2189205 Ontario Inc. v. Springdale Pizza Depot Ltd., 2011 ONCA 467

CITATION: 2189205 Ontario Inc. v. Springdale Pizza Depot Ltd., 2011 ONCA 467

DATE: 20110622

DOCKET: C52462

COURT OF APPEAL FOR ONTARIO

Sharpe, Gillese and Karakatsanis JJ.A.

BETWEEN

2189205 Ontario Inc., Parminder Mutti, and Navjot Kaur Chandi

Respondents

and

Springdale Pizza Depot Ltd., Ranjit Singh Mahil, Dilawar Singh Khakh

Appellants

David S. Altshuller and Kristina Davies, for the appellants

Allan D.J. Dick, for the respondents

Heard: March 23, 2011

On appeal from the judgment of Justice Darla A. Wilson of the Superior Court of Justice, dated June 29, 2010.

Karakatsanis J.A.:

[1] At issue in this appeal are ss. 5(7)(a)(iv) and (8)(a) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the Act), exempting a franchisor from the disclosure obligations on a resale of the franchise by a franchisee.

[2] The appellant franchisor appeals from the decision of D.A. Wilson J. granting partial summary judgment, declaring that the Franchise Agreement documents were validly rescinded and that the franchisor is liable to pay damages required by s. 6(6) of the Act.

[3] After the franchisor directed the respondents to an existing Pizza Depot restaurant that was available for sale, the respondents purchased the assets of the restaurant from the franchisee (the vendors). The franchisor required the respondents to execute various documents in order to provide its consent to the transfer of the franchise. The franchisor did not provide a disclosure document to the respondents. After operating the business for several months, the respondents served the appellants with a Notice of Rescission and commenced these proceedings against the franchisor and the vendors.

[4] The summary motion judge found that there was no genuine issue requiring trial and that the resale exemption in s. 5(7)(a)(iv) of the Act did not apply to relieve the franchisor of its disclosure obligations.

[5] The franchisor raises two grounds of appeal. First, the motion judge erred in deciding a novel and unsettled issue of statutory interpretation in a summary judgment motion. Second, the motion judge erred in her interpretation and application of ss. 5(7)(a)(iv) and 5(8)(a) by finding that the signing of the franchise documents was sufficient to take this case outside the resale exemption. The vendors are not a party to this appeal.

[6] For the reasons that follow, I would dismiss the appeal.

Background Facts

[7] The respondents contacted the franchisor’s head office to acquire a franchise to operate a Pizza Depot restaurant. The franchisor directed the respondents to the vendor’s existing franchised restaurant that was available for sale in Milton, Ontario. The respondents’ evidence was that “[a]ll of the parties of this action negotiated together to bring about the sale of [the vendor’s business] to [the respondents] and for [the respondents] to become a franchisee of Springdale as a result.”

[8] The respondents purchased the assets of the pizza business from the vendors. The agreement provided for the purchase of the assets and equipment of the business for the sum of $220,000.00. It also provided that the purchaser would “pay $5,000 (50%) of the Pizza Depot franchisor’s transfer fee” and required that “[t]he buyer must obtain the Franchisor’s consent and a satisfactory Assignment of the Lease at its expense. The seller shall facilitate this process.”

[9] Clause 18.3 of the vendors’ Franchise Agreement provided that no sale or assignment of the franchise was effective without the written approval of the franchisor, and that “such approval was not to be unreasonably withheld provided that all of the requirements set forth in clause 18.4 have been satisfied.”

[10] Clause 18.4(3) provided that any consent “will be conditional on at least the following”, including

the assignee executing a franchise agreement and related documents with the Franchisor’s in the Franchisor then current standard form, undertaking to bring the Franchised Outlet immediately into conformity with the then current requirements of the Retail Marketing Plan.

[11] In December 2008, the respondents executed an Assignment of Franchise Agreement and (where applicable a separate) License Agreement and Guarantee/Indemnity, as well as five Franchise Agreements that had been previously signed by the vendors: a General Security Agreement, a Guarantee, Subordination and Transfer Restriction Agreement, a License Agreement, a Franchise Agreement, and a sublease agreement with a company which was an affiliate of the franchisor.

[12] To this extent the respondents stepped into the shoes of the vendor franchisee. However, the franchisor also required the respondents to sign two additional documents that had not been required of the vendors: (i) an Undertaking for car wrapping on any delivery vehicles and (ii) an Acknowledgment. The Acknowledgement signed by the respondents provided: “We do not rely in any way on the Franchisor in confirming, substantiating or reporting to us the sales figures of the Business carried on at the Premises”. Once the documents were executed, the franchisor consented to the transfer of the Franchise Agreement.

[13] After operating the business for several months, the respondents served the franchisor with a Notice of Rescission.

[14] In the summary judgment motion, the franchisor took the position that disclosure documentation as required by the Act had been provided but that, in any event, it was exempt from any disclosure requirements pursuant to s. 5(7) of the Act. On appeal, the franchisor does not challenge the motion judge’s finding that the franchisor had not provided the disclosure documentation. As a result, the respondents would be entitled to rescission under s. 6(2) of the Act unless the resale exemption applies.

Analysis

I. Did the motion judge err in finding there was no genuine issue requiring a trial?

[15] The appellant submits that the motion judge erred in finding that there was no genuine issue requiring trial. The franchisor submits that the interpretation of ss. 5(7)(a)(iv) and 5(8)(a) of the Act is unsettled and requires a contextual analysis that ought to be done with the benefit of a full and fair record. In particular, the franchisor submits that what qualifies under s. 5(8)(a) as a “right, exercisable on reasonable ground, to approve or disapprove the grant” remains a novel question of mixed fact and law, which is better determined in the context of a trial.

[16] In this case, the motion judge turned her mind to her powers under Rule 20 and acknowledged the Court’s new powers of weighing evidence and drawing any reasonable inference from the evidence. The relevant evidence in the motion record was not in dispute. There were no cross-examinations on the affidavits. The motion judge decided whether there was a genuine issue requiring a trial on the basis of uncontested evidence and the relevant provisions of the statute. As discussed below, her findings are consistent with decisions interpreting the relevant provisions of the statute. In my view, she did not err in determining that there was no genuine issue regarding the franchisor’s role in this transaction or in interpreting and applying ss. 5(7) and (8) of the Act on summary judgment.

II. The resale exemption

i. The decision

[17] The motion judge, at para. 10, considered whether there was a genuine issue requiring trial as to whether disclosure was exempted by ss. 5(7)(a)(iv) and 5(8) of the Act:

In my view, in order to determine if the statutory requirements have been met, the facts of each case must be examined. I do not accept the submission of counsel for the franchisor that the disclosure provisions do not apply because this case falls into an exemption set out in section 5 of the Act, specifically that this was a resale of a franchise. It was argued that the franchisor was not involved in the sale of the franchise, apart from providing its consent to the transaction. This argument, however, is not supported by the evidence, in particular the various documents that the Plaintiffs were required to sign involving Springdale or one of its affiliates. This was not a case of the sale of a franchise being effected from the existing franchisee only to the new purchaser. That view is also inconsistent with the affidavit evidence filed by the Defendants.

[18] I do not accept the franchisor’s characterization of the motion judge’s decision as a finding that the mere signing of franchise documents was sufficient to defeat the resale exemption. Nor do I accept that she failed to consider the nature or the content of the franchise documents signed. While her reasons on this particular issue were relatively brief, in rejecting the franchisor’s position that it was not involved in the sale, the motion judge relied upon the evidence filed and the various documents that were required by the franchisor.

ii. Position of the Parties

[19] The franchisor’s position is that the grant of the franchise to the respondents was not “effected by or through a franchisor” and the franchisor was therefore exempt from the obligation to provide disclosure under s. 5(7)(a). The franchisor submits that it played no role in the sale process or in arranging the agreement of purchase and sale. Further, the franchisor maintains that it did not go beyond the minimum requirements for consent set out in clause 18.4 of the Franchise Agreement in providing its consent to the assignment of the Franchise Agreement. The franchisor argues that it therefore merely exercised its rights on reasonable grounds to consent to the assignment as contemplated by s. 5(8)(a) and did not “effect” the grant of franchise under s. 5(7)(a)(iv).

[20] The respondents submit that the motion judge considered the applicability of the resale exemption and adverted to the evidence filed, the role of the franchisor in the transaction, and the documents required to be submitted by the franchisor. They submit that there was no genuine issue regarding the facts about the franchisor’s conduct and the nature of the documents signed. Further, they submit that the motion judge correctly concluded, based upon the legislation and the caselaw, that the franchisor’s conduct in the sale and its exercise of its powers to require additional documents as a condition of its consent took it outside of the exemption and triggered its disclosure obligation.

iii. The Relevant Statutory Provisions

[21] A purposive approach to statutory interpretation requires that “words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.” Elmer Driedger, Construction of Statutes, 2d ed. (Toronto: Butterworths, 1983), at p. 87. See Rizzo & Rizzo Shoes Ltd. (Re), 1998 837 (SCC), [1998] 1 S.C.R. 27, at para. 21; Bristol-Myers Squibb Co. v. Canada (Attorney General), 2005 SCC 26, [2005] 1 S.C.R. 533, at paras. 95-96.

[22] The Legislation Act, 2006, S.O. 2006, c. 21, Sch. F, s. 64(1) provides: “An Act shall be interpreted as being remedial and shall be given such fair, large and liberal interpretation as best ensures the attainment of its objects.”

[23] In Salah v. Timothy’s Coffees of the World Inc. (2010), 2010 ONCA 673, 268 O.A.C. 279 (C.A.), at para. 26, Winkler C.J.O. observed:

The Wishart Act is sui generis remedial legislation. It deserves a broad and generous interpretation. The purpose of the statue is clear: it is intended to redress the imbalance of power as between franchisor and franchisee; it is also intended to provide a remedy for abuses stemming from this imbalance.

[24] The franchisor has all the information and dictates the terms of the agreement. In this context, disclosure is intended to provide a prospective and often inexperienced franchisee with sufficient and readily accessible information to make informed decisions. The remedies for failure to comply with the strict disclosure requirements are also intended to remedy abuses by franchisors. As noted by MacFarland J.A., in 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd. (2005), 2005 25181 (ON CA), 256 D.L.R. (4th) 451 (C.A.), at para. 12, it “is evident that the thrust of the Act is to set standards for adequate disclosure and to create significant penalties for failing to meet those standards.”

[25] Section 5 of the Act sets out the specific disclosure obligations for franchisors and s. 6 provides the consequences for failure to strictly comply with those requirements, including rights of rescission and compensation. Exemptions from the disclosure requirements are set out in ss. 5(7) and 5(8).

[26] The disclosure exemptions in s. 5(7) exempt a franchisor from the disclosure obligations where:

• the grant of the franchise is not from the franchisor or on behalf of the franchisor (ss. 5(7)(a) and (d));
• the grant is to an individual associated with the franchisor (s. 5(7)(b));
• the grant is an expansion, renewal or extension of an existing franchise and there has been no material change (ss. 5(7)(c) and (f)); and
• the grant does not meet threshold values as determined by regulation (ss. 5(7)(e), (g) and (h)).

[27] The provisions of the Act relating to the resale exemptionprovide:

5(7) This section does not apply to,

(a) the grant of a franchise by a franchisee if,

(i) the franchisee is not the franchisor, an associate of the franchisor or a director, officer or employee of the franchisor or of the franchisor’s associate,

(ii) the grant of the franchise is for the franchisee’s own account,

(iii) in the case of a master franchise, the entire franchise is granted, and

(iv) the grant of the franchise is not effected by or through the franchisor;

5(8) For the purpose of subclause (7)(a)(iv), a grant is not effected by or through a franchisor merely because,

(a) the franchisor has a right, exercisable on reasonable grounds, to approve or disapprove the grant; or

(b) a transfer fee must be paid to the franchisor in an amount set out in the franchise agreement or in an amount that does not exceed the reasonable actual costs incurred by the franchisor to process the grant.

[28] Pursuant to s. 6(2), the failure to provide any disclosure permits a franchisee to rescind the Franchise Agreement without penalty within two years of the Franchise Agreement. As a result of s. 12, the onus is on the franchisor to prove that an exemption applies.

[29] The franchisor submits that in the context of a primary franchise sale, the franchisee must place heavy reliance on the disclosure document provided by the franchisor to assess the potential financial viability of the franchise. On the other hand, the prospective franchisee in a franchise resale market is better positioned to make an informed decision concerning whether to invest in a franchise. The prospective franchisee in this second scenario has the opportunity to observe the franchisee as a business, discuss the business with the incumbent franchisee and review business records.

[30] However, the disclosure exemption in s. 5(7)(a) does not simply focus upon whether there has been a pre-existing franchise. If the disclosure exemption was only concerned with a pre-existing franchise, there would be no need to qualify the exemption relating to a grant from a franchisee.

[31] While s. 5(7)(a) exempts a franchisor from the disclosure obligations when the grant of the franchise is directly from a franchisee, the provisions limit the role that the franchisor may play in such a grant without triggering the disclosure obligation. The focus of ss. 5(7)(a)(iv) and 5(8) is on the role of the franchisor in the resale. The disclosure exemption is not available where the grant of the franchise is from the franchisee but is “effected by or through the franchisor”. Subsection 8 provides that “a grant is not effected by or through a franchisor merely because … the franchisor has a right, exercisable on reasonable grounds, to approve or disapprove the grant” or because the franchisor may charge a reasonable fee for its approval.

[32] Given the purpose and context of the Act, the exemptions to disclosure set out in ss. 5(7)(a)(iv) and 5(8) must be narrowly construed.

[33] The Concise Oxford English Dictionary defines the verb “effect” as “cause to happen, bring about”: Concise Oxford English Dictionary, 11th ed., sub verbo “effect”. Taken together, the language of ss. 5(7)(a)(iv) and (8) exempt a franchisor from its disclosure obligations only when the franchisor is not an active participant in bringing about the grant and does nothing more than “merely” exercise its rights to consent to the transfer. In such circumstances, the power imbalance does not bear upon the decision to become a franchisee and plays no role in effecting the grant.

[34] A number of cases have considered the conduct of a franchisor that has resulted in the transfer of the grant to be “effected by or through the franchisor”.

[35] In MAA Diners Inc. v. 3 for 1 Pizza & Wings (Canada) Inc., 2003 10615 (Ont. S.C.), aff’d 2004 19240, Speigel J. found that the vendor franchisee and the franchisor were the same. She further found at para 29:

The respondents have also failed to satisfy me that the grant of the franchise as “not effected by or through the franchisor”. [The franchisor’s operation manager] took an active role in the franchise arrangements with the applicants. All of the meetings between the parties took place at the offices of [the franchisor]. [He] prepared the contractual documents. He also provided the bill of sale and the sublease ... [He] testified during cross-examination that he was asked to “facilitate or manage the transaction” with the applicants.

[36] In 1518628 Ontario Inc. v. Tutor Time Learning Centres, LCC, 2006 25276 (Ont. S.C.), Cumming J. considered when a franchisor’s requirements for providing its consent to the assignment goes beyond the mere “right, exercisable on reasonable grounds, to approve or disapprove the grant”, within the meaning of s. 5(8)(a), to become a grant “effected by or through the franchisor” within the meaning of s. 5(7)(a)(iv).

[37] In Tutor Time, the franchisor required the execution of certain documents as a condition of consenting to the assignment of the franchise. The franchisor argued (as does the franchisor in this case) that it was not an active participant in finding the purchaser and in the sale process and that it merely exercised its right, on reasonable grounds, to consent to the assignment. The Franchise Agreement provided conditions for the franchisor’s consent to transfer, “including” enumerated requirements. As in the agreement in this case, the franchisor had the power to impose further requirements for its consent to an assignment of the Franchise Agreement. In that case, the franchisor did not participate in the sale, but required the purchaser’s spouse to sign the Personal Guaranty before it would consent to the assignment of the franchise.

[38] Justice Cumming found that by imposing conditions beyond the specific requirements of the Franchise Agreement, the grant of the franchise to the new purchaser (through the resale of the existing franchise) was “effected by or through the franchisor” within the meaning of the Act: para. 35.

[39] Justice Cumming held that if the proposed purchaser had refused to sign a document specifically required by the transfer provisions of the Franchise Agreement, the franchisor could reasonably have withheld its approval. He noted, “[t]his would arguably be a right of the franchisor exercisable on reasonable grounds, to approve or disapprove the grant”: para. 30. He distinguished, at para. 44, between the franchisor’s right to impose such conditions specifically required by the Franchise Agreement and the franchisor’s power to impose additional conditions:

A “right” is different from simply being in a position of “power”. In my view, a “right” means a condition in the franchise agreement, that is, an express contractual right between franchisor and franchisee. TTLC had the “power” to refuse to consent to the transfer on any basis it wished unless a condition imposed by it was met. TTLC might exercise such “power” on reasonable grounds. However, in such instance, the franchisor could not be said to have a “right” to impose the condition within the meaning of the exempting provision, being s. 5(8)(a) of the Act.

[40] He concluded at para. 49:

The exemption in s. 5(8)(a) stipulates that “a grant is not effected by or through a franchisor merely because the franchisor has a right, exercisable on reasonable grounds, to approve or disapprove the grant” (my emphasis). In my view, a franchisor who exercises the power, albeit on reasonable grounds and pursuant to its usual practice, to require a non-officer, non-shareholder spouse ... to in effect become a co-franchisee is not merely engaging in the relatively passive act of approval of the transfer of the franchise as between the parties contemplated in the agreement between the transferor franchisee ... and intended transferee franchisee ... Rather, the grant is being effected by or through the franchisor.

[41] Clearly, the level of the franchisor’s involvement in the present case does not approach the level of that in MAA Diners Inc., where the court found that the franchisor was also the vendor. Section 5(7)(a)(i) makes the exemption unavailable in such circumstances. However, s. 5(7)(a)(iv) captures the indirect involvement of a franchisor. In this case, there was uncontradicted evidence before the motion judge that the franchisor did not simply play a passive role in the resale of this franchised business, limited to the specific requirements required for its consent under the Franchise Agreement.

[42] In this case, the franchisor directed the prospective vendor to this particular business. The franchisor had detailed financial information about all franchises and the right of first refusal. Further, the franchisor had some involvement in the negotiations for the agreement of purchase and sale of the assets of the business. As noted above, all of the parties of this action negotiated together to bring about the sale of the vendor’s business to the respondents and for the respondents to become a franchisee of Springdale as a result. Furthermore, the agreement of purchase and sale required the respondents to obtain the consent of the franchisor, and thus deal directly with the franchisor. In conclusion, the franchisor was directly involved with the respondents in the purchase of this business. The franchisor was not merely a passive participant in this resale.

[43] In addition, the franchisor did not merely demand execution of the Franchise Agreement and related documents that had been signed by the vendor as required in clause 18.4(3) of the Franchise Agreement. Although they may not have been as significant as the guarantee required in Tutor Time, the franchisor required two additional documents that had not been signed by the vendor, the Undertaking for car wrapping and the Acknowledgement in order to consent to the assignment.

[44] The franchisor submits that the undertaking to use the specified car wrapping was required to bring the franchise into conformity with Pizza Depot’s then current Retail Marketing Plan. However, the vendor had not signed a similar undertaking with the franchisor. There was no evidence before the motion judge that this was required to conform to the current Retail Marketing Plan. Further, the undertaking signed by the respondents provides that a breach of the undertaking regarding the car wrap was considered a breach of the Franchise Agreement.

[45] The Acknowledgement included a signed statement by the respondents that they did not rely in any way on the representations by the franchisor about the sales figures of the business. I cannot agree with the appellants that this additional protection against recourse for the misrepresentation of financial figures was insignificant to the consent.

[46] The franchisor submits that, in any event, the Undertaking for car wrapping and the Acknowledgement would not have been a prerequisite for the consent to the assignment and that the franchisor could not have reasonably refused to consent if the respondents had refused to sign them. However, that position is entirely speculative as the evidence was that the franchisor required the five documents in order to consent. The franchisor had the power to impose additional conditions under the Franchise Agreement and chose to do so. As in Tutor Time, it does not matter if these additional conditions were reasonable.

[47] It may be that any of these individual circumstances would not have been enough to support a finding that the grant was “effected by or through the franchisor.” However, there are a number of circumstances that, taken together, support the motion judge’s conclusion that the resale was brought about or caused to happen by or through the franchisor:

• the franchisor directed the respondents to this particular purchaser;
• the franchisor negotiated together with the vendor and the respondents to bring about the sale of the business and the assignment of the franchise;
• under the agreement the onus was on the respondents to obtain the consent of the franchisor; and
• the franchisor required execution of documents that the vendor had not been required to sign, the Undertaking for car wrapping and the specific acknowledgement that there was no reliance by the respondents on any financial representations by the franchisors.

[48] The motion judge considered the applicability of the resale exemption. She adverted to the role of the franchisor in the transaction and the documents it required from the respondents. In this case the franchisor went beyond the passive role of merely exercising its right, on reasonable grounds, to approve the resale of the franchise business within the meaning of s. 5(8)(a). The franchisor was involved in the sale and sale process and required the respondents to execute documents which were not specified in the Franchise Agreement, as a condition of its consent. For these reasons, the motion judge did not err in concluding that the grant from the franchisee was effected by or through the franchisor and did not fall within the disclosure exemption in s. 5(7)(a)(iv). On this record, there was no genuine issue requiring a trial.

Conclusion

[49] We are indebted to both counsel for their able argument and assistance.

[50] I would dismiss the appeal and fix costs to the respondents in the amount of $5,000 all inclusive.

RELEASED: June 22, 2011 “RJS”

“Karakatsanis J.A.”

“I agree Robert J. Sharpe J.A.”

“I agree E.E. Gillese J.A.”