SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CV-09-385359

DATE: 20130226

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

– AND –

Springdale Pizza Depot Ltd., Ranjit Singh Mahil, Dilawar Singh Khakh, 2147390 Ontario Inc., and Kulwinder Singh, Respondents

BEFORE: Justice E.M. Morgan

COUNSEL:
Shane P. Murphy, for the Appellants

Kristina A. Davies, for the Respondents

HEARD: February 25, 2013

ENDORSEMENT

[1] This is an appeal from the Order of Master Muir dated October 24, 2012. The learned Master granted leave to amend the Statement of Defence of the Respondents Springdale Pizza Depot Ltd., Ranjit Singh Mahil, and Dilawar Singh Khakh (collectively, “Springdale”), to add a defence of equitable setoff in respect of the Appellants’ claims under the Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c. 3 (the “Act”).

[2] The Appellants advance two arguments. In the first place, they submit that Master Muir erred in law in finding that the proposed amendments to the Statement of Defence are tenable at law. Secondly, the Appellants submit that Master Muir’s ruling is written in a way which could be interpreted as re-opening issues that have already been determined by way of partial summary judgment Order and Reference on quantum of damages already concluded in this action, and that there is no legal basis for re-visiting those issues.

[3] The Appellants are former franchisees of Pizza Depot, which is a franchise chain owned and operated by Springdale. The other Respondents are former franchisees from whom the Appellants purchased their franchise; those parties did not participate in the motion or this appeal.

[4] Upon purchasing their franchise, the Appellants did not receive from Springdale the disclosure required under the Act. They brought the within action claiming rescission under section 6(2) of the Act as well as various statutory payments to which a franchisee exercising its right of rescission is entitled under section 6(6) of the Act. In addition, the Appellants have included in the action a damages claim under section 7 of the Act for alleged misrepresentations made to them in the course of their purchase of the franchise. The Statement of Claim was issued on August 19, 2009. Springdale issued a Statement of Defence and Cross-Claim against their co-Respondents on August 31, 2009.

[5] On June 29, 2010, Wilson J. granted partial summary judgment in favour of the Appellants herein. In her judgment, Wilson J. ordered rescission under section 6(2) of the Act and directed that a reference be held before a Master in order to determine the quantum of the Appellants’ entitlements under section 6(6) of the Act. Springdale appealed the judgment of Wilson J. to the Court of Appeal. That appeal was dismissed, with costs to the Appellants herein, on June 22, 2011.

[6] The reference was held before Master Muir on April 2, 2012. On August 10, 2012, the Master issued a Report on Reference holding that Springdale must pay the Appellants a total of $328,852.18 under section 6(6) of the Act.

[7] At the hearing of the Reference, Springdale requested leave to bring a motion to amend their Statement of Defence to add a defence of equitable setoff. Master Muir refused to hear that motion at the time of the Reference, but agreed to hear it after issuing his Report on Reference. On October 24, 2012, the Master granted Springdale leave to amend its pleading.

[8] In reaching his conclusion on the proposed amendment to the Statement of Defence, Master Muir rejected the Appellants’ argument that in moving to add equitable setoff at such a late date, Springdale was “attempting to ‘cooper up’ their defence after judgment.” The Master reasoned [at para. 11]:

The plaintiffs have only obtained partial summary judgment. A substantial portion of their claim remains extant. Moreover, the proposed setoff defence is completely separate from the issues decided on the partial summary judgment motion and on the reference. None of the findings in those proceedings will need to be revisited as a result of the proposed amendments. Those findings will remain in place…

[9] The Appellants argue that the right of rescission and compensation under section 6 of the Act is absolute, and that the defence of equitable setoff is therefore incompatible with any claim brought under that section. They submit that section 6 expressly grants a remedial right of rescission to disappointed franchisees “without penalty or obligation”, and that a successful setoff defence by a franchisor would impose an impermissible obligation on the franchisee. In support of this interpretation, they cite this court’s ruling in 6862829 Canada Ltd. v. Dollar It Ltd., 2008 60699 (ON SC), [2008] OJ No 4687, at para 68, where it was stated that the section 6 rights are “not conditional in any way on the conduct of the franchisee.”

[10] Master Muir based his conclusion that the defence of equitable setoff is a tenable defence on the wording of section 9 of the Act. That section provides that, “[t]he rights conferred by this Act are in addition to and do not derogate from any other right or remedy a franchisee or franchisor may have at law.” The Master stated that although it was rather late in the day he could not identify any reason for excluding Springdale’s proposed defence. He reasoned that, “[section 9] simply allows the Springdale Defendants to advance an equitable defence open to them by law”.

[11] In reaching this conclusion, the Master relied on Personal Service Coffee Corp. v Beer (2005), 2005 25180 (ON CA), 256 DLR (4th) 466 (Ont CA). Specifically, the Master referenced that portion of the Personal Service judgment where the Court of Appeal interpreted section 9 as being broadly permissive of any claim not expressly excluded by the Act. As the Court of Appeal put it, at para 39: “if a party has a common law or equitable right of action against another party, he or she may assert such right under this section where the Act does not otherwise specifically deal with such right.”

[12] In my view, the Appellants overstate the absolute nature of the section 6 remedies. It is correct that, as the court found in Dollar It Ltd., supra, a franchisee’s right of rescission under section 6(2) cannot be undermined. That said, the Act does not cloak the franchisee with a form of immunity from any and all claims by the franchisor, nor does it prevent an award of the statutory amounts claimed by the franchisee under section 6(6) to be conditioned on a settling of accounts with the franchisor.

[13] The fact that the section 6(6) remedies can potentially be subject to the defences and counterclaims raised by a franchisor is demonstrated by Master Muir’s Report on Reference. The Appellants had claimed, inter alia, a refund of monies they had paid for equipment purchased along with their franchise. At paragraph 15 of his Report, the Master granted this head of compensation to the Appellants on condition that the equipment be returned by the Appellants to Springdale.

[14] It is noteworthy that although Springdale has opposed confirmation of the Master’s Report (a decision on confirmation is still pending), the Appellants have apparently accepted the Master’s ruling and have not cross-moved to set aside the conditional aspect of the Report. Indeed, the Appellants’ valid claim under section 6(6) of the Act for compensation for their expenditures on equipment for the now rescinded franchise effectively proves that the section 6(6) claims can be coupled with other factors raised by the franchisor; it would be unthinkable to allow a franchisee to claim return of money spent on equipment without allowing the franchisor to seek a corresponding order that the equipment be returned.

[15] That said, I do not read the judgment of Master Muir as having authorized a re-opening of the section 6(6) claim. Had they originally pleaded equitable setoff, Springdale may have been able to raise it as a defence against the Appellants’ section 6(6) claims, but Master Muir specifically negated that prospect at this stage of the proceedings. As quoted above, he went out of his way to note that even after the grant of partial summary judgment to the Appellants, “[a] substantial portion of their claim remains extant.” It is against the portion of the action that is still alive that the defense of equitable setoff can be raised in an amended Statement of Defence.

[16] Master Muir’s judgment, properly understood, grants leave to Springdale to amend its pleading to add the equitable setoff defence to the Appellants’ section 7 claims, not to their section 6 claims. The section 6 claims are already the subject of a final judgment, regardless of what transpires with the motion to confirm the Report on Reference. Master Muir specifically waited until after the Reference and the issuance of his Report before hearing the motion to amend the Statement of Defence. It is clear that his grant of leave to amend applies only to the still extant section 7 claim, and cannot in any logical way be read as applying to the already decided section 6 claims.

[17] Counsel for Springdale submits that this puts her clients’ equitable setoff at the mercy of the Appellants deciding to continue to pursue their section 7 claim. She argues that if the Appellants collect their section 6 award and then simply let the section 7 claim drop, Springdale’s equitable setoff will never be reached.

[18] I agree that this is a theoretical possibility. However, it is a natural consequence of the way in which Springdale has approached the pleadings and the action. Had Springdale brought a Counterclaim for the damages that it alleges the Appellants caused, it could pursue those damages regardless of whether the Appellants proceeded with their section 7 claim. In moving for leave to add the equitable setoff defense instead of adding a Counterclaim, Springdale must inevitably have something to defend if the setoff issues are ever to see daylight.

[19] At the hearing I asked counsel why an equitable setoff defence had been preferred over a Counterclaim. I was advised that Springdale’s motion for leave to amend was brought at a late stage, and it is likely that by then the limitation period on a new Counterclaim would have expired. That may be the case, but it is not the court’s role to repair the tactical and procedural choices made by a party. Springdale has been granted leave to amend its Statement of Defence in order to add a new defence; it must, by definition, have something to defend in order to make the point it wishes to make, and the only thing left to defend is the section 7 portion of the claim.

[20] In the result, Master Muir’s judgment is correct. However, it must be read with the understanding described above. Springdale has been granted leave to amend its Statement of Defence to add the defence of equitable setoff, but that defence applies only to the Appellants’ remaining section 7 claims.

[21] Both parties are, in effect, successful in this appeal. The challenge to Master Muir’s decision is dismissed, as requested by Springdale. At the same time, the equitable setoff defence must be interpreted as applying only to the claims under section 7 of the Act, as requested by the Appellants. Given this result, there will be no costs for or against either party.

Morgan J.

Date: February 26, 2013