Court File and Parties

COURT FILE NO.: CV-17-00582247-0000 DATE: 20200130 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

2483038 Ontario Inc., Baljeet Singh and Kulwinder K. Singh Plaintiffs – and – 2082100 Ontario Inc. and Samuel Davis Defendants

Counsel: Allan D.J. Dick and Daniel Hamson, for the Plaintiffs/Defendants by Counterclaim Ben V. Hanuka, for the Defendants/Plaintiff by Counterclaim

AND BETWEEN

2082100 Ontario Inc. Plaintiff by Counterclaim – and – 2483038 Ontario Inc., Baljeet Singh and Kulwinder K. Singh Defendants by Counterclaim

HEARD: September 9, 10 and 11, 2019 Kimmel J.

Reasons for Decision

[1] The plaintiff franchisee, 2483038 Ontario Inc., and its officers and directors Baljeet Singh and Kulwinder K. Singh, entered into a franchise agreement and ancillary agreements dated September 9, 2015 for the operation of a “Fit for Life” restaurant in Oakville with the defendant franchisor 2082100 Ontario Inc. Samuel Davis is one of the principals of the franchisor and alleged to be a franchisor’s associate with personal liability. The plaintiffs seek statutory compensation and damages against Samuel Davis and the franchisor under the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000 c. 3 (“the Wishart Act”).

[2] The plaintiffs’ franchise opened for business on or about December 14, 2015. It ceased operating on or about August 11, 2017 after delivery of a statutory notice of rescission.

[3] The primary issue in this case is whether the plaintiffs were entitled to deliver their notice of rescission. If so, the subsidiary questions of whether Samuel Davis is a franchisor’s associate and personally liable for their claimed statutory compensation and damages also must be decided. The plaintiffs seek the payment of $624,821.06 pursuant to s. 6(6) of the Wishart Act. This includes a claim for a refund of the rents they paid to a third-party landlord under a sub-lease with the franchisor totalling $148,911.80. Any amounts that are not recoverable under s. 6(6) are claimed as damages under s. 7 of the Wishart Act.

[4] Conversely, if the plaintiffs’ notice of rescission was invalid, the franchisor seeks damages from them by way of counterclaim for their wrongful rescission of the franchise agreement, including for the removal of their equipment used to operate the Fit for Life franchise and for lost royalties. The franchisor also makes various claims for alleged operational defaults and misrepresentations.

[5] The three-day trial of this action was streamlined by the filing of in-chief affidavits from each of the witnesses who attended at trial to affirm their evidence in chief but primarily to be cross-examined. Five witnesses testified at the trial, one for the plaintiffs and four for the defendants.

Summary of Issues and Outcome

[6] The following issues must be decided:

a. Was there a fatal flaw in the franchisor’s statutory disclosure entitling the plaintiffs to deliver a notice of rescission within two years of the execution of the franchise agreement under s. 6(2) of the Wishart Act?

b. If so, is Samuel Davis a franchisor’s associate within the meaning of the Wishart Act?

c. What amounts are the plaintiffs entitled to recover under sections 6 and/or 7 of the Wishart Act and which defendants are responsible to pay those amounts?

d. Is the rent that the plaintiffs paid under the sub-lease recoverable under any of s. 6(6)(a), 6(6)(d) or s. 7 of the Wishart Act?

e. If the plaintiffs were not entitled to rescind the franchise agreement or to remove their equipment as they did (which they concede would lead to a finding that they are in breach of that agreement), what damages has the franchisor proven arising from the plaintiffs’ failure to perform their obligations under the franchise agreement?

[7] For the reasons that follow, I find that the disclosure certificate provided by the franchisor was fatally flawed. The franchisee was entitled to send its notice of rescission, which was delivered within the two-year period provided for under s. 6(2) of the Wishart Act. I find that Samuel Davis is a franchisor’s associate within the meaning of s. 1(1) of the Wishart Act, and that the defendants are both liable for the statutory compensation claimed by the plaintiffs. Their liability for losses associated with the rent paid by the franchisee under the sub-lease under s.6(6)(d) or s.7 of the Wishart Act, if any, remains to be determined on a reference.

[8] Accordingly, the plaintiffs are entitled to judgment and the counterclaim is dismissed. My specific declarations and orders are detailed at the end of these reasons. The parties advised after the hearing by email correspondence dated November 15, 2019 that they have reached an agreement on how costs should be addressed regardless of the outcome. Costs are to be paid in accordance with that agreement.

Background and Chronology

[9] The timeline of events surrounding the signing of the franchise agreement and sub-lease dated September 9, 2015 is not in dispute. This timeline includes the following events in 2015:

a. August 20 – Surinder Jassal (“Surinder”) submitted a franchise application for a Fit for Life franchise

b. August 21 – franchise disclosure document (“FDD”), head lease and other materials were sent to Surinder and both Surinder and his brother-in-law Baljeet Singh (“Bill”) acknowledged receipt of the FDD in writing

c. August 24 – Bill and Surinder first met with Arthur Davis at the franchisor’s offices

d. August 26 – Bill submitted his own franchise application

e. August 31 – second meeting at the franchisor’s offices with Arthur Davis and Warren Smagaren

f. September 8 – Surinder signed a letter of intent on behalf of a company to be incorporated with the defendant franchisor (2082100 Ontario Inc.)

g. September 15 – initial payment of funds on behalf of franchisee to franchisor

h. September 16 – requested amendments to franchise agreement for newly incorporated franchisee, 2483038 Ontario Inc.

i. September 17 – disclosure of shareholders of franchisee to be Bill and Kulwinder Singh (Surinder’s wife)

j. September 28 – request for Surinder to be replaced with his wife Kulwinder as the principal in the franchise agreement and sub-lease

k. October 2 – FDD provided to Kulwinder and receipt is confirmed in writing

l. October 9 – Bill executes the franchise agreement and sub-lease on behalf of the franchisee and as principal

m. October 15 – RBC confirmed approval of loan for the franchisee, Bill and Kulwinder

n. October 19 – Kulwinder executes the franchise agreement and sub-lease on behalf of the franchisee and as principal

o. October 19 – Smagaren executes the franchise agreement and sub-lease identifying himself as an authorized signing officer of the franchisor

p. October 22 – plaintiffs meet at franchisor’s offices and begin training process

q. October 30 – Arsalan Sayed confirmed internally within the franchisor that the franchisee parties were approved operationally

r. December 13 – Smagaren confirmed internally within the franchisor that the franchisee parties were approved financially

s. December – After internal confirmations, a New Store Checklist is completed by Natalya internally within the franchisor and the franchisee begins operating the Fit for Life restaurant in Oakville

[10] Samuel Davis met briefly with the plaintiffs during at least two of the meetings they attended at the franchisor’s offices.

[11] The franchisee’s notice of rescission was sent to the franchisor and Samuel Davis on August 1, 2017, which led to the delivery of a notice of default from the franchisor dated August 10, 2017. The franchise agreement and sub-lease were terminated by the franchisor on August 16, 2017. Over the course of the fall of 2017, the franchisor negotiated rent relief from the head landlord and refranchised this Fit for Life restaurant location.

Analysis

(i) Did the Franchisor Provide the Required Certified Disclosure?

The Statutorily Required Certified Disclosure

[12] Section 5 of the Wishart Act requires a franchisor to provide a prospective franchisee with an FDD at least fourteen days before the payment on behalf of the franchisee of any consideration to the franchisor or before they enter into any agreement relating to the franchise. Section 5(4) requires the contents of the FDD to comply with what is prescribed by O. Reg. 581/00 (“the regulation”). This includes the disclosure of material facts, information and documents for the purposes of assisting the prospective franchisee in making informed investment decisions. The regulation sets out detailed requirements for the information, statements and documents to be included as part of the FDD and specifically requires in section 7(1) that the FDD include a certificate that the document:

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

b. Includes every material fact, financial statement, statement or other financial information required by the Wishart Act and the regulation.

[13] Section 7(2) of the regulation requires that this certificate be signed and dated by the sole director or officer of the franchisor, or at least two officers and directors if the franchisor has more than one. The signing of the certificate carries with it personal liability for the signatory (or signatories).

[14] If the franchisor fails to provide the FDD, the franchisee has two years under s. 6(2) of the Wishart Act to rescind the franchise agreement without obligation or penalty. This court and the Court of Appeal for Ontario have held that where a franchisee enters into a franchise agreement in circumstances where an FDD is provided but it fails to meet the statutory and regulatory disclosure requirements to such an extent that the disclosure is in effect vitiated, that can give rise to this two-year right of rescission. Absent these circumstances, for example where the FDD is simply found to be deficient in some aspect of the statutory and regulatory disclosure requirements, there is a 60-day right of rescission under s. 6(1).

[15] The distinction that must be drawn is between a complete failure of the required certified disclosure (s. 6(2)) and a mere deficiency in disclosure (s. 6(1)). The plaintiffs must establish that there was a complete failure of the required certified disclosure in order to succeed in this case since their notice of rescission was delivered more than 60 days but less than two years after their receipt of the FDD.

[16] The plaintiffs’ notice of rescission dated August 1, 2017 rescinded the franchise agreement, ancillary agreements (including the sub-lease) and the individual plaintiffs’ personal guarantees. The plaintiffs did so on the basis of the franchisor’s failure to provide them with the statutorily mandated franchise disclosure document (FDD) prior to the signing of the franchise agreement and guarantees or prior to their payment of any consideration to the franchisor relating to the franchise, contrary to s.5 of the Wishart Act and s.7 of the regulation. They specifically rely upon the failure of the franchisor to provide them with an FDD that contained the required certificate signed by Samuel Davis, the sole officer and director of the franchisor. [1]

The Fit for Life FDD

[17] The Fit for Life FDD was comprised of 29 pages plus eight exhibits. The first four pages contained some of the prescribed information under the regulation (about the corporate name, affiliates, business experience, major shareholders and directors, and the objectives or aspirations for the franchise) followed by a signature block where Samuel Davis signed for the franchisor company as its president and CEO.

[18] Samuel Davis testified that he signed the disclosure about the Fit for Life franchise system annually after he received the financial statements. He understood that the document he signed annually was copied and inserted into the FDD each time disclosure was made by the franchisor for the year in which he signed.

[19] Samuel Davis confirmed that what appeared in the pages of the FDD before his signature on page 4 set out the aspirations for the franchise system. He testified that it was his intent to endorse the document in its entirety and to be personally liable when he signed it on page 4. He conceded that there were some inaccuracies in the contents of the disclosure above his signature. He explained that he relied on his team to ensure that the specifics were updated for each FDD provided to a prospective franchisor. He left it to his team to update and assemble the FDD and associated documents to accompany it when disclosure was provided.

[20] The FDD continues after the page signed by Samuel Davis, from pages 5 to 29, and attaches other documents. Pages 5 to 26 contain various statements and information prescribed by the regulation. Certain material contracts are listed and identified in attached exhibits, including the franchise agreement, head-lease, sub-lease and unaudited financial statements for the year ended January 31, 2015. Page 27 contains a heading: “Fit for Life Franchise Certificate of Disclosure” and includes various statements about the truthfulness and completeness of the disclosure. There is no signature or signature line on or after this page.

[21] Bill and Surinder each acknowledged having received a copy of the FDD on August 21, 2015 and acknowledged their responsibility to review it or have their lawyer review it with them. Kulwinder acknowledged having received a copy of the same FDD on October 2, 2015 and acknowledged her same responsibilities.

The Positions of the Parties

[22] The parties come at this from two diametrically opposed perspectives.

[23] The plaintiffs/franchisee parties argue that it is so fundamental to the policy and purpose of the disclosure certificate that it be signed and certified by the appropriate director of the franchisor that a failure to do so is no disclosure at all, irrespective of whether there are any alleged misrepresentations or material omissions in the FDD and/or ancillary documents. The plaintiffs contend that no meaningful investment decision could be made in the absence of the appropriately certified disclosure, irrespective of the content of the disclosure, and even though they are not alleging that their ability to make an informed investment decision was impacted by any misleading, inaccurate or incomplete disclosure. They maintain that the breach of the certification requirement under the regulation is, on its own, fatal to the ability of a purported disclosure document to satisfy the mandated disclosure requirements.

[24] The defendants argue that there is nothing about the alleged defect in the disclosure certificate in this case that prevented the plaintiffs, who were represented by counsel, from making an informed investment decision. They rely on the fact that there is no allegation that the plaintiffs were unable to make an informed decision because of any purported deficiency in the disclosure or that any misrepresentation or omission in the disclosure affected the plaintiffs’ decision to enter into the franchise agreement. The defendants also rely on the admission by the plaintiffs that they had a full opportunity to do their own due diligence. The defendants contend that this is a purely technical argument by the plaintiffs who seek to take advantage of Samuel Davis having signed the FDD in the wrong place (on page 4 rather than on page 27).

The Applicable Case Law

[25] The Wishart Act has been in force for almost twenty years and there have been many opportunities for courts to interpret it. Some of the guiding principles that emerge from the caselaw at the appellate level include:

a. The Wishart Act is intended to redress the imbalance of power between a franchisor and franchisee and it must be given a generous interpretation that errs on the side of over-inclusion to ensure the broadest scope of disclosure. See 2189205 Ontario Inc. v. Springdale Pizza Depot Ltd., 2011 ONCA 467, 336 D.L.R. (4th) 234 at paras. 23-24 and 2240802 Ontario Inc. v. Springdale Pizza Depot Ltd., 2015 ONCA 236, 331 OAC 282, at para. 56.

b. A fair interpretation of the Wishart Act is that it balances the interests of both franchisees and franchisors. See 4297975 Canada Inc. v. Imvescor Restaurants Inc., 2009 ONCA 308, 98 O.R. (3d) 187 at para. 40.

[26] There have been numerous cases decided by the Court of Appeal for Ontario about what is required for a franchisee to be entitled to rescind under s. 6(2). It was established early on that a failure to provide the required disclosure is not limited to circumstances where no FDD is provided. An FDD may be so deficient as to effectively amount to a complete lack of disclosure, thereby permitting rescission under s. 6(2) of the Wishart Act. Calling something a disclosure document does not make it one. See Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62 at para. 47. See also 6792341 Ontario Ltd. v. Dollar It Ltd., 2009 ONCA 385, 95 O.R. (3d) 291 at para. 74.

[27] In Sovereignty Investment Holdings, Inc. v. 9127-6907 Quebec Inc. (2008), 303 D.L.R. (4th) 515 at para. 15, Wilton-Siegel J. identified four instances in which the FDD failed to satisfy the substantive requirements of the Wishart Act, “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.’” One of the four deficiencies in that case was that the document delivered did not include a certificate covering all of the disclosure prescribed under s. 7 of the regulation. [2]

[28] Wilton-Siegel J. emphasized in Sovereignty at para. 19 that the certification requirement is “an important means of ensuring complete and accurate disclosure of all material facts pertaining to a proposed franchise investment…and the mechanism for imposing liability for misrepresentations in the disclosure document on certain parties as contemplated by paragraph 7(1)(e) of the Act.”

[29] Similar policy considerations were relied upon by the Alberta Court of Appeal in the case of Hi Hotel Limited Partnership v. Holiday Hospitality Franchising Inc., 2008 ABCA 276 at para. 36. In that case, an FDD contained the certificate language and a signature block for the corporate franchisor contemplated to be signed “per” a signing officer but was not signed or dated. It was found not to satisfy the Alberta legislation’s requirement for a substantially complete FDD in compliance with its regulation. There was no allegation being made that the FDD actually contained any misleading or inaccurate information (see para. 134). The court in that case still found (at paras. 100, 136) that the FDD was not substantially complete due to the failure to comply with the requirement of a signed and dated certificate.

[30] The Alberta Court of Appeal concluded at para. 135 that there can be no disclosure unless a signed and dated certificate is included in the FDD. The underlying rationales for this included the need for some individual take the responsibility for affirming the accuracy and completeness of all of the disclosure and to bear the consequences of personal liability under s.7 for failing to do so.

[31] A similar approach was endorsed by the Court of Appeal for Ontario shortly afterwards in Dollar It Ltd. at para. 32, where it was observed that the failure to include the mandated certificate alone could be sufficient grounds to conclude that the required disclosure under the Wishart Act had not been provided. [3] The Court of Appeal for Ontario affirmed another decision in which a failure to complete a properly signed certificate was identified as one of the fatal disclosure deficiencies in Springdale (2015), at paras. 48-52 and 59.

[32] The Ontario Court of Appeal more recently revisited the policy behind the requirement for a signed FDD certificate in Mendoza v. Active Tire & Auto Centre Inc., 2017 ONCA 471, 139 O.R. (3d) 230: “to impress upon those who sign the importance of ensuring that the document is complete and accurate.” In addressing the argument against rescission, the Court of Appeal also emphasized that the rescission remedy is not “conditional on the approach taken by a particular franchisee to the disclosed material,” even when the franchisee did not study the contents of the FDD or rely upon them at the time (see paras. 22-27).

[33] It is apparent from the jurisprudence that section 6(2) Wishart Act cases are informed by two policy objectives: (1) informed investment decision making; and (2) impressing upon those who sign a disclosure certificate the importance of ensuring the disclosure document is complete and accurate. The first policy objective broadly recognizes the rights of franchisees. The second policy objective recognizes a specific obligation upon the franchisor.

[34] The most recent case from the Ontario Court of Appeal dealing with disclosure deficiencies was about breaches of s. 5 for non-disclosure of material facts (see Raibex, at paras. 21-24). The motion judge found that the franchisor had breached s. 5 so significantly as to amount to non-disclosure. This finding brought the rescission analysis out of s. 6(1) and into the scope of s. 6(2). The Court of Appeal overturned the motion judge’s finding about the s. 5 breach, in part because the franchisee had not demonstrated that it had actually been deprived of the ability to make an informed investment decision as a result of the alleged disclosure deficiencies.

[35] The Court of Appeal in Raibex endorsed the prior authorities and the view that there can be disclosure that is so deficient that it amounts to no disclosure (Raibex at para. 47). The Court of Appeal emphasized the need for a purposive analysis of s.5 Wishart Act disclosure deficiencies, having regard to the importance of both previously identified policy objectives:

a) emphasis was placed on the importance of full disclosure from a franchisor to a potential franchisee “so that the latter can make a properly informed decision about whether or not to invest in a franchise,” in the context of the Court of Appeal’s decision to overturn the motion judge’s finding that the disclosure about a yet to be negotiated head lease was deficient (Raibex at para. 49); and

b) emphasis was placed on the policy most recently articulated in Mendoza that the certificate was intended to “impress upon [franchisors] the importance of ensuring the document is complete and accurate” in the context of the Court of Appeal’s decision to uphold the motion judge’s finding that the disclosure certificate was valid (Raibex at para. 63).

[36] The defendants contend that this case has shifted the focus of s. 6(2) rescission cases. They argue that a franchisee who claims that a disclosure deficiency amounts to effective non-disclosure must show actual impact of that non-disclosure. Specifically, that a franchisee was deprived of the ability to make an informed investment decision by the alleged deficiency. The plaintiffs argue that the Court of Appeal did not overrule its own earlier decisions in which certificate deficiencies were said to be fatal disclosure deficiencies, amounting to effective non-disclosure, without regard to the impact upon the prospective franchisees.

[37] I agree with the plaintiffs. The Court of Appeal’s decision in Raibex does not import the requirement of an inability to make an “informed investment” and the policy objective of full disclosure that informs the analysis of s. 5 breaches relating to non-disclosure of material facts, into the defective certificate analysis and the different underlying policy objectives that it serves. I also do not accept the further submission of the defendants that simply because the requirement for the certificate appears in the regulation rather than in the Wishart Act it should be considered a less important policy objective.

[38] Requiring a franchisee to demonstrate they were unable to make an informed investment in a deficient certificate case would shift the onus of the Wishart Act in a way which undermines one of its purposes. Franchise disclosure certificates attach personal liability to the signatories under s. 7(1)(e) of the Wishart Act. In doing so, disclosure certificates incentivize the signatories to ensure the contents of the disclosure document are accurate. This is not tied to any impact on the recipient but is a free-standing and laudatory objective.

[39] Having regard to the distinct underlying policy objective served by the requirement of disclosure certificates, I also do not accept the defendants’ contention that a disclosure certificate deficiency must be coupled with other disclosure deficiencies in order to give rise to s. 6(2) rescission rights. A failure to provide a regulatory-compliant certified disclosure can be, and I find that it is in this case, fatal to the ability of the purported FDD to satisfy the mandatory disclosure requirements. This is so particularly when, as in this case, the defect exposes that the underlying objective of “impressing upon the [signatory] the importance of ensuring the document is complete and accurate” (see Mendoza and Raibex) has not been served.

[40] There is nothing in the Raibex decision that explicitly or implicitly overrules the decisions in earlier cases in which the Court of Appeal and this court have said that a deficient disclosure certificate can, on its own, be a fatal defect amounting to effective non-disclosure under s. 5, giving rise to rescission rights under s. 6(2) of the Wishart Act.

Application of the Law to this Case

[41] The defendants rely on the admissions of the plaintiffs in this case. Specifically, that the plaintiffs are not alleging that any misrepresentation or omission in the disclosure affected their decision to enter into the franchise agreement and that they had a full opportunity to do their own due diligence. The defendants say that under the approach in Raibex, the plaintiffs cannot succeed. I have indicated above my reasons for rejecting this argument.

[42] I find that the Fit for Life FDD did not contain the signed and dated disclosure certificate prescribed under s. 7 of the regulation. There is nothing to indicate that the signature of Samuel Davis on page 4 of the FDD applies to anything on the following pages 5 to 27 of the document and no signature at all appears on page 27 under the certificate language. The evidence of Samuel Davis was that he annually signed a similar document to that which appears on pages 2 to 4 of the FDD. He relied on other members of his team to update the FDD and to insert his signature page into the FDD. This demonstrates that his signature did not serve the policy objective of the certificate to impress upon him the importance of ensuring that the entire document was complete and accurate.

[43] Samuel Davis’ testimony in re-examination that by signing page 4 of the FDD it was his intention to endorse the FDD entirely and be personally liable does not satisfy the policy objective in the circumstances of this case. There is no evidence that he had the whole document in front of him, or that he had even reviewed it, before he signed page 4. The evidence does not support the defendants’ contention that this is simply a case of Samuel Davis having signed the certificate on the wrong page. [4]

[44] The absence of a signed and dated disclosure certificate is a fatal flaw in the disclosure provided to the franchisee in this case. It does not matter that the decision of the plaintiffs to invest in a Fit for Life franchise was not affected by any defect or untrue, inaccurate or misleading statement in the disclosure contained in the FDD. The absence of a disclosure certificate goes to the very heart of the policy for requiring disclosure to give meaning to the personal responsibility that is intended to flow from it. The importance of this has been affirmed by the Court of Appeal.

[45] In the earlier cases dealing with defective certificates there were other compounding factors that might have also affected the franchisee’s ability to make informed investment decisions. Despite this, the principle remains and I consider it applicable in this case, that a defective disclosure certificate on its own is fatal and is enough to give rise to a right of rescission under s. 6(2).

[46] I find that the franchisee had the right to rescind the franchise agreement without penalty under s. 6(2) of the Wishart Act and did so lawfully by its notice of rescission dated August 1, 2017.

(ii) Is Samuel Davis a Franchisor’s Associate?

[47] To succeed in their contention that Samuel Davis was a franchisor’s associate within the meaning of s. 1 of the Wishart Act there is a two-part test that the plaintiffs must satisfy. The first part of the test is met because he directly controls the franchisor as its sole officer, director and shareholder.

[48] Under the second part of the test, I must be satisfied that Samuel Davis:

a. Was directly involved in the grant of the franchise:

i. by being involved in reviewing or approving the grant of the franchise; or

ii. by 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; or

b. Exercised significant operational control over the franchise and or was someone to whom the franchise had a continuing financial obligation in respect of the franchise.

[49] The plaintiffs argued that Samuel Davis exercised significant operational control over the plaintiffs’ franchise because of the sub-lease arrangement. However, that sub-lease was with the franchisor. I have not been directed to evidence demonstrating that Samuel Davis personally exercised significant operational control over the plaintiffs’ franchise, and it is not a logical inference to draw from the existence of the sub-lease.

[50] The other grounds relied upon by the plaintiffs are that Samuel Davis was involved in reviewing or approving the grant of the franchise and/or that he made representations to them on behalf of the franchisor to market the franchise to them and in furtherance of the grant of the franchise to them.

Representations by Mr. Davis

[51] The plaintiffs characterize the statements appearing on pages 2 to 4 of the FDD above Samuel Davis’ signature as representations made by him on behalf of the franchisor for the purpose of granting the franchise, marketing the franchise or otherwise offering to grant the franchise. I have found that this was not a disclosure certificate. The plaintiffs contend that it can and should still be considered to have some legal import and effect, especially because Samuel Davis says that he signed it intending and understanding that he would have personal liability [5] and that what he said would be given to the plaintiffs as prospective franchisees.

[52] The statements above Samuel Davis’ signature on page 4 can be fairly characterized as promoting the Fit for Life franchise concept as one worthy of investment. These pages speak to the high quality of their food, how they differentiate themselves from other “fast food concepts”, their objectives and keys to success, and the experience that backs up the concept.

[53] I recognize the irony and potential unfairness of a conclusion that Samuel Davis’ signature on page 4 of the FDD, while not sufficient to meet the requirement of a disclosure certificate, renders him a franchisor’s associate with personal liability under the Wishart Act.

[54] It has been pointed out by the defendants (in their opposition to the agency argument that I will deal with next) that the exercise of statutory interpretation “is not about fairness or unfairness; it is about interpreting the statute in its entire context and in its grammatical and ordinary sense, harmoniously with the statute’s scheme and object, and the intention of the legislature.” I agree that fairness is not part of this analysis.

[55] I adopt a contextual and grammatical reading of the definition of franchisor’s associate. I find that Samuel Davis did make representations to the prospective franchisee on behalf of the franchisor by the statements he made in the pages above his signature in the FDD. I find that the statements above his signature on pages 2 to 4 of the FDD about the franchise and its aspirations were, on an objective reading, made for the purpose of granting the franchise, marketing the franchise or otherwise offering to grant the franchise. He is a franchisor’s associate.

[56] Since I have found that Samuel Davis is a franchisor’s associate I will only briefly touch upon the other grounds assessed in support of this contention.

Samuel Davis’ Involvement in the Review or Approval of the Grant of the Franchise

[57] The plaintiffs attempted to establish that Samuel Davis played a role in the review or approval of the grant of the Fit for Life franchise to them based on his position as the sole officer and director with responsibility for the day to day affairs of the franchisor corporation. He was the one who established all the policies, standards and practices to be followed in the review process which he then delegated to others like Smagaren who kept him informed. There was a lot of evidence about the timing of a communication with Samuel Davis on October 22, 2015 with reference to the timing of the signing of the franchise agreement (October 9, 2015). The plaintiffs suggested that the approval of the franchisee was delayed beyond the date the franchise agreement was signed until the financing from the RBC came through (October 15, 2015) and the eventual operational and financial approvals were confirmed (October 30, 2015). The plaintiffs argued this implicated Samuel Davis in the approval, if not before, then around the time of the October 22 communications with him.

[58] Putting aside the issue of the timing of approval (e.g. whether it could have been after the franchise agreement was signed on October 9, 2015), the record does not disclose evidence of any actual involvement of Samuel Davis in this process in any meaningful way. The few encounters that the plaintiffs had with him were brief and superficial. Even if Bill was told by Arthur Davis that Samuel Davis would be making the decision (as he testified he was), that does not mean that Samuel Davis was actually involved [6].

[59] Those who were directly involved included Warren Smagaren, Arthur Davis and Arsalan Syed. Arthur Davis was responsible for pre-screening and pre-approval, Syed was responsible for operational approval and Smagaren was responsible for financial approval. They might have been found to be franchisor’s associates (see Sovereignty at para. 41) however, they are not named as defendants. [7]

The Agency Argument

[60] The plaintiffs made a further alternative submission that because Arthur Davis, Syed and Smagaren were only unofficially acting on behalf of the franchisor and had not been appointed as officers, the responsibilities that Samuel Davis delegated to them for the review and approval of the franchise were delegated by Samuel Davis personally. The plaintiffs further contend that this meant that these three were acting as the personal agents of Samuel Davis in carrying out his duties and he is to be imputed with all of their actions and knowledge. [8] See Lalonde (c.o.b. Busy Beaver Builders) v. Applewood Holdings Inc. at para. 5 (Ont. C.A.).

[61] The plaintiffs argued that this conclusion is reinforced by the representations made by Samuel Davis in the FDD above his signature on page 4, wherein he states that no affiliates of the franchisor will have any dealings with the franchisee. The individuals with whom the plaintiffs dealt were all employed by affiliates and not by the franchisor. Thus, it was submitted that the only capacity in which they could have been dealing with the franchisee and reviewing and approving the grant of the franchise would be as the personal agents of Samuel Davis, who was the only person holding any position with the franchisor. This is alleged to have been an implied agency (see 1196393 Ontario Inc. v. Glen Grove Suites Inc., 2015 ONCA 580, 337 O.A.C. 85 at paras. 69-71), which, if established, makes the actions and knowledge of the agent in relation to a contract or transaction, the actions and knowledge of the principal at law.

[62] I have difficulty with this agency argument. It is more plausible to me that they were acting as agents of the franchisor rather than as agents for Samuel Davis personally. Their testimony is consistent with this, in that they considered their authority to review and approve the franchisee to have come from the franchisor corporation.

[63] No authority was provided to support the contention that someone acting as a director, officer or employee of a corporation, such as Samuel Davis, who has responsibilities in that capacity could not delegate those responsibilities to be carried out by others on behalf of the company. The suggestion that he could only delegate those responsibilities to someone to carry out for him personally seems antithetical to the corporate veil and recognized distinction of capacities in which officers and directors act.

[64] The plaintiffs’ suggestion that this agency theory should be adopted in order to reconcile and make sense of the statements in the FDD that the franchisee would not be dealing with affiliates, implies a narrow interpretation of those statements. The FDD could be read as future oriented, to say that, in the context of the franchise relationship, once established, that there would be no dealings with other affiliates. It need not be read to say that the affiliates would have no involvement in the review and approval of the grant of the franchise.

[65] Based on the evidentiary record and authorities presented, I am not prepared to find that Arthur Davis, Syed and Smagaren were acting as personal agents of Samuel Davis and that he is imputed with their actions and knowledge arising from their involvement in the review and approval of the grant of the Fit for Life franchise to the franchisee. This does not change my earlier conclusion that Samuel Davis was a franchisor’s associate for other reasons.

(iii) What are the Plaintiffs’ ss. 6 and 7 Wishart Act Damages and Who is Responsible for them?

[66] Certain obligations of the franchisor or the franchisor’s associate, as the case may be (or in this case, both of them) arising from the franchisee’s s. 6(2) of the Wishart Act rescission for non-disclosure are prescribed by s. 6(6). The parties agree that these include:

a. Pursuant to 6(6)(a), a refund of the money received from or on behalf of the franchisee, other than for inventory, supplies and equipment, comprised of the purchase price of $200,000.00 and royalties of $45,789.40;

b. Pursuant to section 6(6)(b), to repurchase the franchisee’s inventory remaining at the date of rescission that the franchisee had purchased from the franchisor, for the purchase price paid by the franchisee of $7,000.00; and

c. Pursuant to s. 6(6)(c), to repurchase the supplies and equipment purchased by the franchisee pursuant to the franchise agreement, comprised of leasehold improvements, equipment and signage, for the purchase price paid by the franchisee of $223,119.86.

[67] The amounts claimed under each of these prescribed categories are not challenged by the defendants and they add up to a total of $475,909.26. The defendants dispute the characterization of rent paid by the franchisee under the sub-lease as s. 6(6)(a) money received from or on behalf of the franchisee. This disputed additional amount claimed of $148,911.80 is addressed in the next section of these reasons. The first month’s rent under the sub-lease was included as part of the $200,000.00 purchase price and the defendants do not dispute its inclusion in the amounts payable under s. 6(6)(a) because it was paid to the franchisor directly.

[68] The defendants argue that the compensation provided for under s. 6(6) is recoverable against only one or the other of the franchisor or the franchisor’s associate, as the case may be, but not against both. They argue that this statutory compensation is recoverable against the one that received the monies being refunded. On a plain reading of sub-sections 6(6)(a) through (c) this might make sense given that the amounts prescribed are tied to amounts paid by the franchisee. However, this does not account for 6(6)(d) that requires that they compensate the franchisee for losses incurred in acquiring, setting up and operating the franchise (net of the amounts set out in clauses (a) to (c)). These are not tied to amounts paid to or received by the franchisor or franchisor’s associate. This argument also does not account for the cases that the plaintiffs indicate have previously found both the franchisor and the franchisor’s associates liable. See e.g. 2240802 Ontario Inc. v. Springdale Pizza, 2013 ONSC 7288 at paras. 59, 64, aff’d 2015 ONCA 236; 2122994 Ontario Inc. v. Lettieri, 2016 ONSC 6209 at paras. 14, 96, aff’d 2017 ONCA 830.

[69] This court has previously stated that the right and remedy of rescission is not fault based. Liability for the failure to comply with the Wishart Act and regulation extends to every party as statutorily prescribed, “even if such party bears no responsibility for the inadequate or incorrect disclosure that has triggered the rescission.” See Sovereignty, at paras. 55-56. Having regard to this and the anomaly of sub-section 6(6)(d), I find the franchisor and the franchisor’s associate, Samuel Davis, both to be liable for the amounts claimed by the franchisee under s. 6(6).

[70] In their Statement of Claim the plaintiffs claim under both sections 6 and 7 of the Wishart Act. It is agreed that there cannot be double recovery under both s. 6(6) and s.7 for the same amounts. The only head of damages identified at trial that might not have been included in s. 6(6) and, if not recoverable under s. 6 might, in theory, be left for the plaintiffs to claim under s. 7, is the rent paid to the landlord.

[71] Since I have found Samuel Davis to be a franchisor’s associate, both the franchisor and Samuel Davis would also be liable for any damages awarded under s. 7.

(iv) Is Rent Paid to the Franchisor Under the Sub-Lease Included in s. 6(6)(a) or 6(6)(d) Wishart Act Damages?

[72] Section 6(6)(a) of the Wishart Act requires the franchisor or the franchisor’s associate to refund monies received from or on behalf of the franchisee. In this case, the sub-lease required the franchisee to pay rent to the franchisor. The franchisor was the party with obligations to the third-party landlord under the head lease. However, with the agreement of the landlord, the franchisee was directed to, and did, pay its monthly rent (after the first month’s rent) directly to the landlord and this rent was thus not received by the franchisor from or on behalf of the franchisee. The rent paid by the franchisee directly to the landlord in this case is not covered by s. 6(6)(a).

[73] Prior decisions of this court in which rent was ordered repaid under s. 6(6)(a) involved rental payments received directly by the franchisor or franchisor’s associate. See Lettieri, at paras. 4 and 5 and Surianni v. Country Style Food Services, 2012 ONSC 881, at paras. 114-117, aff’d 2013 ONCA 589 (indexed as 1159607 Ontario Inc. v. Country Style Food Services Inc.). Neither of these cases considered the question of rent recovery under s. 6(6)(d).

[74] It was importantly noted in Country Style (at para. 115) that the Wishart Act does not exclude payments of rent from the calculation of losses or damages. I find that rent paid to a third-party landlord may be properly claimed as part of a loss incurred in the operation of the franchise under s. 6(6)(d). Alternatively, it may be recoverable as a loss under s. 7.

[75] Section 6(6)(d) of the Wishart Act refers to compensation for losses. The concept of a “loss” implies an accounting for revenues and expenses. One of the cases that I was referred to during the oral submissions of counsel, 2189205 Ontario Inc. v. Springdale Pizza Depot Ltd., 2013 ONSC 1232, aff’d at 2013 ONCA 626, recognized that the amounts payable to a franchisee under subsections (a) – (c) are determined without regard to revenue earned and are to be paid regardless of any accounting for net profits or losses under subsection (d).

[76] Pursuant to the endorsement of Low J. dated made at the pre-trial conference on August 26, 2019, the losses, if any, claimed by the plaintiffs under s. 6(6)(d) of the Wishart Act were deferred and may be referred to a reference before a master if the plaintiffs intend to pursue them.

(v) The Counterclaim

[77] The defendants concede that if the rescission by the franchisee was proper, then the counterclaim for breach of contract fails. The defendants maintain that they still have a claim arising out of the plaintiffs’ improper removal of the equipment from the restaurant premises. They maintain that because the plaintiffs were entitled under s. 6(6)(c) to be refunded the purchase price they paid they had an obligation to leave the equipment on the premises. Instead they removed it and it has been in storage.

[78] The plaintiffs argue that the franchisor had no entitlement to possession of the equipment, paid for by the franchisee and subject to third party security interests, until it was repurchased from them. The franchisee offered to effect an orderly transition of the restaurant to the franchisor, which was declined. The equipment was accordingly moved to a secure storage facility and the franchisor was advised of this on or about August 15, 2017. The plaintiffs also point to sections 14.2 and 14.6 of the Franchise Agreement, which obliged them to remove the equipment from the premises. This equipment has remained available for the franchisor to purchase pursuant to s. 6(6)(c) of the Wishart Act.

[79] I agree with the plaintiffs that they were not obliged to leave the equipment for the franchisor if the franchisor was refusing to pay for it. There are no damages payable by them to the franchisor for the removal of this equipment in these circumstances.

[80] There are other claims in the counterclaim for alleged mis-representations by Bill about his experience in the context of the application for approval and purported operational defaults by the franchisee during its operation of the franchise. These claims have not been proven, either in terms of liability or in terms of any damages said to have been caused by the alleged wrongful acts. It is also questionable whether they can be claimed at all in the face of a valid rescission by the franchisee which is, by virtue of s. 6(2) of the Wishart Act, “to be without penalty or obligation”.

[81] The counterclaim is dismissed.

Summary of Disposition and Costs

[82] The following declarations and orders are made in the final disposition of the matters raised in this action:

a. A declaration that the FDD did not contain the required certification of disclosure;

b. A declaration that the franchisee was entitled to rescind the franchise agreement pursuant to s. 6(2) of the Wishart Act and validly did so by notice of rescission dated August 1, 2017;

c. A declaration that Samuel Davis is a franchisor’s associate;

d. The defendants are both liable and ordered to pay the following amounts to the franchisee under s. 6(6) of the Wishart Act:

i. pursuant to s. 6(6)(a), the money received from or on behalf of the franchisee, other than for inventory, supplies and equipment, comprised of the purchase price of $200,000.00 and royalties of $45,789.40;

ii. pursuant to s. 6(6)(b) the purchase price paid by the franchisee of $7,000.00 to repurchase the franchisee’s inventory remaining at the date of rescission;

iii. pursuant to s. 6(6)(c) the purchase price paid by the franchisee of $223,119.86 to repurchase the supplies and equipment purchased by the franchisee pursuant to the franchise agreement, comprised of leasehold improvements, equipment and signage;

iv. pre- and post-judgment interest on the above amounts in accordance with the Courts of Justice Act, R.S.O. 1990 c. C.43,

and a judgment shall issue in favour of the franchisee in these amounts.

e. If the plaintiffs wish to pursue a claim for losses associated with the $148,911.80 in rent paid to the third-party landlord in the course of the operation of the franchise pursuant to s. 6(6)(d), or alternatively s. 7, that is to be determined by a master on a reference;

f. A declaration that the defendants’ notice of termination dated August 16, 2017 is of no force and effect; and

g. The counterclaim is dismissed.

[83] Counsel jointly communicated by email dated November 15, 2019 that they have reached an agreement on how costs should be addressed regardless of the outcome. Costs are ordered to be paid in accordance with that agreement (to which the court is not privy).

Kimmel J.

Released: January 30, 2020

COURT FILE NO.: CV-17-00582247-0000 DATE: 20200130 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: 2483038 Ontario Inc., Baljeet Singh and Kulwinder K. Singh Plaintiffs – and – 2082100 Ontario Inc. and Samuel Davis Defendants AND BETWEEN 2082100 Ontario Inc. Plaintiff by Counterclaim – and – 2483038 Ontario Inc., Baljeet Singh and Kulwinder K. Singh Defendants by Counterclaim rEASONS FOR Decision Kimmel J. Released: January 30, 2020

[1] At the outset of the trial it was confirmed that the only deficiency in the FDD that the plaintiffs are relying upon for their claim for rescission is that the required certificate was not signed, notwithstanding other alleged disclosure deficiencies.

[2] There was also a complaint in Sovereign that the documentation provided was not collected in a single document delivered at the same time (also alleged although not relied upon as a ground for rescission in this case; but rather to demonstrate that, contrary to what the franchisor alleges, the disclosure in this case was not perfect).

[3] In Dollar It the slight differences in wording of the Ontario and Alberta legislation were raised as grounds for reaching a different conclusion, but the Court of Appeal rejected this noting that, if anything, Ontario’s legislation required an even more rigorous adherence to the regulatory requirement of a signed and dated certificate since the Alberta legislation only required substantial compliance.

[4] The plaintiffs pointed out during the trial that there were some statements contained in the FDD that were inaccurate, about the number of franchises in the franchise system and also some mis-statements about how much time the franchisee had to sign the franchise agreement, and concerns about the fact that certain documents were not provided as part of the disclosure package (for example, the letter of intent). Objections were raised by the defendants to the plaintiffs relying on any other alleged disclosure deficiencies not pleaded. The plaintiffs indicated that they did not rely on these other deficiencies in support of their rescission rights, but rather to demonstrate the danger of Samuel Davis’ practice of not himself reviewing the FDD and how what he did failed to serve the policy objectives of the regulation.

[5] The defendants complain that this ground for finding Mr. Davis a franchisor’s associate was not pleaded, but the plaintiffs say that it was generally pleaded in both paragraph 17 of their Statement of Claim and paragraph 16 of their Reply. I agree that the pleadings are sufficient to include this.

[6] Arthur Davis denied he told the plaintiffs this. The plaintiffs urged me to ignore his denial since it was not put to Bill in cross-examination as required under the rule in Browne v. Dunn (1893) 65. I need not rule on this since I do not find the mere statement by Arthur Davis, even if made, would prove that Samuel Davis was involved. in the absence of any other evidence to corroborate or support that he was involved in the review of approval of the plaintiffs’ franchise.

[7] In closing submissions, counsel for the defendants indicated that these individuals were employees of affiliates that indirectly control the franchisor, which would have brought them within the first branch of the definition of a franchisor’s associate. Because they were not named as defendants or alleged in the statement of claim to be franchisor’s associates, there is no basis on which to make any findings against them.

[8] This agency argument was not pleaded by the plaintiffs. The defendants raised a concern about this at the outset of trial but advised the court that they did not want an adjournment or costs as a consequence of this late request by the plaintiffs for a pleading amendment. Both sides indicated that it was a new legal theory but did not depend on new facts. I ruled at the outset of trial that paragraphs 68 and 69 of the plaintiffs’ opening would be treated as having been pleaded in their statement of claim as an amendment, and that the defendants were deemed to deny it without the necessity of any formal pleadings.