COURT FILE NO.: CV-09-385359
HEARD: April 2, 2012
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: 2189205 Ontario Inc., Parminder Mutti and Navjot Kaur Chandi, plaintiffs
and
Springdale Pizza Depot Ltd., Ranjit Singh Mahil, Dilawar Singh Khakh, 2147390 Ontario Inc. and Kulwinder Singh, defendants
BEFORE: MASTER R.A. MUIR
COUNSEL: Allan D.J. Dick and Shane P. Murphy for the plaintiffs David S. Altshuller for defendants
REASONS FOR DECISION
[1] This action involves a claim by the plaintiffs 2189205 Ontario Inc. ("218"), Parminder Mutti ("Mutti") and Navjot Kaur Chandi ("Chandi"), for a declaration that they validly rescinded their franchise agreement with the defendants pursuant to section 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, C.3 (the “Act”) and that they are entitled to compensation as provided for under the Act.
BACKGROUND AND NATURE OF THE ACTION
[2] On June 29, 2010, Justice D. Wilson granted partial summary judgment to the plaintiffs. In an order dated August 11, 2010, Justice Wilson made a declaration that the franchise agreement in question was validly rescinded by virtue of the plaintiffs’ notice of rescission dated July 16, 2009. Justice Wilson also ordered that the defendants Springdale Pizza Depot Ltd. (“Springdale”), Ranjit Singh Mahil (“Mahil”) and Dilawar Singh Khakh (“Khakh”)[^1] were jointly and severally liable to pay compensation to the plaintiffs as required by section 6(6) of the Act and that such amount was to be determined by reference. An appeal from Justice Wilson’s order was dismissed by the Court of Appeal on June 22, 2011. On September 7, 2011 Master Glustein made an order appointing me as reference master. A hearing for directions was held on November 30, 2011 at which time I scheduled the hearing of the reference for April 2, 2012.
[3] The background facts to this litigation are concisely summarized by Justice Wilson in her decision on the motion for partial summary judgment.[^2] Beginning at paragraph 2 of her decision Justice Wilson states as follows:
2 Mutti and his sister Chandi are the principals of the corporate Plaintiff, 218. They decided they wanted to purchase a franchise of the Defendant Springdale, who was the franchisor, and operate a restaurant known as Pizza Depot. They contacted the head office of Springdale and learned that a franchise located at 611 Holly Avenue in Milton, Ontario was available for purchase. That store was being operated by the defendant, 214. Mutti and Chandi entered into an agreement of purchase and sale with the Defendant 214 on October 14, 2008 for the sum of $220,000.00.
3 The franchise agreement between 214 and Springdale required Springdale's consent to an assignment of the franchise agreement. The Plaintiffs were required to sign several documents in furtherance of securing the consent of the franchisor including an Assignment of Franchise Agreement and Guarantee/Indemnity, general security agreement, new guarantee, subordination and transfer restriction agreement, undertaking for car wrapping, a sublease agreement with a company which was an affiliate of Springdale and an Acknowledgement, all of which were signed in December, 2008.
4 After operating the pizza franchise for several months, the Plaintiffs who had no prior experience in franchises, learned that they did not have the proper disclosure pursuant to the Act. They served a Notice of Rescission of the Assignment of the Franchise Agreement on Springdale on July 16, 2009. This action was commenced on August 19, 2009. The Statement of Defence and Crossclaim of Springdale, Mahil and Khakh pleads that disclosure documentation as required by the Act was provided and that, in any event, they were exempt from any disclosure requirements pursuant to Section 5(7) of the Act. The Plaintiffs continued to operate the pizza business for a few months and attempts were made to resolve the issues between the parties. These ultimately failed and on October 21, 2009, the Plaintiffs ceased operating the business and left the premises.
COMPENSATION UNDER SECTION 6(6) OF THE ACT
[4] As indicated above, Justice Wilson determined that the franchise agreement was validly rescinded and ordered that compensation be paid pursuant to section 6(6) of the Act. That section provides as follows:
(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).
[5] I will address each of these headings of potential compensation in order.
A. REFUND TO THE FRANCHISEE FOR MONEY RECEIVED FROM THE FRANCHISEE
[6] The parties are in agreement with respect to this element of compensation under the Act. The plaintiffs are owed $57,959.35 as a refund of money paid to the Springdale Defendants.
B. INVENTORY PURCHASED BY THE FRANCHISEE AND REMAINING AT THE EFFECTIVE DATE OF RESCISSION
[7] The effective date of the notice of rescission was July 16, 2009. Nevertheless, the plaintiffs continued to operate the franchise until October 21, 2009 when they closed the business and left the premises. As Justice Wilson noted, it appears that the parties made efforts to resolve their differences during that time period and for that reason the plaintiffs continued to operate the business.
[8] The plaintiffs seek payment of $6,000.00 pursuant to this element of compensation. The plaintiffs’ evidence is that throughout the course of their operation of the business, they maintained approximately the same level of inventory. When the plaintiffs took over the operation of the business from the defendant 2147390 Ontario Inc., the inventory was valued at $6,000.00. This is the basis for the plaintiffs’ claim for $6,000.00.
[9] The Springdale Defendants argue that the plaintiffs could and should have prepared a summary of the inventory on the premises of the business at the time it was shut down. It appears that no effort was made to do so. In addition, the Springdale Defendants argue that the plaintiffs are obligated to return the inventory to them in exchange for the payment under section 6(6)(b) of the Act and have failed to do so. The plaintiffs are therefore not entitled to any compensation for inventory. See Payne Environmental Inc. v. Lord and Partners Ltd., [2006] O.J. No. 273 (S.C.J.) at paragraph 16.
[10] The plaintiffs submit that they have tendered sufficient evidence to support this claim. A certain level of inventory is essential in order to operate a business of this nature, which the plaintiffs did up until it closed on October 21, 2009. There is no evidence to suggest that inventory in the amount of $6,000.00 is excessive or unusual. They also point out that much of the inventory in issue was of a perishable nature (produce, cheese and other ingredients necessary for the preparation of the food products sold by the plaintiffs). Even if the plaintiffs had kept this inventory, its value today of course would be negligible.
[11] On balance, I am satisfied that the plaintiffs have met the evidentiary burden of establishing their entitlement to this element of compensation. Inventory in the amount of $6,000.00 would appear to be reasonable for a business of this nature. I also have the viva voce evidence of the plaintiffs that this is the customary level of inventory maintained by them during the course of their operation of the business. Of course, it would have been preferable if a list of the inventory items had been prepared at closing but I do not view that as essential. Finally, I note that the Springdale Defendants have refused to pay any of the section 6(6) compensation to date. It would be absurd to suggest that the plaintiffs should be denied compensation under this heading because they cannot now return this perishable inventory to the Springdale Defendants. Section 6(6) of the Act provides that the compensation is to be paid within 60 days after the effective date of rescission. In this case that date was September 14, 2009. The Springdale Defendants chose to unsuccessfully dispute the validity of the notice of rescission. In my view, they must now live with the consequences of that decision.
[12] The plaintiffs are therefore owed $6,000.00 for this element of compensation under the Act.
C. SUPPLIES AND EQUIPMENT PURCHASED BY THE FRANCHISEE
[13] The plaintiffs claim compensation in the amount of $226,871.37 under this heading of compensation. The Springdale Defendants acknowledge that they are required to pay this amount under section 6(6)(c) of the Act. However, they argue that any such order for payment should be stayed until such time as they have had an opportunity to inventory and inspect the equipment.
[14] The plaintiffs state that they have preserved the equipment in safe storage since closing the business in October, 2009. However, they have not provided any evidence with respect to the particulars of what equipment has been preserved in this fashion and what condition it is in. Upon making a payment required by section 6(6)(c) of the Act, a franchisor is entitled to the return of the equipment. See Payne Environmental at paragraph 16. The plaintiffs expressly acknowledge this right in their written submissions. The Springdale Defendants simply want the court to stay the making of this payment until they are satisfied that all of the equipment has been preserved and has been returned to them.
[15] In my view, this is an appropriate request, based on the authority of Payne Environmental, cited above. However, what the Springdale Defendants are entitled to is the return of the equipment and nothing more. There is no provision in the Act that requires a rescinding franchisee to make any representations about the quality or condition of the supplies and equipment. I agree with the plaintiffs that section 6(6)(c) of the Act makes it mandatory that the equipment be repurchased by the Springdale Defendants regardless of its condition. To the extent that the value of the supplies and equipment has diminished over time, this again is a consequence of the decision by the Springdale Defendants to dispute the notice of rescission and their refusal to pay the required compensation.
[16] The plaintiffs are therefore owed $226,871.37 for this element of compensation under the Act. If the plaintiffs are unable or unwilling to return to the Springdale Defendants the various supplies and equipment purchased pursuant to the franchise agreement, the Springdale Defendants will not be obligated to pay this amount.
D. COMPENSATION FOR LOSSES THAT WERE INCURRED IN ACQUIRING, SETTING UP AND OPERATING THE FRANCHISE
[17] The plaintiffs also claim compensation under section 6(6)(d) of the Act. They claim to have suffered a loss in operating the franchise of $113,858.19 calculated on a non-cash basis. Alternatively, they allege a loss of $119,087.88 on a cash basis.
[18] The cash/non-cash issue arises because the plaintiffs partially operated the business on a cash basis. Certain employees were allegedly paid in cash. Various supplies, such as soft drinks and water, were allegedly purchased in cash. None of these cash expenditures were properly recorded on the books of the business. Similarly, on the revenue side, various cash receipts were not recorded on the books of the business. The plaintiffs’ evidence is that all of the unrecorded cash revenue received by the franchise was used to make cash payments to employees and suppliers. No evidence was presented to independently verify or quantify any of these cash transactions. Moreover, there are several inconsistencies with the plaintiffs’ evidence in this respect. In some cases 218’s financial statements are at variance with its reported revenue. There are no sales reports for the last month of operation. Its PST remittances are in some instances inconsistent with its reported sales. Of course, all of the documents or other evidence to support the plaintiffs’ revenue and expense calculations would be within their control. Additional documentation could and should have been produced in order to assist the court in coming to a determination of the appropriate revenue and expense figures for the operation of the business.
[19] This is obviously not an appropriate way to manage a business. The plaintiffs could and should have followed generally accepted accounting practices. They were obliged to properly record all transactions in connection with the operation of their business. The plaintiffs chose not to do so. In my view, as with the Springdale Defendants’ decision to dispute the notice of rescission, the plaintiffs must also live with the consequences of the choices they have made.
[20] Given this, I accept the Springdale Defendants’ argument with respect to the calculation of revenue, at least in part. The Springdale Defendants argue that a determination of the plaintiffs’ revenue should be based on evidence given by the defendant Mahil. Mr. Mahil is a principal of Springdale. His evidence is that based on his experience, a franchise similarly situated to the plaintiffs’ franchise should earn revenue of about $6,000.00 per week. The plaintiffs operated the business for 42 weeks which translates into expected revenue of $252,000.00. Alternatively, the Springdale Defendants suggest that the best evidence to calculate revenue is by reference to the weekly sales reports the plaintiffs submitted to Springdale. Based on an analysis of those weekly reports, the plaintiffs acknowledge a total revenue figure of $232,688.46, which would include some cash receipts. In my view, under the circumstances, this is the best available approach to calculating total revenue for the purposes of the section 6(6)(d) analysis. I accept the plaintiffs’ position in this regard, at least on the revenue side.
[21] The Springdale Defendants do not dispute the amounts paid by the plaintiffs for rent, operating expenses, advertising, insurance, utilities and legal fees related to the purchase of the franchise. Those expenses total $148,371.53.
[22] The plaintiffs are claiming an expense of $21,800.00 in respect of what they call “working capital loans”. These loans are evidenced by cheques and a bank draft and, for the most part, 218’s corresponding bank statements. Mutti gave oral evidence confirming that he had loaned the business $7,000.00 and none of it was repaid. Further loans in the amount of $14,800.00 were made to the business by Amarpreet Singh (Chandi’s spouse) through his company ABN Truck & Coach. Mr. Singh gave evidence that none of those amounts had been repaid. Both of these witnesses testified in a straightforward and forthright manner. Their answers with respect to these loans were responsive and consistent with the other evidence. I am satisfied that these loans were made for the purposes stated and remain due and owing by 218. I accept that these working capital loans are a proper expense.
[23] The plaintiffs are also claiming an expense relating to ongoing legal fees in the amount of $4,032.45. The plaintiffs take the position that these legal fees are independent of and separate from any legal fees incurred in connection with this action. It appeared at the hearing on April 2, 2012, that the Springdale Defendants had accepted that these fees were a proper expense relating to the ongoing operation of the business. However, in their written submissions, the Springdale Defendants took the position that certain supporting documentation was still missing. It appears that the plaintiffs have now provided that missing documentation. In their responding submissions, the plaintiffs invited the Springdale Defendants to advise the court it they were still disputing this expense. As no further submissions were received from the Springdale Defendants in this regard, I am proceeding on the assumption that this expense is no longer in dispute. In any event, my review of the relevant invoices and dockets leads me to conclude that the legal fees are properly identified as an expense relating to the ongoing operation of the business and not part of this litigation.
[24] The plaintiffs have also identified an expense for accounting fees in the amount of $10,170.00. The Springdale Defendants argue that some of the work product identified in the accountants’ invoice has not been produced and they have no way of verifying that the work was done. In my view, it is not necessary for the plaintiffs to provide the work product in order to justify this expense. The invoice has been rendered to 218 by an unrelated third party for services provided. Simple common sense would lead one to conclude that a business of this nature would necessarily incur ongoing accounting expenses. Some of the work product in the form of unaudited financial statements for 2008 and 2009 has been provided. Mutti’s evidence at the hearing confirmed that the services were provided. The amount of the invoice does not seem unreasonable given the nature of the services provided. I am satisfied on the evidence before me that this is a proper expense.
[25] The plaintiffs have also indentified an expense they have called “foregone salary” in respect of Mutti and Chandi. They argue that they are entitled to claim amounts they would have earned had they not decided to acquire this franchise. When they decided to become franchisees they left their usual employment and received no remuneration from 218 while mostly working full time in the business as franchisees. They argue, therefore, that they are entitled to claim as an expense the amounts they would have earned had they not left their former employment. This claim totals $100,402.36.
[26] Although there is authority that suggests that the plaintiffs are entitled to claim this amount as compensation (see 1706228 Ontario Ltd. v. Grill It Up Holdings Inc., 2011 ONSC 2735 at paragraphs 44-48), I am far from satisfied that they have met the evidentiary burden to establish the quantum they are seeking. Mutti was a self-employed truck driver prior to becoming involved with the franchise. He returned to the same job after he closed the franchise. His 2008 and 2010 draft tax returns were placed in evidence. Mutti’s 2008 return shows total income of $53,584.93. His 2010 return shows total income of $57,650.34. However, his 2010 notice of assessment from the Canada Revenue Agency (“CRA”) shows total income of only $20,050.00. No evidence was provided to account for this discrepancy. In their submissions the plaintiffs argued as follows:
What an individual who is self-employed shows on his personal income tax return for tax purposes in not evidence of his earnings. Self-employed individuals have all manners of determining their position for tax purposes.
[27] First of all, I am not sure what this means. To me the phrase “total income” is just what it says it is. In my view, what is shown on a tax return is, generally speaking, rather cogent and persuasive evidence of a person’s earnings. Second, and perhaps more importantly, this explanation does not address the discrepancy between Mutti’s return and the notice of assessment issued by CRA. Furthermore, Mutti’s notice of assessment for 2008 was not produced or entered into evidence. Given this significant discrepancy, I am not prepared to allow an expense for Mutti’s foregone salary in the $50,000.00 range as requested. In my view, the most persuasive evidence before the court supports a claim of $20,000.00 at best.
[28] Chandi’s draft personal income tax returns revealed similar discrepancies between the total income on her 2008 and 2010 returns and the amounts shown on the notices of assessment she received from CRA. The returns suggest total annual income in the $40,000.00 range. The notices of assessment show total annual income in the $20,000.00 range. Again, no explanation for these discrepancies was provided. For the same reasons set out in respect of the foregone salary claim submitted by Mutti, it is my view that the evidence suggests that Chandi’s claim in this regard amounts to $20,000.00 at best.
[29] The Springdale Defendants took issue with the fact that the foregone salary expense item was not specifically pleaded in the statement of claim. Instead, the plaintiffs sought to claim “staff salaries” as an expense under section 6(6)(d) of the Act. In my view, the statement of claim as drafted is sufficient to cover the claim for foregone salaries. This is simply one approach to measuring staff salaries. Moreover, the statement of claim includes a very broad and general claim for compensation under section 6(6) of the Act and that, in my view, is sufficient to include foregone salaries.
[30] I have therefore concluded that the total allowable expense in respect of foregone salaries is $40,000.00.
[31] I am not prepared to allow any deduction for expenses relating to employee wages and supplier purchases allegedly paid in cash and not recorded on the books of the business. There is no corroborating evidence to support the plaintiffs’ calculations of these expenses. No employee or supplier was called as a witness. It appears that no receipts for these payments were obtained or retained by the plaintiffs. None were placed in evidence. In fact, it appears that no documents whatsoever exist to support these claims.
[32] At best, the evidence consists of rough “ballpark” estimates of what these expenses may have been given the nature and volume of business conducted. The court should not have to speculate or make speculative assumptions in order to calculate a plaintiff’s damages. See Robert McAlpine Ltd. v. Byrne Glass Enterprises Ltd., [2001] O.J. No. 403 (C.A.) at paragraphs 61-67. Moreover, such damages should not be awarded when a plaintiff could have provided the required evidence. See Premd Inc. v. Ogilvy Renault LLP, 2010 ONSC 7141 (S.C.J.) at paragraph 154. As I have stated above, the plaintiffs chose to operate their business in this fashion and they must now accept the consequences of doing so.
[33] I have therefore allowed total expenses of $224,373.98, being comprised of $148,371.53 in undisputed expenses for rent, operating expenses, advertising, insurance, utilities and legal fees; $21,800.00 in respect of the operating loans; $4,032.45 for ongoing additional legal expenses; $10,170.00 for accounting fees; and, $40,000.00 for foregone salary. Deducting these expenses from the revenue figure of $232,688.46 results in a net profit to the plaintiffs of $8,314.48. Therefore, it is my conclusion that no compensation is owing to the plaintiffs under section 6(6)(d).
SET-OFF
[34] The Springdale Defendants seemed to suggest in argument that the compensation owing to the plaintiffs under sections 6(6)(a), (b) and (c) of the Act should be set-off against the gross revenue calculated in accordance with section 6(6)(d) of the Act. I do not accept this argument. The expense/revenue calculations made under section 6(6)(d) specifically exclude any of the expense items set out in sections 6(6)(a), (b) and (c) of the Act. The same argument was advanced by the defendant in Payne Environmental and found to be untenable by Justice Murray. See Payne Environmental at paragraph 12. I agree with Justice Murray. As long as the section 6(6)(a), (b) and (c) amounts are not included in the calculation of the franchisee’s expenses under section 6(6)(d), no deduction need be made.
THE INDIVIDUAL PLAINTIFFS’ ENTITLEMENT TO COMPENSATION
[35] The Springdale Defendants take issue with the right of the individual plaintiffs to compensation under the Act. They argue that only the franchisee, as defined by the Act, is entitled to compensation and in this case that would be 218.
[36] Whether this argument is correct or incorrect is not a matter before me as referee. Paragraph 2 of Justice Wilson’s August 11, 2010 order is clear. All of the plaintiffs are entitled to compensation from the Springdale Defendants on a joint and several basis. The time to dispute the individual plaintiffs’ entitlement to compensation was when this matter was before Justice Wilson or in argument before the Court of Appeal. I am bound to follow the order of Justice Wilson.
STAY
[37] The Springdale Defendants request that any order with respect to compensation be stayed pending the outcome of a motion by the Springdale Defendants to amend their statement of defence. The Springdale Defendants wish to claim a set-off against the plaintiffs for damages allegedly done to Springdale as a result of the plaintiffs’ actions in removing equipment and leaseholds from the leased premises when they closed the business. Springdale alleges that the plaintiffs’ actions resulted in it losing a valuable business location.
[38] I am not prepared to stay the compensation order at this time. It is not even clear that Springdale will succeed on its motion to amend its statement of defence and, if so, to what extent. Springdale is, of course, entitled to bring a motion seeking a stay if and when the statement of defence is amended. At that time the issue can be considered by the court in context and on proper evidence.
INTEREST
[39] Section 128(1) of the Courts of Justice Act, R.S.O. 1990, c. C.43 (the “CJA”) provides that a party is entitled to pre-judgment interest from the date its cause of action arose. A cause of action under section 6(6) of the Act arises 60 days after the effective date of the notice of rescission or at an earlier date if the franchisor communicates its refusal to pay compensation before the expiry of the 60 days. See 2130489 Ontario Inc. v. Philthy McNasty’s (Enterprises) Inc., 2012 ONCA 381 at paragraph 39. It appears that Springdale communicated its refusal to pay compensation, at least initially, on July 20, 2009. However, the parties attempted to negotiate a resolution of their dispute into the fall of 2009 and the plaintiffs continued to operate the franchise during that time period. For this reason, it is my view that it is appropriate in the circumstances of this action that pre-judgment interest run from October 21, 2009, being the date the plaintiffs closed the business and ceased operations.
ORDER
[40] I therefore order that the Springdale Defendants pay compensation to the plaintiffs under section 6(6) of the Act in the total amount of $290,830.72. The sum of $226,871.37, included in the total amount as owing in respect of supplies and equipment, need only be paid if and when the plaintiffs return to the Springdale Defendants the various supplies and equipment purchased pursuant to the franchise agreement. The plaintiffs are entitled to pre-judgment interest from October 21, 2009 at the CJA rate of 0.5% per year. They are entitled to post-judgment interest from June 29, 2010, the date of Justice Wilson’s decision, at the rate of 2% per year.
COSTS
[41] If the parties are unable to agree on the issue of the costs of the reference, they may make brief submissions in writing by no later than July 6, 2012.
[42] Once the issue of costs has been determined, the parties shall prepare a formal Report for my approval and signature.
Master R.A. Muir
DATE: June 11, 2012
[^1]: For the sake of simplicity I will refer to these defendants as the Springdale Defendants. [^2]: 2010 ONSC 3695.