SUPERIOR COURT OF JUSTICE - ONTARIO

BARRIE COURT FILE NO.: 12-1101
DATE: 20141119

RE: Pauline Brister, Applicant/Moving Party

AND:

2145128 Ontario Inc. o/a Cadet Cleaners, Respondent

BEFORE: THE HON. MR. JUSTICE P.H. HOWDEN

COUNSEL:
E. Gionet and J. Botelho, Counsel for the Applicant/Moving Party
F. Poon, Counsel for the Respondent

HEARD: November 14, 2014

ENDORSEMENT

[1] This motion for partial summary judgment is, by agreement of the parties, to determine liability only. The applicant requests judgment declaring the Franchise Agreement dated October 3, 2011 between the franchisor 2145128 Ontario Inc. o/a Cadet Cleaners (“214”) and Pauline Brister (PB) to be rescinded pursuant to Subs. 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c.3 as amended (“the Act”). The applicant originally sought compensation pursuant to s. 6(6) of the Act. Both sides agree that it is not appropriate to deal with that aspect of the case at this time.

[2] It is also agreed that, although this proceeding was converted to an action, it is appropriate to proceed under Rule 20. The issue was stated succinctly by counsel for the respondent 214, Ms. Poon: does this case come within the exemption provision in s. 5 (7) (a) (iv) excepting it from the rigorous disclosure requirements of s. 5 of the Act?

[3] The applicant’s factum addressed in some detail the issue whether a disclosure document as meant by the Act was provided by 214 and both factums address damages. However, as I have already pointed out, the parties agree that damage assessment is for another day, or not at all if this agreement is exempt from the disclosure obligations imposed by the Act.

[4] In brief terms, the Act imposes a duty of fair dealing in the performance and enforcement of a franchise agreement (s.3). In s. 5, the Act sets out in detail the extent of disclosure to be provided by the franchisor no less than fourteen days before signing of a franchise agreement and payment of any consideration. The disclosure duty includes the provision that the following are to be contained in one document: all material facts, financial statements, proposed franchise agreement, and facts necessary to an informed investment decision as prescribed in the Act or regulations (s. 5(4)); and, at any time before signing of the franchise agreement or any payment, a statement of any material change shall be provided [s. 5(5)]. A broad and clearly expressed right of rescission is granted to the franchisee in s. 6 in two parts; (1) one exercisable within 60 days of receiving the disclosure document, and the other within two years of entering the franchise agreement.

[5] In this case, due to the timing of service of the notice of rescission, s. 6(2) is the applicable provision. S. 6(2) states:

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. 2000, c. 3, s. 6 (2).

[6] The provision of the Act of primary concern is this case is s. 5(7) (a) (iv) which reads:

This section (S. 5-the disclosure duties) 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.

[7] The facts of the case can be outlined briefly.

[8] The then franchisee of 214 met PB in the spring of 2011. Gene Osmond (GO) had been the franchisee since January 4, 2007 and had less than one year to go under the agreement which had been made when the franchisor was Dove Corp. At some time after 2007, the agreement was assumed by 214. By August 29, 2011, PB and GO entered an Asset Purchase Agreement. GO and PB agreed to a condition that 214 and PB would enter a new Franchise Agreement. It was also agreed that PB would receive the proposed draft agreement for her to review with her solicitors and 214 would provide a new disclosure document pursuant to the Act. PB was required to enter a new lease for the premises. PB received a sample form of franchise agreement when she met a representative of 214 on September 1, 2011. She also received from GO a copy of the disclosure statement provided him by Dove Corp. in 2006. By September 13, PB was approved as a franchisee by 214. She was required to undergo training by 214 personnel and by GO first at the Cadet plant in Toronto and after that, in Barrie. Meanwhile, on September 19, 2011, 214 sent to PB a six-page document entitled “Statement of Disclosure – Under the Franchise Act of Ontario”. In general terms, it covered the background and experience of the president, a very brief nature the business, Depot Store Outline, and cursory remarks on Turnkey retail stores, franchise fee, operating costs that are the franchisee’s responsibility, transfer fee, advertising, new franchise financial requirements and the fact that the president and principal shareholder has no criminal or bankruptcy record.

[9] On September 27, 2011, PB entered an assignment agreement with 214 and GO regarding the existing lease and PB to assume the rights and obligations under the current lease. The term of that lease was to come to an end in February 2012.Contemporaneous with the assignment agreement, PB and 214 entered an assignment of lease consented to by the landlord in which PB became the tenant in place of 214. A new lease term to September 30, 2016 was agreed to. The affidavit of the 214 representative states that PB had told GO of her desire to take over the lease from 214 and 214 did not oppose that request; there is no evidence that PB had made such request to 214. PB states in her affidavit that this was a significant change from the prior arrangement because 214 was no longer the party to the lease. She does not say whether this change was at her request or not, nor do I require to deal with that evidentiary distinction.

[10] On October 3, 2011, 214 provided a General Security Agreement for signature by PB. By this document, PB granted a security interest to 214 in all of her property, assets, rights and undertaking conditioned on her performing her obligations to 214. The purchase price was $55,000 of which 1,000 was paid as a deposit on August 29, $34000 was paid in cash on October 3, 2011, and the rest was a vendor take-back loan payable over twenty months.

[11] Within months of PB’s commencement in the Cadet business, she found the income was insufficient to cover the monthly bills and PB found that she was losing money. Almost immediately she found that the business was not financially what she had been led to believe. For instance, the police service contract that produced coupons to the officers used to cover their dry cleaning was to end by December 31, 2011, lost by 214. Those coupons were used toward payment of the processing fees charged by 214. On March 26, 2012, PB’s solicitors served the notice of rescission on 214.

[12] The law applicable to this case was most forcefully and fully expressed by Karakatsanis J.A. in 2189205 Ontario Inc. v. Springdale Pizza Depot Ltd., 2011 ONCA 467, [2011] O.J. No. 2821:

21 A purposive approach to statutory interpretation requires that "words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament." Elmer Driedger, Construction of Statutes, 2d ed. (Toronto: Butterworths, 1983), at p. 87. See Rizzo & Rizzo Shoes Ltd. (Re), 1998 837 (SCC), [1998] 1 S.C.R. 27, at para. 21; Bristol-Myers Squibb Co. v. Canada (Attorney General), 2005 SCC 26, [2005] 1 S.C.R. 533, at paras. 95-96.

22 The Legislation Act, 2006, S.O. 2006, c. 21, Sch. F, s. 64(1) provides: "An Act shall be interpreted as being remedial and shall be given such fair, large and liberal interpretation as best ensures the attainment of its objects."

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), 2005 25181 (ON CA), 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."

25 Section 5 of the Act sets out the specific disclosure obligations for franchisors and s. 6 provides the consequences for failure to strictly comply with those requirements, including rights of rescission and compensation. Exemptions from the disclosure requirements are set out in ss. 5(7) and 5(8).

[13] Following these excerpts, the analysis of the Court of Appeal continues:

31 While s. 5(7)(a) exempts a franchisor from the disclosure obligations when the grant of the franchise is directly from a franchisee, the provisions limit the role that the franchisor may play in such a grant without triggering the disclosure obligation. The focus of ss. 5(7)(a)(iv) and 5(8) is on the role of the franchisor in the resale. The disclosure exemption is not available where the grant of the franchise is from the franchisee but is "effected by or through the franchisor". Subsection 8 provides that "a grant is not effected by or through a franchisor merely because ... the franchisor has a right, exercisable on reasonable grounds, to approve or disapprove the grant" or because the franchisor may charge a reasonable fee for its approval.

32 Given the purpose and context of the Act, the exemptions to disclosure set out in ss. 5(7)(a)(iv) and 5(8) must be narrowly construed.

33 The Concise Oxford English Dictionary defines the verb "effect" as "cause to happen, bring about": Concise Oxford English Dictionary, 11th ed., sub verbo "effect". Taken together, the language of ss. 5(7)(a)(iv) and (8) exempt a franchisor from its disclosure obligations only when the franchisor is not an active participant in bringing about the grant and does nothing more than "merely" exercise its rights to consent to the transfer. In such circumstances, the power imbalance does not bear upon the decision to become a franchisee and plays no role in effecting the grant. [Emphasis added.]

[14] In this case, the franchisor was considerably more involved in the process of bringing about the grant than merely exercising its right to consent. I have no doubt that as Ms. Poon submitted, PB was not led by the nose to the ring, that she had had prior business dealings though not regarding the cleaning business, and that she was a willing participant. However, the following indicates that this franchisor was actively involved in setting the terms for the transfer from GO to approval of PB:

(i) 214’s people interviewed her personally prior to approving her as a franchisee;

(ii) 214 required PB to be trained by its personnel as well as by its prior franchisee GO;

(iii) 214 was relieved of its obligations to the landlord; those obligations were assumed by PB alone;

(iv) though there is no evidence of GO being required to provide security against his performance, 214 required PB to enter a General Security Agreement covering all of her property as assurance for her performance of her obligations in the assignment of lease and the new franchise agreement; and

(v) the new Franchise Agreement set by 214 required PB to take over the lease of premises in place of 214.

[15] Therefore, without providing any real disclosure of the realities of this business to PB, the franchisor provided the terms for PB to take over the Barrie operation of the business from GO, interviewed her for the approval of 214, trained her, used PB’s desire to deal direct with the landlord to its advantage by having her assume the new lease term subject to no obligation by 214, and obtained security against all of her property. I have no illusions that PB willingly acted as she did because she wanted to get back into business; she could have refused to go ahead until signing of the new franchise agreement and the security agreement. However she was shown no balance sheet, no profit and loss statements, no disclosure of the strengths and weaknesses of the business, in fact none of the matters set out in the Act as requiring disclosure.

[16] In my view, a franchisor has the burden of demonstrating how it managed to accomplish the advantages it did here without its active participation, and it has failed to do so. This is a closer case than some; for instance there was no requirement of numerous interviews or meetings by the franchisor. But there was not even a signed certificate of the president of 214 that the disclosure provided complied with the Act or regulation. There is no doubt that 214 set the terms, gave PB no preview of those terms except in generic terms, directed the training PB received, and obtained security against the applicant’s property as assurance of performance.

[17] The presence of a power imbalance is manifest in the evidence in this case. I see no genuine issue requiring a trial in this case. Apart from a subtle spin on each side, there is no relevant dispute on the facts leading to this conclusion.

[18] Accordingly, I find that the grant from the franchisee was effected by or through the franchisor and did not fall within the disclosure exemption s. 5(7)(a)(iv). An order rescinding the Franchise Agreement is granted.

[19] If costs are not agreed, I will receive written submissions from counsel within 20 days hereof.

HOWDEN J.

Date: November 19, 2014