COURT FILE NO.: CV-13-480091-00

DATE: 20140721

SUPERIOR COURT OF JUSTICE – ONTARIO

RE: 2337310 ONTARIO INC., Plaintiff

AND:

2264145 ONTARIO INC., 1355565 ONTARIO INC., PETER ANDREAKOS, ANTHONY PALANDRA AND AHMED ALi KHAN, Defendants

AND RE: 2264145 ONTARIO INC. and 1355565 ONTARIO, Plaintiffs by Counterclaim

AND:

2337310 ONTARIO INC., IQBAL MADHANI and TAZIM MADHANI, Defendants by Counterclaim

BEFORE: Stinson J.

COUNSEL:
Omar Sherman, for the plaintiff and defendants by counterclaim

Moses Muyal and Raphael Samson, for the defendants and plaintiffs by counterclaim other than Ahmed Ali Khan

No one appearing for Ahmed Ali Khan

HEARD: June 23 and 27, 2014

ENDORSEMENT

[1] This decision concerns a motion for partial summary judgment and declaratory relief brought by the plaintiff.

[2] The dispute between the parties has its origins in a franchise relationship, for a retail café food service operation known as a “DeliMark Café.” The plaintiff 2337310 Ontario Inc. was the franchisee. As I will explain in more detail below, the plaintiff purchased a DeliMark Café franchise from the defendant corporations (or one of them) as franchisor(s). On this motion for partial summary judgment, the plaintiff seeks a declaration that it validly exercised its right of rescission under s. 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000 c. 3 (the “Wishart Act”). On this basis, the plaintiff seeks recovery of all amounts paid by it to the franchisor for franchise fees, equipment and deposits, and recovery of all costs incurred by it for the purchase of the franchise business.

[3] The basic premise of the plaintiff’s argument on the motion is that the defendants never provided the disclosure document mandated by s. 5 of the Wishart Act. More specifically, the plaintiff asserts that the disclosure material provided by the defendants was so deficient as to amount to a failure to provide a disclosure document in the first place. As a result, the argument continues, the plaintiff was entitled to exercise a right of rescission under s. 6(2).

[4] For their part, the responding parties to the motion argue that the plaintiff is simply trying to resile from a bona fide transaction that it entered into with full knowledge and disclosure. They contend that the plaintiff has raised a number of items that are neither material nor required to be the subject of disclosure under the Wishart Act. They argue that the plaintiff was unable to operate the franchise successfully, despite training and support from the franchisor, and is now seeking to escape its obligation for this reason.

factual and procedural background

[5] The defendant corporations 2264145 Ontario Inc. (“226”) and 1355565 Ontario Inc. (“135”) (collectively, the “Defendant Corporations”) operate as franchisors under the name “DeliMark Cafés”. They share a common head office on Sheppard Avenue East, in Toronto. The defendant Anthony Palandra is an officer and director of each of the Defendant Corporations; the defendant Peter Andreakos is their president. The defendant Ahmed Ali Khan is a real estate agent who was involved in the transactions in question, but against whom no relief is sought on this motion for partial summary judgment. The defendants added by counterclaim, Iqbal Madhani and Tazim Madhani are, respectively, the principal of the plaintiff corporation and his spouse. Mr. Andreakos and Mr. Palandra were the persons who, together with Mr. Ali Khan, interacted with Mr. Madhani and negotiated the terms of the various agreements.

[6] The Defendant Corporations are engaged in the business of selling franchises in the food service industry under the trade name “DeliMark Café”. DeliMark Cafés operate essentially as breakfast and lunch providers for office buildings in industrial/office areas and cater mostly to tenants of such properties and their visitors. There are currently 17 DeliMark Cafés operating in the Greater Toronto Area.

[7] In late 2011 or early 2012, through Mr. Ali Khan, Mr. Madhani was shown two prospective DeliMark Café locations, one in an office complex on Gordon Baker Road and a second in a complex located at 3000 Steeles Avenue East (“3000 Steeles”). Ultimately, Mr. Madhani decided to proceed to acquire a DeliMark Café franchise to operate at 3000 Steeles.

[8] In late January 2012, Mr. Madhani was provided with a document entitled “Ontario Franchise Disclosure Document – DeliMark Cafés” (the “Disclosure Statement”), in purported compliance with the Wishart Act. The Disclosure Statement defines the “franchisor” as “1355565 Ontario Inc. and/or 2264145 Ontario Inc. o/a DeliMark Café”. It was accompanied by certificates signed by Mr. Palandra and by one Tony Papamastos who describe themselves as directors or officers of 135 and who certify that the Disclosure Statement includes every material fact required by the Wishart Act. No directors’ certificates were provided for 226. Among other things, the Disclosure Statement includes unaudited financial statements for 135, but no financial statements for 226. The Disclosure Statement contains no explanation for the corporate relationship between 135 and 226 save that they are both defined as the “franchisor”.

[9] On February 7, 2012, the parties signed an offer to purchase for a DeliMark Café franchise at 3000 Steeles. The purchaser was named as Iqbal Madhani in trust for a company to be incorporated. The vendor was 135. Although that agreement required the vendor (i.e. 135) to produce a copy of the lease with the landlord of the premises at 3000 Steeles, no such lease existed at the time.

[10] On March 6, 2012, the parties signed a further one-page agreement, which describes itself as a “franchise agreement between 1355565 Ontario Inc. and Iqbal Madhani in trust for corporation to be formed”. It purports to supersede the terms set out in a franchise agreement signed by the parties on that same date. (Neither party produced a document that fit that description.) It recites the purchase price of the 3000 Steeles franchise as $180,000.

[11] On July 31, 2012, the parties signed an amendment to the agreement of purchase and sale between Iqbal Madhani in trust for a company to be incorporated and 135, by which the plaintiff was substituted as the purchaser. As well, in this document the parties agreed that the $180,000 purchase price would be allocated as to $120,000 for equipment and fixtures and as to $60,000 for leasehold improvements.

[12] On September 12, 2012, the plaintiff and 135 signed another amendment to their agreement of purchase and sale, substituting certain specific equipment and fixtures and leasehold improvements.

[13] The final agreement signed by the parties was a “DeliMark Franchise Agreement” entered into “as of the 5th day of September 2012, between 2264145 Ontario Inc. o/a DeliMark Cafés” as franchisor, and 233 as franchisee (the “Franchise Agreement”). Appended to this document was a signed sublease between 226 and 233 in respect of the premises for the café at 3000 Steeles, which in turn refers to a head lease between the owner of 3000 Steeles and 226 dated the 29th day of March 2012. The head lease was not appended and has never been disclosed.

[14] In due course Mr. and Mrs. Madhani began to operate the DeliMark Café at 3000 Steeles. For reasons I am not required or able to determine, the operation was not a success. The Madhanis blame the fact that, contrary to representations and assurances made to them by the defendants, another café was allowed to continue to operate nearby in direct competition. They also complain that they were not provided with all the equipment that was promised, which made it difficult for them to operate successfully. Sales were far below the expected level of revenue. For their part, the defendants argue that the Madhanis are responsible for the lack of success of the café at this location. They assert that Madhanis were incompetent operators who did not meet franchise standards, and were the cause of their own problems.

[15] By early March 2013, the Madhanis decided they were not prepared to continue to operate the café. On March 7, 2013, the plaintiff issued a notice of application in this court seeking rescission under the provisions of the Wishart Act. On April 12, 2013, the Madhanis ceased operating the location, and turned over the keys to the defendants’ lawyer. It is undisputed that, by issuing and serving the notice of application, the plaintiff gave notice that it was rescinding the Franchise Agreement.

[16] In due course, in lieu of continuing with the application, the parties agreed to proceed by way of an action involving the exchange of pleadings, affidavits of documents, discovery and trial. Ultimately, the plaintiff determined that it would bring this motion for partial summary judgment seeking declaratory relief for rescission.

[17] On February 7, 2014, Himel J. scheduled the plaintiff’s motion for summary judgment for April 22, 2014, and fixed a timetable for the exchange of materials. On April 22, 2014, the matter came before A. O’Marra J. According to his endorsement, on that occasion the moving party raised an issue that was not set out in the motion material and to which the responding parties had not had an opportunity to respond. He therefore rescheduled the motion for summary judgment to June 23, 2014.

[18] At the outset of the appearance before me on June 23, 2014, counsel for the responding defendants requested a further adjournment, asserting that he had not had an opportunity to examine a third party witness (Mr. Ali Khan) or otherwise respond to certain of the allegations contained in the moving party’s material. That request was opposed by plaintiff’s counsel, who was prepared to proceed.

[19] I reviewed the contents of the notice of motion and the main affidavit filed by the moving party. The latter document was sworn in March 2013, more than 15 months previously. The notice of motion (which largely paralleled the notice of application served in March 2013, but which itself was served in February 2014) made it plain that the plaintiff was seeking rescission of the parties’ agreements on the ground that the defendants did not deliver the disclosure documents mandated by the Wishart Act. It was not clear to me that any material evidence bearing on that issue might be provided by Mr. Ali Khan, nor was counsel able to articulate any. More importantly, the responding defendants had ample notice of the motion, the relief sought and the grounds for it, and ample opportunity to exercise their rights of examination and cross-examination. Since the plaintiff acquired the franchise, it has been paying interest on the debt it incurred to fund the purchase, an ongoing drain on the Madhanis’ resources. I therefore declined the defendants’ adjournment request.

Issues and Analysis

[20] The basic issue argued before me was whether the responding defendants in this case met the statutory requirements mandated by the Wishart Act in relation to the disclosure required to be made by a franchisor. Various heads of complaint were argued, and I will deal with these one by one. Before doing so, however, I will outline the statutory scheme that governs disclosure in franchise relationships.

The scheme of the Wishart Act

[21] In Apblouin Imports Ltd v. Global Diaper Services Inc., 2013 ONSC 2592, I summarized the scheme of the Wishart Act and the relevant jurisprudence as follows (at paras. 10 through 16):

[10] Section 5 of the Wishart Act requires a franchisor to provide a prospective franchisee with a "disclosure document" at least 14 days before the prospective franchisee signs the franchise agreement. Section 5 spells out in some detail the required contents of the disclosure document. Those requirements are further expanded in Part II of O. Reg. 581/00, including s. 2, 3, 4, 6, and 7 of that regulation. There is a further requirement, in s. 5(5), that the franchisor provide the prospective franchisee with a written statement of any material change. All information contained in a disclosure document must be “accurately, clearly and concisely set out.” See s. 5(6) of the Wishart Act.

[11] In section 6, the Wishart Act provides for the remedy of rescission for late disclosure or no disclosure. Specifically, s. 6(1) and (2) provide as follows:

6. (1) A franchisee may rescind the franchise agreement, without penalty or obligation, no later than 60 days after receiving the disclosure document, if the franchisor failed to provide the disclosure document or a statement of material change within the time required by section 5 or if the contents of the disclosure document did not meet the requirements of section 5.

7. (2) A franchisee may rescind the franchise agreement, without penalty or obligation, no later than two years after entering into the franchise agreement if the franchisor never provided the disclosure document.

Simply stated, the position of the plaintiff is that the disclosure material provided by Global was so deficient as to amount to a failure to provide a disclosure document in the first place. As a result, the argument continues, the plaintiff was entitled to exercise a right of rescission under s. 6(2).

[12] It may thus be seen that the remedy for non-disclosure is significant. This is consistent with the underlying philosophy of the statute. This topic was commented upon by Mesbur J. in 1159607 Ontario Inc. v. Country Style Food Services Inc. 2012 ONSC 881 at para. 71 (S.C.J.) ("Country Style") as follows:

The Arthur Wishart Act came into force in 2000. It is a franchisee-friendly piece of legislation designed specifically to protect the interests of franchisees, particularly when it comes to the issue of disclosure. The Court of Appeal described the purpose of the Act in this way in Personal Service Coffee Corp. v. Beer (c.o.b. Elite Coffee Newcastle):

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.

[Footnote omitted.]

[13] In Country Style, Mesbur J. held that the withholding of a material fact from disclosure made the disclosure made by the franchisor completely inadequate and tantamount to no disclosure. She went on to hold that non-disclosure of material facts meant there was not compliance with the Act as to the required disclosure and constituted the equivalent of no disclosure at all: see paras. 109 and 110. To the same effect is the decision of Wilton-Siegel J. in Sovereignty Investment Holdings, Inc. v. 917-6907 Quebec Inc., 2008 57450 (ON SC), 2008 O.J. No. 4450 (S.C.J.) ("Sovereignty Investment"). In that case, documents were provided to the franchisee prior to execution of the agreement; it argued that the documentation was deficient in a number of ways. Wilton-Siegel J. held that the deficiencies and the disclosure provided by the franchisor were such that the franchisor had failed to deliver a disclosure document for purposes of the Act. As a result, he held the franchisee entitled to exercise a right of rescission under s. 6(2) some 21 months after the franchise agreement was signed.

[14] Thus there is good authority for the proposition that deficient disclosure might amount to non-disclosure sufficient to preserve an ongoing right of rescission for up to 2 years after the franchise agreement is signed. That is the plaintiff's contention in the present case. The subject of disclosure and the form in which it is to be provided was discussed by the Court of Appeal for Ontario in 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd. (2005), 2005 25181 (ON CA), 256 D.L.R. (4th) 451, [2005] O.J. No. 3040, (C.A.) ("Dig This Garden") where at paras. 15, 16, 18 and 19 the Court said the following:

15 It is perfectly clear from the language used in s. 5 of the Act that disclosure is to be made in one "disclosure document". All of the required and prescribed information is to be included in that one document and it is to be accurate, clear, and concise - and all delivered at one time. Here the appellants concede that at best they provided only 70 per cent of the information required to be disclosed. Even that, it is obvious, was provided in bits and pieces over time and not in one document delivered at one time.

16 One of the prime purposes of the Act is to obligate a franchisor to make full and accurate disclosure to a potential franchisee so that the latter can make a properly informed decision about whether or not to invest in a franchise. The contents of the disclosure document are generally described in s. 5(4) of the Act and detailed in Ontario Regulation 581/00, passed pursuant to the legislation.

18 In my view, the facts described by the appellants do not fulfill the requirements of the Act. There is no issue of "substantive" versus "procedural" compliance. The requirement that disclosure occur in the form of a single document is not an empty formal requirement. The legislature clearly envisioned that the purpose of the legislation - i.e., ensuring that a decision to enter into a franchise agreement is an informed one - would best be fulfilled by giving prospective franchisees the opportunity to review a single document or documents, so that all the information is before them at the same time. It is simple common sense that people have more difficulty processing and assessing information given at different times, some of it orally, than they do information provided in a single, written document.

19 The language of the Act is unambiguous, and it is mandatory. It prescribes in clear and precise terms what is required. To give effect to the clear language used in this case does not produce an absurd result, and it fulfills the purpose of the legislation.

[15] In Dig This Garden, the Court of Appeal also considered the interplay between the rights provided in s. 6(1) and those provided in 6(2) of the Act. In that case, the franchisor had argued that the case fell within s. 6(1) because they did provide some information package, albeit an inadequate one. The franchisor therefore contended that there were "disclosure documents", even though they did not meet the s. 5 requirements, and thus the relevant time limit for service of a notice of recession was governed by s. 6(1). Since the franchisee's notice was delivered more than 14 months after the execution of the franchise agreement, the franchisor argued, the 60 day statutory deadline under 6(1) was not met.

[16] The Court of Appeal disagreed. It reasoned that s. 6(1) presupposes the existence of a single "disclosure document". The Court of Appeal agreed with the trial judge that disclosure could not be satisfied by several documents or orally. The Court further agreed that had the drafters of the legislation intended to provide a franchisor with an alternative method of satisfying the disclosure obligation, then the Act would have stated so. It does not.

[17] In the present case, based on the Franchise Agreement ultimately signed by the parties, the franchisor was 226 and the franchisee was the plaintiff. I am therefore called upon to consider whether the disclosure provided to the plaintiff by 226 was so deficient as to trigger the two year right of recission under s. 6(2) of the Wishart Act.

consequences of rescission

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

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) to (c).

[52] On this motion for partial summary judgment, I have determined that a declaration should issue that the plaintiff validly exercised the right of rescission. That declaration of rescission should also extend to the sublease agreement and any other agreements signed by the plaintiff with the defendants in relation to the DeliMark Café franchise.

[53] Two questions remain: what amount is the plaintiff entitled to recover under s. 6(6) and who is liable to pay those sums?

[54] In relation to the latter question, 135 and Messrs. Andreakos and Palandra were included as co-defendants on the theory that they are all “franchisor`s associates” as defined in s. 1(1) of the Wishart Act. No specific submissions were made to me in relation to this aspect of the matter. It may be that this is a non-issue and that the defendants concede that all of 135, Mr. Andreakos and Mr. Palandra fall within the definition of “franchisor’s associates”. Should I be wrong in this assumption, I invite the parties to arrange a conference call with me to discuss a suitable method for addressing that issue.

[55] The final issue concerns the quantum of the plaintiff’s recovery. Once again, it may be that this is a non-issue and that the parties are in a position to resolve this question themselves. Should that turn out not to be the case, once again I invite them to arrange a conference call with me to discuss a suitable process for the resolution of that issue.

costs

[56] As the successful party on the motion for summary judgment, the plaintiff is entitled to an award of costs as against the responding defendants. Costs are sought on a partial indemnity basis only, and I agree that is the correct scale.

[57] In relation to quantum, the plaintiff seeks fees, disbursements and tax totaling $19,012.13. In their bill of costs, the responding defendants sought $11,759.28. Thus, the parties’ costs requests are more or less of the same magnitude. One would anticipate the costs of the moving party to be higher since it had the burden of commencing the process and preparing the principal record, whereas the responding parties were required merely to respond. That said, since the plaintiff changed counsel at some point, part of the time spent involved new counsel becoming familiar with the matter.

[58] Turning to rule 57.01 factors, this was a matter of moderate complexity, but one which was of considerable importance to the plaintiff. It involved a moderate sum of money – over $200,000. Viewed proportionally, the plaintiff’s costs are not excessive. I note further that by not cooperating fully, the responding parties caused some needless expense.

[59] As well, in light of the costs incurred by the responding parties (as reflected in their bill of costs), the costs claim of the plaintiff ought to be within their reasonable expectation. In the circumstances, I do not consider the plaintiff’s claim to be unfair or excessive.

[60] Taking all these factors into account, I fix the plaintiff’s costs of the motion at the all-inclusive sum of $17,500. I order the responding defendants to pay that sum to the plaintiff within 15 days.

conclusion and dispostion

[61] For the above reasons, a declaration shall issue that the plaintiff has validly exercised its right of rescission of all agreements with 226 and 135, and it is entitled to the recoveries spelled out in s. 6(6) of the Act. Should the parties require a further attendance in order to (a) quantify the sum(s) payable and/or (b) determine the identity of the franchisor’s associates, they are directed to contact my assistant to arrange a conference call to work out the necessary details. Costs payable by responding defendants to plaintiff within 15 days, fixed at $17,500.

Stinson J.

Date: July 21, 2014