COURT FILE NO.: CV-15-523706
DATE: 20210723
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
2364562 ONTARIO LTD. FAREEN MADHANI and FAIZ MADHANI
Plaintiffs
– and –
YOGURTWORLD ENTERPRISES INC. o/a MENCHIE'S FROZEN YOGURT
Defendant
Alnaz I. Jiwa, for the Plaintiffs
Catherine Gleason-Mercier and Sarah McLeod, for the Defendant
HEARD: February 16, 17, 18 and 19, 2021, with written closing submissions filed March 1 and 8, 2021, supplemented on May 11, 17 and 20, 2021.
KIMMEL J.
[1] The plaintiffs, Faiz Madhani (“Faiz”) and Fareen Madhani (“Fareen”) are husband and wife, together the “Madhanis.” They decided that they wanted to go into business for themselves in 2012. The Madhanis identified the Menchie’s franchise system as a desirable opportunity and they approached the defendant, Yogurtworld Enterprises Inc. (“Yogurtworld” or the Franchisor”), which carries on business as Menchie’s Frozen Yogurt (“Menchie’s”), in around September 2012 about the possibility of entering into the Menchie’s franchise system. After the initial contact, they incorporated 2364562 Ontario Ltd. (“236” or the “Franchisee”) in furtherance of their desire to become a Menchie’s franchisee. The Madhanis are the directors and shareholders of 236.
[2] The plaintiffs seek the refund of a $75,000.00 fee plus HST (for a total claim under the simplified procedure of Rule 76 of $84,750.00). This fee was paid pursuant to various agreements that were entered into when 236 became a Menchie’s franchisee. They seek rescission on the basis of an alleged effective failure of disclosure under s. 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000 c. 3, (the “Wishart Act”), and also claim that the provisions of the agreements specifying the paid fee to be non-refundable are void under s. 11 of the Wishart Act. They make further claims for damages under s. 3 of that statute for alleged breaches of the duty of fair dealing and at common law for misrepresentation and frustration of contract.
[3] The Madhanis attended a Discovery Day information session for potential franchisees on or about February 3, 2013 at which they received a Yogurtworld statutory disclosure document (the “Disclosure Document”) that included complete copies of the forms of the Franchise Agreement and the Multi-Unit Development Agreement (“MUDA”). Yogurtworld and 236 entered into two Franchise Agreements and a MUDA for the development of two Menchie’s stores in Ontario on April 16, 2013. The Madhanis were guarantors of the Franchisee’s obligations under these agreements. The plaintiffs had the opportunity to, and did in fact, receive independent legal advice before executing these documents.
[4] Among other terms, the Franchise Agreements and the MUDA (collectively, the “Agreements”):
a. Designated two exclusive territories in Ontario to the plaintiffs: the City of Pickering and King City.
b. Placed the responsibility on the plaintiffs to secure suitable locations for their Menchie's stores in their designated territories and to seek Yogurtworld’s approval;
c. Required the Franchisee to pay a Multi-Unit Development Fee (of $75,000.00 plus tax, the “Development Fee”) in exchange for the right to develop two Menchie’s stores in Ontario, which was indicated to be fully earned and non-refundable upon execution of the Franchise Agreements; and
d. Allowed the plaintiffs 90 days to secure their first location and one year to open both of their Menchie's stores. Failure to meet these timelines triggered the right for Yogurtworld to terminate.
[5] According to the Disclosure Document and the Agreements, as the Franchisor, Yogurtworld was not responsible for identifying store locations. Yogurtworld nonetheless provided a number of potential locations for the plaintiffs to consider. No locations were presented to Yogurtworld by the plaintiffs for its approval.
[6] The plaintiffs did not secure a location in either of their designated exclusive territories within the initial 90-day deadline. They asked Yogurtworld to allow them to change their exclusive territories and to grant them an extension. Yogurtworld agreed to this, upon the terms contained in an email exchange confirmed on November 27, 2013 (the “Extension Agreement”). One of those terms was that, if the plaintiffs failed to secure suitable locations for their Menchie's stores by September 30, 2014, the parties agreed that the Franchise Agreements would be mutually terminated and the Development Fee would not be refunded.
[7] When the deadline under the Extension Agreement expired on September 30, 2014 the plaintiffs had still not sought approval for, or secured, any store location in either of their designated territories. The plaintiffs suggested a mutual termination and the return of 50% of the Development Fee. Yogurtworld did not agree to this, but did offer another option to the plaintiffs to develop or purchase existing Menchie’s stores, which was not accepted by the plaintiffs. Yogurtworld confirmed the termination of the Franchise Agreements and the MUDA on February 5, 2015, maintaining that it was entitled to retain the fully earned and non-refundable Development Fee.
[8] The plaintiffs demanded that these monies be refunded in a statement of claim filed on March 11, 2015 in this action. They are claiming for rescission and misrepresentation under the Wishart Act, in addition to claiming $100,000.00 in aggravated, exemplary and punitive damages. Their statement of claim was later amended to claim a further $50,000.00 for alleged breaches of the duty of good faith and fair dealing. The plaintiffs’ claims in excess of $100,000.00 were later abandoned so that the action could proceed under the Simplified Procedure of Rule 76 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.
Summary of Outcome
[9] For the reasons that follow, the plaintiffs’ action is dismissed.
[10] The Disclosure Documents provided the statutorily mandated disclosure that the plaintiffs were entitled to. No representations were made that induced the plaintiffs to enter into the Agreements and their failure to secure a site in their designated territories was not an unforeseen or unforeseeable event that frustrated the Agreements.
[11] The arguments raised by the plaintiffs in this action are an after-the-fact attempt to meld the facts of this case into circumstances that have been found in previous cases to fall into categories of fatal disclosure deficiencies. However, the facts of this case do not fit into those categories. The Wishart Act does not require that the franchise location be known or that disclosure be site specific, nor does it foreclose the use of estimates or ranges of anticipated costs. In the Disclosure Document, Yogurtworld provided estimates to the plaintiffs of the cost to build different sizes and differently fixtured Menchie’s store locations, including a “standard size” store build estimate. The impugned disclosure in this case has not been demonstrated to be non-compliant, ambiguous or so deficient as to render it a nullity. Accordingly, the plaintiffs have no right of rescission under s. 6 of the Wishart Act.
[12] The plaintiffs have not established any undisclosed material facts, nor have they established any misrepresentations by the defendant. Their assertion that Yogurtworld was, or should have been, aware that there were no suitable Menchie’s store locations in their assigned (and later changed) exclusive territories has not been established on the record. Nor have the plaintiffs established that there were, in fact, no suitable locations available, such that the Agreements could be said to have been frustrated.
[13] While Yogurtworld argues that the plaintiffs’ failure to find suitable Menchie’s store locations was due to the plaintiffs’ own lack of effort, it is not necessary for me to find that to be so. For purposes of this decision, it is sufficient that the plaintiffs assumed the contractual responsibility for finding store locations that they were satisfied with and that they agreed to pay the non-refundable Development Fee while they tied up the exclusive territories designated to them.
[14] For its part, Yogurtworld exceeded its obligations under the Franchise Agreements and the Extension Agreement by identifying potential store locations in the plaintiffs’ chosen exclusive territories, despite the parties’ agreement that this would be the exclusive responsibility of the plaintiffs. Yogurtworld also agreed to the Extension Agreement and afforded many other extensions and indulgences to the plaintiffs before eventually putting them on notice that if they had not secured a location in at least one of their exclusive territories by a deadline that was well beyond the original 90-day deadline under the Franchise Agreements, the Franchise Agreements would be terminated by mutual agreement pursuant to the terms of the Extension Agreement. The plaintiffs have not established any basis for a finding of a breach by Yogurtworld of its duty of good faith and fair dealing under s. 3 of the Wishart Act.
[15] Finally, while the characterization of the Development Fee as a non-refundable fee earned upon the granting of the exclusive territory to the plaintiffs for a period of time would be offside s. 11 of the Wishart Act if the plaintiffs had, and had exercised, a valid right of rescission under either s. 6(1) or (2), they did not do so.
Chronology of Uncontroverted Events and Dealings Between the Parties
[16] The following events and dealings between the parties are not controversial and I find them to have occurred as outlined below:
a. September 27, 2012: The Madhanis signed the required application forms to start the process to become Yogurtworld franchisees.
b. September 2012 - February 2013: The Madhanis exchanged various emails and communications with David Shneer, Yogurtworld’s Executive Vice-President, about their interest in opening Menchie’s stores and becoming a Yogurtworld franchisee.
c. January 29, 2013: David Shneer began to send site opportunities for the Madhanis to consider for their prospective Menchie's Stores.
d. February 3, 2013: The Madhanis attended a Yogurtworld Discovery Day at the Bloor Street West Menchie's in Toronto and received a copy of the Yogurtworld Franchise Disclosure Document.
e. February - April 2013: David Shneer continued to suggest site opportunities for the Madhanis to consider in Pickering and King City, the territories they had indicated that they were interested in.
f. March 18, 2021: The Madhanis were introduced to Phil Guida, the Vice-President, Development of Yogurtworld, as a contact and resource for store location site opportunities, reviews and approvals.
g. April 9, 2013: The Madhanis confirmed that they wanted to enter into Franchise Agreements for locations in King City and Pickering.
h. April 9 - 12, 2013: The Madhanis requested copies of the various agreements for their legal counsel to review, which were comprised of the form of Franchise Agreement and MUDA appended to the Yogurtworld Disclosure Document, and which they took to their independent counsel to review prior to signing them.
i. April 16, 2013: The Madhanis were given a Statement of Material Change prior to signing the Agreements.
j. April 16, 2013: The Madhanis met with David Shneer, executed the Franchise Agreements for King City and Pickering and the MUDA and paid the specified Development Fee of $75,000 + HST.
k. April 17 – September 19, 2013: The Madhanis continued to deal with Phil Guida regarding potential Menchie’s store locations, both within and outside of their designated territories.
l. July 15, 2013: The 90-day deadline specified in the Agreements for the Madhanis to secure an initial store location in King City and/or Pickering expired.
m. October 10, 2013: The Madhanis asked to exchange their Pickering and King City territories for Fairview Mall in Toronto and Chinook Mall in Calgary, Alberta, and negotiations for such ensued, during which the Madhanis were advised that a new Disclosure Document would be provided.
n. November 27, 2013: The Extension Agreement was confirmed by email, by which Yogurtworld agreed to allow the Franchisee to change the King City and Pickering designated territories to Fairview Mall (Ontario) and Chinook Mall (Alberta), provided that the plaintiffs: (a) found a suitable location by September 30, 2014, and (b) paid legal fees associated with the new Disclosure Document, failing which the parties agreed that the Agreements would be mutually terminated.
o. September 8-22, 2014: The Madhanis emailed Phil Guida and David Shneer advising that they would not be able to secure a location before the September 30, 2014 deadline. The Madhanis stated that they would like to proceed with the mutual termination if 50% of the Development Fee was refunded to them.
p. September 30, 2014: The deadline under the Extension Agreement expired.
q. October 10-27, 2014: Yogurtworld offered the Madhanis options to either enter into a further agreement to develop, or to purchase existing Menchie's stores, as an alternative to the mutual termination. Under either option, Yogurtworld explained that the Development Fee paid in April 2013 was considered to have been fully earned and non-refundable.
r. October 27, 2014: The plaintiffs rejected both of Yogurtworld's proposed options and demanded that the full amount of the Development Fee be refunded to them.
s. February 5, 2015: Yogurtworld provided written confirmation that the Franchise Agreements and the MUDA were terminated.
t. March 11, 2015: The plaintiffs filed a Statement of Claim seeking the return of the Development Fee ($75,000 + HST) and aggravated, exemplary and punitive damages of $100,000, later amending to add a claim of $50,000 for alleged breach of the duty of good faith and fair dealing.
u. April 16, 2014: The two-year anniversary of the signing of the Agreements.
v. June 9, 2015: The Franchisee delivered a notice of rescission under s. 6(2) of the Wishart Act with respect to the Franchise Agreements and the MUDA.
w. July 24, 2015: Yogurtworld filed a Statement of Defence denying the plaintiffs' relief.
x. August 4, 2015: The plaintiffs filed a Reply and agreed to abandon their claims in excess of $100,000 in order to come within the limits of the Simplified Procedure under Rule 76.
[17] What was, in fact, disclosed to the plaintiffs in the Disclosure Document is also not in dispute. The defendant has included at Appendix “B” to its factum a schedule which sets out the required disclosures under the Wishart Act and regulations thereunder, indicating which sections of the Disclosure Document are said by it to fulfill those requirements. The required disclosures challenged by the plaintiffs relate to deposits, fees and start up costs (detailed in sections 8 and 9 and Exhibit C-1 of the Disclosure Document), estimates of operating costs and earnings projections (detailed in sections 10 and 11 of the Disclosure Document), territories (detailed in section 21 of the Disclosure Document) and information about existing and former franchisees (detailed at section 22 and Exhibit E to the Disclosure Document).
Disputed Facts in Relation to the Plaintiffs’ Failure to Find “Suitable” Store Locations
[18] Each side argues that there are credibility issues with the testimony on the other side. Most of the areas in which these credibility concerns are raised are not in relation to facts that are material to the outcome of this case. Many of the disputed facts are in relation to the reason for the plaintiffs’ failure to secure Menchie’s store locations in their designated exclusive territories. How hard the plaintiffs were looking for a “suitable” Menchie’s store location in their exclusive territories, and whether their efforts met the expectations of the Franchisor, is a point of dispute that does not need to be decided.
[19] What is not disputed is that the plaintiffs did not enter into a lease, or even enter into lease negotiations, in relation to any potential store location. Nor did they ever get to the stage of asking the Franchisor to review and/or approve any potential Menchie’s franchise location.
[20] The plaintiffs were contemplating potential Menchie’s store locations in Pickering and King City between April 17, 2013 and November 27, 2013. They were contemplating potential Menchie’s store locations in Fairview Mall and Chinook Mall between November 27, 2013 and September 8, 2014. The plaintiffs equate a “suitable” store location with a “profitable” store location. Profitability is one factor that Yogurtworld considers to be relevant to the assessment of suitable locations, although it does not agree, and its representatives did not concede in their testimony, that suitability and profitability are synonymous.
[21] There is no evidence of any profitability assessments undertaken by the plaintiffs in respect of any of the locations that were under consideration. The plaintiffs did not make any serious efforts to obtain any estimates of revenues or profits from other franchisees. They did no modelling based on the ranges of cost estimates provided by the Franchisor or based on their own due diligence. They contend that they could not do this until they had a lease so that they would know the site specific lease cost, the cost of leasehold improvements, the cost of fixtures and equipment, and the cost of utilities.
[22] What is in dispute in this regard is whether, under a retrospective review, the disclosure was so deficient as to render it, in effect, a nullity, because no one could reasonably be expected to be able to make an investment decision based upon the cost estimates and ranges that were disclosed by the Franchisor to the Franchisee. This, in turn, depends upon whether it is reasonable for investment decisions to be made based on general estimates and ranges of lease and operating costs rather than site specific estimates of lease and operating costs. This “dispute” about the sufficiency of the disclosure provided by Yogurtworld will be addressed later in these reasons.
Issues to be Decided
[23] Having considered the oral and written submissions of the parties, the issues raised by the parties for the court’s determination are as follows:
Wishart Act Rescission Claims:
a. Did Yogurtworld meet its disclosure obligations under s. 5 of the Wishart Act?
b. Was there an irregularity with the Statement of Material Change delivered by Yogurtworld prior to the signing of the Franchise Agreements and MUDA?
c. Do the plaintiffs have a valid claim under s. 6(2) of the Wishart Act to rescind the Franchise Agreements due to deficient disclosure by Yogurtworld?
d. Is the s. 6(2) Wishart Act rescission claim time-barred?
Common Law Claims for Damages for Misrepresentation and Frustration
e. Did Yogurtworld make representations to the plaintiffs that were false and that induced them to enter into the Agreements or the Extension Agreement?
f. Were the Franchise Agreements and the MUDA frustrated?
Claims for Breaches of the Duty of Good Faith and Fair Dealing Under the Wishart Act
g. Did Yogurtworld breach its duty of good faith and fair dealing to the plaintiffs under s. 3 of the Wishart Act?
Damages
h. Are the plaintiffs entitled to the return of the Development Fee ($75,000.00 plus taxes) paid pursuant to the MUDA?
i. Does the requirement for payment of a non-refundable Development Fee violate s. 11 of the Wishart Act?
j. Are the plaintiffs entitled to any punitive, aggravated or exemplary damages?
Wishart Act Rescission Claims: Legal Analytical Framework
[24] The issues in this case, for the most part, must be decided with regard to the Wishart Act, which is a comprehensive statutory regime dealing with disclosure, rights of rescission, fees and the duty of good faith and fair dealing in the franchisee/franchisor relationship. The law applicable to the plaintiffs’ common law claims for misrepresentation and frustration will be addressed in the sections dealing with those claims.
[25] Section 5(4)(a) of the Wishart Act requires a franchisor to provide a prospective franchisee with a disclosure document containing "all material facts", including material facts as prescribed in the accompanying regulations (the "Regulations": O. Reg. 581/00). A "material fact" is defined in s. 1(1) of the Wishart Act as "any information about the business, operations, capital or control of the franchisor or franchisor's associate, or about the franchise system, that would reasonably be expected to have a significant effect on the value or price of the franchise to be granted or the decision to acquire the franchise."
[26] Section 5(4) of the Wishart Act also requires that the disclosure document contain certain prescribed statements for the purpose of assisting the prospective franchisee in making informed investment decisions. Item 1, listed in s. 6 of the Regulations stipulates that every disclosure document must include a "list of all the franchisee's costs associated with the establishment of the franchise, including, …(ii) an estimate of the costs for inventory, leasehold improvements, equipment, leases, rentals and all other tangible and intangible property necessary to establish the franchise and an explanation of any assumptions underlying the estimate".
[27] Section 6 of the Wishart Act provides franchisees with two different rights of rescission, depending on whether a disclosure document has been provided or not: 4287975 Canada Inc. v. Imvescor Restaurants Inc., 2009 ONCA 308, 98 O.R. (3d) 187, at para. 25, leave to appeal refused, [2009] S.C.C.A. No. 244.
[28] Under s. 6(1), a franchisee may rescind a franchise agreement within 60 days of receipt of the disclosure document if the document is not provided "within the time required by s. 5 or if [its] contents... did not meet the requirements of s. 5."
[29] Section 6(2) of the Wishart Act allows a franchisee to "rescind [a] 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."
[30] There have been a multitude of cases decided under the Wishart Act since it was first enacted, and the jurisprudence that has interpreted its provisions has been objective-oriented, with a focus on the consumer protection goals of this legislation. Most relevant to this case is that the courts have given a broad interpretation to the circumstances giving rise to a right of rescission under s. 6(2) of the Wishart Act. That section has been broadly interpreted to permit rescission even when a disclosure document has been provided, if it is found to be so deficient or inadequate so as to effectively amount to no disclosure.
[31] In a case decided last year, I had the opportunity to review, consider and summarize the law regarding disclosure under the Wishart Act. See 2483038 Ontario Inc. v. 2082100 Ontario Inc., 2020 ONSC 475 at paras, 25, 26, 34 and 35:
The Applicable Case Law
[25] The Wishart Act has been in force for almost twenty years and there have been many opportunities for courts to interpret it. Some of the guiding principles that emerge from the caselaw at the appellate level include:
a. The Wishart Act is intended to redress the imbalance of power between a franchisor and franchisee and it must be given a generous interpretation that errs on the side of over-inclusion to ensure the broadest scope of disclosure. See 2189205 Ontario Inc. v. Springdale Pizza Depot Ltd., 2011 ONCA 467, 336 D.L.R. (4th) 234 at paras. 23-24 and 2240802 Ontario Inc. v. Springdale Pizza Depot Ltd., 2015 ONCA 236, 331 OAC 282, at para. 56.
b. A fair interpretation of the Wishart Act is that it balances the interests of both franchisees and franchisors. See 4297975 Canada Inc. v. Imvescor Restaurants Inc., 2009 ONCA 308, 98 O.R. (3d) 187 at para. 40.
[26] There have been numerous cases decided by the Court of Appeal for Ontario about what is required for a franchisee to be entitled to rescind under s. 6(2). It was established early on that a failure to provide the required disclosure is not limited to circumstances where no FDD [franchise disclosure document] is provided. An FDD may be so deficient as to effectively amount to a complete lack of disclosure, thereby permitting rescission under s. 6(2) of the Wishart Act. Calling something a disclosure document does not make it one. See Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62 at para. 47. See also 6792341 Ontario Ltd. v. Dollar It Ltd., 2009 ONCA 385, 95 O.R. (3d) 291 at para. 74.
[34] The most recent case from the Ontario Court of Appeal dealing with disclosure deficiencies was about breaches of s. 5 for non-disclosure of material facts (see Raibex, at paras. 21-24). The motion judge found that the franchisor had breached s. 5 so significantly as to amount to non-disclosure. This finding brought the rescission analysis out of s. 6(1) and into the scope of s. 6(2). The Court of Appeal overturned the motion judge’s finding about the s. 5 breach...
[35] The Court of Appeal in Raibex endorsed the prior authorities and the view that there can be disclosure that is so deficient that it amounts to no disclosure (Raibex at para. 47). The Court of Appeal emphasized the need for a purposive analysis of s.5 Wishart Act disclosure deficiencies, having regard to the importance of both previously identified policy objectives:
a) emphasis was placed on the importance of full disclosure from a franchisor to a potential franchisee “so that the latter can make a properly informed decision about whether or not to invest in a franchise,” in the context of the Court of Appeal’s decision to overturn the motion judge’s finding that the disclosure about a yet to be negotiated head lease was deficient (Raibex at para. 49); and
b) emphasis was placed on the policy most recently articulated in Mendoza that the certificate was intended to “impress upon [franchisors] the importance of ensuring the document is complete and accurate” in the context of the Court of Appeal’s decision to uphold the motion judge’s finding that the disclosure certificate was valid (Raibex at para. 63).
[32] These principles are consistent with the purposes of the Wishart Act that the plaintiffs have emphasized in their submissions, relying on the decision of Garson J. in 2212886 Ontario v. Obsidian Group Inc., 2017 ONSC 1643, 67 B.L.R. (5th) 103, at paras. 22, 23 and 28, as affirmed by the Court of Appeal in Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62, 419 D.L.R. (4th) 53, at para. 48. The overarching theme is to ensure “informed decision-making” on the part of the franchisee. The outcomes in cases that have considered this line of authority have been driven by a concern about a complete lack of disclosure in one of the mandated areas, determined to have rendered it impossible for “anyone reviewing [the] document … [to] make an informed decision about whether or not to invest in [the] franchise”: 6792341 Canada Inc. et al. v. Dollar It Limited et al., 2009 ONCA 385, 95 O.R. (3d) 291, at para. 68; Raibex, at para. 47.
[33] This must be balanced with the concern expressed by the Court of Appeal in Imvescor, at para. 43, that a franchisee that receives imperfect disclosure does not necessarily stand in the same position as a franchisee that was "never provided [with a] disclosure document." The Court of Appeal warned in Imvescor, at para. 37, and repeated in Raibex, at para. 46, that conflating the s. 6(1) and 6(2) scenarios would frustrate clear legislative intent:
The [AWA] ... is clear that a rescission remedy is available to the franchisee in two separate situations, and that the two situations are not to be blurred into one. This interpretation is further bolstered by the purpose of the Act, which is in part to ensure that the franchisee has at least fourteen days to review a disclosure document before signing an agreement. The legislature clearly chose to reserve the two year remedy for instances of a complete failure to provide a disclosure document.
[34] Raibex is the most recent franchise case decided by the Ontario Court of Appeal. This case emphasizes, at para. 48, that “[w]hether deficiencies in a disclosure document are so serious as to amount to no disclosure for the purposes of the AWA must be determined on the facts of each case.” Further, “whether a breach of s. 5 is sufficiently serious to engage s. 6(2) should be determined on a case-by-case basis, with a view to all relevant circumstances bearing on whether the franchisee can make a properly informed decision about whether or not to invest. This inquiry requires, where appropriate, taking into account the terms of the parties’ franchise agreement” as well as what the parties knew and agreed to: Raibex, at para. 52.
[35] In Raibex, the motion judge held that the franchisor's breach of its disclosure obligations was "egregious", as the disclosure document contained "stark and material deficiencies" with respect to the franchisee's lease obligations and estimated development costs. The motion judge therefore concluded that the test for rescission under s. 6(2) had been satisfied. The Court of Appeal disagreed, drawing on the distinction between imperfect disclosure and no disclosure: at paras. 52-57.
[36] While the court considers the objective standard of whether the franchisee had knowledge and information that could reasonably be assessed as sufficient to enable anyone to make an informed decision, the circumstances of the case and the particular franchisee/franchisor provide the context for the analysis. In this assessment, the court must keep the balance of interests in mind, recognizing that these are cases where the court is already being asked to extend the s. 6(2) rescission right to circumstances of “deemed” non-disclosure, where the franchisee can be said to have been “effectively deprived … of the opportunity to make an informed investment decision”: Raibex, at para. 49.
[37] There are some types of omissions that have been categorically recognized to be “fatal flaws”. These are described as: deficiencies of a certain category or type, or of such a degree, that it will be impossible to conclude that the franchisee was fully informed, such as (i) unsigned disclosure certificates, (ii) the failure to include a head lease if one exists (or, where there is no head lease, the failure to disclose that there is no head lease and the absence of the right for the franchisee to opt-out of either the franchise agreement or the lease if the franchisor subsequently negotiates a lease unacceptable to the franchisee), (iii) non-compliant financial statements and/or (iv) piecemeal disclosure: Stephanie Sugar, Franchise Law in Canada (Toronto: LexisNexis, 2019), at s. 4.7.2 “Disclosure Obligations”, at pp. 129-130.[^1]
[38] Beyond the recognized categories of fatal flaws, the determination of whether the alleged deficiency(ies) is sufficiently material to be deemed to be no disclosure at all such that a franchisor has been “effectively deprived … of the opportunity to make an informed investment decision” will depend on the nature and extent of the alleged deficiency and its alleged impairment of decision-making. On a case-by-case analysis, for the court to reach the necessary conclusion that it would be impossible “for anyone reviewing [the] document … to make an informed decision about whether or not to invest in the franchise,” the court will inevitably receive and consider evidence of the particular franchisee and how and why it says its ability/inability to make an investment decision was impaired. These cases are not decided in a vacuum.
[39] If a franchisee is coming to the court to seek rescission more than 60 days after the receipt of a disclosure document, it should have a concrete and contextualized concern about the impairment of its ability to make an informed investment decision. Outside of recognized categories of fatal flaws, if the alleged disclosure deficiency(ies) is not said to have impaired the particular franchisee in its ability to make an informed investment decision then the objective standard, that it be impossible for anyone to make an informed investment decision, may not be met: see New Vision Renaissance MX Ltd. v. The Symposium Café Inc., 2020 ONSC 1119, at paras. 115-120.
[40] In the recently decided case, 2611707 Ontario Inc., et al v. Freshly Squeezed Franchise Juice Corporation, et al., 2021 ONSC 2323, that the plaintiffs asked me to consider after closing arguments had been completed, Vella J. found that rescission under s. 6(2) of the Wishart Act was available to the franchisee. That case was one in which the court identified fatal flaws in the disclosure document, one of which was the failure by the franchisor to disclose that it had not yet entered into a head lease, and its failure to disclose that it had entered into an agreement to lease (found to be a material fact) which contained some unfavourable terms relating to the franchisee’s specified location, the disclosure of which would also have made it clear that the head lease had not yet been entered into: Freshly Squeezed, at paras. 18, 19, 81 and 82.
[41] Having entered into a sub-lease in the absence of the fatally flawed disclosure about the head lease, the franchisee also did not have the ability to opt-out of the franchise agreement and sublease if the rents and terms of the eventual head lease to be negotiated by the franchisor were not acceptable to the franchisee and no other safeguards were afforded. The court found that the franchisor failed to act in a transparent manner and that the deficiencies reached the threshold for s. 6(2) rescission: at paras. 92-94.
[42] The points of distinction between Freshly Squeezed and this case bring into focus the broader distinction between s. 6(2) Wishart Act cases involving the recognized categories of fatal disclosure flaws and cases where the impugned disclosure is not in a recognized category. Unlike in Freshly Squeezed (and Raibex), the Menchie’s franchise system is not a system where the franchisor enters into a head lease that the franchisees are bound to through subleases signed without knowledge of the lease terms or the ability to be relieved from their obligations if they are not satisfied with the lease terms later agreed to by the franchisor. In the Menchie’s franchise system, the Franchisee was the party responsible for securing a location and negotiating its own lease terms and there was, therefore, no head lease to disclose. This does not fall within the fatal disclosure category of an as of yet undetermined head lease with unknown terms to be imposed on the franchisor.
[43] Further, where it is not contemplated that there will ever be a head lease, the safeguard of providing an opt-out clause (from either the sub-lease and/or the franchise agreement) in the event that the franchisee is unhappy with the terms of a head lease entered into by the franchisor is also not a relevant consideration. The issue here is whether there is any need for a safeguard against as of yet undetermined lease costs when they are within the control of the franchisee and the franchisee assumes the sole responsibility and control over the negotiation of the lease for its franchise location(s) and where the lease costs have been estimated for standard sized stores.
[44] The above review of the legal analytical framework and factual predicates provides the basis for the analysis of the issues relating to the plaintiffs’ claims for rescission identified for the court’s determination, which are considered in turn.
Did Yogurtworld meet its disclosure obligations under s. 5 of the Wishart Act?
a. Alleged non-disclosure of lack of available or suitable store locations
[45] Disclosure of material facts in the Disclosure Statement is required under s. 5 of the Wishart Act. This includes “any information about the business, operations, capital or control of the franchisor or franchisor's associate, or about the franchise system, that would reasonably be expected to have a significant effect on the value or price of the franchise to be granted or the decision to acquire the franchise”: Wishart Act, s. 1(1).
[46] The plaintiffs allege that the Franchisor knew and failed to disclose that there were no suitable Menchie’s store locations in the Franchisee’s designated territories (or beyond) because it is suggested that the Menchie’s franchise had already saturated the market. It is suggested that this fact can be inferred from the evidence of Yogurtworld’s representatives. However, both Mr. Guida and Mr. Shneer testified that they were not aware of other franchisees having been terminated for failing to secure a suitable location at the time the Disclosure Document was provided to the plaintiffs (February 5, 2013) or at the time the Agreements were signed (April 16, 2013). I accept their testimony on this point.
[47] Their testimony was not undermined or contradicted by Mr. Guida’s acknowledgment that there have been terminations of other franchisees. When he made this statement he was not being asked about any specific point in time. There is no affirmative evidence or basis for suggesting that any franchisee had been terminated prior to April 16, 2013 for failing to secure a suitable location. Nor is this an appropriate case for an adverse inference to be drawn from the refusal by Yogurtworld to make disclosure about all franchisee terminations and the reasons for them. This would be based entirely upon speculation which is not sufficient foundation for an inference to be drawn.
[48] The plaintiffs’ speculation about the “concerns” of other franchisees referenced in a March 24, 2014 email exchange does not indicate the concerns to be about the unavailability or scarcity of suitable store locations as the plaintiffs suggest. The explanation that Mr. Shneer provided about the “concerns” referenced in this email is equally or more plausible than the inference that the plaintiffs suggest. He testified that the other franchisees’ “concerns” were about putting a moratorium on new franchisees entering the system to give the existing franchisees the opportunity to expand and open more stores themselves before new franchisees were brought in and assigned the remaining territories.
[49] None of the other franchisees were called to testify about what the concerns were. Further, whatever the concerns referenced in this email may have been about, they postdated the Disclosure Document provided to the plaintiffs and the Agreements by almost a year and thus cannot now reasonably be inferred by the court to have been known undisclosed material facts at the time of the Disclosure Document or the Agreements. The plaintiffs’ allegation that there was a known scarcity of suitable store locations within the plaintiffs’ designated territories at the time the Agreements were signed or the Disclosure Document was delivered has not been proven on a balance of probabilities.
b. Alleged non-disclosure about lease guarantees
[50] The plaintiffs’ complaint about the prospect that a landlord might insist as part of lease negotiations on a personal guarantee from one or both of the Madhanis does not amount to a material non-disclosure. This has not been demonstrated to be something that was known to be required by landlords across the Menchie’s franchise system.
[51] This is a business term that might have to be negotiated as part of a commercial lease. There is no evidence that any landlord for any prospective lease in any of the Franchisee’s designated territories was asking for a personal guarantee. The only evidence about the possibility of a personal guarantee was in the context of a discussion with a landlord for a prospective location in Toronto, not in the Franchisee’s designated territory, that the Franchisee was not interested in for other reasons.
c. Prescribed disclosure
[52] Section 5(4) of the Wishart Act requires that the disclosure document contain certain prescribed statements for the purpose of assisting the prospective franchisee in making informed investment decisions. Item 1 in s. 6 of the Regulations stipulates that every disclosure document must include a "list of all the franchisee's costs associated with the establishment of the franchise, including, …(ii) an estimate of the costs for inventory, leasehold improvements, equipment, leases, rentals and all other tangible and intangible property necessary to establish the franchise and an explanation of any assumptions underlying the estimate".
[53] Estimates for these and various other anticipated start-up costs associated with establishing a franchise were provided by Yogurtworld in its Disclosure Document, within specified ranges where applicable. The Franchisee complains that the ranges given within the estimates were too broad. However, their breadth was a function of the variable underlying assumptions, all of which were disclosed and explained as the Wishart Act and Regulations require.
[54] The Franchisee also complains about the absence of any disclosure about expected earnings or profitability. However, the absence of earnings projections is not considered a disclosure deficiency. To the contrary, item 3 in s. 6. of the Regulations under the Wishart Act provides only that, if an estimate of earnings projections is provided, then certain additional prescribed disclosure requirements must be met. Since no estimate of earnings projections was provided by Yogurtworld in or prior to delivery of its Disclosure Document, the regulated requirements for earnings disclosure did not apply: see Obsidian Group, at para. 54.
[55] The Franchisee further complains about the disclosure relating to potential fees. The complaint is not about a failure to disclose the types of potential fees, but that it was not knowable at the time that they received the Disclosure Document whether the fees would apply and what they would be in each instance. The Disclosure Document described the underlying circumstances in which the fees might apply and the basis on which they would be calculated. Ranges were again provided where known. It has not been suggested that the described circumstances or ranges were inaccurate.
[56] The allegation that the disclosure prescribed by s. 5 of the Wishart Act and the Regulations was not provided to the plaintiffs has not been proven on a balance of probabilities.
d. Ability to make an informed decision
[57] The essence of the complaint by the Franchisee regarding the insufficiency of the disclosure provided by Yogurtworld is that it should not have had to decide whether to invest in a Menchie’s franchise based on estimates and ranges of what it would cost to open and operate a Menchie’s franchise store, the ultimate determination of which would be dependent upon the store location, square footage, selected equipment and machines, and the specific requirements, inducements and fixtures of the particular landlord with whom the plaintiffs ultimately entered into a lease.
[58] The Franchisee complains that the lease, equipment and fixturing costs were unknown and unknowable until the location was established and lease terms had been negotiated. The Court of Appeal in Raibex has ruled that the uncertainty of costs associated with a yet-to-be-negotiated lease is not a fatal disclosure flaw when there are safeguards in place to protect the franchisee. In Raibex the ability to opt-out if the franchisor negotiated unacceptable lease terms was considered sufficient to mitigate against the uncertainty of future lease costs that could be imposed later on the franchisee. In this case, the future uncertainty was mitigated by seeding the authority and control over the lease costs in the Franchisee. The clear and unambiguous terms of the Franchise Agreements and the MUDA gave the Franchisee the control and responsibility over the lease negotiations with prospective landlords.
[59] Since this alleged disclosure deficiency does not fall into a recognized “fatal flaw” (discussed earlier in these reasons), the franchisee’s ability to make an informed investment decision must be examined in the particular circumstances of this case.
[60] The plaintiffs were aware prior to signing the Franchise Agreements and from the Disclosure Document that the lease costs would be based on the square footage of the store location that they selected, and would be market driven. The Disclosure Document contained ranges of estimated lease costs based on square footage. The Disclosure Document provided ranges for the cost of building out and fixturing, which were also dependent upon the size of the store.[^2]
[61] The plaintiffs complain that the range of potential costs to establish a Menchie’s store derived from the Disclosure Document is too broad (ranging from $273,000 to $815,000). This is not the range for a given location, however. It is the range that flows from inputting the assumptions at the extreme ends of the specified ranges. Each franchisee will apply different assumptions depending on their particular intentions and outlook to inform their decision making.
[62] The Madhanis complain that they were pressured into signing the Agreements before securing a location, when they would have preferred to find their location first. However, they had legal advice at the time and have not established that they were under any duress. The Franchisee had the opportunity, and was encouraged, to do due diligence, including about potential lease costs of prospective franchise locations in its exclusive territories before signing the Franchise Agreement and the MUDA in order to satisfy itself as to whether there were lease opportunities within the price range that had been indicated in the Disclosure Document and acceptable to the Franchisee. To that end, the Madhanis testified that they visited a number of locations and assessed them under the matrix that they were provided before settling on their designated exclusive territories.
[63] Further, there is no evidence that prohibitive lease costs or lease terms were the reason why the plaintiffs were not able to identify suitable Menchie’s store locations in their designated exclusive territories within the extended timeframe they were given to do so. There is no evidence about any efforts made by them to ascertain lease costs from prospective landlords at any of the locations they visited, within or outside of their designated territories. The plaintiffs’ complaint is that they could not find a location that they deemed would be “successful”. They use this term generically and appear to have been looking for a location that they could be assured would achieve some unspecified level of profitability. That type of assurance does not exist in business and should not be the standard against which the sufficiency of disclosure is measured.
[64] The complaint about their inability to determine whether a prospective location would be “successful” or profitable is tied to various other complaints about lack of disclosure regarding operating costs, earnings projections and the success (or failure) of other franchisees. However, the Wishart Act explicitly contemplates that there might not be disclosure about potential earnings or profitability.
[65] It was open to the plaintiffs to contact the other franchisees for information about operating costs, earnings and profitability. The plaintiffs did not make any serious attempts to contact other franchisees and did not disclose to Yogurtworld any information having been obtained from them. The Franchisor complied with its obligations under the Wishart Act to provide the names and contact information for current and former franchisees. The plaintiffs also could have asked the former and current franchisees about any complaints that they had about the Menchie’s franchise system.
[66] When considered in context, the information disclosed to the plaintiffs was sufficient to enable them to assess the potential costs and risks of establishing and operating a Menchie’s franchise location. Business decisions such as this are not made based on perfect information. Informed business decisions can be made based on ranges and assumptions about future costs, which can then be estimated. The plaintiffs have not proven on a balance of probabilities that the disclosure provided in the Disclosure Statement was not sufficient for a reasonable person to make an informed investment decision about whether to participate in the Menchie’s franchise system: see Raibex, at para. 47; and Dollar It, at para. 68.
Was There an Irregularity with the Statement of Material Change?
[67] Yogurtworld objects to the plaintiffs arguments, raised for the first time in their written closing submissions, about the delivery by Yogurtworld of a Statement of Material Change just prior to the execution of the Franchise Agreements and MUDA. This complaint was not contained in the plaintiffs’ statement of claim and, on that basis alone, I am not prepared to consider this alleged breach of the Wishart Act as part of the determination of the plaintiffs’ claims in this action.
[68] That said, the complaint is also ill-conceived. When this complaint was first raised in their written closing submissions, the plaintiffs did not particularize any specific deficiency or complaint about the content of the Statement of Material Change. They simply complained about the timing of its delivery, prior to execution of the Agreements. However, this is exactly when it was supposed to be delivered under s. 5(5) of the Wishart Act, after the change had occurred and before the signing the franchise agreement or the payment of any consideration relating to the franchise.
[69] Mr. Shneer testified that the Statement of Material Change was reviewed with the plaintiffs when he provided it to them, and before they signed the Agreements. The plaintiffs acknowledge that it was provided to them before they signed the Agreements, but deny that it was reviewed with them. However, they do not contend that they asked any questions about it, asked to review it in more detail or asked to take it to their lawyer, who they had reviewed the other documents with. The plaintiffs’ complaint, long after the fact, about the timing of the delivery of the Statement of Material Change, does not amount to a breach of the Wishart Act by the Franchisor.
[70] In their reply written closing submissions (upon which the defendant had no further opportunity to comment as it was the last of the oral and written closing submissions that had been scheduled) the plaintiffs add in further complaints about previously undisclosed further costs. These complaints are not pleaded, have not been properly particularized and are not properly before the court for consideration.
Do the plaintiffs have a valid Rescission claim under s. 6(2) of the Wishart Act?
[71] Section 6(2) of the Wishart Act allows a franchisee to "rescind [a] 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." This section has been broadly interpreted to permit rescission even when a disclosure document has been provided, if it is found to be so deficient or inadequate so as to effectively amount to no disclosure. As outlined earlier in these reasons, the plaintiffs have not proven the Disclosure Document to have been deficient to this extent, or to render it impossible for an investment decision to be made.
[72] The plaintiffs rely very heavily on the concern expressed in lower court’s decision in Raibex Canada Ltd. v. ASWR Franchising Corp., 2016 ONSC 5575, at para. 73, about a franchisor giving disclosure prematurely, when material matters were not yet known, leading to the potential for abuse and avoidance of statutory disclosure obligations. That concern was recognized and validated by the Court of Appeal in Raibex, even though the lower court’s decision was overturned. The concern about the ability to make compliant disclosure about unknown matters and the potential for abuse and avoidance of statutory disclosure obligations must be considered in the context of each case when deciding whether imperfect disclosure transcends into effective non-disclosure.
[73] The plaintiffs argue that the Court of Appeal’s decision in Raibex should be read as requiring that a franchisee have a right to rescind its franchise agreement until the location has been determined and site specific costs are known. The plaintiffs’ position is, in essence, that no franchisee should ever have to make a decision about whether to invest in a franchise until all site-specific costs are known. They further argue that ranges of cost estimates cannot ever satisfy a franchisor’s disclosure obligations under the Wishart Act. In other words, they seek to have these uncertainties (undetermined location and/or ranges for cost estimates) characterized as “fatal” disclosure flaws that would automatically trigger a s. 6(2) right of rescission.
[74] To accept the plaintiffs’ position would effectively render the distinction between s. 6(1) and (2) of the Wishart Act meaningless in any situation where the franchise location has not yet been determined and lease up and other fixed location-specific costs cannot be precisely determined. That goes beyond what the Court of Appeal said in Raibex, in which it affirmed that there can be compliant disclosure in circumstances where the franchise location has not been determined. What was held to be important is that there be safeguards against the risk of unknown future costs and the risk of abuse by the franchisor. The acceptable safeguards will depend on the particular circumstances, including whether the franchisee is subject to the whim and control of the franchisor after signing the franchise agreement (as was the situation in Raibex).
[75] In this case, the circumstances surrounding the unknown lease costs are different from the situation in Raibex and the uncertainty was mitigated in a different way. The Franchisee had both the responsibility and the authority to negotiate the lease terms for the yet-to-be identified locations in its exclusive territories. The unknown future lease costs for the Menchie’s stores was a matter within the power and control of the Franchisee to negotiate without interference from the Franchisor, who had no ability to impose them on the Franchisee.
[76] In these circumstances, I have not been persuaded on a balance of probabilities, that the disclosure provided by Yogurtworld was so deficient as to constitute no disclosure at all. This is not the type of situation that gives rise to concerns about premature disclosure and the potential for abuse by franchisors. Any imperfections or imprecision in the disclosure by Yogurtworld about future unknown but estimated lease and start-up costs (based on estimated ranges of costs and disclosed assumptions) would fall within s. 6(1) of the Wishart Act. If concerned about the uncertainty regarding the lease costs, the franchisee could have rescinded within 60 days. That protection was available to them to mitigate against concerns about future uncertainties, but they did not avail themselves of it.
Is the s. 6 Wishart Act rescission claim time-barred?
[77] The distinction between imperfect disclosure and no disclosure is manifested in the time that the franchisee has to rescind. Section 6(1) provides for a 60-day rescission period after receiving the disclosure document if a franchisor fails to deliver a disclosure document within the required time periods or the disclosure document did not meet all of the s. 5 requirements. Under s. 6(2) a franchisee has two years within which to rescind a franchise agreement if the franchisor failed to provide a disclosure document.
[78] It is uncontroverted that the Franchisee did not rescind the Agreements within 60 days of receiving the Disclosure Document. The earliest possible rescission date is the date of issuance of the statement of claim, which was on March 11, 2015. A formal notice of rescission was provided on June 9, 2015. All of the disclosure documents (even the second round provided in February 2014 in conjunction with the November 2013 Extension Agreement) preceded the earliest possible date of notice of rescission by far more than 60 days.
[79] The Franchisor argues that even if there was a failure of disclosure under s. 6(2) the Franchisee’s notice of rescission was not provided within two years of the execution of the Franchise Agreements on April 16, 2013. This argument is predicated on a position that the statement of claim (that was issued within the two-year period) cannot serve as both a claim for rescission and a notice of rescission. The Franchisor argues that the statement of claim cannot assert a cause of action because one did not exist until a notice of rescission was provided. If the statement of claim is to serve as the notice of rescission then a subsequent originating process ought to have been issued to assert the cause of action after it had crystalized, and now the Franchisee is out of time under the two year limitation period under the Limitations Act, 2002, S.O. 2002, c. 24, Sch. B, and is barred from doing so.
[80] The Franchisor argues that this is the result that must follow from the combined effect of the Court of Appeal’s decisions in 2130489 Ontario Inc. v. Philthy McNasty’s (Enterprises) Inc., 2012 ONCA 381, 350 D.L.R. (4th) 326, at paras. 38-39, and 235392 Ontario Inc. v. MSI, 2020 ONCA 237, 150 O.R. (3d) 203, at para. 14. This strikes me as a very narrow and technical interpretation of these two decisions.
[81] If this argument were to be adopted, the Franchisor argues that even the June 9, 2015 notice of rescission would not save the claim because the Franchisee’s position is that a statement of claim asserting a cause of action for rescission must follow the notice of rescission, and there has been no new originating process asserting a claim for rescission since June 9, 2015. The Franchisee counters that its amendments to the statement of claim after June 9, 2015 could be said to assert a cause of action after the rescission notice, if that is technically required. That may be a way around the Franchisor’s argument, if it is right.
[82] In any event, I do not need to finally determine this point because I have not found there to have been a failure of disclosure. However, I would have been reluctant to dismiss the plaintiffs’ Wishart Act claims based on this limitations argument if they had valid rescission claims under s. 6(2).
Common Law Claims for Misrepresentation and Frustration
Did Yogurtworld make representations to the plaintiffs that were false and that induced them to enter into the Agreements or the Extension Agreement?
a. That the 90-day deadline would not be enforced
[83] The plaintiffs allege in their statement of claim that the Madhanis were told by Mr. Shneer that the 90-day deadline for securing their first store location contained in the MUDA was “…just a general clause and one that was not relied upon by the franchisor so long as bona fide attempts were being made by franchisees to secure suitable locations.” The plaintiffs rely on the case of Velouté Catering Inc v. Bernardo, 2016 ONSC 7281, 135 O.R. (3d) 32, to support their position that it is not open to the franchisor to rely upon the entire agreement clause in the Agreements in defence of their misrepresentation claim. The plaintiffs also rely on the fact that the franchisor did not terminate the Agreements after the initial 90-day period passed without any location having been secured, and later entered into the Extension Agreement, as further evidence of this representation having been made and relied upon by them.
[84] The plaintiffs then assert that the Franchisor should not be permitted to rely upon any deadlines for store openings because of this representation, even though they have never suggested that they were told or understood that they would have an indefinite amount of time in which to find locations suitable to them and to open the stores in their designated territories. Faiz testified that he had no understanding as to what the end date was to be for the extension of the 90-day deadline.
[85] There was, however, an end date specified in the signed Extension Agreement. In that regard, Faiz and David Shneer corresponded by email about whether the Franchisor would enforce the one-year deadline under the Extension Agreement if the plaintiffs signed a lease for a location that required a build-out process that could take longer than a year, in response to which Mr. Shneer did say that the franchisor would not require strict adherence to the one-year deadline under those circumstances (which never arose).
[86] In contrast, there is no email correspondence or other corroboration of the alleged representation by the Franchisor that the 90-day deadline would not be enforced indefinitely, which is the effect of the alleged representation that the plaintiffs claim to rely upon. I am not persuaded on a balance of probabilities that Mr. Shneer made the alleged representation to the plaintiffs about the non-enforcement of the 90-day deadline under the Agreements. In the context of the dealings between the parties, it is counter-intuitive that such an open-ended representation or assurance would be given. in the face of the defendant’s denial of having made it, I require more corroborative evidence than the general assertion of Faiz, whose memory is faded as to even the particular statement alleged to have been made by Mr. Shneer.
[87] That said, the initial 90-day deadline came and went and was not enforced, and eventually it was agreed that the designated territories would be changed and the franchisor would have until September 30, 2014 to identify and secure Menchie’s store locations in their newly assigned territories. That was documented in the Extension Agreement signed by all parties. September 30, 2014 became the new deadline. Even if there had been a representation that the 90-day deadline under the Agreements would not be enforced, there was no detrimental reliance upon it since it would have been superseded by the Extension Agreement.
[88] When that further deadline of September 30, 2014 under the Extension Agreement passed, the Franchisor put the Franchisee on notice that the agreement to mutually terminate the Agreements had been triggered, suggested some alternative paths that were rejected by the plaintiffs and gave them reasonable notice before insisting on its strict legal right to enforce the agreement to terminate that had been stipulated in the Extension Agreement. The February 5, 2015 notice of termination was a formality consistent with the Franchisor’s position that was initially delineated in an email sent on or about October 10, 2014.
[89] The Franchisor behaved in a manner entirely consistent with its obligations. There is a well-established protocol at common law for a party to revert to its strict legal rights under an agreement even when they have not previously been strictly enforced, as detailed in the Velouté Catering case, at para. 27, citing W.J. Alan & Co. Ltd. v. El Nasr Export & Import Co., [1972] 2 Q.B.189, at p. 213. No equities have been raised by the plaintiffs that would justify a departure from this accepted protocol that was adhered to by the Franchisor.
b. About the success of the franchise
[90] The plaintiffs also contend that misrepresentations were made by the “rosy picture” of the Menchie’s franchised stores at the Discovery Day and in statements made during their discussions with Mr. Shneer. These are, at best, imprecise and ambiguous and fall short of an actionable representation about the success of the other franchise locations.
[91] Furthermore, these alleged representations are said to have been outside of the Disclosure Document, and are entirely inconsistent with the very clear statements in the Disclosure Document that no representations are made about the success of the franchises, and inconsistent with the entire agreement clauses in the Agreements that expressly foreclose any reliance on representations of this nature. The plaintiffs have not established that it would be “unconscionable, unfair, unreasonable or otherwise contrary to public policy” to enforce the entire agreement and disclaimer clauses contained in the Agreements: see TRC Enterprises v. Tobmar Newstands Inc., 2010 MBQB 112, 253 Man. R. (2d) 41, at para. 182, adopting and following the Supreme Court of Canada in Hunter Engineering Co. v. Syncrude Canada Ltd., 1989 CanLII 129 (SCC), [1989] 1 S.C.R. 426.
[92] The plaintiffs have not established a specific representation made to them and that they relied upon on a point of substance that was intended to induce them into entering into the Agreements: see Issa v. Jarrah, 2019 ONSC 6744, at para. 17. At best, even on the plaintiffs’ theory, the alleged statements do not amount to representations. They can be characterized as nothing more than puffery or promotion of the franchise system to an audience of interested prospective franchisees who were clearly told that what they could rely upon was contained in the Disclosure Document.
[93] This does not rise to the level of a “trap” for the unwary franchisee who listens and later signs agreements foreclosing reliance on statements that induced them to sign those very agreements, under the extreme circumstances of some of the cases the plaintiffs seek to rely upon (involving disclaimers found to have been unconscionable, hidden entire agreement clauses and disclosure provided after the signing of the agreements) such as Singh v. Trump, 2016 ONCA 747, 408 D.L.R. (4th) 235, at para. 116. The plaintiffs had independent legal advice. They even testified to having visited and observed other franchise locations before they signed their Agreements.
c. About the availability of suitable store locations
[94] Nor have any other of the alleged misrepresentations about the failure or reasons for termination of other franchisees and/or the concerns indicated in the March 24, 2014 email (referred to previously) been established by the plaintiffs. Further, the evidence even alluding to these issues post-dates the signing of the Agreements so it cannot be said to have been an existing undisclosed material fact at the relevant time.
[95] The fact that there have been, over time, terminations of other franchisees, including for their failure to secure a location in their designated territories, and even the subsequent fact that no locations have ever been secured in the plaintiffs’ designated territories, does not establish a sufficient basis for an inference that the plaintiffs were misled, by omission, about the likelihood of finding suitable store locations in their designated territories at the time they signed the Agreements or the Extension Agreement.
[96] The plaintiffs have not established that it was known, or even that it ought to have been known, to the Franchisor that the territories designated to the plaintiffs did not contain any suitable locations for Menchie’s franchises. They have not met their burden of establishing that there were any misrepresentations of material facts.
d. Summary - Misrepresentation
[97] The analysis of this cause of action does not need to go beyond my findings that: (i) the Franchisor did not represent that the 90-day deadline would not be enforced but, in any event, any understanding or reliance on the part of the plaintiffs about that deadline was superseded by the Extension Agreement; (ii) the Franchisor did not induce the Franchisee to enter into the Agreements by painting a “rosy picture” of the success of other franchisees; and (iii) the allegedly misrepresented state of affairs concerning the availability of suitable Menchie’s store locations in the Franchisee’s designated territory has not been established to have existed at the relevant time, prior to the execution of the Agreements or the Extension Agreement.
[98] In the absence of any proven misrepresentation, there is no need to determine whether the plaintiffs relied to their detriment and suffered any damages as a result.
Were the Franchise Agreements and the MUDA frustrated?
[99] Frustration of a contract occurs when an unforeseen event arises and the performance of an obligation under the contract becomes fundamentally different than what was originally contracted for: see Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58, [2001] 2 S.C.R. 943, at para. 54.
[100] The event that is alleged by the plaintiffs to have frustrated their ability to fulfill their obligations under the Agreements and the Extension Agreement was their inability to find a suitable Menchie’s store location in their designated territories. This was not unforeseen or unforeseeable. Rather, it was expressly contemplated and the contracts specified what would happen in such eventuality:
a. Section 2(a) (iii) of the Franchise Agreement required that the Franchisee identify and secure a location within 90 days from the Effective Date (as defined in subparagraph 15.P [April 16, 2013]) of this Agreement.
b. Section 8 of the Franchise Agreement specified that the Initial Franchise Fee (or the Development Fee for more than one store) had to be paid at the time the Franchise Agreements were signed and that fee was fully earned upon receipt, and was non-refundable in whole or in part for any reason.
c. Any breach of an obligation on the part of the Franchisee gave rise to a right of termination on the part of the Franchisor pursuant to s. 13A and B of the Franchise Agreement.
d. These provisions were summarized in the Disclosure Document as follows:
If the Authorized Location is not known on the Effective date, and if 90 days from the Effective Date you have not designated a location that has been approved by us and have not submitted the necessary documentation relating to the location, we may terminate the Franchise Agreement effective immediately and with no opportunity to cure.
e. Section 4(a) of the MUDA further provided that if the Franchisee failed to open a Store according to the dates set forth in the Development Schedule, the Franchisor had the right to immediately terminate that Agreement pursuant to Section 7(b). The Development Schedule required both of the Franchisee’s Stores to be open and operating within 12 months of signing (April 16, 2013).
f. On November 27, 2013 the parties mutually agreed to amend the existing agreements to designate two new territories to the Franchisee and allow the Franchisee one year from September 30, 2013 to open these new locations. The parties confirmed in their communications about this Extension Agreement that there would be a mutual termination should a site not be secured, with all fees paid to be non-refundable and the Franchisee to be released from its obligation to develop the designated markets.
[101] The plaintiffs argue that neither party contemplated that suitable locations would not be secured in the Franchisee’s designated territories and point to the absence of any clause in the Agreements dealing specifically with the unavailability of store locations. There are at least two problems with this argument:
a. First, it has not been demonstrated on the evidentiary record before the court that there were no suitable Menchie’s store locations in the Franchisee’s designated territories. What has been established is that the plaintiffs did not enter into a lease for any store location but that is not a sufficient foundation for the court to infer that there were no suitable locations at all.
b. Second, foreseeability for purposes of frustration of contract does not necessarily directly correspond with what the parties choose to expressly include in their contract. Just because it was not expected by either party that the plaintiff would not secure a “suitable”[^3] location in any of their designated territories, or conversely, that both parties entered into the Agreements with the optimistic view that “suitable” store locations could and would be secured, does not mean that the plaintiffs failure to secure a location was unforeseen.
[102] The case of Dhillon v. PM Management Systems Inc., 2014 ONSC 5407, that the plaintiffs rely upon is distinguishable in a very important respect: in that case, the franchise agreement was for a franchise to be opened at a specific location. That location could not be secured by the franchisor, whose obligation it was to do so. There was no contractual provision that addressed what would happen in that eventuality. In those, very different, circumstances, the franchise agreement was held to have been frustrated.
[103] In contrast, in this case, the location of the Menchie’s store locations to be opened by the Franchisee in the designated territories was not specified and the Franchisee was given the absolute control and authority to identify and secure the location of their choosing.
[104] The Franchisor also argues that the Franchisee cannot rely upon its own failure to fulfill its obligations in support of its claim for frustration, because an event is not frustrating if it is caused by the fault of a party to the contract: see Dhillon, at para. 14. The Franchisor argues that it is not only a distinguishing feature in this case that the Franchisee was the one responsible for securing a location, but its failure to do so was due to its own lack of effort and diligence.
[105] I indicated earlier in these reasons that I do not need to go so far as to make a finding that the plaintiffs did not make reasonable efforts and were not diligent. That is because the nature of the contracts and disclosure in this case was such that there cannot be said to have been an unforeseen event that fundamentally changed the nature of the performance of the plaintiffs obligations where this eventuality was contemplated and its consequences were provided for. Nor does the evidence support a finding that the plaintiffs did make reasonable efforts or that they were diligent in their efforts to find a suitable Menchie’s store location in any of the Franchisee’s four designated territories.
The Duties of Good Faith and Fair Dealing under s. 3 of the Wishart Act
[106] In addition to the disclosure obligations, the Wishart Act incorporates certain other protections in favour of franchisees, including a duty of good faith and fair dealing in s. 3. If breached, damages and other remedies may be available. These are important protections that do not arise in the circumstances of this case.
[107] Section 3(1) of the Wishart Act independently imposes a duty of fair dealing on the franchisor in the performance and enforcement of the franchise agreement. In Trillium Motor World Ltd v. General Motors of Canada Ltd., 2015 ONSC 3824, at para. 154, rev’d in part on other grounds, 2017 ONCA 544, McEwen J. confirmed that this duty is also context dependent. It requires the honest performance and good faith exercise of contractual obligations but does not make the contracting parties fiduciaries of each other.
[108] As has been established already in the previous sections of these reasons, the Franchisor was lenient with the Franchisee and did not exercise its contractual right to terminate the Agreements when the initial 90-day period expired. Both prior to and after the expiry of this 90-day period the Franchisor offered support, suggested locations and was available to assist the plaintiffs in their efforts to secure a suitable location. Mr. Guida testified that the plaintiffs often did not respond to him in a timely manner and did not seek out his assistance or keep him informed about what they were doing. That was their prerogative, but for them to suggest now that they were not supported in their efforts is revisionist history.
[109] Leading up to the confirmation of the Extension Agreement, the Franchisor put the Franchisee on notice in writing on November 19, 2013 that if a site could not be secured by the Franchisee within 30 days, the Franchisor would act upon the development defaults. This was a fair and reasonable approach and allowed for a reasonable cure period (even though not contractually mandated). The option of swapping designated territories and having additional time to secure a location (or mutually terminate) was also offered to the Franchisee. The Franchisee had approached the Franchisor about the latter option of swapping territories and eventually chose that option. This was confirmed on November 27, 2013 under the Extension Agreement. Although the plaintiffs agreed to reimburse the legal fees associated with their requested territory swap, the Franchisor did not press them for recovery of those fees.
[100] The Franchisor in this case acted fairly and in good faith by not acting immediately when the initial 90-day deadline for securing a location had passed and by entering into the Extension Agreement. Leading up to the September 30, 2014 deadline under the Extension Agreement, the plaintiffs were non-communicative. They ignored the July 8, 2014 email sent: “Just a reminder, according to our agreement you have until September 30[t]h 2014 to secure a site.” The plaintiffs waited until September 8, 2014 to advise the Franchisor that they would not be in a position to meet that deadline. The Franchisor immediately advised the plaintiffs the following day on September 9, 2014 that: “Unfortunately we cannot extend our agreement beyond Sept 30th 2014 and will be proceeding with the mutual termination at the end of this month if a site can't be secured.”
[111] Even after the extended timeframe for securing and developing a Menchie’s store location expired under the Extension Agreement, the Franchisor gave the Franchisee more time and offered some other alternatives before acting on its right to terminate the Agreements that had been agreed to by the plaintiffs as part of the Extension Agreement. The options were categorically rejected on October 27, 2014 and the Franchisor still waited until February 5, 2015 to formally terminate the Agreements.
[112] The Franchisee complains about an October 14, 2014 email from Mr. Guida confirming their default and threatening legal action for damages over and above the retention of the Development Fee as evidence of bad faith. The Franchisor was entitled to revert to its contractual right to terminate the Agreements and retain the Development Fee and it provided reasonable notice of its intention to do so. Nothing in that course of dealings amounts to a breach of the s. 3 Wishart Act duty of fair dealing or a failure to act in good faith or in accordance with reasonable commercial standards. A threat of legal action in the context of the plaintiffs’ repeated defaults under the Agreements and the Extension Agreement does not amount to bad faith or unfair dealing.
[113] The s. 3 duty is not freestanding. It is grounded in the contractual rights and obligations of the parties and does not take away the Franchisor’s ability to adhere to and rely upon the terms of the Agreements to protect its own commercial interests: see 2130679 Ontario Inc. v. The Cora Franchise Group Inc., 2013 ONSC 3099, at para. 21. The plaintiffs have not established that the Franchisor breached its duties under s. 3 of the Wishart Act in the circumstances of this case and the history of dealings between these parties.
Remedies and Damages Claimed
[114] The plaintiffs seek rescission of the Agreements and the return of the Development Fee, or damages in an amount equivalent to the Development Fee (plus applicable taxes) and aggravated, punitive and/or exemplary damages of $50,000.00.
Are the plaintiffs entitled to the return of the Development Fee ($75,000.00 plus taxes) paid pursuant to the MUDA?
[115] The plaintiffs have not established that they are entitled to rescission of the Agreements under s. 6 of the Wishart Act (if they had, the Development Fee and applicable taxes paid by them would have been refundable for reasons indicated in the following section). Nor have they established a breach by the Franchisor of s. 3 of the Wishart Act as a foundation for the $50,000.00 in damages claimed for that breach, or any cause of action at common law for misrepresentation or frustration of contract for the damages claimed, equivalent to the Development Fee plus applicable taxes. Accordingly, they are not entitled to the return of the Development Fee and applicable taxes paid or the equivalent amount in general damages they have claimed.
[116] This is not a case in which the plaintiffs’ position is deserving of sympathy or where the equities favour their position. The delineation of responsibilities of the parties was clearly set out in the Franchise Agreements and the Extension Agreement. It was clearly set out, and acknowledged to have been understood by the plaintiffs, that if they failed to secure Menchie’s store locations in their designated territories within the agreed upon (and extended) timeframes, they would not be entitled to a refund of the non-refundable Development Fee paid under the MUDA.
The Prohibition Against Contracting out of Liability under s. 11 of the Wishart Act
[117] Section 11 of the Wishart Act provides that a franchisee’s rights cannot be waived: “Any purported waiver or release by a franchisee of a right given under this Act or of an obligation or requirement imposed on a franchisor or franchisor's associate by or under this Act is void.”
[118] Although they admitted that they understood when they entered into the Agreements that the terms of the Agreements provided that the Development Fee was non-refundable, the plaintiffs argue that the non-refundable nature of the Development Fee violates s. 11 of the Wishart Act and is void. There is no right under the Wishart Act to have refundable fees generally so the non-refundable nature of the Development Fee is not a violation of the Wishart Act per se.
[119] However, if the plaintiffs had a right of rescission under s. 6 of the Wishart Act, the non-refundable nature of the Development Fee would not have been enforceable, and it would have been ordered to be repaid as part of the statutory rights that arise upon a valid exercise of a right of rescission. The Franchisor conceded this point during oral argument and agreed that if the court found that the Franchisee was entitled to rescission of the Agreements under s. 6, s. 11 would apply to require the return of the Development Fee notwithstanding that it was stated to be non-refundable. Given my findings that the plaintiffs have not established a right of rescission, this does not arise.
Are the plaintiffs entitled to any punitive, aggravated or exemplary damages?
[120] The failure of the plaintiffs’ statutory and common law claims renders their claim for punitive damages moot. In any event, none of the required elements of an award of punitive damages are present in this case. The conduct of the Franchisor has not been shown to have been malicious, arbitrary or highly reprehensible nor has a need been demonstrated for retribution, deterrence or denunciation: see McCabe v. Roman Catholic Episcopal Corporation, 2019 ONCA 213, 146 O.R. (3d) 607, at paras. 42-48.
[121] Yogurtworld dealt fairly with the plaintiffs, despite the plaintiffs’ failure to meet their contractual obligations, by giving them multiple opportunities to remedy their defaults (failure to find suitable Menchie’s store locations in either of their exclusive territories for over 18 months) and by giving them fair notice before reverting to its contractual rights and remedies. This is not a situation where the Franchisor needs to be punished: Whiten v. Pilot Insurance Co., 2002 SCC 18, [2002] 1 S.C.R. 595, at paras. 36, 94.
Final Disposition and Costs
[122] The plaintiffs’ action is dismissed. The defendant is not required to return the Development Fee plus applicable taxes paid by the Franchisee pursuant to the Agreements, or pay any other amount of damages.
[123] During oral argument, the parties agreed to exchange bills of costs when they completed their written closing submissions and I assume that exchange has taken place. Now that the outcome is known, the parties are encouraged to try to reach an agreement on costs. If an agreement is reached on costs, the parties are asked to advise the court of such by August 6, 2021, by email to my judicial assistant at: linda.bunoza@ontario.ca
[124] If the parties are unable to reach an agreement on costs, they requested the opportunity to make written cost submissions. They may do so as follows:
a. The successful defendant shall deliver a written cost submission of no more than five (5) pages double spaced, together with any supporting documents and their Bill of Costs, and file it with the court by August 13, 2021.
b. The plaintiffs shall deliver a written responding cost submission of no more than seven and a half (7.5) pages double spaced, together with any supporting documents and their Bill of Costs, and file it with the court by August 20, 2021;
c. The defendant may deliver a written reply cost submission of no more than two and a half (2.5) pages double spaced and file it with the court by August 27, 2021; and
d. All such submissions shall also be sent to my judicial assistant by email at: linda.bunoza@ontario.ca
[125] The parties may agree to extend the deadlines for their delivery of costs submissions to accommodate summer schedules. If they do, they are to notify my judicial assistant of the new deadlines agreed to. If no cost submissions have been received by August 27, 2021, or such other extended deadline as the parties may agree to and advise the court of, the costs of this action will be deemed to have been settled.
[126] These reasons for judgment shall have the full and immediate effect of a court order without the necessity of formal issuance and entry of an order. Should either party wish to take out an order, they may do so in the normal course.
Kimmel J.
Released: July 23, 2021
COURT FILE NO.: CV-15-523706
DATE: 20210723
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
2364562 ONTARIO LTD. FAREEN MADHANI and FAIZ MADHANI
Plaintiffs
– and –
YOGURTWORLD ENTERPRISES INC. o/a MENCHIE'S FROZEN YOGURT
Defendant
REASONS FOR decision
Kimmel J.
Released: July 23, 2021
[^1]: In 2611707 Ontario Inc. v. Freshly Squeezed Franchise Juice Corporation, 2021 ONSC 2323, Vella J. provided a summary of these deficiencies considered “fatal flaws” that justify a section 6(2) rescission, including the following: “(b) Head leases: to be included in the Disclosure Document but only if it is in existence at the time of disclosure, and if not then the franchisee is to be made aware of that fact, and be given some ability to cancel the lease without penalty.” With leave of the court, the parties made brief supplemental written submissions after closing argument about the recognized “fatal flaws” justifying rescission under s. 6(2) that were referenced in this decision, at para. 43, citing Sugar, at s. 4.7.2, pp. 129-130. Counsel for the plaintiff asserts that passage was incorrectly cited and that the ability to cancel the lease without penalty should have read: “the ability to cancel the lease or agreement without penalty.” The point that plaintiffs’ counsel makes is that the “opt-out” safeguard discussed in Freshly Squeezed and Raibex should apply to both the lease and the franchise agreement, as applicable. I read Vella J.’s decision to be consistent with this and proceeds on the basis that the opt-out should be available under the franchise agreement (not just the lease).
[^2]: The plaintiffs pleaded complaints are about the insufficient disclosure contained in the Disclosure Document, primarily in relation to the costs tied to the as-of-yet undetermined location of their stores. A different and seemingly contradictory argument was raised for the first time in the plaintiffs’ written closing submissions, that the Disclosure Document was somehow inapplicable because it was contemplated by the Franchise Agreement and the MUDA that there would be a new disclosure document provided and new, potentially different, franchise agreements signed once the specific Store locations within their designated territories had been identified. This argument is convoluted and not properly raised on the pleadings or the facts of this case. The parties proceeded on the basis of the Franchise Agreements signed when the exclusive territories were assigned to the Franchisee in 2013, each of which, in turn, were in relation to a Store to be opened in the assigned exclusive territory, with the precise Authorized Location to be determined. The Disclosure Document was connected to the signing of Franchise Agreements for designated territories. Consistent with this, there was a new Disclosure Document provided on February 28, 2014 (receipt of which was acknowledged on March 3, 2014 by the plaintiffs) when their designated territories were changed in conjunction with the Extension Agreement. No new complaints or different disclosure deficiencies have been identified by the plaintiffs in respect of the 2014 Disclosure Document.
This new complaint about the theoretical uncertainty of new disclosure and new franchise agreements being signed when specific store locations were identified is an apparent after-thought. Ironically, as part of their closing submissions, the plaintiffs argued that this is exactly what should have been done, according to the authors of a blog that was published in the Winter 2013 edition of The Franchise Voice written by John Yiorkaris and Christine Jackson.
[^3]: The plaintiffs contend that a “suitable” location means a profitable location. Profitability is not something that can be known or ascertained at the time a location is secured. It can be assessed, modelled and predicted but there is little or no evidence of the plaintiffs having done any of that for prospective locations in their designated territories. The plaintiff contends that Mr. Shneer admitted on discovery that “suitability” and “profitability” are the same. Read in context, his evidence was that profitability was but one factor to consider in assessing suitability.