2256306 Ontario Inc. v. Dakin News Systems Inc., 2015 ONSC 566
COURT FILE NO.: 13/43743 SR
DATE: 2015-01-27
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
2256306 ONTARIO INC. and ALI REDA
M. Fleischmann, for the Plaintiffs
Plaintiffs
- and -
DAKIN NEWS SYSTEMS INC. and WARREN SMAGAREN
H. Mann, for the Defendants
Defendants
HEARD: July 31, 2014
REASONS FOR JUDGMENT
[1] Before me are a motion and cross-motion, each seeking summary judgment.
[2] The dispute centres around an International News kiosk. In February of 2011 the plaintiffs (Mr. Reda and his numbered corporation) purchased the business from one Mr. Khalife, who had operated the kiosk as a franchisee of the defendant Dakin News Systems Inc. The sale was carried out under the Bulk Sales Act. Mr. Khalife’s franchise agreement with Dakin News had expired on July 30th, 2010. The agreement was not formally renewed. Instead, Mr. Khalife had continued to operate the kiosk on what appears to have been a month-to-month basis.
[3] While Messrs. Reda and Khalife were negotiating their deal, their joint lawyer wrote to Dakin News and inquired about the status of the franchise agreement. Dakin News responded by forwarding information about its transfer procedure, advising that a transfer fee of $10,000.00 was payable, and indicating that Dakin News would have to approve of the transfer. Messrs. Reda and Khalife ignored that information, and proceeded to close the deal under the Bulk Sales Act. Dakin News did not follow up then.
[4] Mr. Redo took over operation of the kiosk. Royalties were paid by him to Dakin News. He had managed the kiosk before purchasing it, and was familiar with its operations.
[5] On January 30th, 2012, after a site visit, Dakin News sent a letter to Mr. Khalife stating that it had come to its attention that the kiosk had been transferred without its consent. Dakin News enclosed a new franchise agreement and indicated that a transfer fee of $10,000.00 was required before approval of the transfer could be approved.
[6] On May 23rd, 2012 Dakin sent a new franchise agreement to Mr. Reda, who says that he did not receive it. The new franchise agreement was re-sent, and on October 29th, 2012 Mr. Reda signed it, as did the defendant Warren Smagaren, who is described as “Vice President of Real Estate, Construction and Acquisition for Dakin News Systems”. No franchise application fee or franchise transfer fee was ever paid. Following execution of this new franchise agreement, Dakin News did not provide Mr. Reda with any disclosure documentation as, prima facie at least, is required under s. 5 of the Arthur Wishart Act.
[7] In February of 2013, the landlord of the premises where the kiosk was located decided not to renew the head lease. Dakin News sent a letter to Mr. Reda and his company advising of the need to relocate and to pay relocation costs estimated at over $75,000.00, plus the need to purchase “fresh inventory” at a cost of approximately $20,000.00.
[8] In August of 2013, the plaintiffs sought to rescind the franchise agreement on the basis that Dakin News did not meet its statutory obligation of proper disclosure. The Arthur Wishart Act allows recission in such circumstances, subject to exceptions.
[9] Dakin News resists recission, and relies up three statutory exemptions provided for in the Arthur Wishart Act, specifically those exemptions in s. 5(7) (a) (iv), 5(7)(f), and 5(7)(g)(ii).
[10] Under the first claimed exemption, disclosure is not required “if…(iv) the grant of the franchise is not affected by or through the franchise”.
[11] Dakin News argues that the grant of the franchise was not affected by it, but, rather by Mr. Khalife by means of the sale under the Bulk Sales Act, back in February of 2011. I would find this argument compelling but for the facts that all Mr. Khalife had at the time was an expired franchise agreement that was operating on a month-to-month basis and that it was Dakin News which precipitated the formation of a wholly new franchise agreement between it and Mr. Reda and his numbered company in October of 2012. If the Bulk Sales Act transfer had been a valid grant of the franchise, the October 2012 agreement would have been entirely unnecessary. It is not enough to describe this new agreement between different parties as merely “normalizing the relationship” and not granting the franchise. This exemption does not apply in my view.
[12] I similarly reject the assertion that the exemption under s. 5(7)(f) is applicable. It does away with the franchise disclosure obligation where there is “(f) the renewal or extension of a franchise agreement where there has been no interruption in the operation of the business operated by the franchisee under the franchise agreement and there has been no material change since the franchise agreement or latest renewal or extension of the franchise agreement was entered into”. Here, while the business did operate uninterrupted, there had been a material change in the person responsible for that operation. Responsibility had shifted from Mr. Khalife to Mr. Reda and his numbered company. In addition, I do not accept that the agreement of October 2012 was a renewal or extension of a franchise agreement. It was a whole new agreement between different parties.
[13] The exception under s. 5(7)(g)(ii) triggers when both of two conditions are met. Those conditions arise if the grant of the franchise: 1) is not valid for longer than one year; and 2) the grant does not involve the payment of a nonrefundable franchise fee.
[14] Mr. Reda (and his company) argue that the term of the franchise agreement executed in October, 2012 was from “the 1st day of December, 2010 or thereabout and expiring on the 30th day of July, 2013 inclusive”, thus quoting from s. 2(b) of the agreement itself. Dakin News, it appears, insisted upon making the agreement retroactive to recognize the earlier takeover by Mr. Reda.
[15] Notwithstanding this, Dakin News argues that I should, for the purpose of interpreting the exception in question, consider the term of the agreement to be from the execution of the agreement on October 29th, 2012 to July 20th, 2013, i.e. one of less than one year. It criticizes Mr. Reda for being logically inconsistent when he says that the term is for the period of December 2010 to July 2013 and yet does not recognize that his attempt to rescind in August of 2013, i.e. beyond the two year period for recission on the basis of nondisclosure set out in s. 6(2) of the Arthur Wishart Act. I agree with the submission that Mr. Reda cannot have it both ways. However, that is not the end of the analysis of the applicability of the exception under s. 5(7)(g)(ii). There remains the issue of the second triggering condition described above. The franchise agreement between Mr. Reda and his company and Dakin News, at s. 9, indicates that a franchise fee was to be paid as part of the purchase price. Regardless of whether that franchise fee has actually been collected, the agreement drafted by Dakin News required its payment. Thus, the second condition is not met, and Dakin News cannot rely upon this exception to the disclosure obligation either.
[16] An obligation to disclose arose when the franchise agreement of October 2012 was executed. That obligation was not met, and Mr. Reda elected to rescind in August of 2013, which is well within the two period anticipated by s. 6(2) of the Arthur Wishart Act.
[17] Given that both sides have moved for summary judgment, it is apparent that the parties and their counsel are satisfied that it is appropriate to decide this case on the basis of Rule 20.04. I agree. There is sufficient evidence before me to define and fairly adjudicate upon the issues.
[18] In the plaintiffs’ factum, the order they seek is described as a declaration that they are entitled to statutory recission. Such declaration is to issue. The motion seeking an order dismissing the plaintiffs claim et cetera is dismissed.
[19] If the parties cannot agree upon costs they may make brief written submissions in that regard. Each set of submissions shall not be more than 3 pages in length, not including a costs outline. The plaintiffs have until February 28th, 2015 to submit their costs materials, if any. The defendants have a further 15 days beyond that. All such materials shall be sent to my attention at the John Sopinka Court House in Hamilton.
Parayeski J.
Released: January 27, 2015
CITATION: 2256306 Ontario Inc. v. Dakin News Systems Inc., 2015 ONSC 566
COURT FILE NO.: 13/43743 SR
DATE: 2015-01-27
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
2256306 ONTARIO INC. and ALI REDA
Plaintiffs
- and –
DAKIN NEWS SYSTEMS INC. and WARREN SMAGAREN
Defendants
REASONS FOR JUDGMENT
MDP:mw
Released: January 27, 2015