Court of Appeal for Ontario

Date: 20220609 Docket: C68155

Feldman, Pepall and Tulloch JJ.A.

BETWEEN

2483038 Ontario Inc., Baljeet Singh and Kulwinder K. Singh Plaintiffs (Respondents)

and

2082100 Ontario Inc. and Samuel Davis Defendants (Appellants)

AND BETWEEN

2082100 Ontario Inc. Plaintiff by Counterclaim (Appellant)

and

2483038 Ontario Inc., Baljeet Singh and Kulwinder K. Singh Defendants by Counterclaim (Respondents)

Counsel: Ben Hanuka and Anthony Pugh, for the appellants Allan D.J. Dick and Daniel Hamson, for the respondents

Heard: October 15, 2021 by video conference

On appeal from the judgment of Justice Jessica Kimmel of the Superior Court of Justice, dated January 30, 2020, with reasons reported at 2020 ONSC 475.

Tulloch J.A.:

[1] The parties entered into a franchise agreement to operate a “Fit for Life” restaurant in Oakville. After a brief period of operation, the respondents sought to rescind the agreement on the grounds that they had not received the appropriate financial disclosure under the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (“Wishart Act”). They sought compensation and damages from the appellants.

[2] The trial judge held that the respondents were entitled to rescind the agreement under s. 6(2) of the Wishart Act and found Samuel Davis to be personally liable as a franchisor’s associate.

[3] On appeal, the appellants argue that the trial judge improperly applied the test in holding that the franchise agreements were validly rescinded under s. 6(2) of the Wishart Act. They also argue the trial judge erred in finding Samuel Davis to be a “franchisor’s associate” within the meaning of the Wishart Act.

[4] For the following reasons, I would dismiss the appeal.

Background Facts

[5] The appellant corporation 2082100 Ontario Inc. (“208”) is a franchisor of Fit for Life restaurants. Samuel Davis is the sole director and officer of the corporation. On August 20, 2015, the respondent corporation 2483038 Ontario Inc. (“248”) and its officers and directors, Baljeet Singh and Kulwinder K. Singh, submitted an application for a Fit for Life franchise to the appellants.

[6] On August 21, 2015 and October 2, 2015, the appellants provided financial disclosure documents to the respondents. Mr. Davis signed page four of the disclosure documents under a space marked “Execution.” The statements on pages two to four of the financial disclosure documents promoted the franchise as worthy of investment. The financial disclosure documents did not contain a signed and dated certificate as required by s. 7 of the regulation promulgated under the Wishart Act, O. Reg. 581/00 (“the regulation”).

[7] The parties executed the franchise agreement on October 9 and 19, 2015, and the agreement was approved by the appellants in December 2015. Between the time when the respondents submitted the franchise application to when it was approved in December 2015, they attended at 208’s offices on several occasions. On at least two of these occasions, Mr. Davis met briefly with the Singhs.

[8] After a period of operation, the respondents sent a notice of recission to 208 and Mr. Davis on August 1, 2017. In response, 208 sent a notice of default to the respondents dated August 16, 2017.

Decision Below

[9] The trial judge determined that the financial disclosure documents did not contain the required certificate and that the respondents were therefore entitled to rescind the franchise agreement under s. 6(2) of the Wishart Act.

[10] The trial judge considered this court’s jurisprudence stating that a failure to provide the required disclosure may be established where the financial disclosure documents are so deficient as to effectively amount to a complete lack of disclosure: Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62, 419 D.L.R. (4th) 53; 6792341 Canada Inc. v. Dollar It Limited, 2009 ONCA 385, 95 O.R. (3d) 291. The trial judge also cited jurisprudence finding that the absence of a signed and dated certificate in the financial disclosure documents is a fatal flaw: Sovereignty Investment Holdings, Inc. v. 9127-6907 Quebec Inc. (2008), 303 D.L.R. (4th) 515 (Ont. S.C.); Hi Hotel Limited Partnership v. Holiday Hospitality Franchising Inc., 2008 ABCA 276, 296 D.L.R. (4th) 335.

[11] The financial disclosure documents were only signed on page four, and there was nothing to indicate that this signature applied to the contents on the remaining pages of the financial disclosure documents. The trial judge rejected Mr. Davis’s testimony that his intention was to endorse the financial disclosure documents in their entirety: there was no evidence that he had seen or reviewed the remaining pages of the financial disclosure documents.

[12] The trial judge rejected the appellants’ argument that this court’s decision in Raibex imported a requirement for plaintiffs to show they were unable to make an informed investment decision due to the deficient disclosure. Such a requirement would shift the onus of the Wishart Act away from the franchisor signatories, who are tasked with ensuring the contents of financial disclosure documents are accurate.

[13] The trial judge equally rejected the suggestion that in order to engage recission rights under s. 6(2) of the Wishart Act, the absence of a signed and dated certificate must be coupled with other disclosure deficiencies. The Wishart Act emphasizes to signatories the importance of ensuring that the documents they provide are accurate and complete. The absence of a signed and dated certificate need not be accompanied by other defects in order to fail to satisfy the mandatory disclosure requirements. Raibex did not have the effect of overruling this court’s previous jurisprudence that a deficient disclosure certificate may be, on its own, a fatal defect.

[14] The trial judge also determined that Mr. Davis was a franchisor’s associate within the meaning of s. 1 of the Wishart Act. In the statements preceding his signature on page four of the financial disclosure documents, Mr. Davis, on behalf of the franchisor, made representations to the respondents for the purpose of granting the franchise, marketing the franchise, or otherwise offering to grant the franchise.

[15] The trial judge found both 208 and Mr. Davis to be liable and made an order under s. 6(6) of the Wishart Act for the payment of $475,909.26.

Issues

[16] The appellants raise two issues on appeal:

1. Did the trial judge err by not applying the informed investment test to the recission analysis?
2. Did the trial judge err in determining that Mr. Davis was a “franchisor’s associate”?

Analysis

(1) Failure to certify financial disclosure documents and recission

[17] Section 5 of the Wishart Act requires franchisors to provide prospective franchisees with a disclosure document containing specified information and documents. It requires the information and documents to be accurate, clear, and concise. Section 6(2) of the Wishart Act permits a franchisee to rescind a franchise agreement without penalty or obligation “if the franchisor never provided the disclosure document.” Section 7 of the regulation under the Wishart Act mandates the inclusion of a certificate, signed and dated by specified persons, certifying the accuracy and completeness of the financial disclosure documents.

[18] The main issue in this appeal is whether the failure to certify the financial disclosure documents is enough for a court to find that there was substantially no disclosure such that recission is possible within two years.

[19] The short answer is yes. The trial judge was correct in both her analysis and conclusion.

[20] I see no error in the trial judge’s interpretation and application of the informed investment test. I agree with the trial judge’s finding that deficiencies in disclosure documents can be fatal. The trial judge here clearly considered this court’s guidance in the applicable jurisprudence and was alive to all the relevant facts.

[21] The trial judge was correct in her conclusion that this court’s decision in Raibex does not import the requirement of an inability to make an “informed investment” into the defective certificate analysis. I agree with the trial judge that requiring a franchisee to demonstrate they were unable to make an informed investment in a deficient certificate case would undermine one of the purposes of the Wishart Act. An important purpose of franchise disclosure certificates is that they attach personal liability to the signatories, which is intended to incentivize the signatories to ensure the contents of the disclosure documents are accurate. In this case, the trial judge found that this attachment of personal liability to signatories is a free-standing objective and is not tied to any impact on the recipient. I agree with this finding.

[22] At trial, Mr. Davis testified that his team inserted the page four signature page into the financial disclosure documents. The trial judge found that this indicates that the signature did not serve the policy objective of impressing upon him the importance of ensuring the entire document was complete and accurate. I agree.

[23] She also found that the financial disclosure documents did not contain the signed and dated disclosure certificate required by s. 7 of the regulation and that there is nothing to suggest that Mr. Davis’s signature on page four applies to anything beyond that page. I see no palpable and overriding error in these findings; as such, they are owed deference by this court.

[24] I also agree with the conclusion of the trial judge that the absence of the certificate is a fatal flaw in the disclosure. Therefore, the franchisees had a right to rescind the franchise agreement without penalty under s. 6(2) of the Wishart Act and did so lawfully.

[25] Lastly, I also note that this court reached the same conclusions in 2619506 Ontario Inc. v. 2082100 Ontario Inc., 2021 ONCA 702, a case very similar to the one under appeal.

(2) Franchisor’s associate

[26] The Wishart Act contains the following definition of a “franchisor’s associate”:

“franchisor’s associate” means a person,

(a) who, directly or indirectly,

(i) controls or is controlled by the franchisor, or

(ii) is controlled by another person who also controls, directly or indirectly, the franchisor, and

(b) who,

(i) is directly involved in the grant of the franchise,

(A) by being involved in reviewing or approving the grant of the franchise, or

(B) 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

(ii) exercises significant operational control over the franchisee and to whom the franchisee has a continuing financial obligation in respect of the franchise[.]

[27] Both the appellants and respondents agree that Mr. Davis, as the sole director and shareholder, had control over the franchisor, and therefore meets the first step of the “franchisor’s associate” test under the Wishart Act. The question then becomes whether Mr. Davis was directly involved in the granting of the franchise or was someone who exercised operational control over the franchisee and was owed a continuing financial obligation regarding the franchise.

[28] The trial judge made findings of fact based on the evidentiary record that the statements made at pages two to four of the disclosure documents were “representations” for the purpose of granting, marketing, or offering to grant the franchise. These findings of fact were open to the trial judge and therefore are entitled to deference. Mr. Davis also gave sworn testimony that he intended to be personally liable for his signature on page four. Based on these facts, Mr. Davis was directly involved in the grant of the franchise under clause (b)(i)(B).

[29] I am also unconvinced by the appellants’ reading of the statute. The appellants contend that the concept of direct involvement in s. 1(b)(i) modifies ss. 1(b)(i)(A) and 1(b)(i)(B). For example, section 1 (b)(i)(B) would read as follows:

“franchisor’s associate” means a person,

(b) who,

(i) is directly involved in the grant of the franchise,

(B) by making [direct] 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….

[30] The appellants’ proposed reading of the statute would contravene established principles of statutory interpretation. As Professor Ruth Sullivan has written, “[t]he starting point of every interpretative exercise is determining the ‘ordinary meaning’ of the text. This is what Driedger means when he says the words of an Act are to be read in their ordinary, grammatical sense”: Ruth Sullivan, Statutory Interpretation, 3rd ed. (Toronto: Irwin Law, 2016), at p. 59. It is presumed that the legislature’s “choice of words, word order, and structure and its sequencing of material are careful and orderly, with an accurate appreciation of the impact on meaning”: Sullivan, at p. 129.

[31] In interpreting the Wishart Act, this court has emphasized the need to defer to the legislature’s wording. Analyzing s. 6 of the Wishart Act, for example, this court held that “a fair interpretation of the Act is one that balances the rights of both franchisees and franchisors. To read in the remedy that the appellant is proposing is inconsistent with such an interpretation and was clearly not within the contemplation of the legislature”: 4287975 Canada Inc. v. Imvescor Restaurants Inc., 2009 ONCA 308, 98 O.R. (3d) 187, at para. 40.

[32] The appellants advance a strained and unnatural reading of s. 1. Simply put, the legislature would have inserted the word “direct” into s. 1 (b)(i)(B) if it had intended to import the concept of direct involvement into that provision and thereby limit the application of the subsection. I do not agree with the appellants that an alternate meaning should be imputed, contrary to the contemplation of the legislature.

[33] In any event, the representations were made directly to the franchisee parties because Mr. Davis reviewed the disclosure documents, permitted his signature to be applied after the statements he wrote at pages two to four, and knew that this package would be provided to prospective franchisees.

[34] In all the circumstances, I see no error in the trial judge’s reasons or application of the law and as such, I would not disturb her findings.

[35] Accordingly, I would dismiss the appeal. Counsel advised the court at the hearing that the parties had agreed on costs of the appeal.

Released: June 9, 2022 “K.F.” “M. Tulloch J.A.” “I agree. K. Feldman J.A.” “I agree. S.E. Pepall J.A.”