Court File and Parties
COURT FILE NO.: CV-15-533989 DATE: 20230210 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
2355305 Ontario Inc., doing business as Jayasena Management Corp., carrying on business as Wild Wing, Kaushalya Jayasena and Chathura Jayasena Plaintiffs
– and –
Savannah Wells Holdings Inc., 2239214 Ontario Inc., 1516081 Ontario Inc., Rick Smiciklas, Dasminder Chandiok and Century 21 Leading Edge Realty Inc. Defendants
COUNSEL: Jonathan Mesiano-Crookston, for the Plaintiffs Doug LaFramboise, for the Defendants Savannah Wells Holdings Inc., 2239214 Ontario Inc., 1516081 Ontario Inc, and Rick Smiciklas
HEARD: January 10, 11, 12, 13, 16, 17, 18 and 19, 2023
J.T. Akbarali J.:
Reasons for Judgment
Overview
[1] In this action, the plaintiffs invoke the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 to: (i) seek a declaration that they rescinded agreements related to their franchise, and (ii) seek damages from the franchisor and other defendants, which they allege to be the franchisor’s associates.
Brief Background
[2] The plaintiff franchisees bought an existing Wild Wing franchise from its original franchisee (the “Vendor”). There is no question that the franchisor approved of the plaintiffs as franchisees. After closing the purchase, the plaintiffs ran the business for 18 months unsuccessfully, and incurred losses. They eventually served a notice of recission on the franchisor and shortly thereafter, walked away from the restaurant.
[3] The plaintiffs bring this action seeking, pursuant to the Wishart Act, (i) a declaration that they rescinded agreements related to the franchise, (ii) declarations that certain defendants are the “franchisor’s associates” as that term is defined in the Act, and (iii) recission damages.
[4] The parties disagree about whether they entered into a franchise agreement. Whether they did so is relevant to the question of whether the grant of the franchise was effected by or through the franchisor, or whether the franchisor merely passively consented to the transfer of the franchise. If the grant of the franchise was effected by or through the franchisor, it had an obligation under the Wishart Act to deliver a disclosure document to the plaintiffs. However, if the grant of the franchise was not effected by or through the franchisor, the Wishart Act provides it with an exemption from the requirement to deliver a disclosure document. If the franchisor had an obligation to deliver a disclosure document, and did not do so, the plaintiffs were entitled to rescind the agreements related to the franchise and are entitled to damages.
[5] The defendant 2239214 Ontario Inc. (“223”) is the franchisor. The defendants Savannah Wells Holdings Inc. (“SWH”), 1516081 Ontario Inc. (“151”), and Rick Smiciklas are alleged to be franchisor’s associates. Collectively, I refer to them as the franchise defendants.
[6] The franchise defendants argue that:
a. the grant of the franchise was not effected by or through the franchisor, and as such it had no obligation to deliver a disclosure document to the plaintiffs, because:
i. the franchise agreement is a forgery, and a fake;
ii. even if the franchise agreement was signed, signing it is insufficient to raise the level of the franchisor’s involvement beyond a passive consent to the transfer of the franchise; the obligation to deliver a disclosure document is not triggered;
b. in the alternative, if the grant of the franchise was effected by or through the franchisor, the plaintiffs had sufficient disclosure such that the franchisor did not breach its obligation to disclose; and
c. in any event, the damages claimed by the plaintiffs are excessive.
[7] The defendants Dasminder Chandiok and Century 21 Leading Edge Realty Inc. are no longer parties to the action.
Issues
[8] The issues to be determined in this action are:
a. Was the franchise agreement signed?
b. Was the grant of the franchise effected by or through the franchisor?
c. If it was, such that the plaintiffs were entitled to a disclosure document, was the disclosure they received sufficient to discharge the franchisor’s obligation to disclose?
d. If the plaintiffs were entitled to, and did not receive, a disclosure document, such that they were entitled to rescind the agreements related to the franchise, what are their damages?
e. Are the franchise defendants, other than the franchisor, franchisor’s associates under the Wishart Act?
Legal Principles
[9] Before turning to the issues, I set out legal and statutory principles relevant to the interpretation of the Wishart Act.
[10] In 2189205 Ontario Inc. v. Springdale Pizza Depot Ltd., 2011 ONCA 467, 336 D.L.R. (4th) 234, at para. 23, leave to appeal refused [2014] S.C.C.A. No. 35648, citing Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673, 268 O.A.C. 279, at para. 26, the Court of Appeal for Ontario held that the Wishart Act is “sui generis remedial legislation. It deserves a broad and generous interpretation. The purpose of the statute is clear: it is intended to redress the imbalance of power as between franchisor and franchisee; it is also intended to provide a remedy for abuses stemming from this imbalance.”
[11] The court noted that the disclosure required under the Wishart Act is intended “to provide a prospective and often inexperienced franchisee with sufficient and readily accessible information to make informed decisions”: Springdale Pizza, at para. 24. The Wishart Act sets standards for adequate disclosure and creates “significant penalties for failing to meet those standards”: Springdale Pizza, at para. 24, citing 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd. (2005), 256 D.L.R. (4th) 451 (Ont. C.A.), at para. 12.
[12] Section 5(1) of the Act sets out a franchisor’s obligation to disclose:
A franchisor shall provide a prospective franchisee with a disclosure document and the prospective franchisee shall receive the disclosure document not less than 14 days before the earlier of,
(a) the signing by the prospective franchisee of the franchise agreement or any other agreement relating to the franchise, other than an agreement described in subsection (1.1)
[13] The Wishart Act describes what it means by a “disclosure document” in s. 5(3), which provides that a disclosure document “must be one document, delivered as required under subsections 5 and (2) as one document at one time.” Section 5(4) provides that the disclosure document shall contain the following:
(a) all material facts, including material facts as prescribed;
(b) financial statements as prescribed;
(c) copies of all proposed franchise agreements and other agreements relating to the franchise to be signed by the prospective franchisee;
(d) statements as prescribed for the purposes of assisting the prospective franchisee in making informed investment decisions; and
(e) other information and copies of documents as prescribed.
[14] The prescribed information is set out in General, O. Reg. 581/00, which I do not reproduce here. It suffices to say that the regulation is precise, detailed and sets out a number of items to be disclosed.
[15] Section 5(7) provides for exemptions to the disclosure obligation in s. 5(1). Of relevance here is s. 5(7)(a)(iv), which exempts “the grant of a franchise by a franchisee if … the grant of the franchise is not effected by or through the franchisor”. It thus applies to a resale of a franchise if the grant of the franchise is not effected by or through the franchisor.
[16] Under s. 5(8), a grant is not effected by or through a franchisor merely because the franchisor has a right, exercisable on reasonable grounds, to approve or disapprove the grant, or because a transfer fee must be paid. Something more is required.
[17] Under s. 12 of the Wishart Act, the onus is on the franchisor to prove that an exemption applies.
[18] The right of a franchisee to rescind, relevant to this case, is set out in s. 6(2) of the Act. It provides that “[a] franchisee may rescind the franchise agreement, without penalty or obligation, no later than two years after entering into the franchise agreement if the franchisor never provided the disclosure document.”
[19] Section 6(6) sets out the franchisor’s, or franchisor’s associate’s, obligations on rescission, which are to:
(a) refund to the franchisee any money received from or on behalf of the franchisee, other than money for inventory, supplies or equipment;
(b) purchase from the franchisee any inventory that the franchisee had purchased pursuant to the franchise agreement and remaining at the effective date of rescission, at a price equal to the purchase price paid by the franchisee;
(c) purchase from the franchisee any supplies and equipment that the franchisee had purchased pursuant to the franchise agreement, at a price equal to the purchase price paid by the franchisee; and
(d) compensate the franchisee for any losses that the franchisee incurred in acquiring, setting up and operating the franchise, less the amounts set out in clauses (a) to (c).
[20] “[F]ranchisor’s associate” is defined under s. 1(1) of the Wishart Act, to mean a person:
(a) who, directly or indirectly,
(i) controls or is controlled by the franchisor, or
(ii) is controlled by another person who also controls, directly or indirectly, the franchisor, and
(b) who,
(i) is directly involved in the grant of the franchise,
(A) by being involved in reviewing or approving the grant of the franchise, or
(B) by making representations to the prospective franchisee on behalf of the franchisor for the purpose of granting the franchise, marketing the franchise or otherwise offering to grant the franchise, or
(ii) exercises significant operational control over the franchisee and to whom the franchisee has a continuing financial obligation in respect of the franchise
[21] Against this backdrop, I turn to consider the issues raised in this case.
Was the franchise agreement signed, or is it a fake?
[22] The record includes a franchise agreement, produced by the plaintiffs, that bears only the signature of Mr. Smiciklas on behalf of the franchisor. The plaintiffs allege they entered into this agreement with the franchisor on June 7, 2013, although it is dated June 10, 2013. Mr. Smiciklas denies ever signing the franchise agreement.
[23] To make a factual finding about whether the franchise agreement is legitimate, I begin with the facts leading up to June 7, 2013, most of which are not in contention, and which provide context necessary to evaluating the parties’ evidence about the franchise agreement.
[24] The individual plaintiffs, Kaushalya and Chathura Jayasena, were seeking a franchise opportunity. After visiting a Wild Wing location around November 2012 with a friend, they grew interested in exploring the possibility of becoming a Wild Wing franchisee. Mrs. Jayasena telephoned Wild Wing’s head office seeking information and was told someone would call her back. Shortly thereafter, she received a telephone call from Mr. Chandiok.
[25] Mr. Chandiok met with the Jayasenas and encouraged them to consider purchasing a Wild Wing franchise from a franchisee rather than opening a new location. By doing so, he said they would be able to earn money right away, because they would be taking over an operating business. The Jayasenas lived in Brampton. Mr. Chandiok identified a Wild Wing franchise that was for sale near their home. Together, they went to visit it.
[26] While at the location, Mr. Chandiok took the Jayasenas on a tour, including of areas that were not open to the public, such as behind the bar and into the kitchen. He printed out sales summaries from the restaurant’s computer system. He had a binder full of information about the Wild Wing business, including upcoming promotions that Wild Wing franchises would be engaging in.
[27] Mr. Chandiok took the Jayasenas through a calculation of the income he said they could expect to earn from the business using the past six months of sales summaries from the location. He also pointed out ways in which the current franchisee was not maximizing the earning potential of the location, including by closing it too early, and not repairing the televisions that were an important draw for customers on the nights of big sporting events.
[28] At some point around December 1, 2012, the Jayasenas signed a Buyer Representation Agreement with Mr. Chandiok, in Mr. Chandiok’s capacity as a broker with the real estate agency Royal LePage. Neither of the Jayasenas recalled signing the agreement, and neither had a copy to produce in their productions. They did not dispute having signed the agreement. However, they did not appreciate at the time they signed it that they had hired Mr. Chandiok. They understood Mr. Chandiok to be associated with Wild Wing, and to be facilitating their purchase of a Wild Wing franchise. They did not understand how he would be paid.
[29] The Jayasenas decided to put in an offer to purchase the Brampton franchise. They again met with Mr. Chandiok to sign the offer, dated December 17, 2012. At the time, they also signed a Confirmation of Co-operation and Representation indicating that Mr. Chandiok and Royal LePage were the cooperating broker who represented the interests of the buyer in the transaction. As with the Buyer Representation Agreement, they did not have a copy of the Confirmation of Co-operation and Representation in their productions. At the time they signed the offer and Confirmation of Co-operation and Representation, they did not pay attention to what they were signing. It is apparent that throughout the transaction, the Jayasenas did not read many of the documents they received, did not seek appropriate advice from experts, and did not do their due diligence. Nor did they understand at the time that Mr. Chandiok had a role as their representative.
[30] At the same time as he was representing the Jayasenas, Mr. Chandiok also had a relationship with Wild Wing. He had access to their systems and knowledge about how to operate them. He was privy to information about Wild Wing’s upcoming promotions and had information that could only have come from Wild Wing. He was the person who returned Mrs. Jayasena’s call to Wild Wing when she was looking for information about purchasing a franchise. He knew the people at Wild Wing’s head office and was able to obtain information from them for the Jayasenas, both before they decided to purchase the franchise and during the period before the transaction closed. The record includes a number of cheques payable to Mr. Chandiok from Wild Wing, which Mr. Smiciklas indicated were for consulting fees.
[31] On December 19, 2012, the Jayasenas signed an agreement of purchase and sale (“APS”) with the Vendor to purchase the franchise for $360,000. Originally, the deal was expected to close by the end of January 2013, but it was delayed a number of times. The APS was also amended a number of times, mostly to extend the closing date, but also to address other matters. Of note, the APS was amended to indicate that the Vendor would pay the $25,000 transfer fee to the franchisor.
[32] Mr. Chandiok referred the Jayasenas to a consultant, Pramod Goyal, to assist them in obtaining financing. Mr. Goyal worked with Mr. Chandiok to obtain many of the items he required for the financing application, and the Jayasenas provided the items they were required to provide. Some of these items were false. For example, both sets of the Jayasenas’ parents took out loans to put cash in the Jayasenas’ account to establish that the Jayasenas had liquid assets. Both sets of parents provided a letter indicating that these sums deposited were gifts. Yet they were not; the Jayasenas were obliged to repay their parents. The Jayasenas did not think much about pretending the funds were theirs, unencumbered, although they were not; they testified that they were assured by Mr. Goyal and Mr. Chandiok that this was how things were done in business. In the end, the plaintiffs were not able to obtain financing for the purchase, and as a result, borrowed funds from their parents and remortgaged their house to raise the funds to close the purchase.
[33] Among other things that had to happen for closing was the transfer of the lease for the premises from the Vendor to 2355305 Ontario Inc., doing business as Jayasena Management Corp. (“Jayasena Corp.”). Mr. Chandiok indicated that he would obtain the necessary documentation required by the lessor from the franchisor. A letter dated January 10, 2012 (although the parties agree the date is incorrect; it should be January 10, 2013) signed by Mr. Smiciklas on behalf of the franchisor advises that the Jayasenas were the “approved franchisees of S.W. Hospitality Inc. O/A Wild Wing Restaurants [“S.W. Hospitality”] and in the process of purchasing the store Wanless Drive, Brampton”.
[34] Mr. Smiciklas’s evidence about the January 10, 2013 letter was confusing. While indicating that he consented to the “transfer” of the franchise to the plaintiffs, and while agreeing it was his signature on the letter, he did not recall signing it, and denied providing consent to the transfer of the franchise in a document. He then agreed that the letter did indeed document his consent, and that he routinely provided consent to transfers of franchises through similar letters.
[35] Although Mr. Smiciklas also gave evidence that the plaintiffs never paid the transfer fee and, as such, were “unauthorized franchisees”, the position taken in the litigation by the franchise defendants is that the letter evidences the franchisor’s consent to the transfer of the franchise, and it is the only document by which the franchisor’s consent was granted. Whatever the franchisee’s status after closing, it is apparent that it paid royalties to Wild Wing Restaurants for at least much of the time it ran the franchise.
[36] The transaction was eventually scheduled to close in June 2013. On May 27, 2013, Mr. Chandiok emailed Mrs. Jayasena about a couple of matters relating to closing, including a necessary visit to the Wild Wing head office. He wrote: “I also want to set a time to take you to the Head Office for your Franchise Agreement. Let me know what day works for you. Any day between 10 and 12.”
[37] The parties agree that on June 7, 2013, the Jayasenas went to the Wild Wing head office. Recollections about what happened that day vary:
a. Mrs. Jayasena testified that she and her husband went up a narrow staircase at the head office and were led into a room where a Wild Wing employee, Andrea, had her feet up on her desk. Mr. Smiciklas was present, and asked about the Jayasenas’ ethnicity, wondering if they were Guyanese, and stating that he had dated a Guyanese woman, a conversation which made Mrs. Jayasena uncomfortable. They gathered around a low coffee table with two identical bundles of documents on the table. The Jayasenas sat on a sofa, while Mr. Chandiok and Mr. Smiciklas sat across from them in chairs. Mr. Smiciklas went through one bundle and signed and initialed as he needed to, and then the Jayasenas did the same. This took some time as many signatures and initials were required. Mrs. Jayasena was in the late stages of pregnancy at the time and was uncomfortable in the bent-over position required to sign the documents on the coffee table. Mr. Smiciklas signed the second copy in front of them, and when Mrs. Jayasena asked if they had to sign that copy too, Mr. Smiciklas told her it was their copy for their records, and they could do as they wished. They did not sign that copy. Shortly after that, they left.
b. In contrast, on Mrs. Jayasena’s discovery, she testified that she and Mr. Jayasena signed the franchise agreement with Mr. Chandiok, and someone named Ron. Everyone agrees “Ron” is a reference to Rob Stewart, who was taking over the leadership of the Wild Wing franchise organization from Mr. Smiciklas, as Mr. Smiciklas was embarking on a new career as a filmmaker. On discovery, Mrs. Jayasena indicated that they met Mr. Smiciklas when they attended at head office, but only after they signed the franchise agreement with “Ron”, and on the first floor of head office, not the second floor where they had signed the documents.
c. Mr. Jayasena testified that, when they went to head office, they went up a narrow set of stairs and were led to a sofa by a low coffee table. He could not recall if there were two or three chairs across from them. He testified that Mr. Chandiok was there, as was “Ron” and Mr. Smiciklas. He was confused as to whether Mr. Smiciklas and Mr. Stewart were present at the same time or whether at some point one took over from the other. He testified that by the time they finished signing the franchise agreement, which was the only document they signed, Mr. Smiciklas had gone to his office on the main floor. “Ron” then realized Mr. Smiciklas had missed signing or initialing something, so they returned to the main floor for Mr. Smiciklas to sign in the spot he had missed. Mr. Smiciklas gave Mr. Jayasena some advice on how to hire staff, and then the Jayasenas left. Mr. Jayasena testified that Mrs. Jayasena was bothered by Mr. Smiciklas’ comment about dating a Guyanese woman.
d. Mr. Smicklas testified that he did not sign the franchise agreement. He stated that he was selling the business and had put Mr. Stewart in charge. He was in the process of moving into his new career as a filmmaker. He turned 50 years old on June 9, 2013, and on June 8, 2013 he left for Calgary, Alberta to meet representatives of Bell Media and for a 50th birthday dinner in Calgary. He was in Calgary on the date the agreement states it was signed – June 10, 2013. Mr. Smiciklas also testified that it was his practice to initial each page of an agreement and noted that the franchise agreement produced in this litigation is not initialed. Mr. Smiciklas alternately suggested that the agreement was a forgery produced by the Jayasenas, or by Mr. Chandiok, and alternately expressed confidence in Mr. Chandiok’s trustworthiness, and suggested that the Jayasenas were victims of their counsel who conspired with their expert to try to get money out of the franchise defendants. Mr. Smiciklas also testified that Mr. Stewart’s partner is Guyanese, but he himself has never dated a Guyanese woman.
e. Mr. Smiciklas’s counsel put it to the Jayasenas that they had altered a copy of the franchise agreement between the Vendor and the franchisor that had been provided to the Jayasenas by the Vendor during the transaction to make it look like the plaintiffs had a franchise agreement with the franchisor. The Jayasenas denied having done so.
[38] No one called Mr. Chandiok, Mr. Stewart, or Andrea to give evidence. I understand Mr. Chandiok settled this litigation with the plaintiffs, but I know of no reason why that fact would prevent him from giving evidence if summonsed to do so. The only evidence I have about what transpired around the signing of the franchise agreement, if it was signed, is from the parties.
[39] On the record before me, I find on a balance of probabilities that the franchise agreement was signed and is a legitimate document. I reach this conclusion for the following reasons:
a. The only objective, concurrent, documentary evidence before me about the franchise agreement and the meeting on June 7, 2013, is the May 27, 2013, email from Mr. Chandiok indicating that he had to bring the Jayasenas to the Wild Wing head office “for [their] franchise agreement”. This is a clear indication that a franchise agreement had to be signed at the head office. I place considerable weight on this email.
b. While neither party called the other potential witnesses, I note that, apart from Mr. Chandiok who had relationships with both parties, the other witnesses were Wild Wing employees and presumably accessible to the defendants, who did not lead their evidence. I do not go so far as to draw an adverse inference about the failure to call these witnesses; rather the absence of these witnesses is only one factor I consider in my overall assessment of the evidence.
c. No one called the Vendor to give evidence as to whether it provided a copy of its franchise agreement to the plaintiffs. The plaintiffs denied receiving it. There is no evidence that the plaintiffs received it, or would have received it, from the Vendor, or from anyone other than the franchisor.
d. Mr. Smiciklas agreed that the form of the agreement in evidence is the standard form that Wild Wing Restaurants used at the relevant time.
e. Mr. Smiciklas gave evidence that the franchise agreement was the only agreement Wild Wing Restaurants signed with its franchisees, which is consistent with the fact that the franchise agreement is the only agreement in the plaintiffs’ possession.
f. If the plaintiffs were going to forge an agreement, it defies logic that they would forge Mr. Smiciklas’s signature and yet not sign it themselves.
g. If the agreement was forged using the Vendor’s franchise agreement (and assuming that the Vendor’s franchise agreement was the same version as the agreement in evidence), given Mr. Smiciklas’s evidence that he always initialed every page, the alleged forgery should also bear his initials, but it does not. Moreover, he did not produce any other agreements to which the franchisor was a party that would support his evidence about his practice to initial each page of a contract. Because any franchise agreement the plaintiffs could have obtained must have been legitimately signed at some point, with some franchisee (there being no evidence or suggestion that the plaintiffs could have obtained a blank franchise agreement), I conclude that Mr. Smiciklas’s practice of initialing each page of a contract he signs is inconsistent.
h. While it was put to the plaintiffs on cross-examination that they did not have an original copy of the franchise agreement, there is no indication that a request to inspect documents was made under rr. 30.02(2) and 30.04 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. To the contrary, counsel for the plaintiffs advised me that he had indicated his intention to rely on copies in the litigation without receiving any objection to doing so.
i. Mr. Jayasena was not present for Mrs. Jayasena’s evidence. However, I do not find that his absence from her examination enhances the credibility of his answers because at least one of Mr. Jayasena’s answers on examination in chief (relating to the presence of “Ron” at the time the franchise agreement was signed) led me to conclude that the Jayasenas had discussed Mrs. Jayasena’s evidence at trial, at least on that issue. In the course of a single answer, Mr. Jayasena said he did not recall the name of the other man (besides Mr. Smiciklas and Mr. Chandiok) who was present at the Wild Wing head office on June 7, 2013, but in the same breath mentioned “Ron” by that name. As a party to the litigation, he would have been entitled to be present for Mrs. Jayasena’s examination; I do not raise the discussion I infer took place between the plaintiffs as something improper. Rather, to the extent the plaintiffs urge me to find Mr. Jayasena credible because he did not hear Mrs. Jayasena’s testimony, I decline to do so; instead, I assess his credibility as if he were present for Mrs. Jayasena’s evidence.
j. The evidence supports the conclusion that the Jayasenas were prepared to make untrue representations to the bank about the alleged gifts from their parents. There is also evidence that they were prepared to make untrue representations with respect to Mrs. Jayasena’s work experience at Wild Wing in a letter going to either the Liquor Control Board or their landlord. They explained their willingness to do so by saying that they were encouraged by Mr. Chandiok and Mr. Goyal and were told that such untruths were typical in business. They were inexperienced businesspeople, but I do not think they were so naïve that they did not know that it was not right to misrepresent their assets or their work experience. I have thus considered the possibility that they may be willing to misrepresent their evidence at trial to serve their own interests.
k. However, the evidence given by the plaintiffs is consistent, but not identical, on key matters. Similarly, it is consistent, but not identical, to the evidence they gave about key matters on discovery. In my view, these inconsistencies reflect normal lapses and failings of memory of events that occurred about ten years ago, and overall they lend an air of credibility to their evidence.
l. At the same time, I have some difficulty with Mr. Smiciklas’s evidence. Mr. Smiciklas was an animated, and, at times, combative witness. His evidence was inconsistent, sometimes non-responsive, and scattered. His theory about the forged document shifted during his evidence, and it is unclear to me who he thinks perpetrated the alleged fraud. Moreover, his propensity to expand the fraud allegations to include plaintiffs’ counsel and the plaintiffs’ expert is troubling. My biggest concern is with the reliability of Mr. Smiciklas’s evidence rather than its credibility.
m. With respect to Mr. Smiciklas’s evidence about his practice of initialing every page of a contract, I conclude that he likely initialed every page on the first signed franchise agreement with the plaintiffs; that conclusion is consistent with my finding that Mr. Smiciklas sometimes initialed every page of a contract he signed, and consistent with Mrs. Jayasena’s evidence about having to sign and initial the document multiple times. For whatever reason, Mr. Smiciklas did not initial the Jayasenas’ copy. I accept Mrs. Jayasena’s evidence that there were multiple places to sign or initial on the first copy of the document. Given the fact that the franchise agreement the plaintiffs produced did not contain multiple signatures and initials, it would not serve Mrs. Jayasena to make up that evidence.
n. In the end, I find that the Jayasenas’ version of events is more credible because it is consistent with the email from Mr. Chandiok, indicating they had to attend at the head office for their franchise agreement, and because the allegation of forgery does not make sense in view of the evidence that I have described above, including the fact that the plaintiffs’ signatures are missing on the alleged forgery. Moreover, I find significant problems with the defence theory of forgery, and I reject it.
[40] As a result, I find that the franchise agreement is legitimate and was signed by Mr. Smiciklas. The first copy, not produced in this litigation, was signed and initialed by all parties to the litigation. I note that it is most likely that Mr. Jayasena signed the franchise agreement as a guarantor.
Was the grant of the franchise effected by or through the franchisor?
[41] Having concluded that the franchise agreement was signed, I must consider whether the grant of the franchise was effected by or through the franchisor.
[42] As the Court of Appeal held in Springdale Pizza, at para. 31, the provisions of the Wishart Act limit the role that a franchisor may play in the grant of a franchise from a franchisee to a franchisee (that is, on a resale of a franchise). Under s. 5(8) of the Wishart Act, a grant is not effected by or through a franchisor merely because the franchisor has a right, exercisable on reasonable grounds, to approve or disprove the grant, or because the franchisor may charge a reasonable fee for its approval. However, in view of the purpose and context of the Wishart Act, the exemptions to disclosure must be narrowly construed: see Springdale Pizza, at para. 32.
[43] The Court of Appeal held that the exemption in s. 5(7)(a)(iv) to the disclosure requirement, where the grant of the franchise is not effected by or through the franchisor, captures the indirect involvement of a franchisor. A franchisor that does not simply play a passive role in the resale limited to the specific requirements mandated for its consent under the franchise agreement will be unable to avail themselves of the exemption: see Springdale Pizza, at para. 41. In Springdale Pizza, the franchisor’s involvement went beyond passive involvement; there, the franchisor directed the prospective vendor to the particular franchise at issue, had detailed financial information about all franchises, and some involvement in the negotiations. Moreover, the agreement of purchase and sale required the purchasers to obtain the consent of the franchisor, thus necessitating that they deal with the franchisor directly. The franchisor also required the purchaser to sign two documents that had not been signed by the vendor: see Springdale Pizza, at paras. 42-43, 47.
[44] More recently, in 2256306 Ontario Inc. v. Dakin News Systems Inc., 2016 ONCA 74, at paras. 6-8, the Court of Appeal dealt with a case where franchisees purchased a franchise business from a vendor franchisee. After operating the franchise for about two years, the franchisees entered into a franchise agreement with the franchisor which covered the period the franchisees had been operating the business and extended into the future. It had slightly different terms than the franchise agreement that the vendor franchisee had signed with the franchisor. About 10 months after signing the franchise agreement, the franchisees purported to rescind the franchise agreement because of the lack of disclosure required pursuant to the Wishart Act. The franchisor argued that it was exempt from the disclosure requirement. In rejecting this argument, the Court of Appeal held, at para. 8, that: “[h]aving chosen to require a franchise agreement with the [franchisees], the [franchisor] cannot now argue that a franchise agreement was already in place with them, such that they are exempted from the disclosure requirement by s. 5(7)(a)(iv).”
[45] In my view, the rationale in Dakin applies here. Mr. Smiciklas’s evidence was that the franchisor’s usual practice was to consent to the transfer of a franchise by way of a letter like the one he signed on January 10, 2013. However, for whatever reason, the franchisor went further than that in this case. By requiring the plaintiffs to sign a new franchise agreement, the franchise defendants cannot now argue that a franchise agreement was already in place between the plaintiffs and the franchisor.
[46] If I am wrong, and the signing of the franchise agreement alone is not sufficient for the grant of the franchise to have been effected by or through the franchisor, I would, in any event, find that the franchisor did not play a merely passive role in the transfer or grant of the franchise. Mr. Chandiok was acting as the franchisor’s representative when he steered the plaintiffs to the Brampton franchise that was for sale and provided them with initial information about the franchise. He may have been wearing two hats once the buyer representation agreement was signed, but he remained associated with Wild Wing, and only came to represent the plaintiffs due to Wild Wing’s involvement.
[47] I thus conclude that the grant of the franchise was effected by or through the franchisor. The exemption in s. 5(7)(a)(iv) of the Wishart Act does not apply. The franchisor was thus required, by s. 5(1) of the Wishart Act to provide the plaintiffs with a disclosure document.
Was the disclosure obligation met?
[48] Disclosure need not be perfect to satisfy a franchisor’s obligation to disclose under the Wishart Act. In Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62, 419 D.L.R. (4th) 53, at paras. 48-49, the Court of Appeal confirmed that whether deficiencies in a disclosure document are so serious as to amount to no disclosure for the purposes of the Wishart Act is a question to be determined on the facts of each case. The inquiry is whether the franchisee has been “effectively deprived … of the opportunity to make an informed [investment] decision”: Raibex, at para. 49, citing Caffé Demetre Franchising Corp. v. 2249027 Ontario Inc., 2015 ONCA 258, 125 O.R. (3d) 498, at para. 63.
[49] The franchise defendants argue that, even if the plaintiffs were entitled to a disclosure document, the disclosure that was made discharged the franchisor’s obligation. They note that the plaintiffs received the Vendor’s sales summaries for a period of about six months, and the Vendor’s 2011 and 2012 financial statements, from which they could have seen that the business was earning less in 2012 than in 2011. They note that the plaintiffs’ evidence is that they did not seek expert advice and did not even look at many of the documents available to them, including the financial statements from the Vendor and the business plan prepared by Mr. Goyal.
[50] While there is no doubt that the plaintiffs did not do any meaningful due diligence before purchasing the franchise, that is not the issue here. The obligation to provide a disclosure document is a statutory one, and subject to specific requirements. As the Court of Appeal held in 2611707 Ontario Inc. v. Freshly Squeezed Franchise, 2022 ONCA 437, at paras. 13-14, a franchisor’s obligations do not change depending on the action or reactions of a franchisee. Rather, the test in s. 6(2) focuses on the disclosure itself, not the recipient, because the Wishart Act seeks to ensure that the franchisor provides the same disclosure to every potential franchisee.
[51] The disclosure provided in this case does not meet the requirements of the Wishart Act. Among other things, it was not delivered as one document at one time, as required by s. 5(3) of the Wishart Act. Nor did it include most of the information described in General, O.Reg. 581/00, the regulation which prescribes the material facts and financial statements required by s. 5(4) of the Wishart Act.
[52] The plaintiffs were entitled to a disclosure document that was compliant with s. 5(4) of the Wishart Act and General, O. Reg. 581/00. They did not get it. The franchisor breached its obligation to disclose under the legislation. The deficiencies are so serious as to amount to no disclosure and left the plaintiffs unable to make an informed investment decision.
[53] Given the breach of the franchisor’s disclosure obligation, the plaintiffs were entitled to rescind the agreements relating to the franchise within two years of entering into the franchise agreement. By delivering their Notice of Rescission on January 14, 2015, less than two years after signing the franchise agreement on June 7, 2013, they rescinded in accordance with the statute. They are thus entitled to damages under s. 6(6) of the Wishart Act.
Damages
[54] The plaintiffs led evidence from Ephraim Stulberg, their proposed expert forensic accountant, to support their claim to damages. The franchise defendants conceded Mr. Stulberg’s expertise. Notwithstanding that concession, as gatekeeper, I must first consider whether Mr. Stulberg is a properly qualified expert. Only if I determine he is properly qualified can I consider his evidence.
[55] There is a two-stage analysis that a judge must apply to the admission of expert evidence. In the first stage, the court applies the criteria from R. v. Mohan, [1994] 2 S.C.R. 9, at paras. 16-28 to determine if the four threshold requirements are met. I conclude that they are. First, Mr. Stulberg’s evidence is relevant to the quantification of the plaintiffs’ damages. Second, given the many aspects of the claim for damages, and its complex nature, his evidence is necessary to assist me in determining the plaintiffs’ losses. Third, there is no exclusionary rule that would operate in this case. Finally, I am satisfied, based on his curriculum vitae, that Mr. Stulberg is a properly qualified witness. I note he has signed an acknowledgement of expert’s duty as well.
[56] Moving on to the second stage, I must consider whether to exercise my residual discretion to exclude proposed expert evidence when its probative value is outweighed by its prejudicial effects. At this stage, I must consider the expert’s independence and impartiality: see White Burgess Langille Inman v. Abbott and Haliburton Co., 2015 SCC 23, [2015] 2 S.C.R. 182, at paras. 24, 54. Here, I see no prejudicial effects to admitting Mr. Stulberg’s evidence. I am satisfied that the evidence is helpful and ought to be admitted. I qualify Mr. Stulberg as an expert in the fields of business valuation, damage quantification and forensic accounting.
[57] I note that, although the franchise defendants did not object to the qualification of Mr. Stulberg, on cross-examination, counsel put to Mr. Stulberg that he was in a position of conflict, or was not impartial, having regard to an article that referred to MDG Computers Canada Inc. et al. v. MDG Kingston Inc. et al., 2013 ONSC 5436. In that case, Mr. Stulberg had been retained as an expert in an arbitration before Arbitrator Steven H. Goldman. Mr. Goldman was also a lawyer who had retained Mr. Stulberg as an expert on many occasions when acting as counsel on certain franchise matters, including in at least one matter that was ongoing at the time of the arbitration. Mr. Goldman was also the plaintiffs’ original lawyer in this case, but he has now retired. The plaintiffs’ file remains with Mr. Goldman’s former firm, but new counsel from the firm, Mr. Mesiano-Crookston, acted at trial.
[58] In MDG Computers, Brown J. found that there was a reasonable apprehension of bias on the part of Arbitrator Goldman due to his association with Mr. Stulberg and removed him as arbitrator as a result.
[59] In my view, nothing about this decision is relevant to the question of Mr. Stulberg’s impartiality in this litigation. Mr. Stulberg was not found to have done anything improper. It was the reasonable apprehension of bias on the part of Mr. Goldman that led to his removal as arbitrator.
[60] Moreover, there is nothing unusual about a lawyer or a law firm hiring the same expert in multiple briefs. It stands to reason that someone who has expertise in a given area relevant to litigation will be engaged in matters related to that expertise. In considering whether an expert is properly qualified, one of the factors the court considers is whether they have been accepted as an expert before. To have been an expert previously, one has to have been hired as an expert previously. In a small bar like the franchise bar, it is not surprising that Mr. Stulberg has been hired by the plaintiffs’ lawyers before.
[61] Mr. Stulberg gave his evidence in a clear and straightforward manner. He explained his calculations of the plaintiffs’ damages thoroughly and made concessions on cross-examination when appropriate. In my view, he clearly understood his role as expert and did not exceed the bounds of his expertise. I have no hesitation in accepting his evidence.
[62] Mr. Stulberg calculated damages for each category identified by s. 6(6) of the Wishart Act. While, in the following analysis, I refer to the franchisor as the party with the obligations towards the franchisee on rescission, I do so for shorthand purposes only. The Wishart Act in fact places the obligation on the franchisor or the franchisor’s associates, as the case may be.
[63] First, with respect to s. 6(6)(a), that is, money received by the franchisor on or behalf of the franchisee, other than money for inventory, supplies, or equipment, Mr. Stulberg calculated the plaintiffs’ losses to be $34,783. To reach this figure, Mr. Stulberg assumed the plaintiffs paid a franchise fee of $35,000. He also calculated the royalties the plaintiffs paid to the franchisor over the 18 months they ran the restaurant, based on a review of the general ledger, to be $34,783. He then deducted $35,000 from the losses under this heading because, when the plaintiffs rescinded the franchise agreement, the franchisor delivered them a refund of $35,000, which they kept. The franchisor maintains that the refund was in error or required by the purchaser of Mr. Smiciklas’s business, but in any event, the amount was paid, and so it appears as a credit to the franchise defendants.
[64] At the same time, Mr. Smiciklas argues that he did not receive the transfer fee which, according to the APS, was to have been $25,000 (plus an administrative charge of $2,000) and was to have been paid by the Vendor. Mrs. Jayasena testified that she assumed the fee had been paid by the Vendor, as no one at the franchisor ever raised with her any unpaid fees that were owing. Regardless, it does not matter for the purposes of this calculation. The Jayasenas paid $360,000 under the APS for the franchise. Mr. Stulberg assumed that $35,000 of that figure was the franchise fee and the remainder was in respect of the purchase of supplies and equipment. If the $35,000 were not captured under this head of loss, it would be captured together with the purchase of supplies and equipment.
[65] Accordingly, I accept that the plaintiffs’ losses under s. 6(6)(a) are $34,783.
[66] Second, under s. 6(6)(b), the plaintiffs are entitled to have the franchisor purchase from them any inventory that the franchisee had purchased pursuant to the franchise agreement and that was remaining at the effective date of recission, at a price equal to the purchase price paid by the franchisee.
[67] Mr. Stulberg testified that he calculated, by reviewing the general ledgers, that the inventory balance at the date of rescission was approximately $14,845. He also looked at the corporate tax returns of the franchisee. He explained that he took the inventory balance from the financial statements in the corporate tax returns from the end of the franchisee’s first fiscal year, when an inventory count was done. Using the inventory balance, and keeping track of purchases of inventory going forward, the cost of inventory to the franchise either shows up as an inventory asset or an expense on the income statement. In this way, the inventory calculation is intertwined with the calculation of cost of sales. If there is an error in the estimate of inventory, such that it is overstated, then the cost of sales, which is recoverable under s. 6(6)(d) will be understated, or vice versa.
[68] The defendants argue that, at the time the plaintiffs purchased the franchise, there was slightly less than $9,000 in inventory; they thus question the figure of $14,845. Moreover, they point out that the plaintiffs made the decision to rescind in December 2014 but operated the business for almost another month; they argue that it is reasonable to infer that the plaintiffs would have been running down their inventory as much as possible during that time, and not restocking. Further, they state that the plaintiffs did not make a proper inventory count at the date of rescission and did not provide an invoice for the inventory as required by the franchise agreement. In their view, inventory losses can be no more than $2,000.
[69] I do not agree that it is necessarily true that the business would have had less in inventory at the date of recission than at the date the plaintiffs purchased the franchise. As Mr. Stulberg pointed out, businesses that are not doing well may have a stockpile of inventory because they are not moving product. Moreover, given the intertwining of the loss calculation of inventory and the cost of sales, described above, if the inventory figure is inflated, the cost of sales figure, which I address below, is too low; either way the plaintiffs’ losses are the same. A potential difference in inventory at the date of recission and at the date of purchase makes no difference to the plaintiffs’ overall losses.
[70] As to the requirement in the franchise agreement that the plaintiffs prepare an invoice of inventory, I was unable to locate any such provision, and the franchise defendants did not direct me to one. The franchise agreement requires a franchisor to provide an invoice for inventory to a franchisee for inventory purchased prior to the opening of the franchised business, but that provision is not relevant here.
[71] Finally, I note that the franchise defendants had access to the franchise location once the plaintiffs rescinded the agreement. They were free to undertake an inventory count but led no evidence that they had done so.
[72] I thus accept the inventory figure calculated by Mr. Stulberg of $14,485.
[73] The third head of recission damages is found in s. 6(6)(c) of the Wishart Act. It requires the franchisor to purchase from the franchisee any supplies and equipment that the franchisee had purchased pursuant to the franchise agreement, at a price equal to the purchase price paid by the franchisee.
[74] Mr. Stulberg calculated this loss to be $325,000 by having regard to the purchase price of $360,000 paid under the APS less the $35,000 he assumed was a transfer fee, and which he accounted for in his calculation of damages under s. 6(6)(a), as I have already explained. This is a straightforward calculation and I accept it.
[75] I note the defendants argued that the plaintiffs were obliged to provide a list of chattels left behind and their value under the provisions of the franchise agreement, and that having not done so, they are not entitled to losses in respect of those chattels. Again, the franchise defendants did not direct me to the provision in the franchise agreement that they argue applies, and I have been unable to locate it in reviewing the document. In any event, the evidence suggests that the plaintiffs improved the condition of the franchise and left behind more than they had purchased, including new, and better, televisions, and additional refrigeration equipment.
[76] Finally, under s. 6(6)(d) of the Wishart Act, the franchisor must compensate the franchisee for any losses that the franchisee incurred in acquiring, setting up and operating the franchise, less the amounts covered under ss. 6(6)(a)-(c).
[77] Mr. Stulberg made an original calculation of damages under s. 6(6)(d) in his report dated October 26, 2015. He then updated that calculation in an addendum dated January 6, 2023. The amount is calculated as described below.
[78] First, Mr. Stulberg calculated $222,917 in operating losses up to December 31, 2014, the end of the period for which Mr. Stulberg had copies of the franchisee’s general ledger. Any losses incurred between that day and the day the plaintiffs stopped operating the restaurant are not included. In addition, Mr. Stulberg deducted the royalty fees paid by the franchisee to the franchisor in the amount of $34,783 because these losses were captured in his analysis under s. 6(6)(a), for a total of $188,134 in operating losses.
[79] Second, Mr. Stulberg added prepaid rent in the amount of $17,181, that is, rent that was prepaid by the plaintiff to the lessor and which it could not recover. In his original report, Mr. Stulberg added $392,741 in the plaintiffs’ potential future lease obligation, representing the amount that the plaintiffs would owe under the lease they entered into pursuant to its terms. In his addendum, Mr. Stulberg removed the $392,741 from the calculation of losses because, as it happened, the landlord did not pursue the plaintiffs for the future lease obligation.
[80] The defendants object to the inclusion of the prepaid rent on the basis that it was an amount that was paid to the franchise location’s landlord, a third party. I see no reason why the fact that the rent was prepaid to a third party would exclude it from the ambit of s. 6(6)(d). Rather, as an asset of the franchisee that has no ongoing value, it is an appropriate loss for inclusion in the calculation of the plaintiffs’ losses.
[81] Third, Mr. Stulberg also added the value of foregone wages to the plaintiffs’ losses. He calculated this amount at $95,926. He explained that, based on data from the 2011 National Household Survey, in 2010, restaurant managers in Ontario working full time earned $40,342 annually. Because the Jayasenas did not pay themselves a wage for their hours working at the restaurant, he calculated the value of their lost wages on the basis that Mr. Jayasena was a full-time worker for 18 months at the restaurant, and Mrs. Jayasena was a part-time worker at the restaurant for that same period.
[82] The defendants argue that nothing should be payable in lost wages because both the Jayasenas had other employment while they were running the restaurant, and because they did a terrible job and should not be compensated for poor work. I do not accept these arguments. First, that the Jayasenas had other employment during the time they were running the restaurant does not change the fact that they received no wages for their labour at the restaurant. They were not paid by their employers for the work they did at the restaurant. That time and effort went uncompensated. Second, the defendants argue that the plaintiffs did a poor job running the restaurant. Even assuming the quality of their work is relevant to whether they suffered loss from uncompensated work, on this record I cannot find that they did a poor job running the restaurant. Certainly, the restaurant failed, and they were inexperienced in the restaurant business. Their inexperience could well have contributed to the restaurant’s lack of success. However, they also explained that the cost of the food they were mandated to purchase went up, and they were not permitted to raise prices. At the same time, a number of new Wild Wing franchises opened nearby, which they testified cut into their take-out business. Some combination of these factors either caused or contributed to the failure of the restaurant. But I see no reason why it should affect the calculation of losses suffered by the plaintiffs for unpaid work.
[83] However, in my view, the amount claimed in losses for unpaid wages should be reduced slightly to reflect the fact that Mrs. Jayasena had her first child in August 2013, and took a short maternity leave before she returned to work in the restaurant. Her lost wages should be calculated over 17 months, not 18 months, consistent with her evidence that she took a few weeks off when the baby was born. By my calculation, this results in a reduction in her losses in the amount of $1,681, for a total loss relating to unpaid wages of $94,245.
[84] Fourth, Mr. Stulberg calculated the loss suffered by the plaintiffs in ongoing interest charges on loans that were taken out to finance the purchase of the franchise. Mr. Stulberg considered the loans the Jayasenas’ parents took out to provide funds to the plaintiffs and which the plaintiffs had to repay. He also considered the fact that the plaintiffs’ remortgaged their home to withdraw equity to close the transaction. In the addendum to Mr. Stulberg’s report, he calculated the interest charges the plaintiffs paid until July 31, 2019, when they sold their home and paid off the debts related to the franchise. In total, between the two reports, he concluded that the plaintiffs incurred losses related to interest of $68,000 (rounded).
[85] The defendants point out that Mr. Stulberg proceeded on the assumption that the plaintiffs used $85,000 from the proceeds of their mortgage to close the transaction. However, $25,000 of that $85,000 was drawn from savings Mr. Jayasena had accumulated. Accordingly, the interest calculation needs to be adjusted to deduct the interest incorrectly applied to the $25,000 drawn from Mr. Jayasena’s savings. Subject to that adjustment, a calculation I do not intend to attempt, I accept Mr. Stulberg’s calculation of the plaintiffs’ losses related to the interest cost they incurred.
[86] However, that does not end the matter. Another reduction is required from the plaintiffs’ losses. The plaintiffs recovered $40,000 or $45,000 from Mr. Chandiok in settlement of these proceedings. In my view, while that figure would be theoretically related to Mr. Chandiok’s role in the events at issue, the losses as described by Mr. Stulberg are the entirety of the plaintiffs’ losses. I can see no other loss they would be able to claim against Mr. Chandiok separately. The plaintiffs’ counsel candidly acknowledged that it was within my discretion to determine how to deal with the settlement.
[87] In my view, it is appropriate that the settlement be deducted from the plaintiffs’ losses. Given that there is some uncertainty in the amount, I find that $45,000 should be deducted from the plaintiffs’ losses to reflect the fact that the settlement defrayed their losses to that extent.
[88] The franchise defendants seek a deduction for the $25,000 franchise fee and the $2,000 administrative fee they say they never received. I see no merit to this argument. If the plaintiffs had paid an additional $27,000 in fees to the franchisor, their losses would grow by $27,000 and be recoverable in these proceedings. The franchise agreement having been rescinded, no fees are owing.
[89] Finally, the franchise defendants argue that the plaintiffs’ losses should be reduced because they walked away from the restaurant without attempting to sell it or take any other steps to minimize their losses beyond relinquishing control over the restaurant. At the same time, they acknowledge that damages under the Wishart Act carry no component of contributory negligence and are not subject to the duty to mitigate. I thus see no basis on which I could find that the plaintiffs’ damages should be reduced because of their actions. I recognize that, in the result, they are indemnified for their losses when they took many unreasonable and careless steps in the course of the purchase of the franchise. I appreciate why this might seem unfair to the franchise defendants. However, this result arises from the policy choices made by the legislature in enacting the Wishart Act which creates significant penalties for franchisors who do not meet their disclosure obligations, regardless of the conduct of the franchisee.
[90] In summary, the plaintiffs’ damages are:
a. $34,783 for return of money paid to the franchisor (royalties);
b. plus $14,845 for repurchase of inventory;
c. plus $325,000 for purchase of supplies and equipment;
d. plus $222,917 in operating losses up to December 31, 2014, less $34,783 in royalty fees already captured at para. 90a above, for a total of $188,134;
e. plus $17,181 in prepaid rent;
f. plus $94,245 in unpaid wages;
g. plus interest in the amount of $68,000, less the interest cost related to the $25,000 from Mr. Jayasena’s savings;
h. less $45,000 in respect of the settlement the plaintiffs received from Mr. Chandiok.
Who is a franchisor’s associate?
[91] The last substantive question that remains to be resolved is which of the franchise defendants other than the franchisor is a franchisor’s associate for purposes of the Wishart Act, and in particular, for purposes of the obligation to pay damages to the franchisee pursuant to s. 6(6).
[92] First, it is important to note that all the corporate franchise defendants are controlled by Mr. Smiciklas who is the sole director and officer of each.
[93] As I have already noted, there is no dispute that 223 is the franchisor.
[94] The franchise defendants did not dispute that the defendants other than 223 were franchisor’s associates.
[95] There is evidence in the record that, at some point, royalties in respect of the Wild Wing franchises were directed to be paid to SWH by 151. 151 also held the franchisor’s trademarks and provided other direction and information to franchisees. Both these corporations are franchisor’s associates.
[96] Moreover, it is apparent that Mr. Smiciklas, as a person who controls the franchisor and was directly involved in the grant of the franchise, is a franchisor’s associate under the Wishart Act.
Costs
[97] At the close of trial, the parties agreed to provide me with their costs outlines and the relevant offers to settle, which I indicated I would review only once I had written my reasons on the merits of the trial. The parties agreed that I would proceed to determine costs on that basis.
[98] The plaintiffs are the successful parties on this litigation and are presumptively entitled to their costs.
[99] The three main purposes of modern costs rules are to indemnify successful litigants for the costs of litigation, to encourage settlement, and to discourage and sanction inappropriate behaviour by litigants: see Fong v. Chan (1999), 46 O.R. (3d) 330, at para. 22.
[100] Subject to the provisions of an act or the rules of this court, costs are in the discretion of the court, pursuant to s. 131 of the Courts of Justice Act, R.S.O. 1990, c. C.43. The court exercises its discretion considering the factors enumerated in r. 57.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, including the principle of indemnity, the reasonable expectations of the unsuccessful party, and the complexity and importance of the issues. Overall, costs must be fair and reasonable: see Boucher v. Public Accountants Council for the Province of Ontario (2004), 71 O.R. (3d) 291 (Ont. C.A.), at para. 38. A costs award should reflect what the court views as a fair and reasonable contribution by the unsuccessful party to the successful party rather than any exact measure of the actual costs to the successful litigant: see Zesta Engineering Ltd. v. Cloutier (2002), 21 C.C.E.L. (3d) 161 (Ont. C.A.), at para. 4.
[101] The plaintiffs’ costs submissions indicate actual costs of $280,310.06, substantial indemnity costs of $392,387.05 and partial indemnity costs of $261,592.49, all amounts inclusive of HST but exclusive of disbursements. The plaintiffs seek $29,058.71 for disbursements. The plaintiffs’ substantial indemnity costs are higher than their actual costs because substantial indemnity costs reflect counsel’s rates as they have increased over the duration of the litigation, while the actual costs reflect the rates counsel has maintained on the plaintiffs’ file since the inception of the matter.
[102] In contrast, the franchise defendants’ costs submissions support actual costs of $317,497.22, substantial indemnity costs of $287,653.92, and partial indemnity costs of $210,714.22, all amounts inclusive of HST and disbursements.
[103] The plaintiffs claim substantial indemnity costs from March 2022 forward based on an offer to settle dated March 15, 2022 in the amount of $525,000 plus prejudgment interests and costs of $75,000. In my view, the plaintiffs have beaten their offer to settle and are presumptively entitled to partial indemnity costs up to March 15, 2022, and substantial indemnity costs thereafter.
[104] However, in addition to the offer to settle, there are other grounds to make an award of substantial indemnity costs in this case:
a. The franchise defendants made allegations of fraud and perjury against the plaintiffs without any evidence in support thereof.
b. The franchise defendants made allegations of collusion and fraud against the plaintiffs’ current law firm and prior counsel, and their expert, without any evidence in support thereof.
c. In open court, the franchise defendants made threats of collateral proceedings against counsel for the plaintiffs that were wholly unwarranted.
d. The franchise defendants alleged that plaintiffs’ counsel had behaved improperly by failing to include documents in a joint brief of documents that had been produced by Mr. Chandiok in the litigation when defence counsel had not asked for them to be included.
e. Trial time was increased unnecessarily due to defence counsel’s repetitive cross-examinations and his unfamiliarity with certain rules of evidence, including attempting to introduce pre-existing consistent statements and objecting to opposing counsel posing leading questions on cross-examination.
f. Trial time was increased due to aspects of the defendants’ case that were poorly prepared, including lengthy reading of transcripts, and attempts to argue issues that were no longer part of the plaintiffs’ case, thus increasing the costs of the trial. Moreover, defence counsel had to rely on plaintiffs’ counsel to bring up documents on CaseLines as he was unfamiliar with its use, despite it having been in use at the court for over two years. This also added to the time required for the trial, as plaintiffs’ counsel could not anticipate what document would be next required and had to take his own notes while also navigating documents as if he were defence counsel’s clerk or junior, which he decidedly was not. The court is, however, grateful for defence counsel assisting their friend with navigating CaseLines.
[105] The actual rates charged by plaintiffs’ counsel are reasonable. While I appreciate the rationale for counsel seeking increased rates, in my view, it is more appropriate to assess costs having regard to the actual rate owing, as well as the costs incurred by the franchise defendants, which I take as a reflection of their reasonable expectations as to the low end of costs.
[106] Plaintiffs’ counsel spent more time on the brief than did defence counsel. To some extent that reflects the extra work required of plaintiffs’ counsel in advancing the case and taking the lead on preparing it for CaseLines.
[107] Moreover, the issues raised, while not unduly complex, relate to a fairly complex and niche area of law. The issues were of great importance to all the parties. The amounts are stake are life-changing for the plaintiffs, and the defendants’ submitted the amounts at stake were also meaningful for them.
[108] In view of all these factors, I conclude that substantial indemnity costs of $250,000, all inclusive, are appropriate in the circumstances.
Conclusion
[109] In conclusion, the plaintiffs’ action against the franchise defendants is granted. I make the following orders and declarations:
a. The franchise agreement dated June 10, 2013, made between SW Hospitality Inc., 2355305 Ontario Inc. DBA Jayasena Management Corp. and Kaushalya Jayasena and agreements related to the franchise agreement (including a lease and agreements incorporated by reference in the franchise agreement) were rescinded by service of a notice of rescission dated January 14, 2015, pursuant to the Wishart Act;
b. The defendants 151, Mr. Smiciklas and SWH are franchisor’s associates as that term is defined in the Wishart Act;
c. The plaintiffs are entitled to damages as follows:
i. $34,783 for return of money paid to the franchisor (royalties);
ii. $14,845 for repurchase of inventory;
iii. $325,000 for purchase of supplies and equipment;
iv. $188,134 in operating losses up to December 31, 2014;
v. $17,181 in prepaid rent;
vi. $94,245 in unpaid wages;
vii. interest in the amount of $68,000, less the interest cost related to the $25,000 from Mr. Jayasena’s savings;
viii. less $45,000 in respect of the settlement the plaintiffs received from Mr. Chandiok.
d. The plaintiffs are entitled to their costs of $250,000, all inclusive.
e. The franchise defendants are jointly and severally liable to the plaintiffs for the damages and costs awarded herein.
f. The judgment shall accrue interest pursuant to the relevant provisions of the Courts of Justice Act, R.S.O. 1990, c. C-43.
J.T. Akbarali J.
