SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CV-09-385359
DATE: 20130301

RE: 2189205 Ontario Inc., Parminder Mutti and Navjot Kaur Chandi, Plaintiffs

AND:

Springdale Pizza Depot Ltd., Ranjit Singh Mahil, Dilaware Singh Khakh, 2147390 Ontario Inc., and Kulwinder Singh, Defendants

BEFORE: Lederman J.

COUNSEL:
Allan D. J. Dick and Shane P. Murphy, for the Plaintiffs
David S. Altshuller, for the Defendants

HEARD: February 22, 2013

ENDORSEMENT

Nature of Motion

[1] The Plaintiffs are former franchisees of the “Pizza Depot” franchise system, of which the Defendant, Springdale Pizza Depot Ltd., (“Springdale”) is the franchisor.

[2] Because the Plaintiffs did not receive the required disclosure document pursuant to s.5 of the Arthur Wishart Act (Franchise Disclosure) 2000, S.O. 2000, c. 3 (the “Act”), the Plaintiffs exercised their statutory right of rescission pursuant to s. 6 of the Act and rescinded their franchise agreements.

[3] On June 29, 2010, D. Wilson J. granted partial summary judgment against the Springdale Defendants and awarded the amounts owing to them pursuant to s. 6 (6) of the Act, the exact amount of which was ordered to be determined by way of reference before a Master. The Springdale Defendants [as opposed to the other Defendants who are not involved in this matter] unsuccessfully appealed the Order of D. Wilson J. to the Court of Appeal.

[4] A reference was conducted by Master Muir to determine the precise amount of money owing by the Springdale Defendants to the Plaintiffs.

[5] After a hearing, the Master released Reasons for Decision on June 11, 2012 on the substance of the claims and Reasons on July 11, 2012 for the award of costs. On August 10, 2012, the Master issued his Report on Reference (the “Report”).

[6] On this motion, the Springdale Defendants move to oppose confirmation of the Report and seek an order referring certain matters back to the Master for reconsideration or in the alternative, for an order varying the findings made in the Report and for an order setting aside or varying the costs award.

What is in issue on this motion

[7] The Springdale Defendants oppose confirmation of the Report on the following grounds:

a) that the Master erred by ordering the Springdale Defendants to pay the Plaintiffs $6,000.00 as compensation for inventory held at the time of rescission pursuant to s. 6 (6) (b) of the Act;

b) that the Master erred by ordering the Springdale Defendants to purchase supplies and equipment from the Plaintiffs in the amount of $226,871.37 pursuant to s. 6 (6) (c) of the Act;

c) that the Master erred by failing to find that the Springdale Defendants were entitled to set off any profits earned by the Plaintiffs against any amounts required to be paid by the Springdale Defendants pursuant to ss. 6 (6) (a) - (c) of the Act;

d) that the Master erred in awarding costs of $25,000.00 against the Springdale Defendants.

Standard of Review

[8] The standard of review on a motion to oppose confirmation of a report in Ontario is now well settled based primarily on Jordan v. McKenzie [1987] O.J. No. 1193 (HCJ), as upheld and clarified in Zeitoun v. Economical Insurance Group (2008) 2008 20996 (ON SCDC), 91 O.R. (3d) 131 (Div. Ct.). A recent summary of the standard of review arising from these cases was stated by J.S. Fregeau J. in International Wall Systems Ltd. v. English Lane Residential Developments Ltd., 2011 ONSC 6920 at para. 39 as follows:

The result should not be interfered with unless there has been some error in principle demonstrated by the master’s reasons, some absence or excess of jurisdiction, or some patent misapprehension of the evidence.

The Act

[9] Section 6 (6) of the Act provides as follows:

Franchisor’s obligations on rescission

6(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) - (c).

Inventory – Section 6 (6) (b) of the Act

[10] The Springdale Defendants submit that the Master erred in awarding damages pursuant to ss. 6 (6) (b) of the Act when there was no evidence whatsoever before him of the amount of inventory in existence at the time that the Plaintiffs closed their franchised location. They submit that the only indication that the inventory amounted to $6,000.00 is found in the submissions of Plaintiffs’ counsel by way of their Compensation Brief, their opening statement and aid memoir and written closing argument. The Springdale Defendants submit that there is no admissible credible evidence with respect to the amount of inventory remaining as of October 21, 2009, the customary level of inventory or its perishable or non-perishable nature.

[11] In response, Plaintiffs’ counsel argues that at the hearing of the reference, the amount of inventory was not one of the issues in dispute. They contend that at the opening of the reference, the parties clearly agreed that six items were being contested by the Springdale Defendants and the amount claimed for inventory was not one of those disputed items. They submit that while that was not an issue, the Springdale Defendants did argue that they should not be required to pay money for inventory which could not be repurchased. As a result, the plaintiffs did lead evidence about the nature of the inventory, including perishable products such as cheese and vegetables. This evidence was relied upon by the Master in determining that the Plaintiffs had no obligation to make such inventory available for a purchase.

[12] The Plaintiffs submit that the issue concerning quantum first arose after the hearing of the reference and was contained in the Springdale Defendants’ responding written submissions. Because of the position taken at the outset of the hearing, the Plaintiffs were of the view that the precise quantum to be paid for inventory was not in dispute and accordingly, they adduced no evidence at the reference to support their position that $6,000.00 reflected a reasonable estimation of the amount of inventory held at the time of rescission.

[13] A reading of the transcript of the positions of counsel at the beginning of the hearing of the reference would seem to support the Plaintiffs in this regard. In any event, the Master had before him the Statement of Adjustments, which was provided at the time of the Plaintiffs’ purchase of the franchise business. The Statement of Adjustments which was never challenged by the Springdale Defendants shows that the inventory held at the time was worth $6,000.00. Evidence was provided at the reference that the Plaintiffs operated the franchise business in the ordinary course until several months following rescission and there was nothing to suggest that they were operating with anything less than the usual amount of inventory until the time they ceased operating.

[14] Accordingly, the Master had evidence of the value of the inventory at the beginning of the franchise and their continuing to purchase food products to maintain the business and could reasonably infer that because they operated the business to the very end, they must have had inventory at the time of closing. Given its perishable nature, the inventory would be of value such as the amount that existed at the time that they started the enterprise.

[15] Further, the Springdale Defendants did not provide any evidence to indicate that $6,000.00 was an inappropriate amount to allot for inventory.

[16] Given the fact that the Springdale Defendants did not take a clear stand with respect to this issue at the time of the hearing, and given the evidence that the Master had before him, I see no error of law or in principle in the Master relying upon the available evidence and drawing a reasonable inference.

[17] This ground of appeal must therefore fail.

Supplies and Equipment – Section 6 (6) (c) of the Act

[18] The Springdale Defendants take issue with the characterization of supplies and equipment in this case.

[19] They submit that the parties proceeded on the assumption that the value for “supplies and equipment” as set out in s. 6 (6) (c) was the same as the purchase price for the franchise as set out in the Statement of Adjustments, namely, $226,871.37.

[20] For the first time, the Springdale Defendants now argue that in the Agreement of Purchase and Sale of the franchise, the purchase price is allocated as $100,000.00 for equipment and $120,000.00 for leasehold improvements. They now take the position that leasehold improvements are not properly classified as “supplies and equipment” for the purposes of the Act and should not be included within the amount awarded to the Plaintiffs pursuant to s. 6 (6) (c). They argue that although this item may be more appropriately included under s. 6 (6) (d), it does not qualify as supplies or equipment under s. 6 (6) (c) and accordingly they state that the amount awarded under this heading should be reduced to $100,000.00.

[21] This is an entirely new argument raised on this appeal. This position was not taken by the Springdale Defendants in any of their written or oral submissions before the Master at the reference.

[22] As no issue was taken concerning leasehold improvements at the hearing, no evidence was submitted by the Plaintiffs to support the classification of leasehold improvements as equipment. Had this been raised in a timely way at the hearing, the Plaintiffs would have been in a position to address this question and lead evidence on this point. Given this prejudice, it is not permissible for the Springdale Defendants to raise this argument at this stage.

[23] This ground of appeal is rejected.

Losses and Setting Off Net Profits Against All Amounts Claimed – Section 6(6)(d) of the Act

[24] The Springdale Defendants submit that the Master erred in failing to find that any profit earned by the Plaintiffs during the operation of their franchise location must be set off against any amounts claimed pursuant to ss. 6 (6) (a), (b) and (c) of the Act.

[25] In his reasons, the Master found that the Plaintiffs earned a net profit of $8,314.48 and accordingly awarded no compensation pursuant to s. 6 (6) (d).

[26] The Springdale Defendants contend that where there has been non disclosure as required by the Act, the remedy is “designed to put the franchisee back in its pre-franchise position”: 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd., 2005 25181 (ON CA) at para. 31.

[27] They submit that, because of the restitutionary nature of the rescission remedy, where the calculations under s. 6 (6) (d) yield a net profit, that profit should be set off against other amounts owing under ss. (a) - (c) in order to put the former franchisee back in the same position as it was before it signed the franchise agreement – no better and no worse.

[28] The Springdale Defendants submit that the Master made an error in principle or patently misapprehended the evidence when assessing and considering the gross revenue, working capital loans, and accounting costs which were included in the Master’s determination of the Plaintiffs’ revenues and profits. Accordingly, they submit that the net revenue would have been higher than $8,314.48 and should have been taken into account in determining the totality of the amounts awarded under ss. 6 (6) (a), (b) and (c).

[29] Section 6 (6) of the Act outlines four (4) independent categories of payments that are payable by the franchisor to a rescinding franchisee. Subsections (a) – (c) set out specific refund and purchase obligations on the franchisor in the event of rescission. [It should be noted that the Springdale Defendants did not contest the Master’s award under subsection (a) in this case]. The amounts under ss. 6 (6) (a) – (c) are payable to the rescinding franchisee regardless of revenue earned and they are specifically exempted from s. 6 (6) (d) to prevent double counting. This was the principle stated in Payne Environmental v. Lord and Partners Ltd. [2006] O.J. 273 (SCJ) at para. 12 as follows:

Subsection 6 (6) (d) of the Act is designed to compensate the franchisee for all losses the franchisee incurred in acquiring, setting up and operating the franchise. This calculation of “all losses incurred” under ss. 6 (6) (d), at least initially, may include the amounts which have been identified in ss. 6 (a), (b), and (c). It is precisely because “all losses incurred” may include the amounts identified by ss. 6 (6) (a), (b), and (c) that those amounts are deducted from “all losses” in order to ensure there is no duplication in the calculation of compensation to be paid pursuant to that subsection. In theory, the amounts calculated pursuant to ss. 6 (6) (a) (b), and (c) are included in “all losses incurred” under ss. 6 (6) (d) and then deducted from the total amount in order to avoid duplication. Then all amounts owing pursuant to ss. 6 (6) (a) (b) (c) and (d) are added together to determine the total amount owing by the franchisor to the franchisee pursuant to that subsection of the legislation. In this case, the plaintiff did not include in its ss. 6 (6) (d) calculation any of the amounts owing pursuant to ss. 6 (6) (a), (b) and (c). As long as these amounts have not been included in the calculation of all losses incurred, no deduction need be made.

[30] Accordingly, a rescinding franchisee is entitled to recover all amounts under ss. (a) – (c) even if it suffers no loss under ss. (d) and even if it has otherwise made a profit during the period of operation. Section 6 (6) (d) is clear. It does not say that a franchisor is allowed to offset any revenue or gain under subsection (d) from amounts awarded under ss. (a) – (c). There is to be no discount or offset from a refund under (a), or a purchase of inventory under (b), or a purchase of supplies and equipment under (c). If it were otherwise, subsections (a) – (c) of the Act would not be necessary. A single section providing compensation for losses would suffice if the intention of the Act was simply to put the franchisee back to its former position. For example, The Alberta Franchises Act, R.S.A. 2000, c. F. -23 at ss. 13-14 simply grants a rescinding franchisee compensation for its net losses rather than the itemized array incorporated into Ontario law.

[31] Moreover, the Plaintiffs made a claim under ss. (d) in the belief that they would be able to establish additional losses. They would not be asserting any rights under ss. (d) if they were of the view that they had earned net profits and if there was concern that such net profits could be offset against their remedy under the earlier subsections.

[32] Accordingly, the Master made no error in principle in not awarding an offset for any net profits as against his awards under ss. (a) – (c).

[33] Having found that subsection (d) has no application on this motion, it is unnecessary to consider the Springdale Defendants’ arguments concerning calculation of gross revenue, working capital loans and accounting expenses.

[34] This ground of appeal fails.

Costs Award

[35] In order to determine that the Master erred in his costs award, I would have to find that he made an error in principle or that the costs award was plainly wrong.

[36] The Master set out clearly his reasons for his costs award. He considered the amount of work and effort put into this single day reference. He based his decision on fairness and reasonableness. The fact that the Springdale Defendants did not file their own bill of costs was only one factor that he considered in determining the reasonable expectation of the parties pursuant to Rule 57.01(1) (0.b).

[37] The Master has a wide discretion in making costs awards and I see no basis in principle to interfere with his decision here.

Disposition

[38] For these reasons, the Report on Reference is confirmed and this motion is dismissed.

[39] As agreed by counsel, costs of this motion are fixed at $5,000.00 all inclusive. In view of the fact that the Plaintiffs were successful, the Springdale Defendants are to pay this amount to the Plaintiffs within 30 days.

Lederman J.

Date: March 1, 2013