COURT OF APPEAL FOR ONTARIO

CITATION: 2130489 Ontario Inc. v. Philthy McNasty's (Enterprises) Inc., 2012 ONCA 381

DATE: 20120606

DOCKET: C54736

MacPherson, Gillese and Ducharme JJ.A.

BETWEEN

2130489 Ontario Inc., Jegatheeswaran Sivasothirajah and Thanusha Jegatheeswaran

Applicants (Respondents in Appeal)

and

Philthy McNasty’s (Enterprises) Inc., Philthy McNasty’s Restaurants Inc., and Terry Tsianos

Respondents (Appellants)

Gregory Govedaris, for the appellants

David Altshuller and Kristina Davies, for the respondents

Heard: May 11, 2012

On appeal from the order of Justice Kevin Whitaker of the Superior Court of Justice, dated November 18, 2011.

MacPherson J.A.:

A. INTRODUCTION

[1] In 2007, the parties entered into two franchise agreements. In September 2009, the respondents attempted to rescind the agreement. In November, 2009, the appellants disputed the purported rescission. In November 2010, the respondents brought an application seeking a declaration that they were entitled to rescind the agreement.

[2] In two sets of reasons dated October 11 and November 18, 2011, the application judge held that: (1) it was appropriate to resolve the dispute by way of application; (2) the second Franchise Agreement was a “franchise agreement” within the meaning of s. 1(b) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the “Wishart Act”); and (3) the respondents’ application was brought in a timely fashion; it was not outside the time lines of either the Wishart Act or the Limitations Act, 2002, S.O. 2002, c. 24 (the “Limitations Act”).

[3] The appellants appeal the application judge’s decision. They contend that all three of his conclusions are erroneous.

B. FACTS

(1) The parties and events

[4] The appellant Philthy McNasty’s (Enterprises) Inc. (“PME”) is an Ontario corporation that carries on business as a franchisor of restaurants/pubs. The appellant Philthy McNasty’s Restaurants Inc. is an Ontario corporation that carries on business as a sublessor of restaurants/pubs. The appellant Terry Tsianos (“Tsianos”) is the sole director/principal of the appellant corporations.

[5] The respondent Jegatheeswaran Sivasothirajah (“JS”) is a businessman with experience in several businesses, including a bar and a Pizza Pizza franchise.

[6] The respondent Thanusha Jegatheeswaran (“TJ”) is married to JS. She immigrated to Canada in 2006, married JS at age 19, and has no prior business or work experience.

[7] The respondent 2130489 Ontario Inc. (“213”) is the company incorporated by JS.

[8] In January 2007, JS, acting through an intermediary, approached Tsianos about purchasing a franchise. On February 23, 2007, Tsianos provided JS with a purported disclosure document.

[9] On March 20, 2007, PME entered into a franchise agreement with 213. JS signed the agreement on behalf of 213 and in his personal capacity as guarantor.

[10] Under the auspices of PME, the parties attempted to obtain a small business loan for 213. Their negotiations with the Bank of Montreal ultimately proved fruitless.

[11] In August 2007, JS gave PME $100,000 pursuant to the first Franchise Agreement.

[12] The parties shifted gears in their attempt to secure a small business loan for the respondents. In early October 2007, TS, JS’s wife, obtained a loan for $240,000 from the Royal Bank of Canada (“RBC”). At the same time, TS replaced JS as sole director and principal of 213.

[13] On October 9, 2007, TJ, on behalf of 213 and in her personal capacity as guarantor, signed the second Franchise Agreement. The appellants did not provide either 213 or TS with a second disclosure document.

[14] On October 25, 2007, RBC transferred $240,000 to PME pursuant to the small business loan to TS.

[15] The franchise failed from the outset. On September 23, 2009, 213 served a Notice of Rescission of the second Franchise Agreement and demanded a return of the franchise fees it had paid.

[16] On November 3, 2009, PME responded to the Notice of Rescission and denied liability. PME stated, inter alia, that “your Notice of Rescission is out of time.”

[17] The respondents commenced their application on November 29, 2010.

C. ISSUES

[18] The issues on the appeal are:

(1) Did the application judge err by determining that there were no genuine issues requiring a trial?

(2) Did the application judge err by determining that the Second Franchise Agreement was a “franchise agreement” within the meaning of s. 1(b) of the Wishart Act?

(3) Did the application judge err by determining that the respondents’ application was not barred by the interaction of the limitation periods in the Wishart Act and the Limitations Act?

D. ANALYSIS

(1) Application or action

[19] Rule 14.05(3)(d) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, provides:

14.05(3) A proceeding may be brought by application... where the relief claimed is,

(d) the determination of rights that depend on the interpretation of a... contract ....

[20] The application judge held that the issues in dispute were “rather narrow” and could be resolved as an application “based on material facts not contested”.

[21] The appellants contend that the application judge erred in reaching this conclusion. They say that because there were two franchise agreements in play, viva voce evidence was required to determine the intention of the parties concerning both agreements. This would have included all the evidence concerning the execution of both agreements as well as the conduct of both parties before and after the execution of the agreements.

[22] I do not accept this submission. The application judge determined that the essence of the legal dispute was centered on two issues: (1) whether 213 and TS could rescind the second Franchise Agreement, which included consideration of the statutory definition of “franchise agreement”; and (2) whether the respondents had brought their application in a timely fashion in light of relevant time lines in both the Wishart Act and the Limitations Act. In light of the uncontested facts, which he set out in paragraphs 10-19 of his reasons, the application judge determined that there was a sufficient foundation of undisputed material facts on which to ground his legal analysis and conclusions relating to these two issues. I agree with his assessment. The two issues were essentially legal issues appropriate for resolution on an application.

(2) The second Franchise Agreement

[23] There are two Franchise Agreements involving the parties. In the first Franchise Agreement on March 20, 2007, JS signed on behalf of 213 and in his personal capacity. In the second Franchise Agreement on October 9, 2007, TS signed on behalf of 213 and in her personal capacity. The appellants provided 213 and JS with the statutory disclosure document in advance of the first Franchise Agreement. The appellants did not provide 213 and TS with the statutory disclosure document in relation to the second Franchise Agreement at any time.

[24] The application judge concluded that the second Franchise Agreement was a “franchise agreement” within the meaning of s. 1(b) of the Wishart Act, thus triggering a disclosure obligation on the appellants. He reasoned:

Applying the very broad language of section 1 of the Act which defines the term “franchise agreement” I can come to no other conclusion than the document executed on October 9, 2007 must be a franchise agreement as that term is understood and described in the legislation. The document is an agreement between a franchisor (the respondents) and a franchisee (213) that relates to a franchise between them. These seem to be the three criteria which are to be used to identify a franchise agreement.

As the document is a franchise agreement that was entered into voluntarily by the respondents, the disclosure document obligations under section 5.1 of the Act are triggered.

I conclude that the responding parties failed to provide a disclosure document with respect to the franchise agreement entered into on October 9, 2007 and for this reason, 213 was entitled to issue a Notice of Rescission no later than 60 days after October 9, 2009.

[25] The appellants challenge this analysis. They submit that the application judge failed to find, as was clear from the evidence, that the only purpose of the second Franchise Agreement was to obtain financing from RBC. Accordingly, the application judge should have found that the common intention of the contracting parties at all material times was that the first Franchise Agreement governed their commercial relationship. The second Franchise Agreement was not a ‘fresh’ agreement; it was merely a document to provide to RBC to evidence the involvement of TS in the franchise business.

[26] I do not accept this submission. The umbrella under which this issue needs to be addressed is a recognition that the purpose of the Wishart Act is the protection of franchisees: see 405341 Ontario Ltd. v. Midas Canada Inc., 2010 ONCA 478, 264 O.A.C. 111, at para. 30. As expressed by Winkler C.J.O. in Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673, 268 O.A.C. 279, at para. 26:

The Wishart Act is sui generis remedial legislation. It deserves a broad and generous interpretation. The purpose of the statute 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.

[27] In this context, the disclosure requirement in the Wishart Act is a crucial one. As explained by MacFarland J.A. in 6792341 Canada Inc. v. Dollar It Ltd. 2009 ONCA 385, 95 O.R. (3d) 291, at para. 72:

The purpose of the legislation is to protect franchisees and the mechanism for so doing is the imposition of rigorous disclosure requirements and strict penalties for non-compliance. The legislation must be considered and interpreted in light of this purpose.

[28] The contents of the disclosure requirement have been clearly stated by MacFarland J.A. in 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd., (2005) 2005 CanLII 25181 (ON CA), 256 D.L.R. (4th) 451 (Ont. C.A.), at paras. 18-19:

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

The language of the Act is unambiguous, and it is mandatory. It prescribes in clear and precise terms what is required.

[29] Against this backdrop, it is clear that the second Franchise Agreement was not, as the appellants assert, merely a document designed to give comfort to the lender RBC.

[30] In the first Franchise Agreement, TS was invisible. She was not involved in the enterprise or legal document in any way. In the second Franchise Agreement, the picture changed completely. 213 remained as the franchisee, but TS became the sole director of 213. TS executed the second Franchise Agreement on behalf of 213. The appellants required TS to execute a new sublease agreement with PM Restaurants Inc. TS became a guarantor of 213’s obligations under the second Franchise Agreement.

[31] Combining the umbrella of the relevant franchise case law and the constellation of facts relating to the second Franchise Agreement and TS’s role in it, it seems to me that the application judge’s conclusion that the second Franchise Agreement was a “franchise agreement” within the meaning of s. 1(b) of the Wishart Act is clearly correct. If follows that the appellants breached the Act by not providing TS with a disclosure document.

(3) The limitation issue

[32] The appellants submit that the application judge erred by determining that the respondents’ application was not barred by the interaction of the relevant limitation periods in the Wishart Act and the Limitations Act.

[33] The basic limitation period is set out in s. 4 of the Limitations Act:

4. Unless this Act provides otherwise, a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered.

[34] The relevant provision of the Wishart Act is s. 6, which provides:

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

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

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

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

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

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

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

[35] Because the appellants provided no disclosure document relating to the second Franchise Agreement, the relevant rescission provision is s. 6(2) of the Wishart Act, not s. 6(1): see 4287975 Canada Inc. v. Imvescor Restaurants Inc., 2009 ONCA 308, 247 O.A.C. 391, at paras. 27-29, leave to appeal refused [2009] S.C.C.A. No. 244.

[36] The application judge dealt with the interplay among ss. 6(2) and (6) of the Wishart Act and s. 4 of the Limitations Act in this fashion:

With respect to the Limitations Act argument, section 6(2) of the Act permits the franchisee to rescind the agreement no later than two years after entering into the agreement, where as here, no disclosure has been provided.

Section 6(6) of the Act obliges the franchisor to meet its statutory obligations to the franchisee, within a period of 60 days following the effective date of rescission.

As the franchise agreement was rescinded on September 23, 2009, the franchisor had a further period of 60 days – to November 23, 2009 – in which to satisfy its obligations. Until the expiry of this 60 day period, the franchisee could not know with certainty whether the franchisor would comply with section 6(6).

On November 3, 2009, counsel for the respondents advised the applicants that the notice of rescission was disputed. It is fair to say that at this point, the applicants were on notice that the respondents were not prepared to satisfy their obligations on rescission.

I conclude that the claim was discovered on receipt of this letter from counsel. The two year limitation period for purposes of section 4 of the Limitations Act began to run from November 3, 2009, ending on November 3, 2011.

As this application was commenced on November 29, 2010, it is not barred by the Limitations Act.

[37] The appellants contend that the application judge erred by stating that “the claim was discovered on receipt of this letter from counsel.”

[38] I disagree. Pursuant to s. 6(6) of the Wishart Act, once the franchisee delivers a Notice of Rescission, the franchisor has 60 days from the effective date of rescission in which to fulfil its statutory obligations. It is the Notice of Rescission, nothing else, that triggers these obligations.

[39] Once the Notice of Rescission is delivered, the ball moves to the franchisor’s side of the court. 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.

[40] In sum, I agree with the application judge’s reasoning and conclusion on this issue.

E. DISPOSITION

[41] I would dismiss the appeal. The respondents are entitled to their costs of the appeal which I would fix at $10,000 inclusive of disbursements and applicable taxes.

Released: June 6, 2012 (“J.M.”)

“J.C. MacPherson J.A.”

“I agree. E.E. Gillese J.A.”

“I agree. E. Ducharme J.A.”