SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 2147191 Ontario Inc. and Jaswinder Grewal, Plaintiffs (Moving Parties)

AND

Springdale Pizza Depot Ltd., Ranjit Singh Mahil,
and Dilawar Singh Khakh, Defendants (Responding Parties)

BEFORE: F.L. MYERS J.

COUNSEL:
Shane P. Murphy, for the Plaintiffs (Moving Parties)

David S. Altshuller, for the Defendants (Responding Parties)

HEARD: June 4, 2014

endorsement

[1] The plaintiffs move for partial summary judgment declaring that they were entitled to rescind a franchise agreement with the defendant, Springdale Pizza Depot Ltd., their franchisor, on January 26, 2012 pursuant to the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c.3.[^1] The plaintiffs took an assignment of the franchised business located at 900 Ray Lawson Blvd., Brampton, Ontario on November 22, 2010. The plaintiffs claim that they were entitled to receive formal disclosure from the defendants under the statute in respect of that transaction and that no disclosure was provided. If they are correct, then subsection 6(2) of the statute allowed them to rescind their franchise and all related agreements within two years.

[2] The defendants say that because the plaintiffs bought the business from an existing franchisee rather than from the franchisor, the plaintiffs were not entitled to receive disclosure for the transaction and therefore they had no right to terminate or rescind the franchise agreement. Alternatively, if the plaintiffs had a right to receive disclosure from the franchisor, then the defendants say that the documents that were provided were satisfactory if imperfect and that under subsection 6(1) of the statute, imperfect disclosure would only entitle the plaintiffs to rescind the franchise agreement for a period of six months. The rescission in this case took place well after the six month period had passed.

[3] This principal issues on this motion are therefore:

A. Did the plaintiffs have a right to receive disclosure from the defendants in connection with their purchase of their franchised business?

B. If so, were the documents that were provided by the plaintiffs so deficient as to amount to no disclosure at all thus entitling the plaintiffs to rescind for the full two year period?

[4] Both counsel submitted that I have sufficient evidence before me to decide the issues by way of a motion for summary judgment under the test recently established by the Supreme Court of Canada in Hryniak v. Mauldin, 2014 SCC 7. I have considered the roadmap set out in paragraphs 66 et seq. of the decision and find that I am able to resolve the matter justly, proportionately, affordably and on a timely basis on the undisputed evidence before me without engaging in the exercise of the enhanced powers set out in Rule 20.04(2.1).

Were the Defendants Required to Make Disclosure to the Plaintiffs?

[5] Under subsection 5(1) of the statute, a franchisor is required to provide a disclosure document in a prescribed form to a prospective franchisee prior to the signing of franchise documentation. Subsection 5(3) requires that the documentation be provided all at one time as one document. This requirement has been strictly construed to prevent piecemeal disclosures. (See, for example, 1490664 Ontario Limited et al. v. Dig This Garden Retailers Ltd. et al., 2005 25181 (ON CA), at paragraphs 18 and 19).

[6] Subsections 5(7) and 5(8) of the statute provide, in part:

Exemptions

(7) This section does not apply to,

(a) the grant of a franchise by a franchisee if,

(iv) the grant of the franchise is not effected by or through the franchisor;

Same

(8) For the purpose of subclause (7) (a) (iv), a grant is not effected by or through a franchisor merely because,

(a) the franchisor has a right, exercisable on reasonable grounds, to approve or disapprove the grant; or

(b) a transfer fee must be paid to the franchisor in an amount set out in the franchise agreement or in an amount that does not exceed the reasonable actual costs incurred by the franchisor to process the grant. 2000, c. 3, s. 5 (8).

[7] Under subclause 5(7)(a)(iv) of the act, the franchisor is not required to make disclosure in connection with a resale of an existing franchise by an existing franchisee to a new franchisee as long as “the grant of the franchise is not effected by or through the franchisor”. In this case the franchise agreement being assigned provided that the franchisor had the right to approve the assignment and to be paid a set fee by the existing franchisee. The franchisor signed an assignment agreement with the plaintiffs and was paid its fee. It thereby entered into the relationship of franchisor/franchisee with the plaintiffs. Clauses 5(8)(a) and (b) of the statute provide that a grant is not “effected through a franchisor” merely because the franchisor has a right to approve the transaction on reasonable grounds or because a transfer fee must be paid to the franchisor in an amount set out in the franchise agreement. Therefore, the defendants were not required to make disclosure to the plaintiffs unless they did something more than merely approving the transaction and receiving a fee in the amount set out in the existing franchise agreement.

[8] I am greatly aided in this case by the decision of the Court of Appeal involving a franchise sale in Milton, Ontario within the very same franchise system as is involved in this case. In 2189205 Ontario Inc. v. Springdale Pizza Depot Ltd., 2011 ONCA 467 (“Springdale Milton”) the Court of Appeal unanimously upheld the decision of Wilson J. dated June 29, 2010 granting summary judgment against the same defendants on the same grounds as are alleged in this proceeding. I mention the date of the decision of Wilson J. because it was released some four months prior to the grant of the franchise to the plaintiffs in this case.

[9] In Springdale Milton, the franchisors provided no disclosure at all to the buyer on the basis that the transaction was exempt from disclosure as a resale from an existing franchisee under subclause 5(7)(a)(iv) of the act. There was also uncontested evidence in that case that all of the parties negotiated together to bring about the sale. There is a factual dispute in this case as to the degree of the defendants’ participation in the sale negotiations. However, the following facts are uncontested:

a) The agreement of purchase and sale between the plaintiffs and the former franchisee provided that it was conditional for ten days “for the Purchaser to obtain franchisor approval to the transfer”. That is, although the franchise agreement put the burden of obtaining franchisor approval on the former franchisee, the defendants dealt directly with the plaintiffs for that purpose. As discussed below, in Springdale Milton this same fact was among the factors expressly relied upon by Karakatsanis J.A. (as she then was) at paragraph 42 of her Reasons for Decision;

b) The plaintiffs met the defendants three times prior to the signing of the franchise assignment. The meetings occurred either at the premises of the defendants or of other franchisees.

c) The defendants required the plaintiffs to enter into the same form of Acknowledgement as was discussed by the Court of Appeal in Springdale Milton. In Springdale Milton, Karakatsanis J.A. wrote the following concerning the Acknowledgment:

[45] The Acknowledgement included a signed statement by the respondents that they did not rely in any way on the representations by the franchisor about the sales figures of the business. I cannot agree with the appellants that this additional protection against recourse for the misrepresentation of financial figures was insignificant to the consent. [emphasis added]

[10] The plaintiffs allege that the defendants sold them on the business at the meetings which they held. The defendants did not contradict the plaintiffs’ evidence, but they point to certain inconsistencies and the availability of further evidence which they say seriously undermines the credibility of the personal plaintiff. In light of the view that I take on the uncontested facts, I do not need to consider how Hryniak would have me deal with the potential conflicting evidence that might be available.

[11] In assessing whether the franchisor’s involvement was sufficient so as to find that the grant was effected “by or through” it, Karakatsanis J.A. made the following relevant points in Springdale Milton:

[23] In Salah v. Timothy’s Coffees of the World Inc. (2010), 2010 ONCA 673, 268 O.A.C. 279 (C.A.), at para. 26, Winkler C.J.O. observed:

The Wishart Act is sui generis remedial legislation. It deserves a broad and generous interpretation. The purpose of the statue is clear: it is intended to redress the imbalance of power as between franchisor and franchisee; it is also intended to provide a remedy for abuses stemming from this imbalance.

[24] The franchisor has all the information and dictates the terms of the agreement. In this context, disclosure is intended to provide a prospective and often inexperienced franchisee with sufficient and readily accessible information to make informed decisions. The remedies for failure to comply with the strict disclosure requirements are also intended to remedy abuses by franchisors. As noted by MacFarland J.A., in 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd. 2005 25181 (ON CA), (2005), 256 D.L.R. (4th) 451 (C.A.), at para. 12, it “is evident that the thrust of the Act is to set standards for adequate disclosure and to create significant penalties for failing to meet those standards.”

[41] … However, s. 5(7)(a)(iv) captures the indirect involvement of a franchisor. In this case, there was uncontradicted evidence before the motion judge that the franchisor did not simply play a passive role in the resale of this franchised business, limited to the specific requirements required for its consent under the Franchise Agreement.

[48] The motion judge considered the applicability of the resale exemption. She adverted to the role of the franchisor in the transaction and the documents it required from the respondents. In this case the franchisor went beyond the passive role of merely exercising its right, on reasonable grounds, to approve the resale of the franchise business within the meaning of s. 5(8)(a). The franchisor was involved in the sale and sale process and required the respondents to execute documents which were not specified in the Franchise Agreement, as a condition of its consent. For these reasons, the motion judge did not err in concluding that the grant from the franchisee was effected by or through the franchisor and did not fall within the disclosure exemption in s. 5(7)(a)(iv). On this record, there was no genuine issue requiring a trial. [emphasis added]

[12] The purpose of the disclosure requirement is to redress the information disparity and power imbalance in franchise transactions. There is no such imbalance, arguably, where the franchisor is a not involved in the transaction and the new franchisee simply buys its business from the former franchisee. Therefore, the Legislature has provided an exemption from the disclosure requirement where the transaction is not effected by or through the franchisor including where the franchisor is just involved to provide its contractual consent under the existing franchise agreement and takes a set fee. The case law, including Springdale Milton and the cases cited in that decision, refer to this as mere passive exercise of its rights.

[13] In my view, the defendants here went beyond a mere passive role limited to the specific requirements required for its consent under the franchise agreement. They became engaged in the transaction to a degree that the statutory purpose of redressing the power imbalance and information deficit was engaged. The franchise agreement required the former franchisee to obtain consent to an assignment; yet the defendants met with the purchaser/plaintiffs three times personally. The defendants say that they were just considering the approval of the new franchisee. But they also required the plaintiffs to provide them with an Acknowledgement that includes consideration beyond the fee allowed for in clause 5(8)(b) of the statute. The Acknowledgement limits the plaintiffs’ ability to exercise their rights under the Arthur Wishart Act including, among other things, their ability to bring statutory misrepresentation claims under section 7 of the act. By meeting personally with the plaintiffs multiple times and requiring the plaintiffs to give valuable consideration (as distinct from the fee to which the franchisors were entitled from their existing franchisee) the franchisor engaged in the transaction and brought its inherent power imbalance to bear upon the prospective franchisees.

[14] In assessing the interpretation of the exemptions in subsection 5(7) of the statute, in Personal Service Coffee Corp. v. Beer, 2005 25180 (ON CA), MacFarland J.A. commented upon the purposive interpretation of the law as follows:

[28] It is clear, therefore, that the focus of the Act is on protecting the interests of franchisees. The mechanism for doing so is the imposition of rigorous disclosure requirements and strict penalties for non-compliance. For that reason, any suggestion that these disclosure requirements or the penalties imposed for non-disclosure should be narrowly construed, must be met with skepticism.

[15] In light of the defendants’ actions, the transaction was not a simple “franchisee to franchisee” transaction. The franchisor became involved. One might wonder why it needed the plaintiffs to waive reliance upon representations if there were none made. I do not need to decide what was said at the meetings. Once the franchisor became engaged in the transaction and required additional consideration that limited the rights of the prospective franchisee under the statute, it was no longer passively exercising its approval rights. Rather, it was negotiating for itself concerning the allocation of statutory and common law rights and responsibilities as between franchisor and franchisee. I do not believe that I should strain the words of subsections 5(7) and 5(8) of the statute in order to help the defendants avoid the need for disclosure in such circumstances.

[16] Mr. Altshuller asked rhetorically “When will a franchisor ever not be required to give disclosure if not in this case?” The answer, it seems to me, is that the exemption will apply when a franchisor merely passively exercises its consent rights and no more. It may wish to consider the prospective franchisee’s financial and operational fitness and obtain privity with it by requiring assignment documents to be signed. To borrow Justice Karakatsanis’s words, the franchisor did not simply play a passive role in the resale of this franchised business when its actions were not limited to the specific requirements required for its consent under the Franchise Agreement.[^2]

[17] I note that in this case, the franchisor’s counsel initially told the former franchisee/vendor’s counsel that the franchisor would require a new franchise agreement rather than a simple assignment document. To that end, the franchisor recognized that disclosure would be required. Perhaps that is why the defendants made some disclosure in this case despite claiming now that it was exempt. When a franchisor leads the parties to believe that it is starting down the path of requiring a new franchise agreement, meets the prospective franchisees multiple times, and requires extra consideration that limits the exercise of the prospective franchisees’ rights, I do not think it can be said to have been merely passive. Moreover, I think that as the party with the best information that is keenly relevant to the proposed negotiation, once the franchisor is involved more than passively and especially where the franchisor actively seeks to limit the purchasers’ rights, there should be disclosure.

[18] The statute provides franchisors with a choice. As a practical business matter, a franchisor may not wish to be merely passive in its assignment approval process. If that is the case and a franchisor wishes to have a more significant role to play in the transaction (like requiring waivers of rights etc.) then the franchisor should be making disclosure in order to fulfill the statutory goal of leveling the informational playing field. There is no prejudice to a franchisor that makes full and fair disclosure. In my view, the remedial purpose of the statute requires the Court to err on the side of disclosure. Where the franchisor makes a business decision to do more than remain a passive approver of a “franchisee to franchisee” transaction, then the grant is “by or through the franchisor” and disclosure is required.

[19] The defendants question whether disclosure would have done anything in this case because the plaintiffs appear to have determined to buy the franchise and were already spending money and time on the business well before disclosure was made. Mr. Altshuller made this argument as much or more in relation to the degree of disclosure discussed below as to this issue. In either case, in my view, the actual subjective use by the plaintiffs of the information disclosed is irrelevant under the statutory scheme. There is no causation requirement in sections 5 or 6 of the statute. Clause 5(4)(a) of the statute requires disclosure of material facts. The definition of “material fact” in subsection 1(1) is based on an objective view of the reasonable person. The statute allows franchisees to make whatever use they wish of information that is disclosed to them. If a franchisor is required to disclose but does not do so, it makes no difference what the franchisee did or might have done. Absent disclosure, the franchisee is entitled to rescind the franchise.

Was there Sufficient Disclosure in this Case?

[20] As noted at the outset, the issue is whether there was some imperfect disclosure in which case the plaintiffs were too late to rescind the franchise agreement or whether there was effectively no disclosure, in which case the plaintiffs were entitled to rescind the franchise agreement when they did.

[21] In 4287975 Canada Inc. v. Imvescor Restaurants Inc., 2009 ONCA 308 the Court of Appeal set the test to distinguish cases of non-compliance with disclosure requirements from cases where disclosure is so incomplete so as to amount to no disclosure at all. At paragraph 43 Laforme J.A. wrote:

[43] These cases do not stand for the broader conclusion, proposed by the appellant, that any failure to comply with s. 5 results in a finding of no disclosure and therefore a s. 6(2) remedy. On my reading of the two cases, they hold that if the disclosure document that is provided turns out to be materially deficient, then no disclosure will be found to be have been made. On the facts, that is not what happened here. The disclosure document was merely late. [emphasis added]

[22] Therefore, the issue for me is whether the disclosure document provided by the defendants to the plaintiffs was “materially deficient”. It is virtually self-evident that this is the case. The package did not include any of the documents that the defendants required the plaintiffs to sign. None of: the proposed assignment of the franchise agreement, the proposed general security agreement, the proposed sublease and head lease to the franchised premises, or the Acknowledgement was disclosed. This is a clear breach of clause 5(4)(c) of the statute.

[23] I note that the head lease that was not disclosed appears to have expired so that the head tenant (an affiliate of the plaintiffs) is overholding on a month-to-month basis. A reasonable purchaser would want to know that it is paying hundreds of thousands of dollars to buy a location that has no security of tenure.

[24] In 6792341 Canada Inc. v. Dollar It Limited, 2009 ONCA 385 the Court of Appeal commented upon the failure of the franchisor in that case to disclose the head lease with the sublease which it did disclose. The sublease contained an acknowledgement that prospective franchisee/sub-tenant had reviewed the head lease and was familiar with its terms:

[39] How, I ask rhetorically, could the franchisee, who is the sub-tenant under the sub-lease, ever comply with its acknowledgement obligation without receiving a copy of the head lease? It is expected to accept all of the terms and obligations of the head lease and to be bound by them. In my view, to suggest, in these circumstances, that the head lease is not material and that there is no obligation to disclose it under the Act is absurd. It is obviously material and required to be disclosed. [emphasis added]

[25] Also missing from the disclosure document provided to the plaintiffs was any reference to the judgment of Wilson J. at first instance in Springdale Milton. There was reference in the document to the ongoing litigation, but not to the judgment rendered four months earlier. Subsection 2(5) of the Ont. Reg. 581/00 prescribes the content of the disclosure document required by the statute and includes, expressly, that the disclosure document disclose any finding that the franchisor “has committed a failure to provide proper disclosure to a franchisee”. A reasonable prospective franchisee would find it a major red flag to discover, in reviewing the franchisor’s disclosure document, that the franchisor had previously been found by a court to have failed to make proper disclosure. A reasonable prospective franchisee and its counsel would necessarily increase the rigour of their due diligence review upon seeing such a finding. Moreover there is a significant difference between an allegation of non-disclosure by a disgruntled former franchisee and a finding made by a judge of this Court that the franchisor has committed a breach of the statutory requirement. Mr. Altshuller argues that the disclosure of the substance of the claim was enough. However, he ignores the requirement on the franchisor under subsection 5(5) of the statute to disclosure material changes to material facts “as soon as practicable”. The judgment of Wilson J. was certainly a material change to the disclosure contained in the defendants’ document and ought to have been disclosed.

[26] There is no disclosure at all in the disclosure document about any facts specific to the location being purchased as distinct to disclosure about the defendants’ franchise system in general. There was also no description of the franchisee’s exclusive territory as required by the regulation.

[27] A disclosure document is required to contain a list of current franchisees so that the prospective franchisee can contact them should it choose to do so. Subsection 6(17) of the regulation requires the franchisor to disclose the “business address, telephone number and name” of the other franchisees. The list in this case is missing two franchisees completely and does not provide full names or contact particulars for many others.

[28] In all, I do not have to determine whether the failure to disclose any one document alone falls outside the test in Imvescor, supra. It is obvious that the nondisclosure in this case involved major items including every single one of the deal documents and this, together with the other failings noted above, make the disclosure document starkly and materially deficient as that phrase has been used in the case law.

[29] Therefore, I find that the plaintiffs had the right to rescind the franchise agreement and related documents under subsection 6(2) of the statute and that they validly did so.

Statutory Damages

[30] The plaintiffs have a right under subsection 6(6) of the statute to judgment for the damages specified in the subsection. Both parties have asked me to refer to the Master for determination the damages due under clauses 6(6)(b) and (d). Counsel should be able to agree upon the amount due under clause 6(6)(b) if not both clauses. I make the referral as requested.

[31] Clause 6(6)(a) entitles the plaintiffs to a refund of funds paid to the franchisor or its associates other than for inventory, supplies or equipment. The defendants argue that rent paid to the sub-landlord who is not a party to this proceeding is not captured in that clause. In addition, under clause 6(6)(c), the franchisor is required to purchase from the franchisee any equipment and supplies that the franchisee had purchased at a price equal to the price paid by the franchisee. The defendants argue that the amount of the purchase price that the plaintiffs and their vendor allocated to goodwill as between them is not payable under this clause. I do not need to decide either issue. If the defendants are correct, they concede that the rent and goodwill paid would fall to be recouped under clause 6(6)(d) in any event. Accordingly, I refer both issues to the Master to decide if it matters which clause the amounts fall under and, if so, to make the relevant determinations.

[32] The remaining amounts due under clauses 6(6)(a) and (c) are not in dispute. If counsel cannot agree, I may be spoken to.

Costs

[33] Costs on a partial indemnity basis should follow the event unless there are offers to settle for me to consider. If the parties cannot agree on costs, the plaintiffs may deliver no more than five pages of submissions plus their costs outline by June 13, 2014. The defendants may deliver responding submissions of no more than five pages and their costs outline by June 20, 2014. The plaintiffs may deliver reply submissions of no more than two pages by June 25, 2014. Materials are requested to be provided by email to my assistant with cases, if any, submitted by hyperlinks. If necessary, the parties may deliver their submissions and authorities by cumbersome hard copies delivered to Judges’ Administration at 361 University Avenue.

[34] Finally, I am indebted to counsel whose depth of knowledge and professionalism shone through their material and advocacy at the hearing of the motion.

F.L. Myers J.

Date: June 6, 2014

[^1]: The franchisor is the corporate defendant and the franchisee is the corporate plaintiff. I refer to each in the plural throughout as there is no issue that the individual plaintiff shares the cause of action asserted and the individual defendants concede that if liability exists they are liable with the corporate defendant as “franchisor’s associates” under the statute.

[^2]: This is not to say that franchisors can avoid the statutory requirement of disclosure simply by drafting broader approval rights for themselves in their franchise agreements. As contracts of adhesion, such steps may well attract scrutiny especially if they were tantamount to impermissibly contracting out of the statute. However, I do not need to decide that issue in this case or consider the limitations, if any, of Justice Cumming’s view in 1518628 Ontario Inc. v. Tutor Time Learning Centres, LCC, 2006 25276 (Ont. S.C.) as discussed by Karakatsanis J.A. in Springdale Milton at paragraphs 36 through 40.