2352392 Ontario Inc. et al. v. The Works Gourmet Burger Bistro Inc. et al.

[Indexed as: 2352392 Ontario Inc. v. Msi]

Ontario Reports Court of Appeal for Ontario Feldman, Huscroft and Harvison Young JJ.A. March 23, 2020

150 O.R. (3d) 203 | 2020 ONCA 237

Case Summary

Contract — Franchise agreement — Rescission — Disclosure — Pleading of rescission of franchise agreement in a third party claim sufficient to constitute notice under Arthur Wishart Act (Franchise Disclosure) — Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3, s. 6 (3).

A franchisee was sued by a bank for default on its loan for the acquisition of the franchise. The franchisee issued a third party claim against the franchisor claiming damages and rescission of the franchise agreement for failure to deliver the required disclosure documents under the Arthur Wishart Act (Franchise Disclosure), 2000. The franchisor responded that rescission was not available because the franchisee had not delivered the notice required under s. 6 of the Act. The lawyer who drafted the third party claim became involved in his personal capacity. The franchisee's new counsel issued a new statement of claim against the franchisor, taking the position that the third party claim in the bank action constituted the required notice. The franchisee then issued a statement of claim against his former lawyer for negligence in failing to comply with the statutory requirements. In a motion within both actions, the motion judge held that a pleading could not constitute the notice required under s. 6. The lawyer who issued the third party claim appealed.

Held, the appeal should be allowed.

The notice of rescission of the franchise agreement in the third party claim was sufficient for the purpose of s. 6 of the Arthur Wishart Act. The legislation, being remedial, was to be interpreted in a generous manner to redress the imbalance of power in franchising relationships, while also balancing the rights of both franchisees and franchisors. The purpose of the notice was to advise the franchisor that the franchisee was rescinding; it was not intended as a precondition to litigation. The only requirements for the notice were that it be in writing and delivered to the franchisor. The issue identified by the motion judge was that the pleading itself may be premature, but that was a procedural matter to be addressed by the parties depending on their respective positions. Although a written notice of rescission delivered by the franchisee to the franchisor before commencing litigation was the normal and preferable procedure, to preclude a franchisee from using a pleading to provide notice of rescission to a franchisor and to find that such a notice could not comply with the Act when there was no such prohibition in the Act itself was to favour form over substance and create a barrier to enforcement of the rights of franchisees under the Act.

Cases referred to

2130489 Ontario Inc. v. Philthy McNasty's (Enterprises) Inc., 2012 ONCA 381;
2352392 Ontario v. MSI, 2019 ONSC 4055;
4287975 Canada Inc. v. Imvescor Restaurants Inc., 2009 ONCA 308;
Ahmed v. Ont., [2004] OTC 923, [2004] OJ No 4350 (QL);
Mendoza v. Active Tire & Auto Inc., 2017 ONCA 471;
779975 Ontario Ltd. v. Mmmuffins Canada Corp., 62 BLR (4th) 137, [2009] OJ No 2357 (QL);
Salah v. Timothy's Coffees of the World Inc., 2010 ONCA 673

Statutes referred to

Authorities referred to

Ontario Legislative Assembly, Standing Committee on Regulations and Private Bills, Subcommittee Report: Franchise Disclosure Act, 1999, Bill 33, 37-1, (19 April 2000)

APPEAL from the order of Nakatsuru J., 2019 ONSC 4055 (S.C.J.) that a pleading could not constitute notice of rescission of a franchise agreement.

Jean-Marc Leclerc, for appellants. Stephany Mandin and Steven H. Goldman, for respondents 2352392 Ontario Inc. and Brent Shearer. Jennifer Dolman and Sarah McLeod, for respondents The Works Gourmet Burger Bistro Inc., The Works Realty Corp., Fresh Brands Inc., Andrew O'Brien aka Thomas Andrew O'Brien, Sean Bell, and David Wilson.

The judgment of the court was delivered by

FELDMAN J.A. : —

[1] The question of law to be determined in this case under s. 6(2) and (3) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 is whether a notice of rescission of a franchise agreement is sufficient if it is contained in a pleading, or, specifically in this case, a third party claim.

Background

[2] The issue arises in the following circumstances. The franchise was not financially successful. The franchisee's bank sued the franchisee for default on its loan for the acquisition of the franchise. The franchisee issued a third party claim against the franchisor claiming damages and rescission of the franchise agreement for failure to deliver the required disclosure documents under the Act. The franchisor responded that the franchisee could not claim rescission under the Act because it had not delivered the required notice under s. 6 of the Act.

[3] Subsequently, the lawyer who drafted the third party claim for the franchisee became involved in his personal capacity. New counsel for the franchisee issued a new statement of claim against the franchisor, taking the position that the third party claim in the bank action constituted the required notice under the Act. The franchisee then issued a statement of claim against his former lawyer, alleging that he was negligent in failing to comply with the requirements of the Arthur Wishart Act.

[4] In a motion within both actions, the franchisor and the franchisee each argued that the third party claim did not constitute notice under the Act. The motion judge accepted that position. This appeal is brought by the lawyer who issued the third party claim, and is opposed by both the franchisor and the franchisee.

Legislative context

[5] Section 6(2), (3) and (6) of the Act provide:

6(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.

(3) Notice of rescission shall be in writing and shall be delivered to the franchisor, personally, by registered mail, by fax or by any other prescribed method, at the franchisor's address for service or to any other person designated for that purpose in the franchise agreement.

(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).

The motion judge's decision

[6] The motion judge held that a pleading could not constitute the notice required under s. 6(3). He referred to a number of cases that he acknowledged did not address the issue directly, as well as to the decision of the Superior Court in Ahmed v. Ontario, [2004] O.T.C. 923 (S.C.), which held that a pleading can fulfill the notice requirement under s. 7(1) of the Proceedings Against the Crown Act, R.S.O. 1990, c. P.27. In that case, Low J. found that the original statement of claim, which was ultimately struck out, nevertheless served the purpose of the notice requirement of providing the Crown with notice of the claim and was sufficient compliance with the Act.

[7] The motion judge ultimately relied on the decision of this court in 2130489 Ontario Inc. v. Philthy McNasty's (Enterprises) Inc., 2012 ONCA 381, 350 D.L.R. (4th) 326. The issue in that case was when the cause of action arose for compensatory damages for a franchisor's failure to comply with the statutory obligations following receipt of a notice of rescission under s. 6(6) of the Arthur Wishart Act, and whether the claim for such damages was commenced within the two-year limitation period under s. 4 of the Limitations Act, 2002, S.O. 2002, c. 24, Sch. B. In that case, the franchisee gave notice of rescission for the franchisor's failure to provide the disclosure document; after receiving the notice, the franchisor failed to comply with s. 6(6) of the Act within 60 days; and the franchisee then commenced the proceeding against the franchisor within two years of its failure to comply. In concluding that the application was commenced in time, the court held that "[u]ntil the franchisor decides to not fulfil the obligations in s. 6(6), the franchisee has no cause of action for compensatory damages": at para. 39.

[8] Relying on Philthy McNasty's, the motion judge concluded, at para. 40:

Thus, since a notice under subsection 6(3) serves a different purpose from a pleading, this Third Party Claim in the case at bar cannot constitute such a notice. It is plain and obvious the Third Party Claim which is based upon a cause of action dependant upon a failure of the franchisor to abide by its obligations under subsection 6(6), cannot constitute notice since there is no cause of action until such notice has been given. Logically, the Third Party Claim cannot serve the same function as notice.

[9] At para. 34, the motion judge distinguished the Ahmed case on the basis that "a notice under [the Proceedings Against the Crown Act] serves a very different purpose than that under subsection 6(3) of the Wishart Act and does not carry with it the extraordinary consequences that follow service of the notice under subsection 6(3)".

Analysis

[10] In effect, the notice of rescission and the claim for rescission were brought contemporaneously in this case. Is there a reason to interpret the Act in a way that requires a separate notice, and does not allow the third party claim, issued within two years after entering into the franchise agreement as required by s. 6(2), to constitute the required notice? In my view, there is not.

[11] As the Arthur Wishart Act is remedial legislation, it should be interpreted in a generous manner to redress the imbalance of power in franchising relationships, while also balancing the rights of both franchisees and franchisors: Mendoza v. Active Tire & Auto Inc., 2017 ONCA 471, 139 O.R. (3d) 230, at para. 13, leave to appeal refused, [2017] S.C.C.A. No. 405; Salah v. Timothy's Coffees of the World Inc., 2010 ONCA 673, 268 O.A.C. 279, at para. 26; 4287975 Canada Inc. v. Imvescor Restaurants Inc. et al., 2009 ONCA 308, 98 O.R. (3d) 187, at para. 40, leave to appeal refused, [2009] S.C.C.A. No. 244.

[12] Under s. 6(2) of the Act, a franchisee has the right to rescind the franchise agreement within two years if the franchisor did not provide the statutory disclosure document. To do so, the franchisee must provide written notice of rescission. The purpose of the notice is to advise the franchisor that the franchisee is rescinding. Its purpose is not as a precondition to litigation. In fact, a review of the Hansard debate at the time the Act was introduced confirms that s. 6 was intended to allow the parties to extricate themselves from the agreement without litigation if the franchisor accepts the notice of rescission and complies with all the requirements in s. 6(6) within 60 days of receiving the notice: see Ontario Legislative Assembly, Standing Committee on Regulations and Private Bills, Subcommittee Report: Franchise Disclosure Act, 1999, Bill 33, 37-1, (19 April 2000) at 11:10 (Joseph Hoffman, Director, Policy and Agency Relations Branch, Ministry of Consumer and Commercial Relations).

[13] Under s. 6(3), the only requirements for the notice are that it be in writing and delivered to the franchisor. Although it is fair to say that the Act appears to contemplate that notice will be given outside the context of litigation, a pleading can comply with the Act's requirements. It did in this case. Moreover, it was not the respondents' position that the language of the third party claim was too imprecise to give notice to the franchisor, as was the case in 779975 Ontario Ltd. v. Mmmuffins Canada Corp. (2009), 62 B.L.R. (4th) 137 (Ont. S.C.). This was not a case in which the franchisor was somehow prejudiced by the manner in which notice was given, nor did the respondents submit otherwise. Their position was that no pleading could constitute the required notice under the Act.

[14] The issue identified by the motion judge is that the pleading itself may be premature, particularly to the extent that it claims the damages and payments provided in s. 6(6) before the 60 days have gone by. However, the prematurity of the pleadings is a procedural matter that may have to be addressed by the parties, depending what positions they take. In this case, as in the Ahmed case, the pleading served only as notice and the parties subsequently issued new statements of claim. Although this procedure is anomalous, and certainly not the ideal or recommended approach, I see no basis to find that the third party claim could not constitute the written notice required under s. 6(3) of the Act -- a finding that would have the effect of denying the franchisee's right to rescind.

[15] To conclude, although a written notice of rescission delivered by the franchisee to the franchisor before commencing litigation is the normal and preferable procedure, to preclude a franchisee from using a pleading to provide notice of rescission to a franchisor and to find that such a notice cannot comply with the Act when there is no such prohibition in the Act itself, would be to favour form over substance and create a barrier to enforcement of the rights of franchisees under the Act.

Disposition

[16] For these reasons, I would allow the appeal with costs to the appellant in the agreed amount of $10,000, inclusive of disbursements and HST. I would also order costs of $10,000 in the motion below to be paid to the appellant.

Appeal allowed.

End of Document