Court of Appeal for Ontario

Date: 20240722 Docket: COA-23-CV-0380, COA-23-CV-0382 & COA-23-CV-0385

Before: Roberts, Miller and Gomery JJ.A.

Parties

Docket: COA-23-CV-0380

Between: Royal Bank of Canada, Plaintiff

And: Everest Group Inc., Yousaf Jameel Khan, also known as Yousaf Jamil, Zarmina S. Khan and Shahid Saleem Khawaja, Defendants (Appellants/ Respondent by way of cross-appeal)

And: Paramount Franchise Group Inc., Paramount Franchise Inc., Fakih Group Inc., 2302733 Ontario Inc., Mohamad Fakih*, Holly Graham* and Michel Gagnon, Third Parties (Respondents/ Appellants by way of cross-appeal*)

Docket: COA-23-CV-0382

And Between: Premium Host Inc., Plaintiff (Appellant/ Respondent by way of cross-appeal)

And: Paramount Franchise Group Inc., Paramount Franchise Inc., 2302733 Ontario Inc., Michel Gagnon, Mohamad Fakih and Holly Graham*, Defendants (Respondents/ Appellants by way of cross-appeal*)

And Between: Paramount Franchise Group Inc., Paramount Franchise Inc., and 2302733 Ontario Inc., Plaintiffs by Counterclaim

And: Premium Host Inc., Gul Nawaz Sheikh, Shahid Khawaja, and Sardar Samiuddin Khan, Defendants to the Counterclaim

Docket: COA-23-CV-0385

And Between: Royal Bank of Canada, Plaintiff

And: Versatile Holdings Inc., Sardar Samiuddin Khan, also known as Sardar M. Khan Samiuddin, Nida Shahid and Shahid Saleem Khawaja, Defendants (Appellants/ Respondent by way of cross-appeal)

And: Paramount Franchise Group Inc., Paramount Franchise Inc., Fakih Group Inc., 2302733 Ontario Inc., Mohamad Fakih*, Holly Graham* and Michel Gagnon, Third Parties (Respondents/ Appellants by way of cross-appeal*)

Counsel

Adrienne Boudreau, Daniel Hamson and Maria Arabella Robles, for the appellants/respondents by way of cross appeal Versatile Holdings Group Inc., Everest Group Inc. and Premium Host Inc.

Justin Nasseri and Gordon Vance, for the respondents/appellants by way of cross appeal Paramount Franchise Group Inc., Paramount Franchise Inc., Fakih Group Inc., 2302733 Ontario Inc., Mohamad Fakih and Holly Graham

Heard: June 26, 2024

On appeal from the judgments of Justice Marie-Andrée Vermette of the Superior Court of Justice, dated March 3, 2023, with reasons reported at 2023 ONSC 1507, and from the costs order dated June 26, 2023, with reasons reported at 2023 ONSC 3808.

Reasons for Decision

[1] These appeals and cross-appeal concern a franchise dispute between the franchisor, Paramount Franchise Group Inc. (“Paramount”), and three franchisees: Versatile Holdings Inc. (“Versatile”), Everest Group Inc. (“Everest”), and Premium Host Inc. (“Premium Host”). In lengthy and detailed reasons, the trial judge explained why she dismissed the rescission actions for statutory compensation under the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the “Wishart Act”) brought by Versatile and Everest and allowed the action brought by Premium Host. She also found that the franchisor’s employee, Holly Graham, and the franchisor’s related company, Paramount Leasing, were franchisor’s associates as defined in the Wishart Act, and were therefore jointly and severally liable with Paramount to pay statutory compensation to Premium Host. She rejected the claim that Paramount Wholesale and the Fakih Group were also franchisor’s associates.

[2] Versatile and Everest raise the following issues on their appeals:

1. The trial judge erred in law by requiring them, and not the franchisor, to prove that there was no disclosure or insufficient disclosure.
2. Alternatively, the trial judge erred by finding that the franchisees had failed to prove non, or insufficient, disclosure.
3. The trial judge erred by failing to find that Paramount Wholesale and the Fakih Group were not franchisor’s associates.

[3] We are not persuaded that the trial judge made any reversible error.

[4] First, the burden of proving that the franchisee is entitled to rescission and statutory compensation falls squarely on the franchisee, as it would for any claimant. As this court stated in Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62, 419 D.L.R. (4th) 53, at para. 40, to justify rescission in circumstances where a franchisee primarily bases its claim for rescission on deficiencies in the franchise disclosure document (“FDD”), “the Franchisee must not only demonstrate that the FDD was deficient, but also show that it was so deficient that the Franchisor effectively ‘never provided [a] disclosure document.’” The trial judge stated and applied the law correctly.

[5] Second, as set out in her reasons, the trial judge’s finding that Versatile and Everest had not met their burden to prove no, or inadequate, disclosure was rooted in the evidence that she was entitled to accept. It was open to the trial judge to reject the franchisees’ evidence that the documents on which they relied were not the last documents that they received from the franchisor and that the franchisor had produced further documents to the franchisees, which the franchisees failed to produce. These findings were not inconsistent with her finding that the documents relied on by the franchisor at trial were not the documents received by the franchisees.

[6] Finally, the trial judge gave cogent and thorough reasons for finding that Paramount Wholesale and the Fakih Group were not franchisor’s associates. She properly applied the statutory definitions and her findings that neither was involved in the review or approval of the franchise nor exercised significant operational control were open to her on the record to which she referred.

[7] These appeals are accordingly dismissed.

[8] With respect to the cross-appeal, Paramount, Paramount Franchise Inc., 2302733 Ontario Inc., Fakih Group, Mohamad Fakih, and Ms. Graham submit that the trial judge made reversible errors in finding that:

1. The disclosure exemptions in s. 5(7) of the Wishart Act do not apply to Premium Host;
2. The termination of the franchise agreement because of the franchisee’s breach does not preclude rescission by the franchisee;
3. The omission of financial statements concerning a franchise referred to as the Heartland location was an omission of a material fact entitling Premium Host to statutory compensation;
4. Holly Graham and Paramount Leasing are franchisor’s associates.

[9] We do not accept that the trial judge made any reversible errors.

[10] First, the trial judge set out detailed reasons explaining why the s. 5(7) disclosure exemptions relied upon by Paramount in relation to their obligations towards Premium Host do not apply. We agree with her analysis and conclusions.

[11] Second, the trial judge made no error in finding that the franchisor’s termination of the franchise agreement because of a franchisee’s breach does not preclude the franchisee from exercising the statutory right to rescind the franchise agreement. The Wishart Act does not make the exercise of the s. 6 right of rescission conditional on non-termination. As a matter of principle, this makes sense. The lawful termination of a contract for breach absolves the non-breaching party from performing future obligations under the contract, but it does not render the contract void ab initio: see e.g., Pickering Square Inc. v. Trillium College Inc., 2016 ONCA 179, 395 D.L.R. (4th) 679, at paras. 28-29. Where the franchisor fails to meet its disclosure obligations to the franchisee, the franchisee is entitled to rescind the franchise agreement pursuant to the Wishart Act. The franchisor cannot negate the franchisee’s statutory right to rescind by pre-emptively terminating the agreement, even where there has been a breach by the franchisee.

[12] Third, the trial judge did not err in allowing Premium Host’s claim for statutory compensation. The trial judge made a finding, informed by her credibility assessments and the written record before her, that Paramount failed to disclose in a disclosure document to Premium Host financial information relating to the operation of the Heartland location. That finding, and the finding of the materiality of the non-disclosure, is entitled to deference and there is no basis on which we could overturn it.

[13] Finally, the trial judge explained why she found that Ms. Graham and Paramount Leasing were franchisor’s associates, as defined in the Wishart Act. With respect to Ms. Graham, although she did not have the authority to approve the grant of a franchise, the trial judge found that her responsibilities amounted to being “involved in reviewing or approving the grant of the franchise.” These responsibilities included: (a) the initial vetting of prospective new franchisees; (b) evaluating prospective franchisees’ experience in the food services industry and noting red flags; (c) advising the principals of the results of her review, including outstanding debts; (d) undertaking initial meetings with prospective franchisees; and (e) briefing the principals on those meetings. Ms. Graham may not have been a director or officer, but neither was she a clerical or junior employee. She performed a significant role in the process of reviewing the applications, exercising professional judgment, and advising the ultimate decision-makers. We find no issue with the trial judge’s analysis.

[14] Similarly, we do not agree that the trial judge erred in finding Paramount Leasing was also a franchisor’s associate. As the trial judge amply explained, Paramount Leasing exercised significant operational control over the franchisees, and was owed a continuing financial obligation in respect of the franchise, satisfying the statutory definition of franchisor’s associate. As noted by the trial judge, Paramount Leasing had the power to terminate the franchisee’s lease for breach of the franchise agreement. These findings were supported by the evidence before the trial judge and were open to her.

Disposition

[15] The appeals and cross-appeal are dismissed. If the parties are unable to agree on the costs of these appeals, the court will receive submissions in writing within 10 days of the release of these reasons.

“L.B. Roberts J.A.”

“B.W. Miller J.A.”

“S. Gomery J.A.”