21] Secondly, I fully appreciate that even if she did decide this issue, it is open for me to hold differently. However, there is a strong argument that for the sake of comity, I should follow her decision absent a change in circumstances or some exceptional reason not to do so. None has been suggested by Msi. I find neither in this case.
[22] Thirdly, I appreciate that before Justice Wilson, counsel for Msi may not have been fully prepared to argue why a rule 21.01(1)(a) motion was not appropriate. At least not as prepared as he is now. That said, I find it noteworthy that counsel for Msi who had opposed a Rule 22 motion (a position Justice Wilson commented being one that counsel could not articulate any persuasive reason for opposing), was the one who actually suggested a Rule 21 or a summary judgment motion. Thus, it should not have come as a surprise if he obtained what he had asked for. Finally, the arguments counsel makes on why a rule 21.01(1)(a) motion will not shorten the trial or substantially save costs could all have been made at the chambers appointment. The arguments essentially rely only on the pleadings. Msi has not asked to produce any evidence on this motion as permitted with consent or leave under rule 21.01(1)(a).
[23] Fourthly, there are sound policy reasons for following the views of Justice Wilson. The chambers appointment conducted by her is a part of the case management process in the civil courts. Orders made by a judge from such a meeting are like any other orders of the court. For me to conclude that a rule 21.01(1)(a) motion is not appropriate would not only be at odds with Justice Wilson’s conclusion, it will no doubt prove detrimental to the process put in place to encourage efficient, timely, affordable and proportionate civil justice. Some of the comments made by Justice F. Meyer about the need to comply with scheduling orders made in civil practice court in the case of Cali’s Plumbing Ltd. v. National Dispatch Services Ltd., 2015 ONSC 1918 seem to be apropos here.
[24] In the alternative, like Justice Wilson, I am also of the view that deciding the question of law in this motion may dispose of all or part of the action, substantially shorten the trial or result in a substantial saving of costs. Msi argues that this motion will not. The argument by Msi is that resolution of the s. 6 issue will not resolve the claims made under s. 7 of the Wishart Act or any common law remedies sought by Shearer. It is submitted that under the latter, an investigation into the nature of the disclosure provided by The Works will be required regardless of what happens to the s. 6 claim. In my opinion, this argument fails to adequately appreciate the distinct question of law at issue in this motion. That question is notice. The determination of this question does not deal with questions regarding whether the disclosure met requisite statutory or common law standards. The fact that some matters may be left unresolved does not mean resolution of the question of law will not streamline issues or shorten the trial.
[25] In my view, the direction of three separate actions hinge significantly on the determination of this issue. A decision on this question of law can dispose of all or some of the actions and/or a substantial part of others. Regardless of the outcome of a decision on this question of law, the trials will be shortened and substantial costs will be saved. The parties are just at the pleadings stage. It would be of great benefit to have this question of law resolved. I therefore find these requirements of rule 21.01(1)(a) are met.
[26] With respect to the point raised by counsel that there is a conflict in the law, I do not see this as an impediment to deciding this case. As my reasons will demonstrate, I do not find the law is as unsettled as contended by Msi. In this case, there are no material facts in dispute. In my view, it is plain and obvious that the Third Party Claim cannot constitute notice under the subsection 6(3) of the Wishart Act.
C. Is the Pleadings Notice?
[27] Rescission under section 6 of the Wishart Act, if properly invoked, imposes sweeping obligations. It requires that within 60 days from the effective date of the rescission, the franchisor must essentially pay back what the franchisee paid: 212294 Ontario Inc. v. Lettieri, 2017 ONCA 830 at para. 5.
[28] Section 6 of the Wishart Act provides for two distinct circumstances where a franchisee can invoke the statutory right of rescission: (1) if the disclosure document is not delivered in a timely fashion or if it does not comply with the statutory requirements and; (2) if no disclosure document is provided at all. Regardless of which circumstance, the franchisee must comply with the notice provision in subsection 6(3):
(3) Notice of rescission shall be in writing and shall be delivered to the franchisor, personally, by registered mail, by fax or by any other prescribed method, at the franchisor’s address for service or to any other person designated for that purpose in the franchise agreement.
[29] It is argued by Msi that the Third Party Claim constitutes the required notice under subsection 6(3). The relevant reference is made in the Third Party Claim to recession in the prayer for relief:
g) rescission of the franchise agreement of a franchisee under the Franchise Legislation and/or pursuant to common law principles, and a full refund of all monies paid to the Third Parties
[30] Both Shearer and The Works argue that the Third Party Claim is not proper notice. I recognize that Shearer has pleaded that it is, in its action commenced against The Works. Shearer now contends on this motion that it does not. It seems that on the issue of statutory rescission, Shearer has picked its primary litigation target to be Msi.
[31] There are few authorities which have considered the issue of whether a pleading can constitute notice under subsection 6(3). The issue was considered in 779975 Ontario Limited v. Mmmuffins Canada Corp., 2009 28893 (ONSC). Factually, there are similarities in that case to the case at bar. In Mmmuffins, the franchisee sought rescission under subsection 6(2) of the Wishart Act on the grounds of fraudulent or reckless pre-contractual misrepresentations. The franchisee sent a draft statement of claim and served the identical statement of claim claiming rescission, without reference to the Wishart Act, within two years of signing the franchise agreement. More than two years later, the franchisee commenced a second action against the franchisor and claimed for rescission under subsection 6(2). The franchisee alleged that delivery of the draft statement of claim by letter and/or service of the issued statement of claim constituted a notice of rescission. The franchisor argued it did not. Therefore, it argued that the claim for statutory rescission was statute-barred.
[32] Strathy J. (as he then was) in Mmmuffins ultimately ruled that the statement of claim in question was too deficient to meet the minimum requirements of a notice of rescission. On the facts before him, the franchisee had brought an action for equitable rescission. This was a claim separate and apart from the Wishart Act. As a result, he held that the claim did not provide notice that the franchisee was exercising its statutory right to rescind the franchise agreement. Strathy J. noted that treating a pleading for rescission in a previous action as a notice of rescission under subsection 6(3) was not reasonable or fair (at para. 50):
Keeping in mind the observation of the Court of Appeal in 4287975 Canada Inc. v. Imvescor Restaurants Inc. above, at para. 40 that “[a] fair interpretation of the [AWA] is one that balances the rights of both franchisees and franchisors” it would not be reasonable or fair to treat the First Action as “notice” of rescission. To do so would give the First Action a purpose that it was quite obviously never intended to have.
[33] In my view, the primary emphasis of the motion brought in Mmmuffins was on the substantive adequacy of the notice. Put another way, the case dealt with what a notice under subsection 6(3) of the Wishart Act had to minimally contain. Factually, it just happened that the purported notice claimed by the franchisee in Mmmuffins was in a statement of claim. Strathy J. rejected the argument that the first statement of claim constituted adequate notice. Since it made no reference at all to the Wishart Act and only to equitable rescission and damages, it did not meet the minimum requirements of notice. He did not go on to analyze whether a pleading like a statement of claim itself could by its nature constitute such a notice. I find this was because the parties did not raise the issue; their concerns focused on whether the first statement of claim could constitute sufficient notice by its contents.
[34] I appreciate that Strathy J. refers to an authority cited by the plaintiff in Mmmuffins, Ahmed v. Ontario, [2004] O.J. No. 4350 (S.C.J.) which held that service of a statement of claim was notice for the purposes of the Proceedings Against the Crown Act. However, in my opinion, a notice under that Act serves a very different purpose than that under subsection 6(3) of the Wishart Act and does not carry with it the extraordinary consequences that follow service of the notice under subsection 6(3). Thus, I do not see Strathy J.’s brief reference to this authority as detracting from my view that Mmmuffins does not stand apposite Shearer and The Works’ position.
[35] Strathy J.’s comments were echoed later by the Ontario Court of Appeal in the case of Yim v. Talon International Inc. 2017 ONCA 267 which dealt with the reasonableness of a notice under the Condominium Act. Epstein J.A. referred to the Mmmuffins case in discussing what adequate notice should look like in the context of consumer protection legislation. She discussed the ratio of Mmmuffins in the following way (at para 73):
Ultimately, at paras. 49-50, Strathy J. concluded that the statement of claim in the first action was not sufficient to constitute "notice of rescission" to the franchisor within the meaning of the AWA. The statement of claim made no reference to the AWA, nor to the franchisor's failure to provide a disclosure document or statement of material change in time or at all, and there was nothing to indicate to the franchisor that the franchisee was claiming the relief set out in s. 6(6). The statement of claim did not purport to be an exercise of a statutory right by the franchisee -- on the contrary, it was simply an action for rescission and damages that had nothing to do with the AWA. [Emphasis added.]
[36] While Epstein J.A. does not comment further, she does recognize, if not explicitly at least implicitly, that a statement of claim was a different creature both in form and purpose than a notice under subsection 6(3). The statement of claim did not nor could it, in my opinion, be a form of notice saying to the franchisor that the franchisee was claiming the relief under subsection 6(6).
[37] Although they do not address the question directly, I find that these authorities do not stand for the proposition that a statement of claim can amount to notice under the Wishart Act.
[38] Finally, I find that any debate on this question has been put to rest in 2130489 Ontario Inc. v. Philthy McNasty’s (Enterprises) Inc., 2012 ONCA 381. In this case, the franchisee signed a franchise agreement with the franchisor on October 9, 2007, but the franchisor did not provide any disclosure documents. The franchisee provided a notice of rescission on September 23, 2009 within two years of signing the franchise agreement, but did not commence an application for statutory rescission until November 29, 2010. The franchisor claimed that the franchisee was out of time, as the application was brought after October 9, 2009, the second anniversary of the execution of the franchise agreement. Both the appeal court and the lower court ruled the application was brought in time, as the franchisee had no cause of action for statutory rescission until after the notice of rescission was delivered.
[39] The Ontario Court of Appeal clarified that a notice of rescission is distinct from a pleading commencing a proceeding. It concluded that a notice of rescission notifies the franchisor that they have 60 days to compensate the franchisee pursuant to subsection 6(6) of the Wishart Act. In contrast, a franchisee has no cause of action for statutory rescission damages until those 60 days have elapsed or the franchisor communicates its refusal to compensate the franchisee. MacPherson J.A. wrote:
Until the franchisor decides to not fulfil the obligations in s. 6(6), the franchisee has no cause of action for compensatory damages; at most, the franchisee has a latent or potential cause of action. Accordingly, the franchisee only has a cause of action at the earlier of (a) when the franchisor fails to pay compensation pursuant to s. 6(6) by the end of the 60 day period following the effective date of the Notice of Rescission or (b) when the franchisor communicates its refusal to do so at some point before expiry of the 60 days, as happened in this case on November 3, 2009. [Emphasis added.]
[40] Thus, since a notice under subsection 6(3) serves a different purpose from a pleading, this Third Party Claim in the case at bar cannot constitute such a notice. It is plain and obvious the Third Party Claim which is based upon a cause of action dependant upon a failure of the franchisor to abide by its obligations under subsection 6(6), cannot constitute notice since there is no cause of action until such notice has been given. Logically, the Third Party Claim cannot serve the same function as notice.
[41] Here, Shearer failed to provide notice under subsection 6(3) before they made their Third Party Claim. It now alleges that this was due to the negligence of Msi. Recognizing this, in a rather transparent attempt to avoid liability, Msi tries to repurpose the Plaintiffs’ pleading into something it was clearly never intended to be.
[42] A pleading has a very distinct purpose from a notice of rescission. A pleading is intended to give notice to the other side of the case to be met, to inform the court of the matters in issue, to constitute a record of the issues raised in deciding the action so as to prevent further litigation upon matters already judicially determined, and to help define the scope of discovery. A pleading is meant to define the litigation and the causes of action.
[43] In contrast, a notice of rescission is intended to notify the franchisor that the franchisee is rescinding its franchise agreement and gives the franchisor 60 days to compensate the franchisee in accordance with subsection 6(6) of the Wishart Act. A pleading of rescission and a notice of rescission are functionally and temporally distinct. There is no cause of action for rescission until: (a) the notice of rescission has been delivered to the franchisor, and (b) the franchisor has either not compensated the franchisee within 60 days, or advised the franchisee, prior to the expiry of the 60 days, that the franchisee will not be compensated.
[44] A pleading for rescission under the Wishart Act only crystallizes after a franchisor has failed or refused to compensate the franchisee in accordance with subsection 6(6) of the Wishart Act, and is meant to seek damages for unlawful conduct.
[45] To illustrate the absurd result if a pleading could act as notice under subsection 6(3), a franchisee could sue the franchisor in a claim for rescission without the franchisor being given anytime to comply with what the legislature says it must do. This would not be fair to the franchisor. This would also undermine the legislative framework set up under section 6 of the Wishart Act. Indeed, subsection 6(6) seems to be a legislative alternative to the franchisee being forced to bring a cause of action.
[46] Therefore, in conclusion, I find on the basis of binding authority and legal principle, that it is plain and obvious that the Third Party Claim cannot be notice under subsection 6(3) of the Wishart Act.
D. Is the Substance of the Notice Sufficient?
[47] It was further argued by Shearer and The Works that even if pleadings could constitute notice, this particular notice given in the Third Party Claim is deficient. Mmmuffins and Talon International both speak to what is required to satisfy the notice requirement. However, given my conclusion above, it is not necessary to decide this issue.
E. Conclusion
[48] Thus, I conclude that the Third Party Claim does not constitute a proper notice of rescission under subsection 6(3) of the Wishart Act.
[49] I would encourage the issues of costs be resolved between the parties. If it cannot, I will entertain written submissions, each one limited to two pages excluding any attachments (any Bill of Costs, Costs Outline, and authorities). Shearer and The Works shall file within 10 days of the release of these reasons. Msi shall file within 7 days thereafter. There will be no reply submissions without leave of the court.
Justice S. Nakatsuru Released: July 3, 2019
Reasons for Judgment
COURT FILE NOS.: CV-16-560612; CV-16-556369 DATE: 20190703 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN: 2352392 ONTARIO INC. and BRENT SHEARER Plaintiffs/Moving Parties – and – VUSUMZI MSI and VUSUMZI MSI, PROFESSIONAL CORPORATION Defendants/Responding Parties
AND BETWEEN: 2352392 ONTARIO INC. and BRENT SHEARER Plaintiffs/Moving Parties – and – THE WORKS GOURMET BURGER BISTRO INC., THE WORKS REALTY CORP., FRESH BRANDS INC., ANDREW O’BRIEN aka THOMAS ANDREW O’BRIEN, SEAN BELL and DAVID WILSON Defendants/Responding Parties
