COURT FILE NO.: CV-18-00591679-0000
CV-17-00586380-00A1
CV-17-50086381-00A1
DATE: 20230303
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
PREMIUM HOST INC.
Plaintiff
– and –
PARAMOUNT FRANCHISE GROUP INC., PARAMOUNT FRANCHISE INC., 2302733 ONTARIO INC., MOHAMAD FAKIH, HOLLY GRAHAM and MICHEL GAGNON
Defendants
Adrienne Boudreau, Daniel Hamson and Lauren Baker, for the Plaintiff and Defendants to the Counterclaim
Andrew Winton, Nadia Campion and Carter Liebzeit, for the Defendants and Plaintiffs by Counterclaim Paramount Franchise Group Inc., Paramount Franchise Inc., 2302733 Ontario Inc., Mohamad Fakih and Holly Graham
AND BETWEEN:
PARAMOUNT FRANCHISE GROUP INC., PARAMOUNT FRANCHISE INC. and 2302733 ONTARIO INC.
Plaintiffs by Counterclaim
– and –
PREMIUM HOST INC., GUL NAWAZ SHEIKH, SHAHID KHAWAJA and SARDAR SAMIUDDIN KHAN
Defendants to the Counterclaim
BETWEEN:
ROYAL BANK OF CANADA
Plaintiff
– and –
VERSATILE HOLDINGS INC., SARDAR SAMIUDDIN KHAN, also known as SARDAR M. KHAN SAMIUDDIN, NIDA SHAHID and SHAHID SALEEM KHAWAJA
Defendants
– and –
PARAMOUNT FRANCHISE GROUP INC., PARAMOUNT FRANCHISE INC., FAKIH GROUP INC., 2302733 ONTARIO INC., MOHAMAD FAKIH, HOLLY GRAHAM and MICHEL GAGNON
Third Parties
BETWEEN:
ROYAL BANK OF CANADA
Plaintiff
– and –
EVEREST GROUP INC., YOUSAF JAMEEL KHAN, also known as YOUSAF JAMIL, ZARMINA S. KHAN and SHAHID SALEEM KHAWAJA
Defendants
– and –
PARAMOUNT FRANCHISE GROUP INC., PARAMOUNT FRANCHISE INC., FAKIH GROUP INC., 2302733 ONTARIO INC., MOHAMAD FAKIH, HOLLY GRAHAM and MICHEL GAGNON
Third Parties
Adrienne Boudreau, Daniel Hamson and Lauren Baker, for the Defendants
Andrew Winton, Nadia Campion and Carter Liebzeit, for the Third Parties Paramount Franchise Group Inc., Paramount Franchise Inc., Fakih Group Inc., 2302733 Ontario Inc., Mohamad Fakih and Holly Graham
Adrienne Boudreau, Daniel Hamson and Lauren Baker, for the Defendants
Nadia Campion, Andrew Winton and Carter Liebzeit, for the Third Parties Paramount Franchise Group Inc., Paramount Franchise Inc., Fakih Group Inc., 2302733 Ontario Inc., Mohamad Fakih and Holly Graham
HEARD: November 8-10, 12, 15-19, 22-26, December 17, 2021 and June 6-7, 2022, with supplementary written submissions delivered on February 28, 2023
REASONS FOR JUDGMENT
VERMETTE J.
[1] Three franchisees, Versatile Holdings Inc. (“Versatile”), Everest Group Inc. (“Everest”) and Premium Host Inc. (“Premium Host”, and together with Versatile and Everest, the “Franchisees”), exercised the statutory remedy to rescind their franchise agreements pursuant to the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (“Act”) based on the alleged failure of the franchisor, Paramount Franchise Group Inc. (“Paramount”), to deliver a disclosure document that was not materially deficient. The main issue before this Court is whether the Franchisees validly exercised the right to rescind and are entitled to statutory compensation under subsection 6(6) of the Act.
[2] This is not a case where the franchisor never provided a disclosure document. The evidence reflects that a number of disclosure documents were provided. The question to be determined is whether the relevant disclosure documents were so deficient as to effectively amount to a complete lack of disclosure, thereby permitting rescission under subsection 6(2) of the Act.
[3] This case was factually intensive, with drastically divergent versions of the disclosure documents that were allegedly provided. Significant credibility and reliability issues were raised.
[4] I find that the Franchisees have failed to establish on the balance of probabilities that any of the disclosure documents that they rely upon were provided by Paramount, and/or (b) were the latest disclosure documents received from Paramount.
[5] However, I am also not satisfied that the disclosure documents that Paramount relies upon were ever provided to the Franchisees. There are significant issues with the documents kept in Paramount’s files, including fabricated receipts and a number of documents that are clearly wrongly dated.
[6] Ultimately, based on the entirety of the evidence, I conclude that it has been demonstrated on the balance of probabilities that Paramount failed to disclose certain material information to Premium Host in one disclosure document at one time. This constitutes a fatal flaw and a deficiency that is sufficiently material to conclude that Paramount failed to deliver to Premium Host a “disclosure document” for the purposes of the Act. Therefore, Premium Host validly rescinded its franchise agreement and is entitled to statutory compensation under the Act. This is not the case for Versatile and Everest.
[7] All excerpts from e-mails and documents reproduced in these Reasons are quoted verbatim. For reasons of readability, I have not inserted “[sic]” when there were spelling or grammatical errors in the quoted text.
I. THE PARTIES
[8] The Royal Bank of Canada is no longer involved in this action.
A. Versatile
[9] Versatile is a corporation incorporated pursuant to the laws of the Province of Ontario with its registered office in the City of Mississauga. It was incorporated on March 6, 2015.
[10] Sardar Samiuddin Khan, also known as Sami Khan, has been a director and the President of Versatile since its incorporation on March 6, 2015. He was appointed Secretary and Treasurer of Versatile on January 29, 2016. Mr. Khan became a 25% shareholder of Versatile on March 6, 2015 and currently owns 25% of the issued and outstanding shares of Versatile. Mr. Khan is Zarmina Khan’s husband.
[11] Nida Shahid was a director and the Secretary of Versatile from March 6, 2015 until her resignation on January 29, 2016. She became a 75% shareholder of Versatile on March 6, 2015 and currently owns 75% of the issued and outstanding shares of Versatile. Ms. Shahid is Shahid Khawaja’s wife.[^1]
[12] In 2016-2017, Versatile operated a Paramount Fine Foods franchise at premises located at 85 Front Street East, Toronto (“Front Location”). Versatile is a former “franchisee” of the Paramount Fine Foods franchise system within the meaning of subsection 1(1) of the Act.
B. Everest
[13] Everest is a corporation incorporated pursuant to the laws of the Province of Ontario with its registered office in the City of Mississauga. Everest was incorporated on November 9, 2015.
[14] Shahid Khawaja was a director and the President of Everest from November 9, 2015 until his resignation on January 29, 2016. He became a 55% shareholder of Everest on November 9, 2015 and currently owns 55% of the issued and outstanding shares of Everest. Mr. Khawaja is Ms. Shahid’s husband.
[15] Zarmina Khan was a director and the Vice-President of Everest from November 9, 2015 until her resignation on January 29, 2016. She became a 25% shareholder of Everest on November 9, 2015 and currently owns 25% of the issued and outstanding shares of Everest. Ms. Khan is Mr. Khan’s wife.
[16] Yousaf Jamil, also known as Yousaf Khan, is a former director and former Executive Vice-President of Everest. He resigned as a director and officer of Everest on January 29, 2016. Mr. Jamil currently owns 20% of the issued and outstanding shares of Everest.
[17] Sardar Samiuddin Khan was elected as a director of Everest on January 29, 2016 and is currently the sole officer (President/Secretary/Treasurer) of Everest. He was appointed as an officer of Everest on January 29, 2016. Mr. Khan is not and has never been a shareholder of Everest.
[18] In 2016-2017, Everest operated a Paramount Fine Foods franchise at premises located in the food court of Yorkdale Shopping Centre (“Yorkdale Location”). Everest is a former “franchisee” of the Paramount Fine Foods franchise system within the meaning of subsection 1(1) of the Act.
C. Premium Host
[19] Premium Host is a corporation incorporated pursuant to the laws of the Province of Ontario with its registered office in the City of Mississauga. Premium Host was incorporated on November 13, 2015.
[20] Shahid Khawaja was a director of Premium Host from November 13, 2015 until his resignation on December 21, 2015. He became a 60% shareholder of Premium Host on November 13, 2015 and currently owns 60% of the issued and outstanding shares of Premium Host.
[21] Sardar Samiuddin Khan has been a director and an officer (President, Secretary and Treasurer) of Premium Host since its incorporation on November 13, 2015. He became a 10% shareholder of Premium Host on November 13, 2015 and currently owns 10% of the issued and outstanding shares of Premium Host.
[22] Dr. Gul Nawaz Sheikh is a former director and former Vice-President of Premium Host. He resigned as a director and officer of Premium Host on December 21, 2015. Dr. Sheikh currently owns 30% of the issued and outstanding shares of Premium Host.
[23] In 2015-2017, Premium Host operated a Paramount Fine Foods franchise at premises located at 5700 Mavis Road, Mississauga (“Heartland Location”). Premium Host is a former “franchisee” of the Paramount Fine Foods franchise system within the meaning of subsection 1(1) of the Act.
D. Mr. Khan, Ms. Khan, Mr. Khawaja, Ms. Shahid, Mr. Jamil, Dr. Sheikh, Mr. Pirani and Mr. Gray
[24] Before being involved with the Paramount Fine Foods franchise system, Mr. Khan was an area manager for Sherwood Chicken Foods, which operates Kentucky Fried Chicken and Taco Bell restaurants as a franchisee. Mr. Khan was looking after five of their stores in Ontario. He left his employment in October 2015. Mr. Khan was never, in his personal capacity, a “franchisee” of the Paramount Fine Foods franchise system within the meaning of subsection 1(1) of the Act.
[25] Ms. Khan was also an area manager for Sherwood Chicken Foods at the relevant time. She left her employment in early 2016. The superior of both Mr. Khan and Ms. Khan at Sherwood Chicken Foods was Azim Pirani. Mr. Pirani is not a party, but he testified at trial.
[26] Mr. Khawaja is a real estate broker. At the relevant time, he was working for Re/Max Performance Realty Inc. In 2017, he opened his own brokerage and he now has approximately thirty real estate agents. Mr. Khawaja was never, in his personal capacity, a “franchisee” of the Paramount Fine Foods franchise system within the meaning of subsection 1(1) of the Act.
[27] At the relevant time, Ms. Shahid occasionally did some work for Mr. Khawaja’s team at Re/Max Performance Realty Inc. in the areas of marketing and customer service. However, she spent most of her time at home with her young children. In early 2015, she had two children under the age of three. She had a third child in August 2016.
[28] Mr. Jamil is a real estate agent. At the relevant time, he was working at Re/Max Performance Realty Inc. in Mr. Khawaja’s team. He was Mr. Khawaja’s second-in-command in his team.
[29] Mr. Khan, Ms. Khan, Mr. Khawaja, Ms. Shahid and Mr. Jamil all reside in Mississauga.
[30] Dr. Sheikh is a physician specialized in internal medicine. He resides in Richmond Hill. He practices at Ajax-Pickering Hospital. Mr. Khawaja has acted as his realtor.
[31] All the individuals referred to above gave evidence at trial in support of the Franchisees’ case. David Gray, a corporate lawyer retained by Mr. Khawaja in late 2015, also testified at trial.
[32] In addition to the oral evidence of witnesses at trial, affidavits from a prior motion for summary judgment were also before this Court. Mr. Khan, Ms. Shahid, Mr. Khawaja, Ms. Khan, Mr. Jamil and Dr. Sheikh had all provided affidavit evidence in support of the Franchisees’ position.
E. Paramount entities
[33] Paramount is a corporation incorporated pursuant to the laws of the Province of Ontario with its registered office in the City of Toronto. Paramount is the franchisor of the Paramount Fine Foods franchise system, which is a franchise system of specialty restaurants offering Middle-Eastern cuisine. It is agreed by the parties that at all material times, Paramount was a “franchisor” within the meaning of subsection 1(1) of the Act.
[34] Paramount Franchise Inc. (“Paramount Leasing”) is a corporation incorporated pursuant to the laws of the Province of Ontario with its registered office in the City of Toronto. Paramount Leasing carried on business as Paramount’s lease-holding company. It entered into leases in respect of real property on behalf of Paramount for some of Paramount’s franchisees, and sublet these premises to the franchisees. Paramount Leasing was the sub-lessor for Versatile, Everest and Premium Host.
[35] Fakih Group Inc. (“Fakih Group”) is a corporation incorporated pursuant to the laws of the Province of Ontario with its registered office in the City of Toronto. Fakih Group, among other things, provided construction management services in respect of the construction of certain Paramount Fine Foods restaurants. It provided construction management services to Versatile and Everest, but not Premium Host.
[36] 2302733 Ontario Inc. (“Paramount Wholesale”) is a corporation incorporated pursuant to the laws of the Province of Ontario with its registered office in the City of Toronto. Paramount Wholesale, among other things, carried on business as a supplier, but not the only supplier, to Paramount Fine Foods restaurants. Paramount Wholesale was a supplier to Versatile, Everest and Premium Host.
F. Mr. Fakih, Mr. Gagnon, Ms. Graham, Ms. Leenders and Ms. Aulakh
[37] Mohamad Fakih is the Chief Executive Officer and President of Paramount. At all material times, he controlled and was the sole director and officer of Paramount, Paramount Leasing, Fakih Group and Paramount Wholesale. It is agreed by the parties that Mr. Fakih is a “franchisor’s associate” within the meaning of subsection 1(1) of the Act.
[38] In or around 2007, Mr. Fakih became the owner of the first Paramount Fine Foods restaurant located near Dixie and Eglinton in Mississauga (“Crestlawn Location”). After successfully opening a number of corporate-owned Paramount locations, he started considering franchising. He approached a Montreal-based consultant, Michel Gagnon, who accepted to lead and supervise the franchise process at Paramount. Paramount started franchising in or around 2014. By the end of 2015, Paramount had between 20 and 30 franchised locations.
[39] Michel Gagnon worked for Paramount at all material times. His title was Executive Vice-President. All the actions have been discontinued as against Mr. Gagnon. He did not testify at trial.
[40] Holly Graham worked for Paramount from December 2012 to July 2017. At the time of the relevant events in 2015, she was 26 years old. From December 2012 to May 2014, she was Mr. Fakih’s executive assistant. In 2014, she became Manager of Franchising. Her employment contract is dated August 22, 2014 and provides for a $5,000.00 commission for every franchised location sold by Ms. Graham. When it was decided that Ms. Graham would become Manager of Franchising, Mr. Gagnon provided training to her, including with respect to disclosure. As Manager of Franchising, Ms. Graham reported to Mr. Gagnon and Mr. Fakih. The evidence shows that Ms. Graham had an overwhelming workload at the relevant time, in addition to having to deal with illness in her family. At the end of her employment, Ms. Graham’s title was Manager of Franchise Sales and International Business Development.
[41] Paramount, Paramount Leasing, Paramount Wholesale, Fakih Group, Mr. Fakih and Ms. Graham are referred to as the “Franchisor Parties”.
[42] Margaret Leenders and Harjinder Aulakh are not parties to the litigation, but they gave evidence at trial for the Franchisor Parties. Ms. Leenders is an accountant. She is a consultant to Fakih Group and, when working for Fakih Group, she has used the title “Construction Manager”. Ms. Leenders has managed the construction for some of Fakih Group’s construction projects, including Paramount locations. Her work in this role involved coordination and accounting. Ms. Leenders does work for other clients besides Fakih Group. She has never been an employee of Fakih Group. However, she used a paramountfinefoods.com e-mail address. While working on the construction projects for the Front Location and the Yorkdale Location, she dealt with Mr. Khawaja and Mr. Khan.
[43] Ms. Aulakh is a chartered professional accountant and Paramount’s corporate controller. She started working at Paramount in 2018, i.e. after the events in this case. She gave evidence at trial in support of the Franchisor Parties’ counterclaims for certain liquidated sums.
[44] As stated above, affidavit evidence from a prior motion for summary judgment was before this Court. Mr. Fakih and Ms. Graham had provided affidavits in support of the Franchisor Parties’ position in the motion.
II. STATUTORY FRAMEWORK AND INTERPRETIVE PRINCIPLES
[45] The Act is sui generis remedial legislation. It is intended to be protective legislation for franchisees. Its purpose is to redress the imbalance of power as between franchisor and franchisee and to provide a remedy for abuses stemming from this imbalance. See Mendoza v. Active Tire & Auto Inc., 2017 ONCA 471 at para. 13 (“Mendoza”) and Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673 at para. 26. The Act must be considered and interpreted in light of this purpose: 6792341 Canada Inc. v. Dollar It Limited, 2009 ONCA 385 at para. 72 (“Dollar It”). A fair interpretation of the Act is one that balance the rights of both franchisees and franchisors: see 4287975 Canada Inc. v. Imvescor Restaurants Inc., 2009 ONCA 308 at para. 40.
[46] One of the ways in which the Act protects the interests of franchisees is through the imposition of rigorous disclosure requirements and strict penalties for non-compliance: see Personal Service Coffee Corp. v. Beer, 2005 CanLII 25180 at para. 28 (Ont. C.A.) (“Personal Service”) and 1490664 Ontario Ltd. v. Dig this Garden Retailers Ltd., 2005 CanLII 25181 at para. 12 (Ont. C.A.) (“Dig this Garden”). The franchisor has all the information and dictates the terms of the agreement and, in this context, disclosure is intended to provide a prospective and often inexperienced franchisee with sufficient and readily accessible information to make informed decisions: see 2189205 Ontario Inc. v. Springdale Pizza Depot Ltd., 2011 ONCA 467 at para. 24 (“Springdale”).
[47] The Act and Regulation O. Reg. 581/00 (“Regulation”) impose a number of requirements on franchisors to fully disclose the type of financial and other information a prospective franchisee would normally need in order to decide whether to become a franchisee. The Act then provides remedies to the franchisee where the franchisor does not meet the statutory obligations, including certain rights of rescission in section 6 and damages in section 7. See Mendoza at para. 14. Any suggestion that the disclosure requirements or the penalties imposed for non-disclosure should be narrowly construed must be met with skepticism: see Personal Service at para. 28. Disclosure requirements are not merely formalistic: see Dig this Garden at paras. 18-19.
[48] The relevant parts of sections 5 and 6 of the Act read as follows at the relevant time:
Franchisor’s obligation to disclose
5 (1) 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; and
(b) the payment of any consideration by or on behalf of the prospective franchisee to the franchisor or franchisor’s associate relating to the franchise.
Methods of delivery
(2) A disclosure document may be delivered personally, by registered mail or by any other prescribed method.
Same
(3) A disclosure document must be one document, delivered as required under subsections (1) and (2) as one document at one time.
Contents of disclosure document
(4) The disclosure document shall contain,
(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.
Material change
(5) The franchisor shall provide the prospective franchisee with a written statement of any material change, and the franchisee must receive such statement, as soon as practicable after the change has occurred and before the earlier of,
(a) the signing by the prospective franchisee of the franchise agreement or any other agreement relating to the franchise; and
(b) the payment of any consideration by or on behalf of the prospective franchisee to the franchisor or franchisor’s associate relating to the franchise.
Information to be accurate, clear, concise
(6) All information in a disclosure document and a statement of a material change shall be accurately, clearly and concisely set out.
Exemptions
(7) This section does not apply to,
(a) the grant of a franchise by a franchisee if,
(i) the franchisee is not the franchisor, an associate of the franchisor or a director, officer or employee of the franchisor or of the franchisor’s associate,
(ii) the grant of the franchise is for the franchisee’s own account,
(iii) in the case of a master franchise, the entire franchise is granted, and
(iv) the grant of the franchise is not effected by or through the franchisor;
(c) the grant of an additional franchise to an existing franchisee if that additional franchise is substantially the same as the existing franchise that the franchisee is operating and if there has been no material change since the existing franchise agreement or latest renewal or extension of the existing franchise agreement was entered into;
(h) the grant of a franchise where the prospective franchisee is investing in the acquisition and operation of the franchise, over a prescribed period, an amount greater than a prescribed amount.
Same
(8) For the purpose of subclause (7) (a) (iv), a grant is not effected by or through a franchisor merely because,
(a) the franchisor has a right, exercisable on reasonable grounds, to approve or disapprove the grant; or
(b) a transfer fee must be paid to the franchisor in an amount set out in the franchise agreement or in an amount that does not exceed the reasonable actual costs incurred by the franchisor to process the grant.
Rescission for late disclosure
6 (1) A franchisee may rescind the franchise agreement, without penalty or obligation, no later than 60 days after receiving the disclosure document, if the franchisor failed to provide the disclosure document or a statement of material change within the time required by section 5 or if the contents of the disclosure document did not meet the requirements of section 5.
Rescission for no disclosure
(2) A franchisee may rescind the franchise agreement, without penalty or obligation, no later than two years after entering into the franchise agreement if the franchisor never provided the disclosure document.
Notice of rescission
(3) Notice of rescission shall be in writing and shall be delivered to the franchisor, personally, by registered mail, by fax or by any other prescribed method, at the franchisor’s address for service or to any other person designated for that purpose in the franchise agreement.
Franchisor’s obligations on rescission
(6) The franchisor, or franchisor’s associate, as the case may be, shall, within 60 days of the effective date of the rescission,
(a) refund to the franchisee any money received from or on behalf of the franchisee, other than money for inventory, supplies or equipment;
(b) purchase from the franchisee any inventory that the franchisee had purchased pursuant to the franchise agreement and remaining at the effective date of rescission, at a price equal to the purchase price paid by the franchisee
(c) purchase from the franchisee any supplies and equipment that the franchisee had purchased pursuant to the franchise agreement, at a price equal to the purchase price paid by the franchisee; and
(d) compensate the franchisee for any losses that the franchisee incurred in acquiring, setting up and operating the franchise, less the amounts set out in clauses (a) to (c).
[49] Pursuant to subsection 5(2) of the Act, disclosure by e-mail was not permitted in 2015.
[50] Courts have repeatedly held that a purported disclosure document may be so deficient as to effectively amount to a complete lack of disclosure, thereby permitting rescission under subsection 6(2) of the Act. See 2619506 Ontario Inc., v. 2082100 Ontario Inc., 2021 ONCA 702 at para. 8, Mendoza at para. 18; Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62 at para. 47 (“Raibex”); and 2611707 Ontario Inc. v. Freshly Squeezed Franchise Juice Corporation, 2022 ONCA 437 at para. 9 (“Freshly Squeezed”). However, not every franchisee receiving imperfect disclosure is able to validly rescind its agreement. Subsection 6(2) is engaged only where the deficient disclosure prevents the franchisee from making an informed choice about whether or not to invest in the franchise. See Freshly Squeezed at para. 10.
[51] The parties agree that a deficient disclosure document can be cured, but only if the disclosure process is started afresh. In that circumstance, the franchisor must redisclose the prospective franchisee with the corrected disclosure document to take advantage of the curative disclosure. The corrected disclosure document supersedes all prior disclosure documents. See Giroux v. 1073355 Ontario Ltd., 2018 ONSC 143 at paras. 115-116. As noted by Justice Penny in 2122994 Ontario Inc. v. Lettieri, 2016 ONSC 6209 at para. 52 (“Lettieri”); aff’d by 2017 ONCA 830:
I observe, however, that the safe course for a franchisor, to avoid the “piecemeal” disclosure problem posed by the requirements of s. 5(3), would be to serve a new disclosure document when new information becomes available and defer signing any franchise agreement for an additional 14 days.
[52] The test for a valid rescission, i.e. whether the information provided impaired the franchisee’s ability to make an informed decision, is an objective one. No evidence of actual impairment is required. The franchisor’s obligations do not change depending on the actions or reactions of a particular franchisee. The test under subsection 6(2) focuses on the disclosure itself, not its recipient, because the Act seeks to ensure that the franchisor provides the same disclosure to every potential franchisee. See Freshly Squeezed at paras. 11-14.
[53] The following definitions set out in subsection 1(1) of the Act are relevant for our purposes:
“disclosure document” means the disclosure document required by section 5; (“document d’information”)
“franchise” means a right to engage in a business where the franchisee is required by contract or otherwise to make a payment or continuing payments, whether direct or indirect, or a commitment to make such payment or payments, to the franchisor, or the franchisor’s associate, in the course of operating the business or as a condition of acquiring the franchise or commencing operations and,
(a) in which
(i) the franchisor grants the franchisee the right to sell, offer for sale or distribute goods or services that are substantially associated with the franchisor’s, or the franchisor’s associate’s, trade-mark, service mark, trade name, logo or advertising or other commercial symbol, and
(ii) the franchisor or the franchisor’s associate exercises significant control over, or offers significant assistance in, the franchisee’s method of operation, including building design and furnishings, locations, business organization, marketing techniques or training, or
(b) in which,
(i) the franchisor, or the franchisor’s associate, grants the franchisee the representational or distribution rights, whether or not a trade-mark, service mark, trade name, logo or advertising or other commercial symbol is involved, to sell, offer for sale or distribute goods or services supplied by the franchisor or a supplier designated by the franchisor, and
(ii) the franchisor, or the franchisor’s associate, or a third person designated by the franchisor, provides location assistance, including securing retail outlets or accounts for the goods or services to be sold, offered for sale or distributed or securing locations or sites for vending machines, display racks or other product sales displays used by the franchisee; (“franchise”)
“franchise agreement” means any agreement that relates to a franchise between,
(a) a franchisor or franchisor’s associate, and
(b) a franchisee; (“contrat the franchisage”)
“franchisee” means a person to whom a franchise is granted and includes,
(a) a subfranchisor with regard to that subfranchisor’s relationship with a franchisor, and
(b) a subfranchisee with regard to that subfranchisee’s relationship with a subfranchisor; (“franchisé”)
“franchise system” includes,
(a) the marketing, marketing plan or business plan of the franchise,
(b) the use of or association with a trade-mark, service mark, trade name, logo or advertising or other commercial symbol,
(c) the obligations of the franchisor and franchisee with regard to the operation of the business operated by the franchisee under the franchise agreement, and
(d) the goodwill associated with the franchise; (“système de franchise”)
“franchisor” means one or more persons who grant or offer to grant a franchise and includes a subfranchisor with regard to that subfranchisor’s relationship with a subfranchisee; (“franchiseur”)
“franchisor’s associate” means 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;
“grant”, in respect of a franchise, includes the sale or disposition of the franchise or of an interest in the franchise and, for such purposes, an interest in the franchise includes the ownership of shares in the corporation that owns the franchise; (“concession”)
“material change” means a change in the business, operations, capital or control of the franchisor or franchisor’s associate, a change in the franchise system or a prescribed change, that would reasonably be expected to have a significant adverse effect on the value or price of the franchise to be granted or on the decision to acquire the franchise and includes a decision to implement such a change made by the board of directors of the franchisor or franchisor’s associate or by senior management of the franchisor or franchisor’s associate who believe that confirmation of the decision by the board of directors is probable; (“changement important”)
“material fact” 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; (“fait important”)
“prospective franchisee” means a person who has indicated, directly or indirectly, to a franchisor or a franchisor’s associate, agent or broker an interest in entering into a franchise agreement, and a person whom a franchisor or a franchisor’s associate, agent or broker, directly or indirectly, invites to enter into a franchise agreement; (“franchisé éventuel”)
III. Paramount’s evidence regarding its disclosure process
[54] As Manager of Franchising at Paramount, Ms. Graham was responsible for the preparation and delivery of disclosure documents to prospective franchisees. Her evidence was that she always explained the importance of the disclosure document to prospective franchisees.
[55] Ms. Graham described Paramount’s Franchise Disclosure Document (which she calls “FDD”) as follows in her affidavit:
The main body of the Franchisor’s FDD, roughly pages 1 to 70, Exhibits A, D, E, F, G, H and I, the Receipt and the Franchisor’s Certificate of Disclosure, were, at all material times, a single electronic Microsoft Word file (the “Base Document”). The Base Document did not include Exhibit B – the Franchisor’s financial statements, or Exhibit C – the franchise agreement, and its schedules, nor would it include any site specific documents, such as an asset purchase agreement or lease, that may have been appended from time to time, as applicable, depending on the particular circumstances. I would not make changes to the Base Document unless I was specifically instructed to do so by Mr. Fakih or Mr. Gagnon.
[56] Ms. Graham also described how she prepared Franchise Disclosure Documents:
When preparing an FDD for a particular candidate, I would print the Base Document and then proceed to print each of the exhibits not included in the Base Document separately. I would then collate the various documents into a single document to form the FDD, which I would then personally deliver to prospective franchisees and obtain an acknowledgement of receipt, confirming delivery.
I always ensured that the FDD being provided to the prospective franchisee included:
(a) The Base Document, including a Franchisor’s Certificate of Disclosure signed by Mr. Fakih;
(b) Copies of the Franchisor’s most current financial statements;
(c) the Franchisor’s then current form of franchise agreement, including all attached schedules; and
(d) any additional documents related to a particular location, if one had been identified at the time of disclosure.
After I collated the required number of FDDs, I would double check each FDD to ensure that they were identical and that nothing was missing. I would then put a large clip on each document to hold it together. Overtime, I switched to binding the FDDs.
If no franchisee corporation had been incorporated, I prepared a single copy of the FDD for the individual with whom we were in discussions, on the understanding that the individual would incorporate a company to serve as the prospective franchisee. If a franchisee corporation had already been formed, I prepared separate copies for each of the shareholders of the prospective franchisee and each prospective guarantor. In both instances, I also always prepared and retained an identical copy of the FDD delivered to the prospective franchisee(s) and guarantors for the Franchisor’s records. The Franchisor’s copy of the FDD was stored in the prospective franchisee’s physical file in our office. At a later date, the Franchisor undertook a project to scan and store digital copies of all key legal documents for each franchise location, including the FDDs.
[57] As stated above, Ms. Graham would ask prospective franchisees to sign a receipt when she gave them a disclosure document. The references to a “Receipt” in these Reasons are a reference to the following document, which is part of Paramount’s base disclosure document:
EXHIBIT J
RECEIPT
TO: PARAMOUNT FRANCHISE GROUP INC. (the “Franchisor”)
FROM: The undersigned
RE: Disclosure Document delivered by the Franchisor to the undersigned with a Certificate of Disclosure dated ______________, 2015 and as executed by Mohamad Fakih (the “Disclosure Document”)
IMPORTANT NOTES:
THE DISCLOSURE DOCUMENT SUMMARIZES CERTAIN PROVISIONS OF THE FRANCHISE AGREEMENT AND OTHER INFORMATION. READ THIS DISCLOSURE DOCUMENT AND ALL AGREEMENTS CAREFULLY.
EACH OF THE UNDERSIGNED HEREBY ACKNOWLEDGES HAVING RECEIVED THE DISCLOSURE DOCUMENT, (AS ONE DOCUMENT AND AT ONE TIME, EXCEPT IN THE PROVINCE OF MANITOBA, WHERE DISCLOSURE IS PERMITTED IN PARTS AND AT DIFFERENT TIMES) WHICH DOCUMENT INCLUDES, WITHOUT LIMITATION, THE FOLLOWING:
Exhibit A – Convictions, Charges, Administrative Orders, Litigation & Bankruptcy
Exhibit B – Financial Statements of Franchisor
Exhibit C – Franchise Agreement and Schedules
Exhibit D – Trade-Marks
Exhibit E – Table of Contents of Manual
Exhibit F – List of Franchisees, Company or Affiliate owned and Licensees
Exhibit G – List of Terminated, Cancelled, Not Renewed, Etc. Franchisees
Exhibit H – Franchisee Disclosure Questionnaire
Exhibit I – Halal Monitoring Authority (HMA) Non Exclusive Certification Mark Licence Agreement
Exhibit J – Receipt by Franchisee
Certificate of Disclosure of the Franchisor
[58] The references to a “Certificate” in these reasons are a reference to the “Certificate of Disclosure of Franchisor”, which is also part of Paramount’s base disclosure document. The Certificate is two pages long, and includes different sections applicable to different Provinces (Ontario, Alberta, Prince Edward Island, Manitoba and New Brunswick). The relevant section of the Certificate reads, in part:
For Prospective Ontario Franchisees Only: The foregoing information and all attachments are provided in accordance with the disclosure obligations under the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c.3 (the “Ontario Act”) and is current to the date mentioned on the cover page of this Disclosure Document. The undersigned certifies that this Disclosure Document:
(a) contains no untrue information, representation or statement; and
(b) includes every material fact, financial statement, statement and other information required by the Ontario Act and the Ontario Regulations.
DATED at Toronto this _________ day of _________________ 2015.
PARAMOUNT FRANCHISE GROUP INC.
Per: ___________________________________
Name: Mohamad Fakih
Title: President and Director
[59] Ms. Graham’s evidence was that she always included a signed Certificate in disclosure documents that she gave to prospective franchisees and that she never included unsigned Certificates. She stated that if Mr. Fakih was not available to sign a Certificate when she was preparing a disclosure document (e.g. if Mr. Fakih was traveling), she had a “little stack” of Certificates signed by Mr. Fakih that she can use. She said that each time that she made disclosure to a prospective franchising, Mr. Fakih was aware of it. She was the person who inserted the date on the Certificate, which was not the date on which Mr. Fakih signed the Certificate, but, rather, the date on which Ms. Graham said that she provided the disclosure document to the prospective franchisee. Ms. Graham denied giving back the Receipt and signed Certificate to prospective franchisees at the time of the signing of the franchise agreement.
[60] At trial, Ms. Graham gave the following evidence regarding her general practice at meetings where she provided a disclosure document to a prospective franchisee:
Q. Thanks. I want to ask you questions about your general practice at a meeting where you’re meeting with a prospective franchisee and you’re giving them disclosure for the first time?
A. Mm-Hmm.
Q. Tell us about that meeting?
A. When I would meet with a franchise to give disclosure for the first time, I would show them the table of contents and go through – I wouldn’t go through the entire document, but I would explain all of the exhibits. I would have explained the purpose of the disclosure already in my first meeting, or I would explain it thoroughly in that meeting, how it needs to go to a lawyer, if there was any lawsuits or anything pending against the company they would be included, all of our franchisees are in there, they are able to contact them directly, I would let them know that the range of the costs are there, the financial statements are there, the franchise agreement is there. So, I’d point out all of the exhibits and again reiterate that I suggest for them to take it to a lawyer, come back if they had any questions, and that they couldn’t sign anything before fourteen days.
Q. What about your general practice when it came to the signing of disclosure receipts; can you tell us about that?
A. The signing of the actual disclosure receipt; again, I would show them where the exhibits were, and I would have them sign the receipt once confirmed that all the exhibits are there, they would get a copy and I would get a copy as well. So, each person would get a copy and I would keep a copy for the office.
Q. Of the receipt?
A. Of the whole document with the receipt.
Q. Okay.
A. They were always together and not – there was never a receipt given with no disclosure.
[61] Mr. Fakih was not involved in disclosure meetings. His evidence at trial regarding the Certificates was as follows:
Q. Alright. And at what point in the disclosure process are you signing the certificate?
A. I always, always sign it when I see the document, and when I make the document is the way I know and I understood that a disclosure document should look like and always, always before disclosure.
Q. What if you’re out of town or away, unavailable to review a disclosure document? What happens then?
A. Well, it happened a couple times or more than a couple times during the last three, four years, and where I pre-sign certificate based on the document that – I think the screen is blinking – based on all the information that I’ve seen in those documents when I was in Canada. And when I’m away – I mean, I still work 20 hours a day, so it doesn’t matter where I am in the world. They’ll call me and they’ll tell me who they’re disclosing. It was very, very important to me all the time for the people I’m signing with the document because my personal life is tied to these people.
So, I used to get a call and I used to always make sure that Michel is supervising a little bit more than usual what’s happening, especially when I’m away, and I used to get a call from Holly explaining to me and making sure that the documents are right.
Q. Now, just to close the loop on – on one issue, when it came to franchise disclosure document certificates that you signed which we showed you earlier, there’s an allegation in this action that Holly Graham would ask prospective – the prospective franchisees in this case to initial a certificate that you had not signed and then would take it back to you to sign. Did that ever occur?
A. Not - was not signed by me?
Q. Yes.
A. I think – but there was no reason, because I used to even pre-sign them to have them available if I’m away, and I was always there. I’m a hands-on CEO. I’m – I wake up in the morning at eight A.M. I’m in the office. I visit desk to desk, and I talk to my team. It’s not like I’m a CEO that’s not there, and there was no reason and I pre-signed them. I mean, that’s the most risk I could take is pre-signing, and I pre-signed them, so…
Q. Did you ever recall signing a franchise disclosure certificate that already had the initials of a prospective franchisee on it?
A. No. I would only certify something that hasn’t gone to anyone except us. There is no need.
[62] Paramount had a practice of asking prospective franchisees to sign a “generic” franchise agreement after providing them with a generic disclosure document. This was explained as follows by Ms. Graham:
Q. So, what is your understanding of generic disclosure?
A. A generic disclosure would be when there is no location, so we would generically disclose them. So, they would review the document, take it to their lawyers, when comfortable, if comfortable sign the franchise agreement generically without location and then we would proceed to find them a location.
Q. And why would Paramount disclose or do it that way?
A. It was for a commitment, even though it would become later null and void on signing a new agreement. There was a commitment because otherwise I could have spent a year looking for a location for someone and then they say that they are not going to sign the franchise agreement due to something in the franchise agreement, and I wasted a year.
Q. You described for us the contents of the disclosure documents you assembled. You mentioned there’s the base document and you added various pieces. Do you recall, from the various pieces that would be included, did any of those – or what portions of a location-specific disclosure document don’t make it into the generic?
A. The lease, the offer to lease, and if there would be any like amendments or right of first refusal, that might be added.
[63] When franchisees signed a franchise agreement with Paramount, they would typically sign the franchise agreement first, and Mr. Fakih would sign after.
IV. FACTUAL BACKGROUND
1. Initial expression of interest in a Paramount franchise
[64] On December 20, 2014, Mr. Khan sent an e-mail to Ms. Graham to express an interest in a Paramount franchise and request an appointment with her to discuss a few things before filling in the franchise application.
[65] Ms. Graham and Mr. Khan had a telephone conversation on January 9, 2015. Ms. Graham sent an e-mail to Mr. Khan on the same day attaching some documents for his review, including the application form. They had another telephone conversation on January 20, 2015.
[66] On January 23, 2015, Ms. Graham met with Mr. Khan and Nasim Qadir, a friend of Mr. Khan. Mr. Qadir ultimately decided not to proceed to purchase a Paramount franchise. Mr. Khan subsequently approached Mr. Khawaja to see whether he would be interested in investing in a Paramount franchise with him.
[67] On February 2, 2015, Ms. Graham sent a follow-up e-mail to Mr. Khan asking whether he had any questions regarding the application. Mr. Khan responded that he had been very busy, but was planning to make an appointment “to visit [her] with the application and move forward”. Ms. Graham sent the following response on February 3, 2015:
Thank you for your follow up email. I apologize for the late response as I am actively on the road a lot. As I mentioned at our first meeting I don’t set up meetings without receiving the application prior. I will need that before our next meeting to get a better understanding of where you are financially and what areas and steps we are looking at taking. Once I receive and review the application I am more than willing to set up our next meeting to Disclose. Thank you.
[68] On February 6, 2015, Mr. Khan sent an e-mail to Ms. Graham which attached an application from Mr. Khan and an application from Ms. Shahid. Ms. Shahid’s application was completed by Mr. Khawaja on her behalf. Her application lists Mr. Khawaja’s e-mail address as her e-mail address.
[69] Ms. Graham’s evidence is that after receiving Mr. Khan’s and Ms. Shahid’s completed applications, she shared the applications and her initial impressions of the prospects with one or both of Mr. Fakih and Mr. Gagnon, who ultimately approved them as prospective franchisees. Paramount’s evidence is that Ms. Graham never had the authority alone, or in conjunction with anyone else, to approve a prospective franchisee. This decision rested entirely with Mr. Fakih.
[70] After sending the applications, Mr. Khan sent an e-mail to Ms. Graham to confirm that she had received them. A meeting was eventually scheduled for February 10, 2015 at the Crestlawn Location. Ms. Graham and Mr. Khan met on that day. Among other things, they discussed franchise areas/locations that Mr. Khan was interested in. According to Ms. Graham, Mr. Khan made it clear that he was interested in having more than one location.
2. February 12, 2015 meeting
[71] Ms. Graham’s evidence is that she met with Mr. Khan and Ms. Shahid on February 12, 2015, she gave them a generic disclosure document on that day, and they signed a Confidentiality Agreement and a Receipt. This is reflected in a tracking sheet that she was keeping at that time. According to Ms. Graham, Mr. Khawaja was also present at the meeting and signed a Confidentiality Agreement.
[72] There is a Receipt signed by Mr. Khan and Ms. Shahid that is dated February 12, 2015. The date on the Receipt was inserted by Ms. Graham. None of the parties have produced a copy of the disclosure document that relates to this Receipt. Mr. Khan’s and Ms. Shahid’s evidence is that they signed a Receipt on March 9, 2015.
[73] There are also three Confidentiality Agreements dated February 12, 2015 signed by Mr. Khan, Ms. Shahid and Mr. Khawaja. Among other things, the Confidentiality Agreements state that Paramount has shared a copy of its Franchise Disclosure Document with the signatory. Contrary to many other documents in issue in this case, it is admitted that the dates on the Confidentiality Agreements were written by the signatories themselves, i.e. Mr. Khan, Ms. Shahid and Mr. Khawaja, and not by Ms. Graham. However, the date on which the Confidentiality Agreements were signed is in dispute.
[74] Ms. Shahid’s evidence was that she signed the Confidentiality Agreement on March 9, 2015, even though it is dated February 12, 2015. Ms. Shahid stated that the first time that she met someone from Paramount was on March 9, 2015. She also stated that she only met with Paramount twice: once on March 9, 2015 and once on November 9, 2015 (i.e. the date of the execution of Versatile’s franchise agreement). Mr. Khawaja’s evidence was also that he did not meet with anyone from Paramount before March 9, 2015. According to Ms. Shahid and Mr. Khawaja, Ms. Graham told them to write February 12, 2015 in the date fields on the Confidentiality Agreements even if they did not sign on that date, and they did as instructed.
[75] Ms. Graham’s evidence was that she met with Ms. Shahid more than twice in 2015, i.e. between five and ten times.
[76] Mr. Khan’s evidence at trial was different from Ms. Shahid’s and Mr. Khawaja’s evidence. He stated that on February 12, 2015, Mr. Khawaja, Ms. Shahid and he signed a Confidentiality Agreement with Paramount and they received some documents.
[77] I note, however, that Mr. Khan said during his examination for discovery that he did not remember how many times he met with Ms. Graham in February 2015, when those meetings were and who was at the meetings.
3. March 9, 2015 meeting and signature of the Generic Franchise Agreement
[78] Ms. Graham’s calendar suggests that she met with Mr. Khan on February 25, 2015, but she did not remember what was discussed at the meeting. On February 26, 2015, Mr. Gagnon sent an e-mail to Ms. Graham stating that she could meet with Mr. Khan to sign the franchise agreement when she was ready. According to Ms. Graham, Mr. Gagnon sent that e-mail as the 14-day period required by the Act had passed since February 12, 2015.
[79] As stated above, Versatile was incorporated on March 6, 2015.
[80] On March 9, 2015, Mr. Khan and Ms. Shahid attended at Paramount’s head office and signed a generic franchise agreement on behalf of Versatile (“Generic Franchise Agreement”) to show their commitment to become Paramount franchisees. Mr. Khawaja was also present. Mr. Khan and Ms. Shahid initialed each page of the Generic Franchise Agreement before executing it.
[81] At the time Versatile signed the Generic Franchise Agreement, Paramount had not approved any location or territory from which Versatile could operate. As a result, the Generic Franchise Agreement did not refer to any particular territory or location/premises. Ms. Graham described the Generic Franchise Agreement to Mr. Khan and Ms. Shahid as a “placeholder”. Neither Mr. Khan nor Ms. Shahid read the Generic Franchise Agreement before signing it. Mr. Khawaja did not read it either. Mr. Khan does not recall whether he took a copy of any documents with him when he left the meeting. On March 10, 2015, Versatile paid a franchise fee of $45,000 plus HST ($50,850).
[82] None of the parties have sued on the Generic Franchise Agreement.
[83] It is the evidence of Mr. Khan and Ms. Shahid that at roughly the same time that they signed the Generic Franchise Agreement, they also signed a Receipt stating that they acknowledged having received a disclosure document. Mr. Khan and Ms. Shahid stated that they did not review the Receipt before signing it and they did not receive any disclosure document at the time they signed the Receipt or at any time before. According to Mr. Khan and Ms. Shahid, Ms. Graham directed them to sign but not date the Receipt, and they did as instructed. Ms. Graham kept all copies of the Receipt and Mr. Khan and Ms. Shahid did not receive a copy until November 9, 2015. At that time, the date fields had been filled in as “February 12, 2015”. At the same time, they also received the second page of the Certificate dated February 12, 2015. As sated above, none of the parties have produced a copy of the disclosure document to which this Receipt refers.
4. Search for locations
[84] In August 2015, Paramount advised Mr. Khan and Mr. Khawaja of potential locations for a restaurant, including one at Yonge and Eglinton and one on Front Street, where there used to be Spring Rolls restaurants. They visited the locations at the end of August and asked Mr. Fakih to start negotiating for both locations.
[85] With respect to these two locations, Mr. Khan’s evidence was that Mr. Khawaja and he were thinking of selecting the location for which the negotiations would be finalized first. Mr. Khawaja’s evidence was that at around that time, i.e. when they were considering the two Spring Rolls locations, Mr. Fakih suggested to Mr. Khawaja that they should go for two locations. Paramount was expanding and the locations that were available at this early stage (which Mr. Fakih apparently described as “diamond locations”) would not be available in the future. When Mr. Khawaja raised concerns about their ability to raise the necessary funds, Mr. Fakih suggested that Mr. Khan and Mr. Khawaja find partners and bring in Mr. Khan’s wife, Zarmina Khan, who had experience in the food industry.
[86] Mr. Fakih’s evidence was that Mr. Khan and Mr. Khawaja told him numerous times that they wanted to open and operate multiple locations and to be Paramount’s primary partner in the Greater Toronto Area. According to Mr. Fakih, he never suggested to Mr. Khawaja and Mr. Khan that they go find partners for their investments after their first location.
[87] At some point, Mr. Khan and Mr. Khawaja started working with Claus Etzler of Etzler Franchise Consulting, a consultant who was helping them to obtain loans. Mr. Khan and Mr. Khawaja learnt about Mr. Etzler through Paramount.
[88] Various locations continued to be considered. In September 2015, Mr. Khan and Mr. Khawaja became aware of an opportunity to open a Paramount restaurant in the food court at Yorkdale Shopping Centre at a location then occupied by Famoso Neopolitan Pizzeria (“Famoso”). They discussed that opportunity mainly with Mr. Fakih throughout the fall.
5. Introduction to the Heartland Location
[89] Mr. Khan and Mr. Khawaja met with Mr. Fakih on September 17, 2015. Various issues were discussed during the meeting, including the sale of the Heartland Location, which was owned by the franchisee 2455824 Ontario Ltd. (“245”) and managed by Shami Munir. The Heartland Location had been operating for a few months only. Mr. Fakih told Mr. Khan and Mr. Khawaja that Mr. Munir was going to become the master franchisee for the Paramount Fine Foods franchise system in New York state and/or the Province of Quebec and, as a result, he would no longer operate some of his restaurants in Ontario. Mr. Khan and Mr. Khawaja had previously expressed an interest in having a store in Mississauga since this was where they lived. Mr. Fakih mentioned a sale price of $2.2 million for the Heartland Location. According to Mr. Fakih, he passed on this information to all of Paramount’s existing franchisees in the Greater Toronto Area.
[90] On September 18, 2015, Mr. Khawaja sent an e-mail to Mr. Fakih, thanking him for meeting with him and Mr. Khan the previous day. Mr. Khawaja stated that Mr. Khan and he were “good to go” with respect to the Front Location, that they wanted to start the process of bank financing and would be waiting for an executed copy of the lease from Paramount. Mr. Khawaja also wrote the following regarding the Heartland Location:
As far as Heartland location is concerned, sami and i decided that instead of going on 2.2 million price. we will wait as per your verbal promise for the new upcoming location in mississauga our home town by 2016 inshallah.
[91] A meeting between Mr. Khan, Mr. Khawaja and Mr. Fakih was scheduled for September 21, 2015 at Paramount’s head office. On September 20, 2015, Mr. Fakih sent an e-mail to Mr. Khan and Mr. Khawaja which contained information about positive features of the Heartland Location.
6. September 28, 2015 meeting
[92] On Friday, September 25, 2015, Mr. Khawaja sent an e-mail to Ms. Graham that read, in part:
Please confirm the time for Monday
So that we can come to give the Deposit cheques for both locations.
Secondly, Still awaiting the accepted Copy of 85 Front street east new lease, & Aps executed by landlord & also by spring roll for financing purpose. Please forward it by this evening if possible.
Also sami and my self have the few questions on Yonge / Eglinton Existing Lease;
[93] Ms. Graham responded later that day and a meeting was ultimately scheduled for 9 a.m. on September 28, 2015 at Paramount’s head office with Mr. Fakih, Ms. Graham, Mr. Khan and Mr. Khawaja.
[94] There is a Receipt dated September 28, 2015 signed by Mr. Khawaja and Ms. Khan. The date was inserted by Ms. Graham. Paramount did not produce any disclosure document relating to this Receipt. Ms. Graham did not recall giving a disclosure document to Mr. Khawaja and Ms. Khan on September 28, 2015, but, based on the Receipt, she believed that she did. Ms. Khan’s evidence was that she did not meet with anyone from Paramount on September 28, 2015. She stated that she was not involved in discussions regarding the Yorkdale Location at that time, and that the first time that she met with anyone from Paramount was on November 16, 2015. Mr. Khawaja also denied signing a Receipt on September 28, 2015 as they were “not even close” to talk about signing a franchise agreement for the Yorkdale Location. Like Ms. Khan, he thought that this Receipt was signed on November 16, 2015, not on September 28, 2015.
[95] I note that in the e-mails regarding the meeting on September 28, 2015, there was no mention of Ms. Khan attending this meeting. I also note that Mr. Fakih’s evidence was that he never met with Ms. Khan as a franchisee and never discussed business matters with her. He said that he met with her as a restaurant manager (i.e. at the time the restaurants were operating) and once when she came to see him give a speech.
7. Communications between September 29 and October 22, 2015
[96] On September 29, 2015, Ms. Graham sent the following e-mail to Mr. Khan and Mr. Khawaja:
I am sending this email to confirm that you will be doing front st, eglinton, and Yorkdale. Kindly confirm. Thank you.
[97] On September 30, 2015, and further to Paramount’s direction, Versatile provided a payment to Paramount Leasing in the amount of $250,000.
[98] On October 14, 2015, Mr. Khan sent an e-mail to Mr. Fakih’s assistant stating that Mr. Khan and Mr. Khawaja wanted to meet with Mr. Fakih “to discuss some opportunities for Paramount, apart from our existing 3 locations.” A meeting was arranged for October 16, 2015 at Paramount’s head office.
[99] A “Project Costs Estimate Summary” dated October 15, 2015 was provided to Mr. Khan and Mr. Khawaja regarding the construction costs for the Front Location. The document has a Paramount logo on it. It states that the construction was scheduled to start on November 6, 2015 and end on December 21, 2015. The document indicated that the Project Director was Margaret Leenders and stated the following at the bottom of the page:
These estimated costs are based on the latest information available to Franchisor at the time of printing. All figures, except franchise fees are subject to change based on actual Invoices received from contractors and suppliers. Franchisor reserves right to revise figures as required to reflect final costs.
Payments to be made to Franchisor’s construction division.
[100] The evidence is unclear as to who prepared the Project Costs Estimate Summary, but it may be Ms. Leenders.
[101] On October 22, 2015, Ms. Graham forwarded to Mr. Khan and Mr. Khawaja information that she had received regarding another potential location at 106 Front Street East, Toronto. Mr. Khan responded and asked her to book a tour of that location and another location on Eglinton Avenue.
8. October 23, 2015 meeting
[102] On October 23, 2015, at approximately 12:45 p.m., Mr. Khan sent an e-mail to Ms. Graham advising her that he and Mr. Khawaja had gone to see the possible location for the restaurant at 106 Front Street East from outside, but that they did not like it. Mr. Khan wrote that they “still would like to go with 85 front street”, and he asked Ms. Graham to only book a tour of the location on Eglinton Avenue. There was no mention of a meeting on that day.
[103] It is Paramount’s position that Ms. Graham provided a disclosure document to Mr. Khan and Ms. Shahid on behalf of Versatile on October 23, 2015. Paramount relies on a Receipt dated October 23, 2015 that was signed by Mr. Khan and Ms. Shahid. The dates were inserted by Ms. Graham. Ms. Graham’s evidence is that Mr. Khan and Ms. Shahid kept their respective copies of the disclosure document and Ms. Graham retained Paramount’s copy of the disclosure document, including Paramount’s copy of the Receipt.
[104] Paramount’s copy of the disclosure document that it says it delivered to Versatile on October 23, 2015 is dated “current as of September 1, 2015” and includes Paramount’s financial statements,[^2] a Certificate signed by Mr. Fakih, and the following site-specific documents:
a. Agreement to Lease dated September 2015 (unsigned);
b. Assignment of Lease made as of November 19, 2015 (unsigned);
c. Lease Amending Agreement dated January 17, 2012 (signed); and
d. Asset purchase agreement dated September 22, 2015, as well as an Amending Agreement dated October 8, 2015 and a Second Amending Agreement dated November 6, 2015 (signed).
[105] Mr. Khan and Ms. Shahid denied receiving a disclosure document and signing a Receipt on October 23, 2015. Their evidence was that the only hard copy disclosure document that they received from Paramount with respect to Versatile was provided to them on November 9, 2015.
[106] Ms. Shahid’s evidence was that she could not have met with a representative of Paramount on October 23, 2015 because this was a Friday and her nanny usually took Fridays off. She said that she would have been at home with her young children. During her cross-examination, Ms. Shahid was shown a Guarantee and Postponement of Claim that she appeared to have signed on a Friday in November 2015 at a Royal Bank of Canada branch. Ms. Shahid did not remember the circumstances surrounding the signature of this document. It appears from other documents that Ms. Shahid was going to be leaving the country for a two-month period the weekend following the Friday on which she signed the document at the bank.
[107] Mr. Khan’s evidence was that he could not have met with a representative of Paramount to receive a disclosure document on October 23, 2015 as he was working in Brantford on that day from 10:30 a.m. to 6:30 p.m. Mr. Khan stated that he did not have time to meet with a representative of Paramount or anyone else on October 23, 2015.
[108] Ms. Graham had no recollection whatsoever about the alleged meeting on October 23, 2015 nor about preparing the disclosure document that was allegedly given on that day.
[109] I note that Paramount’s disclosure document for October 23, 2015 contains two documents that Paramount did not have in its possession on October 23, 2015: the Second Amending Agreement dated November 6, 2015, which Paramount only received on November 6, 2015, and the Assignment of Lease made as of November 19, 2015, which was only received by Paramount on November 18, 2015.
[110] It is also Paramount’s position that Ms. Graham provided a disclosure document to Mr. Khawaja and Ms. Khan on behalf of Yorkdale on October 23, 2015. Paramount relies on a Receipt dated October 23, 2015 that was signed by Mr. Khawaja and Ms. Khan. The dates were inserted by Ms. Graham. Paramount did not produce any disclosure document relating to this Receipt.
[111] Mr. Khawaja and Ms. Khan deny receiving a disclosure document and signing a Receipt on October 23, 2015
[112] Mr. Khawaja’s evidence was that he was busy with appointments for his real estate clients on October 23, 2015. He stated that he did not have time to meet – and did not meet – with any representative of Paramount on October 23, 2015, and he did not receive any disclosure document in respect of Everest on that day.
[113] Ms. Khan’s evidence was also that she could not have met with a representative of Paramount on October 23, 2015 as she was working at Dixie Mall from 10:30 a.m. until 6:30 p.m. She stated that she did not have time to meet with a representative of Paramount or anyone else on October 23, 2015.
[114] Ms. Graham did not have any memory of providing a disclosure document to Mr. Khawaja and Ms. Khan on October 23, 2015, but she relied on the Receipt.
9. Mr. Khawaja retains a lawyer, David Gray
[115] At the end of October 2015, Mr. Khawaja decided to retain a lawyer in relation to the franchised business. On October 27, 2015, he reached out to David Gray, a lawyer at the firm Macdonald Sager Manis LLP. He eventually retained Mr. Gray. Mr. Gray told Mr. Khawaja that he was acting for him, and not anyone else (including not for Ms. Shahid and Mr. Khan).[^3]
[116] On October 27, 2015, Mr. Khawaja sent an e-mail to Mr. Fakih and Ms. Graham stating that Mr. Khan and Mr. Khawaja were “still interested to find a good location in Richmond hill or Markham” and giving information on a potential location.
[117] Mr. Khawaja met Mr. Gray in person for the first time on October 29, 2015. Mr. Khawaja sent the following e-mail to Mr. Gray later that day:
it was pleasure meeting you Today. I spoke to my accountant, so he explained and also suggested to not to go for the master company structure.
each location will be a separate Company & Entity.
the first coming up location, in downtown Toronto my wife will be 60% of partner and 40% is our partner contributing.
if you want clarification, then the accountant will be available over the phone. please let me know when you are available to come over the phone?
also my basic term and conditions already spoke to my partner and agreed on, so it needs to be documented either by resolution or partnership agreement. and also maintaining the minute book.
also i will get the Franchise agreement original copy in couple of days and get you dropped off.
please let me know how to proceed further on this matter.
10. October 30, 2015 meeting, redisclosure process and November 3, 2015 meeting
[118] On October 30, 2015, Ms. Graham sent the following e-mail to Mr. Khan and Mr. Khawaja, with the subject line “Famoso Yorkdale Shopping Centre – Head Lease”:
Please see the attached and below. I need to disclose you both on the Yorkdale location. Kindly advise when I can meet you briefly next week. I can come to you. It will take 5min. Thank you
[119] Mr. Khan responded to Ms. Graham’s e-mail and indicated that they could meet on November 3, 2015 at noon at the Crestlawn Location. Ms. Graham agreed to meet them there.
[120] Mr. Khawaja confirmed that he received the head lease for the Yorkdale Location by e-mail on October 30, 2015.
[121] Ms. Graham’s evidence was that she expected that the meeting referred to in her October 30, 2015 e-mail would be a short one because it was a “redisclosure”. She stated the following in her testimony:
Q. So, what’s a re-disclosure?
A. Re-disclosure would have been – they would have gotten disclosed on all the same documents they did during a generic except the location specifications would be there, so it was an offer to lease or a head lease that was unsigned, an amendment to the lease, whatever it was, documents that would have came from the landlord.
Q. What happens if – as appears for Yorkdale and Front Street, the lease negotiations are unfolding in real time?
A. For Yorkdale and Front Street, because they were existing locations, there were a lot of things that were added on and changed as the negotiations were going back and forth because it was a buyout of existing locations. Therefore, with these two locations there was multiple re-disclosures done.
Q. When you say, “existing locations” are you referring to existing Paramount locations?
A. No, existing restaurant locations.
Q. Okay.
A. Spring Rolls was Front Street and Fermoso’s was Yorkdale.
Q. Okay, and so what’s the added wrinkle for that kind of transaction?
A. Because there was a lot of back and forth going, like, negotiating with the leases because it was existing, so it’s not a brand-new lease. You’re taking over another lease.
[122] Ms. Graham also stated the following about her practice regarding redisclosure:
Q. […] So, just if you can explain to us, what was your practice when you’re making disclosure if the lease for a location is not yet finalized?
A. I would include all the documents we had up to date.
Q. And then what if a document changes or if there’s a new document then related to the location, what would be your practice?
A. ... re-disclosing.
Q. And when you re-disclose, what kind of document are you putting together to give to the franchisee?
A. I would give the full complete disclosure with all the new updated lease materials.
[123] It appears that there was a meeting on November 3, 2015, as discussed in the e-mails. Mr. Khawaja signed a Receipt dated November 3, 2015. There is no other signature on the Receipt (aside from Ms. Graham’s signature as a witness). Paramount did not produce any disclosure document relating to this Receipt.
[124] According to Mr. Khawaja’s evidence at trial, he received a disclosure document on behalf of Versatile, not Everest, on November 3, 2015. This was the first time that Mr. Khawaja gave this evidence. During his examination for discovery, he had stated that he did not remember the November 3, 2015 meeting. I note that Mr. Khawaja’s evidence at trial on this point is inconsistent with the purpose of the meeting set out in Ms. Graham’s October 30, 2015 e-mail, i.e. to provide disclosure with respect to the Yorkdale Location. Further, Mr. Khan, not Mr. Khawaja, was a shareholder, director and officer of Versatile, and it appears from the exchange of e-mails that Mr. Khan was going to attend this meeting. If the disclosure related to Versatile/Front Location, it is likely that Mr. Khan would have signed the Receipt, not Mr. Khawaja.
[125] On November 3, 2015, Mr. Gray sent an e-mail to Mr. Khawaja to confirm his instructions and set out his fees. The e-mail stated that Mr. Khawaja did not want Mr. Gray to review the disclosure document or the lease. With respect to the instructions regarding the disclosure document, Mr. Gray wrote: “thus I can provide you with no opinion as to whether it complies with the Arthur Wishart Act, and whether you have any rescission rights, as discussed”. However, Mr. Gray was to review the signed franchise agreement and meet with Mr. Khawaja to discuss, and do some corporate work with respect to Versatile. Despite the fact that Mr. Gray’s e-mail suggested otherwise, Mr. Khawaja’s evidence was that a disclosure agreement had not been received at that time.
[126] Later on November 3, 2015, at the request of Mr. Gagnon, Ms. Graham forwarded to Mr. Khan and Mr. Khawaja an e-mail from Paramount’s lawyer setting out comments on the lease for the Yorkdale Location. Paramount received the comments from its lawyer at noon on November 3. 2015, and Ms. Graham’s forwarded the comments just before 1:30 p.m. (i.e, after her scheduled meeting with Mr. Khan and Mr. Khawaja at the Crestlawn Location at noon).
[127] On the issue of redisclosure, Mr. Khan’s evidence was that there were many instances of redisclosure with respect to the Front Location:
Q. When were you re-disclosed on Front and Eglinton with the details of Front? Do you know?
A. I’m just trying to recall. Because on the leasing, I believe – what do you call it? The leasing, that was disclosed numerous times, so I don’t know, like, how many times, but numerous times at different locations. But….
Q. Is the answer you don’t remember?
A. I don’t remember, yeah. I don’t recall it at this time.
Q. Because you got many disclosure documents, did you not?
A. Yes.
Q. Because there were all kinds of locations and things were happening at different times and you were going in and out of the Paramount office. So there’s a lot of disclosure documents. You would agree with me that; right?
A. Yes.
11. November 6, 2015 events
[128] A meeting between Mr. Khan, Mr. Khawaja, Mr. Fakih and Mr. Gagnon was scheduled for November 5, 2015. At that meeting, Mr. Khan asked Mr. Fakih to ask Ms. Graham to send him an electronic copy of Paramount’s disclosure document. Mr. Khan and Mr. Khawaja wanted to send this document to Mr. Etzler so that it could be used with the bank in support of their request for a loan. The following day, on November 6, 2015, Ms. Graham sent an e-mail to Mr. Khan and Mr. Khawaja which attached Paramount’s Franchise Disclosure Document dated “current as of September 1, 2015” (approximately 115 pages long).
[129] The disclosure document that was attached to Ms. Graham’s e-mail was the Word copy of Paramount’s base disclosure document, without all the schedules that were manually inserted in a complete version of a disclosure document (including Paramount’s financial statements, the proposed franchise agreement and site-specific information). Ms. Graham’s evidence was that Paramount was instructed by its lawyer not to send copies of the actual disclosure documents by e-mail because they were too big to fit in one file and, at the time, disclosure could not be effected by e-mail.
[130] Very early on November 6, 2015, just before 6 a.m. and before Ms. Graham sent her e-mail with the attached base disclosure document, Mr. Khawaja sent two e-mails to Mr. Gray. The first one attached a copy of a blank franchise agreement and some additional pages (discussed below). Mr. Khawaja stated the following in his e-mail:
here is the franchise agreement .. I am gonna send you & franchise agreement and disclosure documents electronic copy by tomorrow which was signed by my partner and my wife.
[131] Mr. Khawaja’s second e-mail simply stated: “here is the disclosure documents”. It attached a Paramount Franchise Disclosure Document dated “current as of July 3, 2015” that had 51 pages and was clearly incomplete (i.e. page 51 was clearly not the last page of the document). According to Mr. Khawaja, the attachment was the complete document that he had received from Ms. Graham in hard copy format. He scanned the hard copy on November 3, 2015. Mr. Khawaja stated during his cross-examination at trial that the disclosure document that he sent to Mr. Gray by e-mail was the disclosure document that he received from Ms. Graham on November 3, 2015.
[132] Mr. Gray’s evidence was that the attachment to Mr. Khawaja’s e-mail was not a complete disclosure document. In addition to missing pages, it did not contain any document related to the actual Front Location (e.g., a lease), it did not have financial statements, it did not have a certificate of disclosure of franchisor, and it did not have the franchise agreement attached to it.
[133] These comments fail to take into account the additional pages contained in the attachment to Mr. Khawaja’s first e-mail to Mr. Gray. These additional pages appear to be the balance of a disclosure document. After Schedule G to the Franchise Agreement (Schedule H is missing), we find page 52 and the following pages of the disclosure document. Paramount’s financial statements are included. However, only the first page of the Certificate is included and there is no second page with a signature by Mr. Fakih. It appears that Mr. Khawaja took the blank Franchise Agreement out of the disclosure document and put it at the front of the document and, somehow, the rest of the disclosure document was split in two, with 51 pages in one scan and the rest in a second scan, following the blank Franchise Agreement.
[134] Mr. Khawaja did not forward to Mr. Gray the Franchise Disclosure Document dated “current as of September 1, 2015” that Ms. Graham sent by e-mail on November 6, 2015.
[135] Later on November 6, 2015, Mr. Khan sent the following e-mail to Ms. Graham, with a copy to Mr. Khawaja:
This is to request, that please send me the Copy of lease signed and executed by land Lord for front street. In our meeting with Mohammad yesterday, he mentioned that It’s ready.
Also we need the electronic copy of franchise Agreement Signed by us for front street along with the Disclosure document ASAP.
As need to forward these documents to clous [Mr. Etzler], By the end of the day today.
[136] Also on November 6, 2015, Mr. Gagnon sent the following e-mail to Mr. Khan and Mr. Khawaja further to their meeting on November 5, 2015:
Thank you for your visit yesterday. As discussed you will be preparing 2 checks to Paramount Franchise inc of $250,000 each. One for tomorrow Friday 6th and another one for Tuesday Nov 10. Please let us know if you require Holly to pick up or if you are dropping them somewhere.
One check is to cover $150,000 of for current and future expenses related to Front Street and the other one is for $350,000 for Yorkdale. Including a $45,000 franchise fee, prepaid rent, purchase price etc. We will of course reconcile all these amounts when the deals are done with the landlords.
For clarification, the Yorkdale amount includes $45,000 plus HST which will be applied against the franchise fee for Yorkdale ($50,850.00). Holly will get you to execute the franchise agreement but the fee is paid with these funds.
[137] Later in the morning, Ms. Graham sent the following e-mail:
I will be in meetings downtown and then back in Mississauga after 11:00am. I will be at Erin Mills Town Centre until about 12:30 then at Crestlawn for most of the remainder of the day. Kindly let me know what works for you. Sami I know you wanted to come with your wife to sign the Disclosure receipt so please let me know what works for the both of you. Thank you.
[138] Further to Paramount’s direction that Versatile provide a payment to Paramount Leasing in the amount of $250,000, Mr. Khan brought a bank draft to Mr. Gagnon at the end of the day on November 6, 2015.
12. Events leading to the execution of Versatile’s Franchise Agreement on November 9, 2015
[139] On November 7, 2015, Ms. Graham sent the following e-mail to Mr. Khan and Mr. Khawaja:
I hope you are both well. I apologize for the confusion yesterday when you called me I was in a meeting. You to date have only signed one Franchise Agreement dated March 9th. When it was Sami and Nida Shahid for Versatile inc. When you were in the office that time with both Mr. Fakih and I we did not sign the Franchise Agreement you were re-disclosed on the location of Front and Eglinton with the details of Front which is why the documents are blank. If you remember you told me that Sami’s wife and Shahid would be signing this document and we did not sit down the four of us to sign this as we were waiting for Front St. to be approved. When you come and meet me at Crestlawn at 6:00pm on Monday both of you and your wife’s will need to be there if you would both like to keep the Agreements split like this. I have attached your March 9th Agreement that was signed generically. When you sign on Monday, there will be an Amendment stating that the March 9th Agreement will become Null and Void. I will still provide you a copy of this Agreement should you not have one but it is attached to this email. Please confirm we will be using Versitile inc. for Front St. and Sami your wife and Shahid will sign for Yorkdale for a company to be incorporated. I will need a copy of your wife’s Id, I already have Nida’s. I have confirmed with Rosanna we should have the Lease for Front by that point. Please let me know if you have any further questions. Have a great weekend. Thank you.
[140] I note that, contrary to what Ms. Graham stated in her e-mail, no written amendment to the Generic Franchise Agreement signed on March 9, 2015 was ever executed.
[141] On Sunday, November 8, 2015, Mr. Gagnon sent an e-mail to Rosanna Skinner, Paramount’s Manager of Corporate Services, copying Ms. Graham, with the subject line “85 front”. He stated, in part:
Please go through the final documents for 85 Front and put your hands on the signed documents or the latest documents from both sides on the lease assignments and APA for Front, IN ONE EMAIL and send them to Holly and myself Monday morning as we need to send these to the franchisee
Please gather the latest docs for Yorkdale and do the same please for Holly.
There has been many docs exchanged in the last week ... We need the latest latest ones
[142] Ms. Skinner sent the requested documents for the Front Location in the morning of November 9, 2015, which included: (1) a signed Asset Purchase Agreement dated September 22, 2015; (2) a signed Amending Agreement to the Asset Purchase Agreement dated October 8, 2015; (3) a signed Second Amending Agreement to the Asset Purchase Agreement dated November 6, 2015; and (4) a draft Amending and Consent to Assign Agreement regarding an Offer to Lease dated November 20, 2015. On December 3, 2015, Ms. Graham sent an e-mail to Mr. Gagnon stating that she had printed the documents sent by Ms. Skinner in this e-mail and given copies to the franchisees when signing the franchise agreement.
[143] As stated above, Everest was incorporated on November 9, 2015.
[144] Also on November 9, 2015, Mr. Fakih came back to Mr. Khan and Mr. Khawaja about the Heartland Location. He mentioned a lower purchase price of $1.85 million. By that time, neither Mr. Khan nor Mr. Khawaja had ever had any discussion with Mr. Munir or anyone else involved at the Heartland Location. Ultimately, Mr. Khan and Mr. Khawaja agreed to that price in November 2015.
13. November 9, 2015 meeting and execution of Franchise Agreement by Versatile
[145] On November 9, 2015, Mr. Khan and Ms. Shahid met with Ms. Graham at the Crestlawn Location in relation to Versatile. Mr. Khawaja was also present.
[146] According to Mr. Khan and Ms. Shahid, they received a disclosure document on November 9, 2015 – which was dated “current as of July 3, 2015”, only had 51 pages, and was obviously incomplete – and they signed a Receipt. Neither of them reviewed the disclosure document. Mr. Khan and Ms. Shahid stated that Ms. Graham specifically directed them to sign but not date the Receipt, and they did as instructed. In addition to signing the Receipt, Ms. Shahid and Mr. Khan each initialed the second page of the Certificate. Their evidence was that Mr. Fakih had not signed the Certificate, the signature blocks were blank and the document was undated.
[147] Also on November 9, 2015, Mr. Khan and Ms. Shahid caused Versatile to enter into certain agreements for the operation by Versatile of a Paramount Fine Foods franchise. These agreements, some of which were entered into personally by Mr. Khan and Ms. Shahid, included the following:
a. Franchise Agreement dated November 9, 2015 (“Versatile Franchise Agreement”);
b. Guarantee dated November 9, 2015;
c. Acknowledgement dated November 9, 2015;
d. General Security Agreement dated November 9, 2015;
e. Sublease dated November 9, 2015 (with no head lease attached); and
f. Telephone Assignment Agreement dated November 9, 2015.
[148] It is agreed that the documents in subparagraph a, b, d and f above are “franchise agreements” within the meaning of subsection 1(1) of the Act. Neither the Versatile Franchise Agreement nor the other documents signed on November 9, 2015 refer to the Generic Franchise Agreement.
[149] The following documents were also attached to the Versatile Franchise Agreement, which are the same documents that were sent by Ms. Skinner to Ms. Graham and Mr. Gagnon in the morning of November 9, 2015:
a. Asset Purchase Agreement dated September 22, 2015 between Paramount Leasing and Thai Pan Restaurants Inc., Amending Agreement dated October 8, 2015, and Second Amending Agreement dated November 6, 2015; and
b. Draft Amending and Consent to Assignment Agreement dated November 20, 2015 between Market Lofts Inc. (the landlord), Thai Pan Restaurants Inc. and Paramount Leasing.
[150] Mr. Khan and Ms. Shahid did not read what they signed.
[151] Mr. Khan’s affidavit evidence was that neither he nor Ms. Shahid received signed copies of the Versatile Franchise Agreement and other documents on November 9, 2015. He stated that Ms. Graham retained all copies of the documents and, after they were executed by Mr. Fakih on behalf of Paramount, she provided them with fully executed copies on November 10, 2015. The Receipt and the second page of the Certificate were attached to the front of the executed Versatile Franchise Agreement. The date fields in the Receipt and the Certificate, now signed by Mr. Fakih, had all been filled in as “October 23, 2015”. Mr. Khawaja’s evidence on this point was similar. He stated that Ms. Graham returned the documents to him on November 10, 2015.
[152] The evidence regarding the 51-page disclosure document allegedly received on November 9, 2015 is highly disputed.
[153] Mr. Khan stated in his affidavit that the 51-page document was the only disclosure document that he or Ms. Shahid received in relation to Versatile’s franchise (aside from the base disclosure documents sent by e-mail by Ms. Graham). However, he stated during his examination for discovery that he had received many disclosure documents with respect to the Front Location.
[154] Ms. Shahid stated that she thought that Mr. Khawaja took the disclosure document with him at the end of the meeting on November 9, 2015.
[155] A significant issue with Mr. Khan’s and Ms. Shahid’s evidence regarding the disclosure document allegedly received on November 9, 2015 is that Mr. Khawaja sent the exact same 51-page disclosure document by e-mail to Mr. Gray three days earlier, on November 6, 2015.
[156] Mr. Khawaja’s evidence at trial was different than Mr. Khan’s and Ms. Shahid’s evidence. He said that he brought with him to the November 9, 2015 meeting a copy of the disclosure document that he had sent to David Gray on November 6, 2015, and he asked Ms. Graham to confirm that it was Paramount’s disclosure document for Versatile. According to Mr. Khawaja, Ms. Graham so confirmed and he left the meeting with the document.
[157] Mr. Khawaja’s evidence regarding bringing a disclosure document with him to the November 9, 2015 meeting and taking it back home after the meeting is inconsistent with the evidence he gave during his examination for discovery, where he did not remember who took the disclosure document on November 9, 2015 and whether he had left with a copy. It is also inconsistent with the following answer to undertaking:
To review records and make inquiries to determine who took the single hard copy disclosure document given to the plaintiffs on Nov 9, 2015 and determine whether that document scanned. If the document was scanned, and a scan is available, to produce that electronic copy.
Answer: Cannot determine who took the single hard copy disclosure document given to the plaintiffs on Nov 9, 2015, but it was likely Mr. Khawaja.
Mr. Khawaja has completed a thorough review of the records; he was unable to find any evidence that the hard copy disclosure document received on Nov 9 (Versatile FDD) was scanned and sent to anybody.
[158] On January 18, 2021, the answer was corrected to read as follows:
Answer: Cannot determine who took the single hard copy disclosure document given to the plaintiffs on Nov 9, 2015, but it was likely Mr. Khawaja.
The disclosure document dated July 3. 2015 was scanned. On at least two occasions during the first half of November 2015, Mr. Khawaja sent the scanned version of the July 3, 2015 disclosure document to Mr. Gray.
[159] Ms. Graham denied giving a disclosure document to Mr. Khan and Ms. Shahid on November 9, 2015. Further, her evidence was that it was impossible that she could have given a 51-page disclosure document to Mr. Khan, Ms. Shahid and Mr. Khawaja and/or confirmed that such a document was the correct disclosure document. When asked why this was impossible, she stated the following:
Because I worked with this document every day for the last year and there is zero chance that I would look at this and see it as a complete document.
[160] In the evening of November 9, 2015, Mr. Gagnon sent an e-mail to Ms. Graham asking her about her meeting with Mr. Khan and Mr. Khawaja. She responded as follows the following morning:
They didn’t sign yorkdale. They wanted to have there lawyer review the hard copy to ensure it is the same. They didn’t want to use the soft copy I had sent them. They were only In a rush for front. The signing for front went fine. They are getting their corporation tomorrow for yorkdale and will sign this week. Mohamad happened to come into crestlawn and joined us for a bit. I think they are reconsidering taking heartland. They would still take front regardless. They will confirm within 24 hours.
[161] Mr. Gagnon responded to Ms. Graham’s e-mail on November 10, 2015. He stated the following:
Please confirm my understanding:
Front FA is signed and you have cancelled the no longer necessary extra FAs. DD provided and properly dated ...
They are OK with the receipts Dave prepared
They will sign the FA for Yorkdale this week ... When. Maybe you can ask them to give you the third check for $250,000 at the same time and then Dave can send them a receipt in the same format as the other two.
What about Eglinton, either 45 or 75. Are they still interested in that third one?
[162] Ms. Graham sent the following response on the same day:
They are okay with front and need no more documentation. Yorkdale they will confirm when they can skin [sign] this week. The third location eglinton they still want but need to decide exact corporation split and who is on the agreement they said they should have finalized by the end of the week. They wanted their lawyer to confirm the receipt is okay. When I am asking for the additional 250k which location is this for? Front or eglinton? […]
[163] On November 10, 2015, at 11:13 a.m., Ms. Graham sent a reminder e-mail to herself which stated: “Dd to Sami”, i.e. disclosure document to Mr. Khan. She did not recall what this reminder related to.
[164] On November 10, 2015, just before noon, Mr. Khawaja sent an e-mail to Mr. Gray with an attachment. The e-mail stated: “here is the 85 Front St east Paramount Already signed lease agreement.” According to Mr. Khawaja, the attachment to his e-mail was what he received back from Ms. Graham on November 10, 2015. The attachment to the e-mail included the following: (1) a Receipt dated October 23, 2015 signed by Mr. Khan and Ms. Shahid; (2) the second page of the Certificate signed by Mr. Fakih on behalf of Paramount dated October 23, 2015; and (3) the Versatile Franchise Agreement and related agreements signed on November 9, 2015.
14. November 12, 2015 events
[165] On November 12, 2015, Ms. Graham sent an e-mail to Mr. Khan and Mr. Khawaja with the subject line “DD” attaching again Paramount’s base disclosure document dated “current as of September 1, 2015”, i.e. the same document that she had sent to them by e-mail on November 6, 2015.
[166] On November 12, 2015 at 3:45 p.m., Mr. Gray sent an e-mail to Mr. Khawaja with the subject line “updated project list”. The first point set out in his e-mail read as follows:
Please provide me with the exact details and confirmation as to receipt of disclosure for both front and yorkdale, including: (i) who received disclosure, (ii) what disclosure was received: (iii) any financials provided outside of disclosure; (iv) what documents have been signed to date (and copies of same). I NEED THIS INFORMATION BEFORE I CAN COMPLETE MY REVIEW.
[167] Later on November 12, 2015 (4:54 p.m.), Mr. Khawaja sent to Mr. Gray the same 51-page disclosure document current as of July 3, 2015 that he had sent to him on November 6, 2015. Mr. Khawaja stated the following in his e-mail to Mr. Gray:
here is the disclosure for 85 front st. documents. plz note we have promised to give 350,000 dollars first payment chq to paramount tomorrow. so if by end of today you can review franchise agreement & also disclosure agreement, I can negotiate or protect ourself before giving the the payment for yorkdale mall.
[168] Mr. Gray responded to this e-mail as follows:
I will do my very best, but do please respond to my last email (ie, what are the chain events in respect of the receipt of disclosures (ie, when, by whom, etc.).
15. Provision of information regarding the Heartland Location
[169] On November 12, 2015, Mr. Khan called Mr. Fakih’s assistant to request a copy of the “financials” for the Heartland Location. At 5:27 p.m., Mr Fakih forwarded to Mr. Khawaja and Mr. Khan sales reports that he had received earlier that day from the Chief Operating Officer of Mr. Munir’s company, Jay Yordi. Mr. Fakih stated the following in his forwarding e-mail to Mr. Khawaja: “here tomorrow more”.
[170] At approximately 1 a.m. on November 13, 2015, Mr. Khawaja sent the following e-mail to Mr. Fakih:
THANK YOU SO MUCH for giving us the opportunity of Heartland Location. Apart from business you are also a Gentlemen, and we always appreciate that, you are very accommodative, Understandable & coming up with right solutions.
The heartland location sale attachments report & screen shots are not readable. please send us the detailed sale reports & financial statements for last 3 to 4 months or since the store started.
and also pls send us all the Heartland documents (lease agreements, schedules, amendments, Aps) whatsoever is required to draft the offer. we will inshallah register our company tomorrow and need to send all documents to the lawyer to draft APS & start working.
[171] Early on November 13, 2015, Mr. Fakih responded as follows:
thanks shahid,
shami please arrange whatever financial stamens you have ready and send them
All this will come from Rosanna [Skinner] as paperwork.
as you know as a franchisor we have no access to those numbers or anything that relates to financial statements before end of his financial year.
Shami will send.
[172] Later that morning, Mr. Fakih sent the following clarification to Mr. Khawaja, with a copy to Ms. Graham and Mr. Munir:
I meant the lease info will come from Rosanna
we have nothing to do with statments
[173] Mr. Fakih subsequently forwarded to Mr. Khawaja and Mr. Khan the weekly reports for the Heartland location from August 3 to October 26, 2015 that Mr. Yordi had sent to him.
[174] Shortly thereafter, Ms. Skinner sent an e-mail to Mr. Khan and Mr. Khawaja attaching the head lease for the Heartland Location and a lease amendment agreement.
[175] Premium Host was incorporated on November 13, 2015. At that time, the three shareholders were Mr. Khawaja (51%), Adnan Siddique (39%) and Mr. Khan (10%).
16. Additional communications sent on November 13-15, 2015
[176] On November 13, 2015, in the afternoon, Mr. Gray sent the following e-mail to Mr. Khawaja with the subject line “front street”:
I looked through all of the documents that I printed out and I can’t seem to find the actual head lease for front street. Please send over asap as a stand alone attachment.
I looked at the disclosure for front street but not all of the pages are there. I need to see the actual hard copy version of what you have seen. Can you bring Monday morning?
[177] Mr. Khawaja replied and stated that he would bring the original with him at their meeting scheduled for Monday, November 17, 2015.
[178] After receiving Mr. Gray’s e-mail and his inquiry about the head lease for the Front Location, Mr. Khawaja sent the following e-mail to Mr. Gagnon, Ms. Graham, and Ms. Skinner:
85 front st east franchise agreement & discloser documents are missing the Head lease agreement or New Signed & accepted Agreement with landlord.
pls send me the accepted copy for 85 Front st east, Toronto at your earliest convenience.
[179] Ms. Graham sent the following response later that day:
I have printed and given you copies of everything we have at this point. We have not received back the signed finalized lease. This is something that can take a bit of time and they will courier to our office. I will send to you as soon as it is received. Thank you.
[180] Also on November 13, 2015, Mr. Gray sent an e-mail to Mr. Khawaja with the subject line “Yorkdale”. Mr. Gray advised Mr. Khawaja that he had reviewed the franchise agreement, lease as amended and agreement of purchase and sale, and he had “considered the lack of disclosure document”. Mr. Gray attached three reports to his e-mail. In one of them, the right to rescind a franchise agreement in the event the franchisor failed to provide a proper disclosure document was discussed. The report stated: “I confirm your advice that you have not been provided with a disclosure document, but your partner has received a disclosure for the Front Street location.” [Emphasis in the original.]
[181] On November 14, 2015, Mr. Fakih sent pictures of the Heartland Location to Mr. Khan and Mr. Khawaja with the subject line “full”.
[182] On November 15, 2015, Mr. Khawaja sent an e-mail to Mr. Fakih about the Heartland Location and requested documents from the current owner. In his response, Mr. Fakih stated: “as you all know I am only facilitating this deal.” He commented on the requests set out in Mr. Khawaja’s e-mail and said that he had forwarded them. Mr. Fakih did forward Mr. Khawaja’s e-mail and his response to Mr. Munir and Mr. Yordi. His forwarding e-mail read as follows:
read below
it’s up to you
start preparing list of employees (they want them all)
list of assets
list of contracts you have
as far as P/L I copied you on all and its your call.
17. November 16, 2015 meeting
[183] As instructed by Paramount, Everest provided a cheque in the amount of $150,000 payable to Paramount Leasing dated November 16, 2015. On that day, Ms. Graham and Mr. Khan exchanged e-mails about Mr. Khan dropping off the cheque at Paramount’s head office between 3 and 5 p.m. The e-mails were copied on Mr. Khawaja. At 2:34 p.m., Ms. Graham asked Mr. Khan to confirm the time at which he would be dropping off the cheque at Paramount’s head office. She told him to ask for Magda when he arrived. At 3:41 p.m., Mr. Khan advised that he had the cheque with him and that he could bring it to the Crestlawn Location and meet with Ms. Graham there. At 3:49 p.m., Ms. Graham informed Mr. Khan that she was no longer at the Crestlawn Location and asked him to bring the cheque to the head office before 5 p.m. She stated: “When I spoke to Shahid he advised you would bring it to the office after 3:00pm.”
[184] It is the evidence of Ms. Khan and Mr. Khawaja that they also went to Paramount’s head office at that time and received a disclosure document for Everest that was dated “current as of October 6, 2015”. The disclosure document that they say they received is, generally speaking, Paramount’s base disclosure document without any inserted schedules (such as the financial statements and the franchise agreement) and with pages 20-21 missing. Neither of them reviewed the disclosure document. Mr. Khawaja said that he also received at that meeting a copy of the head lease for the Yorkdale Location and a blank asset purchase agreement, but that these documents were not attached to and did not form part of the disclosure document. According to Mr. Khawaja, he looked through the disclosure document quickly and it contained “generic information”; it did not contain extra information compared to the other disclosure documents that he had previously received.
[185] Ms. Khan’s evidence about the November 16, 2015 meeting is a bit different. She said that she was driven by Mr. Khawaja to Paramount’s head office and that the meeting was only between Ms. Graham, Mr. Khawaja and her (she did not mention her husband being present). The meeting was in the evening. Her evidence was that this was the first time that she met Ms. Graham or anyone from Paramount. She believed that Mr. Khawaja took the disclosure document with him at the end of the meeting.
[186] Mr. Khawaja’s and Ms. Khan’s evidence was that they signed a Receipt on November 16, 2015. They said that Ms. Graham specifically directed them to sign but not date the Receipt, and they did as instructed. In addition to signing the Receipt, Mr. Khawaja and Ms. Khan each initialed the second page of the Certificate. However, Mr. Fakih had not signed the Certificate, the signature blocks were blank and the document was undated. Mr. Khawaja and Ms. Khan stated that they did not receive a copy of the Receipt and the second page of the Certificate until December 21, 2015 which was then dated October 23, 2015.
[187] In response to an undertaking to review records to determine who took the disclosure document home when it was allegedly received on November 16, 2015, Mr. Khawaja indicated that he had reviewed his records, but could not recall which of the partners took this disclosure document home when it was initially provided. He also could not find any digital version of it.
[188] Ms. Graham’s evidence was that she had no recollection of having a disclosure meeting with Mr. Khawaja and Ms. Khan on November 16, 2015. She pointed out that her e-mails with Mr. Khan on that day only provided for him to drop off a cheque. She also stated that it was not possible that she could have given to Mr. Khawaja and Ms. Khan the disclosure document that they say they received on November 16, 2015 as it was too small and she would have known that things were missing from it. Ms. Graham’s evidence was that she never provided a disclosure document dated “current as of October 6, 2015” to Mr. Khawaja and Ms. Khan.
18. Meeting and communications between Mr. Gray and Mr. Khawaja on November 16-17, 2015
[189] Mr. Khawaja had a meeting with Mr. Gray on November 16, 2015. As agreed, he brought with him the hard copy of the 51-page disclosure document dated “current as of July 3, 2015” and left it with Mr. Gray. Mr. Gray confirmed that the hard copy document was identical to the scan that Mr. Khawaja had previously sent. The hard copy disclosure document remained with David Gray until late September 2017. This is the only hard copy disclosure document that Mr. Gray received from Mr. Khawaja.
[190] Mr. Gray sent an e-mail to Mr. Khawaja in the evening to confirm the main issues that were discussed during the meeting. The e-mail included the following point:
In terms of disclosure document, you provided to me an unbound and unsigned partial general form of disclosure document. We discussed your apparent franchise rescission rights and that you must diarize your calendar for no more than 2 years after the date you sign the agreement. We reviewed my report in this regard.
[191] On November 17, 2015, Mr. Khawaja forwarded to Mr. Gray Ms. Graham’s e-mail dated November 12, 2015 with the attached Paramount disclosure document dated “current as of September 1, 2015”. Mr. Khawaja indicated in his e-mail to Mr. Gray that he was sending the current disclosure document that he had received on November 12, 2015. Mr. Khawaja’s evidence as to why he sent this e-mail to Mr. Gray was as follows:
The confusion was still there. We were very happy with signing the franchise agreement. Lawyer is looking for a disclosure document, so I forwarded this email because when I got the November 6th email and then this November 12th email, the lawyer was asking me. So, I’m looking for some papers which are – that should be disclosure document. So, I never knew what is the disclosure document, so I was sending to David Gray on behalf of Nida and Sammy, that here, we got the disclosure document finally, so you can have it.
[192] Mr. Khawaja also stated the following with respect to the information that he sent to Mr. Gray:
Q. Did you give Mr. Gray any of the purported disclosure documents that you received from Paramount?
A. Yes, I do.
Q. Okay, and which ones did you give to Mr. Gray?
A. So, I gave – because Versatile was our first one, and because Nida was the one who was partner and shareholder, so on behalf of Nida I gave Mr. David Gray the actual copy to Mr. David Gray.
Q. Aside from Versatile, did you give David Gray disclosure, or purported disclosure, documents for Everest or Premium Host?
A. So, I sent through email the one came in Versatile, but not physical copies.
Q. SO, aside from Versatile, did you ever give Mr. Gray an Everest disclosure document or a Premium Host disclosure document?
A. So, at that time, I think all – for me, as I never knew what is the disclosure document at that time, as the real – what’s the need of it, so I was more focusing towards franchise agreement, because that was, I think, was the most important thing, and the second thing that was important was the lease. So, as a hardcopy that was the only one, what I provided them, not the other ones.
Q. And when you say “the only one” in hardcopy, which unit are you referring to?
A. Versatile.
Q. Versatile. So, why was it that you gave Mr. Gray only one of the hardcopies that you received of the disclosure documents?
A. Because I said, at that time, I was not knowing the importance of the disclosure document, but we were, because Mr. David was asked this question in between that time period when we contacted Mr. David Gray until all these three companies and all these partners were coming. So, time-to-time he was asking me about it, the chain, how I get it, the emails, what I send, I forward him, and I send everything to Mr. David Gray – most of the thing to Mr. David Gray. The only thing, because this disclosure document, what I got with Nida and Sammy, and even the other ones when I got, it was all the same, which was partial blank. So, I was thinking it’s pretty much, like, you know, it’s the same thing I’m paying for again and again, and we, all partners are paying for same thing, if it’s the same blank document, so what’s the point? I think that I’m paying again and again for the same fees. So, I was looking for if it’s something different, sure. Like, anything comes, I forward to the lawyer.
19. November 18, 2015 communications and letter of intent regarding the Heartland Location
[193] Mr. Khawaja, Mr. Khan, Mr. Fakih and Mr. Gagnon had a meeting on November 17, 2015. On November 18, 2015, Mr. Gagnon sent the following e-mail to the people who attended the meeting:
Here are the notes from our meeting yesterday. We will need to make amendments to the franchise agreements already signed and prepare a new agreement for Hearltand when all parties agree. We will prepare all those together in order to execute all at the same time and have clean final copies of these 3 deals.
In the meantime, please let me know if these notes are what was discussed
Amendment to Heartland franchise agreement. Franchisee is PREMIUM HOST INC. Cross default with other franchise agreements signed for Front and Yorkdale do not apply
Amendment to Front agreement Territory will be 1KM excluding existing locations if any Removal of 10% construction fee from FG
Amendment to Yorkdale agreement Territory of 2KM excluding existing locations if any Exclusivity for length of agreement in Yorkdale region Second ROFR on Square One location after the existing one granted to another franchisee
[194] Later on November 18, 2015, Mr. Khawaja sent the following e-mail to Mr. Fakih regarding the Heartland Location:
as discussed and agreed, here is the Letter Of Intent with changes of deposit holder will be Paramount Franchise Inc.
we also attached the copy of the Bank Draft of 500,000 and please get the letter of intent acceptance and all other related undertakings as mutually agreed along with the your letter.
upon acceptance of LOI we can drop off the Bank draft even tonight or tomorrow anytime.
[195] Mr. Fakih’s assistant shortly thereafter forwarded the letter of intent to Mr. Munir. She asked him to sign it and return it to her or Mr. Fakih.
[196] The $500,000 bank draft referred to in Mr. Khawaja’s e-mail was made to Paramount Leasing. There was a corresponding invoice dated November 17, 2015 from Paramount Leasing to Premium Host in the amount of $500,000 for the item “Heartland Asset Sale” and with the following description: “Deposit on purchase of Heartland asset from Shami Munir This deposit is fully refundable if the transaction is not executed”.
[197] Mr. Fakih’s evidence was that the deposit for the asset purchase transaction was accepted by Paramount Leasing at the direction of Mr. Munir. On November 18, 2015, Mr. Fakih signed a “Franchisor Undertaking” on behalf of Paramount Leasing to Premium Host with the Re line: “Premium Host Inc. purchase from 2455824 Ontario Ltd. (the “Vendor”) operating as Paramount Fine Foods restaurant on 5700 Mavis Road, Mississauga, ON”. The Franchisor Undertaking read as follows:
IN CONSIDERATION OF inducing the purchaser [i.e. Premium Host] to enter into the letter of intent dated November 18, 2015 (the “LOI”) regarding the captioned matter, and other good and valuable consideration, the undersigned hereby irrevocably agrees to fully adhere to the undertaking contained in Subsection 4(a) of the LOI, being:
“4(a) $500,000 deposit (the “Deposit”) to be held by Paramount Franchise Inc.’s (“Franchisor”), in trust Account upon execution of this letter of intent, and credited against the purchase price on the Closing Date. In the event that this transaction does not close for any reason whatsoever or howsoever, including the Purchaser’s default, the Deposit shall immediately be returned to the Purchaser without set off or deduction of any kind [ ... ]”.
For the avoidance of any doubt in the event that the captioned transaction does not close for any reason whatsoever or howsoever, including the Purchaser’s default, the undersigned undertakes to immediately return the Deposit to the Purchaser without set off or deduction of any kind.
The undersigned further undertakes not to release the Deposit to the Vendor, or any other party, except the Purchaser, until the captioned transaction is closed and it receives written authorization to do so from the Purchaser, or its counsel.
[198] On November 22, 2015, Premium Host and 245 signed a letter of intent setting out the general terms and conditions of the proposed purchase of the Heartland Location restaurant as a going concern, as well as the assets and inventory of the franchise. While the document was signed on November 22, 2015, the letter of intent is dated November 18, 2015.
20. Communications regarding the Heartland Location on November 23-28, 2015
[199] On November 23, 2015, Mr. Khawaja sent an e-mail to Mr. Gray to instruct him to remove Mr. Siddique from Premium Host. Mr. Siddique had apparently changed his mind about getting involved in the business. Mr. Khawaja indicated in his e-mail that, at that time, the shares could be split 90% to him and 10% to Mr. Khan. He also stated that he would let Mr. Gray know the following day about any new partner.
[200] On November 24, 2015, Mr. Khawaja sent an e-mail to Mr. Gagnon and Ms. Skinner asking them to ask the vendor of the Heartland Location to provide a series of documents/information that had been requested by Mr. Khawaja’s lawyer to draft an agreement of purchase and sale.
[201] Mr. Gagnon responded as follows later on November 24, 2015:
I am forwarding your email to Shami and Jay to act of this. As you know Paramount is not the Seller, therefore the information for an APA between parties must be provided by the Seller and the Purchaser
In regards to Paramount, we will provide the following at closing
Our approval to the transfer of the franchise rights from Shami to you Cancelling the existing franchise agreement and sub lease Preparing a new franchise agreement and sub lease from Paramount to you
Since we are buying the assets at closing, we will resell them to you the following day at the same price and conditions on an invoice format agreed with Claus and Margaret
[202] Mr. Gagnon copied Mr. Fakih on his e-mail. A few minutes later, Mr. Fakih sent the following e-mail to all the recipients:
we agreed the financials they provided all what he is doing
the don’t have last year
what they owe supplier isn’t our business they will pay
please call me for discussions.
[203] Mr. Khawaja sent the following response to Mr. Fakih:
i spoke to our lawyer, so everything should be ok, and Purchase agreement is almost drafted, i will try to send by tomorrow or latest thursday. also working with shami Banker to get the bank approval faster. inshallah. we are communicating with michel & rosanna to get the paper work done in expedite manners. and will keep you posted.
[204] On November 26, 2015, Mr. Khawaja sent the following e-mail to Mr. Fakih and Mr. Gagnon, with a copy to Mr. Khan:
as you know we are working with shami financial guy to get the mortgage done thru BMO of the amount of 500 k .. so that guy is asking for interim financial statement from Mr shami.
I think he spoke to mr shami about this matter couple of time. The bank will not start the process of financing until they have these Financials. I also need following documents on earliest possible basis to get the other things going smoothly
also If you want me to ask all these documents directly from shami manager I believe is Jay, then future I can do that too?
I have requested Mr. Shami for Interim Financial statement but have not received
[205] Mr. Gagnon responded as follows:
I am forwarding this to Jay and I suggest that you communicate directly with him on these issues. In regards to financial statements for the Bank, lets see if we can fix that. Ask Claus to call me on this particular subject ... The store has only been open a few months .... There are no need for financials in my humble opinion. You have sales, rent and Claus can calculate everything else
[206] Mr. Fakih also forwarded Mr. Khawaja’s e-mail to Mr. Yordi with the following note: “please arrange asap”.
[207] On November 28, 2015, Mr. Khawaja sent an e-mail to Mr. Munir requesting various documents and information, including Mr. Munir’s existing franchise agreement, disclosure document and sublease agreement. Mr. Gagnon, who was copied on the e-mail, sent the following e-mail in response:
For clarification you will not receive s copy of Shami’s franchise agreement and sub lease. these will be cancelled and new ones made with us directly as said in my earlier email
[208] Also on November 28, 2015, Mr. Khawaja sent an e-mail to Mr. Fakih and Mr. Gagnon, with the subject line “APS for Mavis Location”, asking them to follow up with Mr. Munir as to whether he was fine with the draft agreement of purchase and sale which had been sent to him. Mr. Gagnon responded as follows:
Copies of the APA will be sent early next week as soon as they arrive from our lawyer and Holly will need to meet with you next week to sign a new franchise agreement
We will contact you when ready
[209] On the same day, Mr. Khawaja sent another e-mail to Mr. Fakih and Mr. Gagnon asking them to ask Mr. Munir to provide certain information. Mr. Fakih told Mr. Khawaja to ask Mr. Munir for this information as it was with him, not them.
21. November 28, 2015 meeting
[210] It is Paramount’s position that it provided a disclosure document to Mr. Khawaja and Mr. Khan in relation to Premium Host on November 28, 2015, which is denied by them. Paramount relies on a Receipt dated November 28, 2015 that was signed by Mr. Khawaja, Mr. Khan and Dr. Sheikh. The dates were inserted by Ms. Graham. The copy of the disclosure document that Paramount says was provided on November 28, 2015 is dated “current as of September 1, 2015”. It is admitted that the disclosure document included the wrong financial statements, i.e. the financial statements of Paramount Leasing instead of Paramount. The disclosure document also included the head lease for the Heartland Location dated March 18, 1999 and a draft Heartland Amending Agreement between Paramount, Premium Host, Mr. Khawaja, Mr. Khan and Dr. Sheikh.
[211] Mr. Khawaja’s evidence was that he was busy with appointments for his real estate clients on November 28, 2015, which was a Saturday. He stated that he did not have time to meet – and did not meet – with any representative of Paramount on November 28, 2015, and he did not receive any disclosure document in respect of Premium Host on that day. In addition, he said that as of November 28, 2015, the partners who were going to be involved in Premium Host had not been determined.
[212] Dr. Sheikh’s evidence was that he did not receive a disclosure document and did not sign a Receipt on November 28, 2015 as, at that time, he had no knowledge of or involvement in Premium Host. Further, and in any event, he was not available to meet with anyone on November 28, 2015 as he was on 24-hour call at a medical facility in Ajax on November 27 and 29, 2015 and he had to rest on November 28, 2015 in order to be sufficiently refreshed to go back on 24-hour call the following day. Dr. Sheikh’s evidence was that he only signed a Receipt on December 15, 2015.
[213] Ms. Graham had no recollection of a meeting on November 28, 2015. She did not recall whether she provided a disclosure document to Mr. Khawaja, Mr. Khan and Dr. Sheikh all at the same time with respect to the Heartland Location. She could not explain why there was a receipt dated November 28, 2015 with Dr. Sheikh’s signature on it. She agreed that she could not have disclosed Dr. Sheikh on November 28, 2015 and witnessed his signature on the Receipt that day.
[214] Given that Paramount was unaware of Dr. Sheikh on November 28, 2015, not only could he not have signed a Receipt on that day, but the draft Heartland Amending Agreement between Paramount, Premium Host, Mr. Khawaja, Mr. Khan and Dr. Sheikh that Paramount says was included in the disclosure document could not have been prepared or provided on November 28, 2015.
22. November 30, 2015 meeting
[215] On November 30, 2015, at 1:31 p.m., Ms. Graham sent the following e-mail to Mr. Khan and Mr. Khawaja:
I hope you are both well. As there has been some changes in locations we want make sure we all have the right documentation on our end. Can you please confirm the corporation and guarantors on each of the following:
Front
Yorkdale
Heartland
Kindly send to me as soon as you are able. Thank you.
[216] It is Paramount’s position that a disclosure document was provided to Mr. Khawaja, Ms. Khan and Mr. Jamil in relation to Everest on November 30, 2015, which is denied by them. The disclosure document that Paramount says it provided on November 30, 2015 is dated “current as of September 1, 2015”. It included a copy of the head lease between Yorkdale Shopping Centre Holdings Inc. and Famoso dated July 8, 2011, a Lease Amending Agreement dated April 3, 2012, a draft Consent to Assignment of Lease dated November 16, 2015, a draft Asset Purchase Agreement dated October 2015 and an Amending Agreement dated November 20, 2015 (partially signed).
[217] Mr. Khawaja’s evidence was that he was busy with appointments for his real estate clients on November 30, 2015. He stated that he did not have time to meet – and did not meet – with any representative of Paramount on November 30, 2015, and he did not receive any disclosure document in respect of Everest on that day.
[218] Ms. Khan’s evidence was also that she could not have met with a representative of Paramount on November 30, 2015 as she was working at Erin Mills Town Centre from 10:30 a.m. until 6:30 p.m. She stated that she did not have time to meet with a representative of Paramount or anyone else on November 30, 2015. Further, her evidence was that she met with people from Paramount only twice: on November 16 and December 18, 2015.
[219] Mr. Jamil’s evidence was that he did not receive a disclosure document and did not sign a Receipt on November 30, 2015 as, at that time, he had no knowledge of or involvement in Everest. Further, and in any event, he was completely occupied with his real estate business on that day and did not have time to meet with a representative of Paramount.
[220] In the course of the litigation, Paramount produced a 3-page Receipt dated November 30, 2015. The parties have agreed to the following with respect to this Receipt:
a. The signature in the name of “Zarmina Khan” is authentic, in that it was made by the hand of Zarmina Khan. The “Zarmina Khan” signature block is the result of a cut and paste fabrication, where an authentic signature has been lifted, copied, or cut from another document and applied to the Receipt. None of the parties to this litigation have identified or produced the source document from which the “Zarmina Khan” signature was lifted, copied, or cut;
b. The signature in the name of “Shahid Khawaja” is an authentic signature, in that it was made by the hand of Shahid Khawaja, directly to the Receipt;
c. The signature above the printed name “JAMIL YOUSAF” is inauthentic, in that it was not made by the hand of Yousaf Jamil. The signature is likely the product of a tracing process; and
d. On each page of the 3-page Receipt, Ms. Graham filled in the date in the “RE” line, signed and printed her own name, and filled in the blanks beside the words “DATED at”.
[221] I also note that, with respect to the Receipt signed by Mr. Jamil, there is white out near the signature line, there are small holes in the page, and Mr. Jamil’s name is written backwards under the signature line (i.e. Jamil Yousaf instead of Yousaf Jamil).
[222] Paramount also produced a Certificate signed by Mr. Fakih dated November 30, 2015, which was initialed by Mr. Khawaja. Mr. Khawaja stated that he did not initial a Certificate on November 30, 2015. He stated that he did so on November 16, 2015.
[223] Ms. Graham had no recollection of a meeting on November 30, 2015. Her evidence was that she did not know how it came to pass that her signature as a witness was on a document where there had been a cut and paste of Ms. Khan’s signature and where there was an attempt to sign Mr. Jamil’s signature for him. She stated that she did not remember giving a disclosure document to Ms. Khan and Mr. Jamil, but she believed that she did because they were franchisees. She also stated that she met with Ms. Khan multiple times before she signed the franchise agreement for Everest.
[224] Ms. Graham admitted that it was possible that the Receipt was not signed in front of her, even though she signed the Receipt as a witness. She said that she could have put her signature and the date before the Receipt was signed. She could not explain how the two Receipts purportedly signed by Ms. Khan and Mr. Jamil got into Paramount’s file.
23. Agreement of purchase and sale for the Heartland Location
[225] Further to the letter of intent dated November 18, 2015, Premium Host and 245 entered into an Agreement of Purchase and Sale dated December 1, 2015 regarding the Heartland Location. The preamble to the agreement described what was being purchased and sold as follows: “the Business [defined as a “Paramount Fine Foods” franchised business under license to Paramount Franchise Group Inc.], as a going concern, and substantially all the assets, goodwill, property and undertakings of and pertaining to the Business”. The closing date was December 15, 2015, but it could be extended by up to 28 business days by Premium Host by giving written notice of no less than four calendar days prior to the closing date, or such other date as the parties may agree in writing as the closing date.
[226] One of the representations and warranties given by 245 was that the franchise agreement and sublease related to the Business had been terminated as of the closing date. Further, Premium Host’s obligation to complete the transaction was subject to a number of conditions, including the following condition:
Signing Franchise Agreement and sublease: The Purchaser signs a new franchise agreement and sublease on terms acceptable to it.
[227] On December 2, 2015, Ms. Graham sent the following e-mail to Mr. Khan and Mr. Khawaja, following up on her e-mail of November 30, 2015 in which she was asking for information regarding the corporations and guarantors for the three locations:
I just wanted to follow up with my email below. Front will stay as versatile, yorkdale Everest. Please confirm corporation for Heartland and Guarantors. I will need to disclose on Heartland before the end of the week to close for the 15th. Can you advise availability for tomorrow or Friday? Thank you.
[228] On December 3, 2015, Mr. Munir and Mr. Yordi sent some information to Mr. Khan and Mr. Khawaja by e-mail in preparation for the closing of the transaction for the Heartland Location. On December 4, 2015, they exchanged the contact information of their respective lawyers. Mr. Fakih and Mr. Gagnon were copied on these e-mails. On December 4, 2014, Mr. Fakih sent the following e-mail:
great everyone
ease [please] make sure the drafting lawyer send us documents for our approval and consent.
24. Start of discussions regarding construction and Dr. Sheikh’s involvement in Premium Host
[229] On December 2, 2015, Mr. Khan and Mr. Khawaja had a meeting with Ms. Leenders regarding construction at the Front Location. Ms. Leenders sent an e-mail to Mr. Khan and Mr. Khawaka summarizing the meeting on December 4, 2015. She stated in her e-mail that Mr. Khan and Mr. Khawaja had to review the construction agreement which needed to be signed and returned for both Versatile and Everest.
[230] On December 3, 2015, at 7:33 a.m, Mr. Khawaja sent an e-mail to Mr. Gray attaching a copy of Dr. Sheikh’s driver’s licence. He stated the following in his e-mail:
here is the 3rd partner id .. he is going as 30 % partner in premium host inc. Gul nawaz is also a doctor ..
i will give you green light by tomorrow 1 pm to go ahead to start paper work to add his name
[231] According to Mr. Khawaja, Dr. Sheikh had not yet agreed to invest in Premium Host when he sent this e-mail to Mr. Gray.
[232] The evidence of both Mr. Khawaja and Dr. Sheikh was that Mr. Khawaja went to Dr. Sheikh’s house unannounced in the afternoon of December 3, 2015. Mr. Khawaja then talked to Dr. Sheikh about becoming a shareholder of Premium Host. Dr. Sheikh did not have any knowledge about Premium Host prior to that day. He decided to invest in Premium Host that same day. I note, however, that Mr. Khawaja’s evidence was not totally clear on this point as he suggested at trial that there could have been a telephone conversation prior to December 3, 2015.
[233] On December 3, 2015, Ms. Graham sent an e-mail to Mr. Gagnon and others indicating that she was going to disclose Mr. Khan and Mr. Khawaja regarding the Heartland Location that week. She stated that she had sent an e-mail to Mr. Khan to try to confirm a time for the following day and “confirm his corporation documents”.
[234] On December 4, 2015, Mr. Khawaja sent an e-mail to Mr. Gray confirming that Dr. Sheikh should be added as a shareholder of Premium Host:
as discussed this morning. pls add Gul nawaz sheikh as 30 % partner in premium host and also file Form 1 to do the final deletion of adnan name and also adding of the new partner name.
also for mavis location the shareholders agreement is also the next step.
[235] Dr. Sheikh’s evidence was that he formally became a shareholder of Premium Host on December 8, 2015.
25. Communications regarding the Yorkdale Location on December 3-7, 2015
[236] On December 3, 2015, Mr. Gagnon sent the following e-mail to Ms. Graham and Ms. Skinner with the subject line “leases”:
For Famoso/Yorkdale did we send the documents to the franchisees before we signed off of this?
Lets make sure the franchisee approves by email the final documents before we sign off
[237] Ms. Graham replied that she “had given them everything we had known yorkdale at the time of disclosure.”
[238] Later on December 3, 2015, Mr. Gagnon forwarded to Mr. Khan and Mr. Khawaja a Consent to Assignment of Lease dated November 16, 2015 between Famoso Inc. and Paramount Leasing regarding the Yorkdale Location. He stated in his e-mail: “See attached. Please review and sign the document acceptance of offer to lease and return it to us asap. We will sign the final documents following your acceptance.”
[239] On December 5, 2015, Mr. Gray sent an e-mail to Mr. Khawaja setting out a short report with respect to the Yorkdale Location. The report read, in part:
We reported on the signed franchise agreement that you provided to us. We noted that you also provided with what appears to be a partial unbound disclosure document. You indicated that the form you provided to us is the form you received it in. I noted that it appears highly unusual for you to receive it in such a form and that if in fact this is how you received it then you had a rescission claim available; within 2 years from the date you signed the agreement. We reviewed your rescission rights and we told you that if this store is really in trouble, or if you otherwise wish to get out then please call us well before the 2 year date;
We reviewed the lease; amendment to lease and an unsigned consent to assign a lease. WE CONFIRMED OUR GREAT RESERVEATIONS WITH THIS DEAL WITHOUT MAJOR CHANGES TO THE LEASE TERMS.
[240] At trial, Mr. Khawaja admitted that he did not give to Mr. Gray a copy of the disclosure document that he received for the Yorkdale Location. Mr. Gray did not remember what the words “partial unbound disclosure document” in the e-mail above referred to, but he confirmed that he had only received one paper copy of a disclosure document from Mr. Khawaja, i.e. the 51-page disclosure document. He also could not remember whether Mr. Khawaja had told him that the hard copy that he had was to be used for more than one location.
[241] Mr. Khawaja responded to Mr. Gagnon’s e-mail dated December 3, 2015 regarding the Consent to Assignment of Lease for the Yorkdale Location on December 7, 2015. Mr. Khawaja’s e-mail read, in part:
thanks for the update & documents for the Yorkdale Mall. we reviewed the amendment to the lease documents with Our RBC Banker over the weekend.
as you know the Yorkdale Mall Existing Tenanat ( FAMOSO ) lease is expiring on May 31st 2022. so by the time we will finish the construction (on or before march 10, 2016) then our remaining term will be only 6 years & 2 months.
because of the Top designer style store Construction requirement this project will go somewhere 1.2 million to 1.3 million minimum. so the banker asked us again the same question, how RBC can finance this high end location with only 6 years lease term?
by paying asset purchase of 150 k, high rent of 42 k, and also investing top notch Designer Style construction, the RBC will not secure our financing with only 6 years and 2 months term. as the RBC loan financing will be for 7 years.
so we would like to request for full 10 years lease term with minimum of 1 option to renew for 5 years to secure the financing and if we get 2 options of 5 years renewals will be a perfect scenario.
so here is the requirement from Banker :
as discussed last week with Mohamad similar issue arose on 85 front street east, and was taken care by you & Mohamad!!!! we Look forward for the same kind attention & Resolution on this matter from Mohamad & you.
awaiting your response. [Emphasis in the original.]
26. December 7, 2015 meeting
[242] Mr. Khawaja responded to Ms. Graham’s December 2, 2015 e-mail asking them to confirm the corporation and guarantors for the Heartland Location on December 7, 2015 at approximately 2 p.m. He advised that Premium Host was the corporation for the Heartland Location and he gave information regarding the shareholding in Premium Host. A copy of Dr. Sheikh’s driver’s licence was attached to the e-mail. Mr. Khawaja also outlined changes to the franchise agreement for the Heartland Location that had been discussed with Mr. Fakih and Mr. Gagnon and he indicated that they were ready to proceed with the execution of the franchise agreement. He stated:
HEARTLAND EXISTING LOCATION:
Cross default: Does not Apply in Heartland location bcz of the 3rd Partner (Gul Nawaz Sheikh )
Second ROFR: on any new upcoming location in Mississauga will go to us & First ROFR will go to Erin mills if they will be same partners.
Radius Territory: 3km Radius Territory for the Heartland location.
please arrange the franchise agreement & disclosure documents ready, we can sign anytime at ur earliest convenience. if you are changing anything else in Franchise agreement then send me the full electronic copy of franchise agreement & disclosure so our lawyer can do a quick review. [Emphasis in the original.]
[243] Later on December 7, 2015, Ms. Graham sent the following e-mail to Mr. Gagnon:
Shahid and Sami confirmed they can meet me tonight to disclose them but their partner is not available as he is a dr. to meet. They advised if I give them the receipt later tonight. They will get it signed and meet me tomorrow. I wanted to advise if we require any application from the third party as I have never met him before. I will send them the NDA to sign but other than his id I do not have anything on him. Kindly advise. Thank you.
[244] Ms. Graham did not remember whether Mr. Gagnon instructed her to proceed as suggested in the e-mail or not.
[245] Also on December 7, 2015, Ms. Graham sent an e-mail to Ms. Skinner, with a copy to Mr. Gagnon, asking for a copy of the most recent lease for the Heartland Location and the Amending Agreement as she had “to disclose the franchisee this afternoon.”
[246] Mr. Khan, Mr. Khawaja and Ms. Graham exchanged e-mails during the afternoon of December 7, 2015 and agreed to meet at 4 p.m. at the Crestlawn Location.
[247] Mr. Khan’s and Mr. Khawaja’s evidence is that they met with Ms. Graham on December 7, 2015, as agreed upon, and that she gave them a disclosure document for the Heartland Location that was dated “current as of December 1, 2015”. The disclosure document that they say they received is, generally speaking, Paramount’s base disclosure document without any inserted schedules (such as the financial statements and the franchise agreement) and with pages 24-27 missing. Their evidence is also that they signed a Receipt at that time. According to Mr. Khawaja and Mr. Khan, Ms. Graham specifically directed them to sign but not date the Receipt, and they did as instructed. Ms. Graham kept all copies of the Receipt and Mr. Khawaja and Mr. Khan did not receive a copy until on or about December 21, 2015. At that time, the date fields had been filled in as “November 28, 2015”.
[248] Mr. Khawaja did not specifically remember, but he believed that he was the one who took the copy of the disclosure document with him after the meeting. He did not send a copy of this disclosure document to Mr. Gray because he thought that it was the same as the other disclosure documents that were received.
[249] Later on December 7, 2015, at approximately 7:30 p.m., Ms. Graham sent an e-mail to Mr. Khan and Mr. Khawaja attaching the head lease agreement for the Heartland Location and a Consent and Amending Agreement dated December 16, 2014. Her e-mail stated: “Please see the attached that were attached on your disclosure. Thank you.” These documents are not part of the disclosure document that Mr. Khan and Mr. Khawaja say they received on December 7, 2015.
[250] Ms. Graham’s evidence was that it was not possible that she could have given to Mr. Khawaja and Mr. Khan the disclosure document that they said they received on December 7, 2015 as it was too small and she would have known that things were missing from it.
27. Mr. Jamil’s involvement in Everest
[251] On or around December 7, 2015, Mr. Khawaja talked to Mr. Jamil about investing in Everest for the first time while they were both at work. Mr. Jamil thought about it for a couple of days and made sure that he had the necessary funds. He then decided to invest in Everest and he told Mr. Khawaja about his decision.
[252] On December 9, 2015, Mr. Khawaja sent the following e-mail to Mr. Gray:
attached are the most recent documents for the yorkdale mall. also yousaf khan will be our 3rd partner in yorkdale mall Restaurant. pls add him accordingly in the Company as director.
Company Name: Everest Group Inc
here is the partnership breakdown
Shahid khawaja :: 55 % Shares
zarmina khan :: 25 % shares
Yousaf khan :: 20 % shares
zarmina khan will be the main operator at that store, she is wife of sami khan and have almost 13 year of Kfc experience.
please send me the checklist what other documents you need for yorkdale mall.
also i already paid 150 k first deposit to paramount .. and proof is also attached which was paid from RBC our Everest Group INC account.
[253] Everest’s reconstituted minute book reflects that Mr. Jamil became a shareholder of Everest on December 10, 2015.
28. Communications regarding the Heartland Location between December 8-14, 2015
[254] On December 8, 2015, Mr. Khawaja sent an update to Mr. Fakih regarding the closing for the Heartland Location.
[255] On December 10, 2015, Ms. Graham sent to Mr. Khawaja and Mr. Khan draft amending agreements for all three locations. The first name of Dr. Sheikh was misspelled on the draft amending agreement for Premium Host (“Gull” instead of “Gul”).
[256] On December 11, 2015, Mr. Gray sent e-mails to Mr. Khawaja regarding the Heartland Location. He confirmed Mr. Khawaja’s instructions not to review the disclosure agreement or franchise agreement.
[257] Also on December 11, 2015, Mr. Fakih sent an e-mail to Mr. Munir asking him to move the closing date of the transaction to December 16 or 17, 2015. Mr. Munir agreed to move the closing date to December 17, 2015 and proposed a meeting between Mr. Munir and Mr. Fakih for December 14, 2015. Mr. Fakih asked Mr. Munir to advise Mr. Khawaja of the new closing date. Mr. Fakih’s evidence was that he got involved in setting the closing date to ensure that the 14-day period after the disclosure was respected. I do not accept this explanation. It is inconsistent with the exchange of e-mails between Mr. Munir and Mr. Fakih. Further, the original closing date would have complied with the 14-day period if, as alleged by Paramount, the disclosure for the Heartland Location took place on November 28, 2015. If a disclosure document was provided on December 7, 2015, as alleged by Premium Host, then neither the original closing date nor the revised closing date complied with the 14-day period.
[258] On December 14, 2015, Mr. Khawaja sent an e-mail to Ms. Graham confirming that Mr. Khan, Dr. Sheikh and he were available to meet the following day to sign the franchise agreement for the Heartland Location. He pointed out to her that Dr. Sheikh’s name was wrongly spelled in the amending agreement to the franchise agreement and he stated that their lawyer was asking for two minor amendments.[^4]
[259] Ms. Graham sent the following response on the same day:
I am able to confirm meeting tomorrow at 1:00pm for the signing dated December 16th however I will need to hold onto all documents to get Mohamad signature and receive Shamis final termination papers on the 16th. I can then meet with you to give you your copy and send it to you via email as well. Thank you.
29. December 15, 2015 meeting and execution of Franchise Agreement by Premium Host
[260] On December 15, 2015, Mr. Khawaja, Mr. Khan and Dr. Sheikh caused Premium Host to enter into certain agreements for the operation by Premium Host of a Paramount Fine Foods franchise. These agreements, some of which were entered into personally by Mr. Khawaja, Mr. Khan and Dr. Sheikh, included the following:
a. Franchise Agreement dated December 16, 2015 (“Premium Host Franchise Agreement”);
b. Guarantee dated December 16, 2015;
c. Acknowledgement dated December 16, 2015;
d. General Security Agreement dated December 16, 2015;
e. Sublease dated November 9, 2015;
f. Telephone Assignment Agreement dated December 16, 2015;
g. Heartland Amending Agreement dated December 16, 2015; and
h. Acknowledgement dated December 15, 2015.
[261] It is agreed that the documents in subparagraph a, b, d, f and g above are “franchise agreements” within the meaning of subsection 1(1) of the Act.
[262] The head lease for the Heartland Location dated March 18, 1999 and a Consent and Amending Agreement dated December 16, 2014 between the landlord, Paramount Leasing and another company were also attached to the Premium Host Franchise Agreement.
[263] The Acknowledgement dated December 15, 2015 referred to in subparagraph h above was provided by Paramount and Paramount Leasing to Premium Host in relation to the acquisition of the Heartland Location and the lease for that location. The Acknowledgement was signed by Mr. Fakih and stated the following:
THE UNDERSIGNED, being the tenant of the Property and the franchisor, jointly and severally confirm the following, as of the Effective Date:
The Lease is in good standing.
The sublease of the Property and the franchise agreement between the undersigned, as applicable, and the Vendor, have been terminated.
The undersigned have provided the appropriate notice to the Landlord in respect of the Purchaser’s acquisition of the Business and sublease of the Lease.
The Franchisee is in good standing; the Franchisee is paying all transfer/assignment related costs and fees due to be paid to the undersigned related to transfer of the Business.
The Property, and the improvements and systems thereon, reflect the current system standard of the Paramount Fine Foods franchise and no major renovations, refurbishments or repairs are required thereto as of the Effective Date.
[264] This meeting on December 15, 2015 was the first and only time that Dr. Sheikh met Ms. Graham or any representative of Paramount. According to Dr. Sheikh, he had no communications with Paramount by e-mail or any other means prior to this meeting, and this was the only occasion on which he signed documents for Paramount. Dr. Sheikh’s evidence was that he did not review the documents that he signed on December 15, 2015, Ms. Graham did not explain any of the documents at the meeting and he was not given any documents to take with him. He said that he was relying on Mr. Khawaja to bring important items to his attention.
[265] According to Mr. Khawaja, Mr. Khan and Dr. Sheikh, the Receipt that had been previously signed by Mr. Khawaja and Mr. Khan on December 7, 2015 was signed by Dr. Sheikh on December 15, 2015. Dr. Sheikh stated that, as instructed by Ms. Graham, he did not date the Receipt. Dr Sheikh’s evidence was that while he signed the Receipt, he never received a disclosure document from any representative of Paramount.
[266] In addition to signing the various agreements, Mr. Khawaja, Mr. Khan and Dr. Sheikh stated that they initialed the second page of a Certificate. However, Mr. Fakih had not signed the Certificate, the signature blocks were blank and the document was undated.
[267] The evidence of Mr, Khawaja was that Mr. Khan, Dr. Sheikh and/or he did not receive signed copies of the various documents executed on December 15, 2015. He stated that Ms. Graham retained all copies of the documents (including the Receipt and the Certificate) and, after they were executed by Mr. Fakih on behalf of Paramount, she provided them with fully executed copies (including the Receipt and the second page of the Certificate) on December 21, 2015. The date fields in the Receipt and the Certificate, now signed by Mr. Fakih, had all been filled in as “November 28, 2015”.
30. Mr. Gray’s report on Versatile dated December 15, 2015
[268] On December 15, 2015, Mr. Gray sent an e-mail to Mr. Khawaja which contained a short report on Versatile. The report read, in part:
We reported on the signed franchise agreement that you provided to us. We noted that you also provided with what appears to be a partial unbound disclosure document. You indicated that the form you provided to us is the form you received it in. I noted that it appears highly unusual for you to receive it in such a form and that if in fact this is how you received it then you had a rescission claim available; within 2 years from the date you signed the agreement. We reviewed your rescission rights and we told you that if this store is really in trouble, or if you otherwise wish to get out then please call us well before the 2 year date (ie. well before November 8, 2017);
We received an unsigned consent to assign a lease. We requested the head lease which we were not provided with. We have not been retained in respect of the lease. We reminded you that if the lease term ends earlier than the franchise agreement then the franchise agreement will terminate.
We reviewed the draft lease and expressed a number of major concerns; also that no disclosure was provided for this lease. Again, we discussed your rescission rights.
31. Closing of the transaction regarding the Heartland Location on December 16, 2015
[269] On December 16, 2015, Mr. Khawaja sent an update to Mr. Fakih regarding the planned closing of the Heartland transaction on that day. He ended his e-mail as follows: “we are all Good for Closing the Deal Inshallah, just need your Guidance & support to Close Today.” In his response, Mr. Fakih thanked him and asked him to let him know what they needed and he would help.
[270] Later on December 16, 2015, Ms. Graham forwarded to Mr. Gray a copy of the Termination of Franchise Agreement and Release made as of December 16, 2015 between Paramount, 245 and Mr. Munir. The document provided that 245’s franchise agreement shall terminate on December 16, 2015.
[271] The transaction closed and Premium Host began operating at the Heartland Location on or about December 16, 2015.
32. Communications regarding the Yorkdale Location on December 16-17, 2015
[272] Early on December 16, 2015, Mr. Khawaja sent an e-mail to Ms. Graham advising her that they were ready to sign the franchise agreement for Yorkdale and asking when they could sign the paperwork. Mr. Khawaja also asked for an update regarding the 10-year lease for the Yorkdale Location as he needed to provide a copy to his bank.
[273] Further to Mr. Khawaja’s e-mail, Ms. Graham sent the following e-mail to Mr. Gagnon, with a copy to Mr. Fakih and Ms. Leenders:
I am able to sign the franchise agreement for Yorkdale tomorrow but as discussed we have been given new lease information and it is cleaner to disclose again and sign in two weeks which I explained to them as well. Should I still re-disclose or sign the FA now and issue a material change for the lease later? Kindly advise. Thank you.
[274] Mr. Gagnon responded: “Sign FA now. The Yorddale lease will be redone anyway later with an extended lease”.
[275] On December 17, 2015, Mr. Gagnon sent an e-mail to Mr. Khan and Mr. Khawaja stating that Ms. Graham had advised him that there would be another partner for Yorkdale and asking for some information in this regard.
[276] On December 17, 2015, Mr. Khawaja sent an e-mail to Mr. Gagnon (copied to Mr. Fakih and Ms. Graham,) advising him that there would be three partners for Yorkdale: Mr. Khawaja – 55%, Ms. Khan – 25%, and Mr. Jamil (described as Yousaf Khan in the e-mail) – 20%. He stated that all three partners would sign the franchise agreement for Everest and be a guarantor. Later on December 17, 2015, Mr. Khawaja sent another e-mail to Mr. Gagnon asking him to correct Mr. Jamil’s name (i.e. Yousaf Jamil instead of Yousaf Khan) and sending a copy of Mr. Jamil’s driver’s licence.
33. December 18, 2015 meeting and execution of Franchise Agreement by Everest
[277] On December 18, 2015, Ms. Graham met with Mr. Khawaja, Ms. Khan, Mr. Khan and Mr. Jamil at the Crestlawn Location. This was the first time that Mr. Jamil met anyone from Paramount. At that meeting, Mr. Khawaja, Ms. Khan and Mr. Jamil caused Everest to enter into certain agreements for the operation by Everest of a Paramount Fine Foods franchise. These agreements, some of which were entered into personally by Mr. Khawaja, Ms. Khan and Mr. Jamil, included the following:
a. Franchise Agreement dated December 18, 2015 (“Everest Franchise Agreement”);
b. Guarantee dated December 18, 2015;
c. Acknowledgement dated December 18, 2015;
d. General Security Agreement dated December 18, 2015;
e. Sublease dated December 16, 2015; and
f. Telephone Assignment Agreement dated December 18, 2015.
[278] It is agreed that the documents in subparagraph a, b, d and f above are “franchise agreements” within the meaning of subsection 1(1) of the Act.
[279] The head lease for the Yorkdale Location dated July 8, 2011 and a draft Consent to Assignment of Lease dated November 16, 2015 between the landlord, Famoso, Paramount Leasing and another company were also attached to the Everest Franchise Agreement.
[280] Mr. Khawaja’s affidavit evidence was that neither Ms. Khan, Mr. Jamil nor he received signed copies of the executed Everest Franchise Agreement on December 18, 2015. He stated that Ms. Graham retained all copies of the documents and, after they were executed by Mr. Fakih on behalf of Paramount, she delivered the fully executed copies (including the Receipt executed on November 16, 2015, but not the second page of the Certificate initialed on November 16, 2015) at the Heartland Location on December 21, 2015. The date fields in the Receipt and the Certificate, now signed by Mr. Fakih, had all been filled in as “October 23, 2015”.
[281] Ms. Khan’s evidence was that she did not walk out with any documents on December 18, 2015. She did not remember signing a franchise agreement on that day. She remembered initialing some documents that were handed to her, but she did not read them. She stated: “I had somewhat idea that they are franchise agreement but I did not have the details of it.”
[282] According to Mr. Jamil, he did not take any documents with him after the meeting.
[283] The evidence of Mr. Khawaja and Ms. Khan was that, in addition to signing the Everest Franchise Agreement, they received a disclosure document for Everest on December 18, 2015. The disclosure document was dated “current as of October 6, 2015” and was identical to the disclosure document that Mr. Khawaja and Ms. Khan say they received on November 16, 2015 (also missing pages 20-21). Their evidence was that Ms. Graham did not ask them to sign a Receipt in respect of this disclosure document. Ms. Khan stated during her examination-in-chief that she did not remember what happened to the disclosure document after the meeting. She said that Mr. Khawaja was in charge of the paperwork. However, during her cross-examination, Ms. Khan gave contrary evidence and stated that she did not recall that there was a disclosure document provided at the December 18, 2015 meeting. Mr. Jamil’s evidence was that he never received a disclosure document. Ms. Graham’s evidence was that she never provided a disclosure document dated “current as of October 6, 2015” to Mr. Khawaja and Ms. Khan.
34. Communications on December 21-22, 2015 and in January 2016
[284] On December 21, 2015, Ms. Graham sent an e-mail to Mr. Khawaja and Mr. Khan advising them that she would “be dropping off your heartland contract this afternoon.”
[285] As stated above, it was Mr. Khawaja’s evidence that the Everest Franchise Agreements was also dropped off by Ms. Graham at the same time.
[286] On December 22, 2015, Mr. Khawaja requested that Paramount Leasing pay him back $150,000 from a draft of $250,000 that had been provided as a payment in relation to the Yorkdale Location. Mr. Khawaja acknowledged in writing that, as a result of his request, “only $100,000 will be factored in as a payment to [Paramount Leasing].”
[287] On January 5, 2016, Mr. Gagnon sent an e-mail to Mr. Khawaja and Mr. Khan to let them know that the landlord for the Yorkdale Location had agreed to an extension of the lease up to May 31, 2026 and that was the best that they could get. Mr. Gagnon asked them to sign a letter confirming that they were satisfied with the lease’s term and obligations and that they would enter into a sublease with Paramount Leasing under the same terms and conditions. Mr. Khan sent an e-mail later that day confirming that they were “all good to go”.
35. Construction Management Agreements dated February 3, 2016
[288] On January 22, 2016, Ms. Leenders sent two constructions management agreements to Mr. Khan and Mr. Khawaja: one for Versatile and one for Everest. She wrote the following in her e-mail:
The bank will require a copy of the construction agreements for Front Street and Yorkdale.
I am attaching both to this email.
As per Mohamad [Mr. Fakih], he is doing Front Street without any fee and just 10% for Yorkdale on construction portion only (eg. Not equipment).
Kindly fill in the date at the top of page 1 and sign and date on page 12 and return to me.
I will also sign and send back a copy for you.
Any questions or concerns, please let me know.
[289] Versatile and Fakih Group entered into a Construction Management Agreement on February 3, 2016. The Agreement was signed by Mr. Khan on behalf of Versatile and by Ms. Leenders as “Construction Manager” on behalf of Fakih Group. It provided that it commenced on February 3, 2016 and continued until the construction of the project was completed in full and all monies payable hereunder to Fakih Group or to third parties in connection with the project were paid in full, unless terminated sooner pursuant to its terms. Pursuant to the Construction Management Agreement, Fakih Group did not charge any management fee to Versatile for its services. The funds that Versatile paid to Fakih Group were to pay the various suppliers and contractors.
[290] Also on February 3, 2016, Everest and Fakih Group entered into a Construction Management Agreement. Mr. Khawaja signed the Agreement on behalf of Everest. Contrary to the Construction Management Agreement signed by Versatile, the Agreement signed by Everest provided for a management fee to Fakih Group equal to 5% of the construction costs. However, the management fee was ultimately not charged.
36. Subsequent events in 2016
[291] The lease for the Front Location was signed in April 2016. On or about May 16, 2016, Versatile entered into certain agreements with Paramount Leasing. These agreements included the following:
a. Consent to Sublease dated May 16, 2016; and
b. Sublease dated May 16, 2016.
[292] On June 30, 2016, Fakih Group made a loan to Mr. Khan and Mr. Khawaja in the amount of $100,000.00, without interest. The loan was to be repaid on or before August 1, 2016.
[293] Versatile began operating at the Front Location in or around early July 2016.
[294] Everest began operating at the Yorkdale Location in or around early August 2016.
[295] Before they were able to begin operating, both Versatile and Everest encountered a host of issues during the construction process at their respective locations which caused delay and additional costs.
37. Events in 2017 leading to the notices of rescission of Versatile and Everest
[296] Both Mr. Khan and Ms. Khan collected a salary from all three corporations (Versatile, Everest and Premium Host) in 2016 and 2017.
[297] By spring of 2017, Versatile, Everest and Premium Host were defaulting on their payment obligations. Agreements and promises to make payments and clear arrears by certain dates were often breached.
[298] In August 2017, Everest entered into an agreement of purchase and sale with Apexiod Inc. with respect to the Yorkdale Location. One of the conditions in the agreement was the obtaining of the unconditional consent and agreement of the franchisor and landlord.
[299] On September 25, 2017, Kim Clarke, Paramount’s Director of Finance, sent an e-mail to Mr. Fakih with the following subject line: “Sami Khan – Yorkdale; Heartland & Front St Update – Amount owing as of today $397,510.58”. She wrote, in part:
Sami Kahn did not cover all of the payments required on Sept 10h for his Paramount Wholesale purchases he paid the Heartland amount on Monday Sept 18th but not the amounts owed for the Front St and Yorkdale locations. The total amount of these two items was $39,231.78.
As of today Sept 25th he now owes for the Purchases for all three locations for the period of Sept 1-15th as well. The new amount due today is $51,522.77. I have just sent an email to both Sami and his accountant asking for an update on status of payment.
Below you will find the details regarding the payments that are to be covered by the sale of the Yorkdale location. This is in addition to the amounts in the above paragraphs.
[300] Mr. Fakih forwarded this e-mail to Mr. Khan and Mr. Khawaja. He stated as follows:
salam all
please see below
above beyond last purchases please note another 52000 will add to last 2 weeks delay
and it’s not what we agreed on
please let me know what’s the solution and arrangement.
Look at amount above is scary regardless what we agree to deduct on closing the promise was will not exceed 265000.
please explain.
thank you!
[301] On September 26, 2017, Mr. Fakih sent an e-mail to Mr. Khawaja with the subject line “Yorkdale deal”. He stated as follows:
are we doing this deal?
is it happening?
deal requires our written approval and so far no documents shared please advise.
[302] Mr. Khawaja responded the following day:
sorry missed your call today. attached is the copy of deal for yorkdale paramount.
here is the purchaser lawyer details […]
[303] Ultimately, the transaction with Apexiod Inc. did not proceed.
[304] On September 29, 2017, at the request of Mr. Khawaja, Mr. Gray put into two boxes the documents that he had in his file for Mr. Khawaja to pick up, including the original disclosure document that Mr. Khawaja had provided in November 2015. Mr. Gray scanned that document on September 29, 2017 and sent a copy by e-mail to Mr. Khawaja on the same day. The document was the 51-page disclosure document dated “current as of July 3, 2015”. Mr. Gray had put a post-it note on the first page which stated:
Yorkdale?
DD
[305] Mr. Khawaja’s assistant went to pick up the documents at Mr. Gray’s office. The documents were eventually sent to the Franchisees’ current lawyers.
[306] According to Mr. Fakih, at some point in October 2017, Mr. Khawaja called him and threatened rescission unless Mr. Fakih forgave $250,000 of the arrears owing. Mr. Khawaja denied this.
[307] On October 10, 2017, in accordance with subsection 6(3) of the Act, Versatile and Everest each delivered a Notice of Rescission dated October 10, 2017 to Paramount pursuant to subsection 6(2) of the Act. Paramount received it on the same day. Versatile claims that it is entitled to receive $2,828,473.27 in statutory compensation from the Franchisor Parties pursuant to subsection 6(6) of the Act. Everest claims that it is entitled to receive $3,051,027.52 in statutory compensation from the Franchisor Parties pursuant to subsection 6(6) of the Act. No payments have been made to Versatile or Everest.
38. Events leading to the termination and Notice of Rescission of Premium Host
[308] On October 30, 2017, Premium Host entered into an agreement of purchase and sale with Platinum Host Inc. with respect to the Heartland Location. Like the agreement between Everest and Apexiod Inc., the agreement was conditional on obtaining the unconditional consent and agreement of the franchisor and landlord. Mr. Khawaja sent the agreement to Mr. Fakih by e-mail on November 16, 2017 and sought Paramount’s approval at that time. He indicated that the tentative closing date was November 30, 2017, with the approval of Paramount.
[309] On November 17, 2017, Paramount sent a Notice of Default to Mr. Khan in relation to the Heartland Location. The alleged default was the failure to make the September P&L submission. In order to cure the default, the September P&L had to be submitted by November 20, 2017.
[310] On November 23, 2017, Mr. Khawaja sent a follow-up e-mail to Mr. Fakih stating that he was still waiting to hear back from him regarding the sale of the Heartland Location. Paramount did not approve the transaction before it terminated the Premium Host Franchise Agreement on November 28, 2017.
[311] On November 24, 2017, Paramount sent a Notice of Default to Premium Host regarding the Heartland Location. The notice read as follows:
We have recently been advised by several third party suppliers to your Franchised Business, that you are delinquent in payments owed for supplies and services rendered. Specifically, we have been advised by Nella that you are in arrears to them in the amount of approximately $2,200. As you know, it is a requirement of your Franchise Agreement to ensure that you remain current on all payment obligations accruing under your Franchise Agreement. Failure to pay your suppliers, vendors or landlord in a timely manner constitutes a breach of your Franchise Agreement and grounds for immediate termination under Section 12.1 of your Franchise Agreement.
Your past record of financial defaults both with us, our affiliates and with other business partners, including key Paramount suppliers and the landlord of the Premises, has already seriously compromised the brand and our reputation with these business partners[.] The continued erosion of our key relationships resulting from your failure to abide by the terms of your Franchise Agreement will not be tolerated. Your immediate attention to this matter is requested, with written confirmation received no later than November 30th, 2017, that all accounts to third party suppliers and service providers are current and in good standing.
Failure to address this issue and cure this breach of your Franchise Agreement within the specified timelines, may result in more serious disciplinary measures being taken, up to and including the termination of your Franchise Agreement with Paramount Fine Foods.
Paramount reserves all rights available to it under the Franchise Agreement.
We thank-you for your prompt attention to this matter.
If you have any questions on the above, please do not hesitate to reach out to me directly.
[312] On November 28, 2017, two days before the end of the cure period set out in the Notice of Default sent on November 24, 2017, Paramount sent a Notice of Termination to Premium Host. The Notice of Termination was sent directly to Premium Host’s lawyer. The grounds set out in the Notice of Termination included food safety defaults and other breaches of system standards, defaults related to financial payment and reporting and business operations, and defaults in relation to the proposed transfer of the franchised business. Paramount stated that it was prepared to hold the Notice of Termination in abeyance to allow Premium Host to address the defaults set out in the letter if Premium Host: (a) agreed to certain terms and conditions set out in the Notice, and (b) got back to Paramount by no later than 12 p.m. on November 29, 2017.
[313] On November 30, 2017, in accordance with subsection 6(3) of the Act, Premium Host delivered a Notice of Rescission dated November 30, 2017 to Paramount pursuant to subsection 6(2) of the Act. Paramount received it on the same day. Premium Host claims that it is entitled to receive $3,917,415.76 in statutory compensation from the Franchisor Parties pursuant to subsection 6(6) of the Act. No payments have been made to Premium Host.
39. Additional facts
[314] Ms. Graham received a commission with respect to both the Front Location and the Heartland Location.
[315] Generally speaking, all of the witnesses had a poor recollection of the events in 2015-2017.
[316] Mr. Khan did not read any of the disclosure documents provided by Ms. Graham. He also did not read the franchise agreements.
[317] Ms. Khan’s evidence was that she did not personally retain any of the documents received from Paramount, and she did not read any of the documents that were provided by Paramount and that she signed or initialed.
[318] Ms. Shahid remembered very little and/or was not involved in the discussions and events at the relevant time. She did not review the documents either.
[319] When documents were provided by Paramount, it would typically be Mr. Khawaja who would take them with him. With respect to disclosure documents, he would usually do “a quick page flip”, but he would not look at the documents in any detail.
[320] Mr. Khan and Mr. Khawaja had frequent meetings and communications with representatives of Paramount. For example, Mr. Khan agreed that he had numerous meetings, almost daily meetings, with Paramount people in November 2015.
V. DISCUSSION
[321] I will discuss the following issues: (1) the statutory exemptions from disclosure relied upon by Paramount; (2) the defences raised by Paramount; (3) the validity of the rescissions; (4) the issue of franchisor’s associates; (5) statutory compensation; and (6) the counterclaims.
1. Disclosure exemptions
[322] Paramount argues that it was exempt under the Act from its disclosure obligations. It relies on three of the exemptions set out in subsection 5(7) of the Act: (a) grant over $5 million (s. 5(7)(h)); (b) additional franchise to existing franchisee (s. 5(7)(c)); and (c) resale of an existing franchise (s. 5(7)(a)).
[323] The burden of proving an exemption is on the person claiming it: see section 12 of the Act.
[324] Given the context and purpose of the Act, the exemptions to disclosure set out in subsection 5(7) must be narrowly construed: see Springdale at para. 32.
[325] In my view, none of the exemptions relied upon by Paramount apply in this case.
A. Grant over $5 million (s. 5(7)(h))
[326] This exemption was worded as follows at the relevant time: “the grant of a franchise where the prospective franchisee is investing in the acquisition and operation of the franchise, over a prescribed period, an amount greater than a prescribed amount.”
[327] At the relevant time, the prescribed period was one year and the prescribed amount was $5 million.
[328] Paramount argues that the three restaurants were a single “grant” and that the Plaintiffs always acted as if the three corporations were a single entity. Paramount submits the following in support of the application of this exemption in this case:
a. The franchisees invested over $5 million in the acquisition and operation of the three restaurants.
b. Mr. Khan and Mr. Khawaja represented to Paramount, at a time when they were bound by a duty of fair dealing and good faith, that they were opening “multiple locations” and that the locations were all connected.
c. The decision to use three different corporations was only made on October 29, 2015 at the advice of M. Khawaja’s accountant, for financing reasons.
d. Mr. Khawaja was the directing mind and beneficial owner of all three companies,
e. Mr. Khan was the sole director and officer of all three companies.
f. Funds were transferred between the three corporations wherever needed.
g. All three franchisees shared a common lawyer, bookkeeper, and accountant.
h. All three corporations fell into arrears at the same time.
i. Given that the franchisees always acted as if the three corporations were a single entity, it would be an injustice to find that these were three separate grants instead of a single grant. Paramount relies on Salah v. Timothy’s Coffees of the World Inc., 2009 CanLII 58066 at paras. 58-63 (Ont. S.C.J.), aff’d by 2010 ONCA 673, and argues that the Court should not rigidly adhere to separate corporate existences where to do so would yield a result which is flagrantly opposed to justice. It submits that the just conclusion in this case is to find that this was a single franchise grant.
[329] In my view, Paramount’s arguments miss the mark. Even if one were to consider that there was only one franchisee instead of three (as Paramount submits this Court should do), there would still be three different grants of franchises, not one. Contrary to the language in subsection 5(7)(h), Paramount’s argument is not focused on the grant of the franchise, but, rather on subsequent operations. The relevant time to consider when dealing with disclosure documents is the time of the grant of the franchise.
[330] In this case, there were three grants which occurred at different times, were effected through three different franchise agreements, and conferred rights to operate three different franchised businesses at different geographic premises in different territories, none of which overlapped.
[331] The limited nature of each grant is set out in section 2.1 of Paramount’s franchise agreement:
2.1 Licensed Rights. Subject to the terms and conditions of this Agreement, we hereby grant you during the currency of this Agreement a:
(a) right to establish and operate the Franchised Business solely at the Premises which Premises should be solely situated inside the Territory. Your right to establish and operate the Franchised Business will be of one of the following types, which we will designate on the Summary Page of this Agreement:
i. A sit down restaurant (the “Sit Down Restaurant”); or
ii. A quick-service restaurant (the “Quick-Service Restaurant”); and
(b) non-exclusive license to use, in connection with the Franchised Business, the System and the Marks in relation to your operation of the Franchised Business, solely for the purpose of promoting the Franchised Business.
[332] There was no grant of franchise involving multiple locations. A different franchise agreement was required for each location and Paramount had no obligation to grant a franchise with respect to additional locations not covered by executed franchise agreements. Paramount’s position that there was a single grant is an after-the-fact argument.
[333] I conclude that Paramount’s argument of a “single” grant cannot be accepted in light of the language of subsection 5(7)(h) and the definitions of “grant” and “franchise” in subsection 1(1). This is especially the case given that the exemptions to disclosure set out in subsection 5(7) must be narrowly construed.
[334] Since none of the three individual grants involved an investment of $5 million, the exemption set out in subsection 5(7)(h) of the Act does not apply.
B. Additional franchise to existing franchisee (s. 5(7)(c))
[335] This exemption is worded as follows: “the grant of an additional franchise to an existing franchisee if that additional franchise is substantially the same as the existing franchise that the franchisee is operating and if there has been no material change since the existing franchise agreement or latest renewal or extension of the existing franchise agreement was entered into”.
[336] It has been held that this exemption reflects “a level of comfort by the Legislature regarding franchisees who were already familiar with the operations of the franchise system and for whom the risk of making a further investment of funds was low”: see 3574423 Canada Inc. v. Baton Rouge Restaurants Inc., 2011 ONSC 6697 at para. 301.
[337] Paramount argues that this exception applies to Premium Host because the Front Location and the Heartland Location are substantially the same (both sit-down restaurants) and there was no material change to Paramount’s affairs between the Versatile Franchise Agreement and the Premium Host Franchise Agreement. As for the exemption regarding a grant over $5 million, Paramount’s position is that corporate franchisees who do not themselves observe separate corporate personality in their operations cannot be said to be different franchisees under the Act. Paramount submits the following in support of the application of this exemption in this case:
a. Given that the Plaintiffs did not observe separate corporate personality in their operations, and Mr. Khan and Mr. Khawaja were shareholders, officers and directors of both Versatile and Premium Host, Premium Host was an existing franchisee at the time it entered into the Premium Host Franchise Agreement.
b. At the time that Premium Host entered into the Premium Host Franchise Agreement, Mr. Khan and Mr. Khawaja had already started “operating” the Front Location.
c. The Front and Heartland Locations and Franchise Agreements are substantially the same.
d. There was no material change between the time of the Versatile Franchise Agreement and the Premium Host Franchise Agreement.
[338] In my view, the additional franchise exemption does not apply in this case. Premium Host was not an “existing franchisee” when it was granted a franchise for the Heartland Location. That grant was not the grant of an “additional franchise”; it was Premium Host’s first franchise.
[339] While subsection 5(7)(c) allows for some differences between the additional franchise and the existing franchise (they only have to be “substantially the same”), there is no similar language in the exemption about the franchisee, i.e. it does not say that the additional franchisee only has to be “substantially the same” as the existing franchisee. The language used is “existing franchisee”, i.e. the same one. See Bark & Fitz Inc. v. 2139138 Ontario Inc., 2010 ONSC 1793 at para. 26.
[340] Even if I were to entertain the argument that an “existing franchisee” could be a new corporation with principals who are involved in another corporate franchisee, I would still conclude in this case that Premium Host was not an existing franchisee at the time of the grant relating to the Heartland Location because there were significant differences between Premium Host and Versatile. Importantly, Dr. Sheikh was involved in Premium Host, but he was not involved in Versatile. Dr. Sheikh is a 30% shareholder of Premium Host, compared to Mr. Khan who is only a 10% shareholder of Premium Host. Paramount has not suggested that Dr. Sheikh is not a genuine shareholder of Premium Host or that he has not invested his own money in the company. I note that Dr. Sheikh was required to sign a Guarantee in favour of Paramount with respect to Premium Host. Further, Paramount and Premium Host agreed to amend Paramount’s standard form of franchise agreement with respect to the Heartland Location to delete the Cross Default clause. As stated in Mr. Khawaja’s e-mail to Ms. Graham dated December 7, 2015, the deletion of the Cross Default clause was at least in part because of the presence of a third partner, Dr. Sheikh. Paramount’s agreement to make this amendment, which is reflected in the Heartland Amending Agreement, was an acknowledgement on its part that Premium Host and Versatile were not the same franchisees.
[341] Given my conclusion that Premium Host was not an “existing franchisee”, I do not need to decide whether the franchise with respect to the Heartland Location was “substantially the same” as the franchise with respect to the Front Location and whether Versatile was “operating” at the time that Premium Host was granted a franchise. I note, however, that if the additional franchise exemption is meant to apply to franchisees who are already familiar with the operations of the franchise system and for whom the risk of making a further investment of funds is low, this would militate in favour of interpreting the word “operating” as meaning something more than simply having signed a franchise agreement, as argued by Paramount. When Premium Host signed the Premium Host Franchise Agreement, Versatile had been a franchisee with a specific location for approximately one and a half months, it had barely started the construction process and it was not operating a restaurant. In these circumstances, it cannot be said that Versatile and its principals were already familiar with the operations of the franchise system and were in a better position to assess the risks of making a further investment.
[342] In light of the foregoing, I conclude that the exemption set out in subsection 5(7)(c) of the Act does not apply.
C. Resale of an existing franchise (s. 5(7)(a))
[343] This exemption is worded as follows:
(a) the grant of a franchise by a franchisee if,
(i) the franchisee is not the franchisor, an associate of the franchisor or a director, officer or employee of the franchisor or of the franchisor’s associate,
(ii) the grant of the franchise is for the franchisee’s own account,
(iii) in the case of a master franchise, the entire franchise is granted, and
(iv) the grant of the franchise is not effected by or through the franchisor.
[344] Paramount argues that this exemption applies to Premium Host and the Heartland Location. The parties’ main disagreement with respect to this exemption focuses on the last element, i.e. whether the grant of the franchise was effected by or through the franchisor. Subsection 5(8) of the Act provides that a grant is not effected by or through a franchisor merely because: (a) the franchisor has a right, exercisable on reasonable ground, to approve or disapprove a grant; or (b) a transfer fee must be paid to the franchisor in an amount set out in the franchise agreement or in an amount that does not exceed the reasonable actual costs incurred by the franchisor to process the grant.
[345] In Springdale, the Court of Appeal stated the following with respect to this exemption (at para. 33):
Taken together, the language of ss. 5(7)(a)(iv) and (8) exempt a franchisor from its disclosure obligations only when the franchisor is not an active participant in bringing about the grant and does nothing more than “merely” exercise its rights to consent to the transfer. In such circumstances, the power imbalance does not bear upon the decision to become a franchisee and plays no role in effecting the grant.
[346] In that case, the Court of Appeal found that the franchisor was directly involved and “was not merely a passive participant in this resale”: see Springdale at para. 42.
[347] Paramount submits the following in support of the application of this exemption in this case and its position that the grant of the franchise to Premium Host was not effected by or through Paramount:
a. The resale was not initiated by Paramount.
b. Paramount and Mr. Fakih were not involved in the negotiations, other than to help Mr. Khawaja and Mr. Khan get information from Mr. Munir when they had trouble getting responses from Mr. Munir directly.
c. A deposit was paid to Paramount Leasing at Mr. Munir’s direction and because 245 owed money to Paramount Leasing.
d. The new franchise agreement and the acknowledgement signed for Mr. Khan’s and Mr. Khawaja’s benefit did not make the transaction between Premium Host and Mr. Munir’s company a transaction “through” Paramount. The agreement was that on closing, Premium Host would enter into a new franchise agreement and 245’s franchise agreement would be terminated at the same time. It was as if 245’s agreement was assigned to Premium Host, but with the better terms that Mr. Khan and Mr. Khawaja wanted.
[348] In my view, the resale exemption does not apply in this case, for a number of reasons.
[349] First, I agree with Premium Host that there was no “grant of a franchise by a franchisee” in this case, as required by subsection 5(7)(a). Given that 245’s franchise agreement and sublease were terminated by Paramount and a fresh franchise agreement and sublease were entered into between Paramount, Paramount Leasing and Premium Host, there was no transfer or grant of a franchise by 245. 245 had no franchise to grant as its franchise agreement was terminated. The grant of franchise to Premium Host was directly from Paramount.
[350] Further, Paramount has failed to demonstrate that the grant of the franchise was not effected by or through the franchisor. I find that Paramount was not merely a passive participant in the sale of the Heartland Location. It was directly involved and an active participant in bringing about the grant. Among other things:
a. Paramount directed Mr. Khan and Mr. Khawaja to this particular vendor and had some involvement in the negotiations between the parties, including discussions about purchase price. In fact, the purchase price was agreed upon without there being any direct communications between Premium Host and 245.
b. Representatives of Paramount had a number of meetings with representatives of Premium Host at the head office of Paramount during which the purchase of the Heartland Location was discussed without representatives of 245.
c. Mr. Fakih sent e-mails to Mr. Khan and Mr. Khawaja about positive features of the Heartland Location (September 21, 2015 and November 14, 2015 e-mails).
d. Paramount and Mr. Fakih acted as intermediaries between Premium Host and 245 with respect to a number of requests for information/documentation by Premium Host.
e. After Mr. Fakih received the Letter of Intent from Mr. Khawaja, his assistant sent the Letter of Intent to Mr. Munir and asked him to sign it and return it to her or Mr. Fakih.
f. Paramount Leasing received the deposit for the asset purchase transaction. In this regard, Mr. Fakih signed an Acknowledgement on behalf of Paramount Leasing which stated, in the preamble, that it was in consideration of inducing the purchaser, i.e. Premium Host, to enter into the Letter of Intent dated November 18, 2015.
g. Paramount and Mr. Fakih got involved in the discussions as to what should be requested or produced by the parties for the purpose of the transaction: see, e.g., e-mails from Mr. Fakih sent on November 15 and 24, 2015, and e-mail from Mr. Gagnon sent on November 26, 2015.
h. Mr. Gagnon’s e-mail dated November 24, 2015 appears to contemplate that Paramount would be buying 245’s assets at closing and resell them to Premium Host the following day at the same price.
i. Paramount decided that 245’s franchise agreement would not be provided to Premium Host and that a new franchise agreement and sublease would be entered into with Premium Host: see Mr. Gagnon’s e-mail sent on November 28, 2015. While Paramount argues that a new franchise agreement was entered into because Premium Host requested changes to the franchise agreement, this only explains the existence of the Heartland Amending Agreement, not the existence of a new franchise agreement. Since the franchise agreement between Paramount and 245 has not been produced, Paramount – on which the onus to prove the applicability of an exemption rests – has not shown that the Premium Host Franchise Agreement does not include new terms, schedules and/or agreements that the vendor had not been required to sign.
j. Mr. Fakih got involved in the setting of the closing date: see Mr. Fakih’s e-mails to Mr. Munir dated December 11, 2015.
See Springdale at paras. 42 and 47, and MAA Diners Inc. v. 3 for 1 Pizza & Wings (Canada) Inc., 2003 CanLII 10615 at para. 29 (Ont. S.C.J.).
[351] Accordingly, I conclude that the exemption set out in subsection 5(7)(a) of the Act does not apply.
[352] In light of the foregoing, Paramount was not exempt under the Act from its disclosure obligations.
2. Defences raised by Paramount
[353] In the event that disclosure was required, Paramount raises two defences: (1) the Versatile Franchise Agreement dated November 9, 2015 did not novate the Generic Franchise Agreement dated March 9, 2015 and, therefore, Versatile’s two-year limitation period to rescind expired on March 9, 2017; and (2) the Premium Host Franchise Agreement was validly terminated and, therefore, it could not subsequently be rescinded.
A. Limitation period with respect to Versatile
[354] Paramount submits the following:
a. Versatile entered into a franchise agreement on March 9, 2015, i.e. the Generic Franchise Agreement. The Generic Franchise Agreement was never voided.
b. The November 9, 2015 site-specific agreement, i.e. the Versatile Franchise Agreement, is nearly identical to the March 9, 2015 agreement and merely added a location.
c. The only franchise fee was paid pursuant to the Generic Franchise Agreement.
d. The two-year deadline to rescind does not restart when a subsequent agreement merely added a location to a pre-existing relationship.
e. Versatile did not deliver a Notice of Rescission until October 2017 and, as a result, it failed to rescind its agreement within the two-year limitation period.
[355] Versatile submits that the Generic Franchise Agreement has no effect on Versatile’s ability to rescind pursuant to subsection 6(6) of the Act because the Generic Franchise Agreement did not actually effect any grant of franchise. I agree.
[356] Section 2.1 of the Generic Franchise Agreement provides for the grant of a “right to establish and operate the Franchised Business solely at the Premises which Premises should be solely situated inside the Territory.” Neither the “Premises”[^5] nor the “Territory” are identified in the Generic Franchise Agreement.
[357] Section 8.2 of the Generic Franchise Agreement reads, in part:
8.2 Site Selection and Approval. Unless we otherwise direct you in writing, you assume all cost, liability, expense and sole responsibility for locating, securing, developing, constructing and equipping a site for the Premises inside the Territory. Your proposed site for the Premises must meet our specifications and written approval, and you must obtain our approval of the proposed site within 180 days of the Effective Date of this Agreement. Though the site must meet our then-current site selection criteria, site selection is ultimately your sole responsibility. […]
[358] I note, again, that no “Territory” is specified in the Generic Franchise Agreement. Further, the 180-day period elapsed before the Versatile Franchise Agreement was signed on November 9, 2015.
[359] Section 10.1 of the Generic Franchise Agreement sets out four obligations of Paramount prior to the opening of the “Franchised Business”. One of them is to “[c]onsider any site for the Premises proposed by you”. As noted above, the Premises must be within the Territory, and no Territory is identified in the Generic Franchise Agreement.
[360] In light of the foregoing, I agree with Versatile’s argument that the Generic Franchise Agreement is not a “franchise agreement” within the meaning of subsection 1(1) of the Act because it does not grant a franchise. Given its wording, the failure to identify a Territory made the “grant” incomplete and, therefore, ineffective as it did not allow Versatile to engage in any business.
[361] Thus, with respect to Versatile, the only franchise agreement to consider when applying the two-year limitation period set out in subsection 6(3) of the Act is the Versatile Franchise Agreement executed on November 9, 2015. Versatile delivered its Notice of Rescission before the expiry of the limitation period on November 9, 2017.
B. Termination of the Premium Host Franchise Agreement
[362] Paramount argues that Premium Host could not rescind the Premium Host Franchise Agreement on November 30, 2017 because it was validly terminated before that date. According to Paramount, it is axiomatic that a party cannot rescind an agreement that is no longer in force, and that allowing a franchisee to rescind a franchise agreement after termination would create a dangerous precedent. Paramount submits that it would be contrary to reasonable commercial standards to permit franchisees to disregard their obligations under a franchise agreement, have the agreement terminated, and then claim their rescission remedy.
[363] The right to statutory rescission in the Act is different from equitable rescission and the principles of the latter do not apply to the former. The consequences of the exercise of the statutory remedy of rescission are dictated by the Act, not by the common law. See Dig this Garden at para. 28 and MDG Kingston Inc. v. MDG Computers Canada Inc., 2008 ONCA 656 at para. 25.
[364] The parties to a franchise agreement cannot contract out of the Act. Section 11 of the Act provides that “[a]ny 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.” See Pointts Advisory Ltd. v. 754974 Ontario Inc., 2006 CanLII 29990 at para. 42 (Ont. S.C.J.) and Dig this Garden at paras. 33-34.
[365] In light of the foregoing, Premium Host’s position is that it is irrelevant to its rescission claim that Paramount delivered a Notice of Termination relating to the Premium Host Franchise Agreement. Premium Host submits that Paramount’s exercise of one of its contractual rights (i.e. termination under the franchise agreement) cannot have the effect of unilaterally depriving Premium Host of an unrelated, statutory right under the Act, i.e. the right to rescission. Premium Host argues that if this were the case, this would mean that by entering into a franchise agreement that grants the franchisor powers of termination in certain circumstances, a franchisee would effectively waive its statutory rights if the contractual right was exercised, and this would offend the non-waiver provisions contained in section 11 of the Act. Premium Host also points out that the right to rescind is not available only to “good” franchisees; it is also available to franchisees who fail to operate a franchise in accordance with their contractual obligations.
[366] Premium Host further argues that there is no legal conflict as between termination and rescission. The former ends a contractual relationship, whereas the latter seeks to restore a rescinding franchisee to the position it would have been in if it had not executed the franchise agreement. According to Premium Host, there is nothing inherent in a termination that would prevent the franchisee from subsequently being returned to its pre-franchise position.
[367] Premium Host has identified two instances where rescission cases have proceeded in the Ontario courts despite the fact that the franchisor had earlier purported to exercise contractual termination rights: see 2352392 Ontario Inc. v. Msi, 2019 ONSC 4055 at paras. 6 and 9 (overturned on other grounds: 2020 ONCA 237), and 2364562 Ontario Ltd. v. Yogurtworld Enterprises Inc., 2021 ONSC 5112 at paras. 7-8. However, the issue of the effect of the termination on the rescission was not directly addressed in these cases.
[368] While Paramount’s position is superficially attractive, I ultimately agree with Premium Host’s position. Pursuant to section 11 of the Act, the termination provisions in the Premium Host Franchise Agreement cannot be interpreted as depriving Premium Host of its right to rescind the agreement. Concluding otherwise would, in my view, run afoul of the purpose of the Act which is to protect franchisees: see 405341 Ontario Limited v. Midas Canada Inc., 2010 ONCA 478 at para. 30. A few examples come to mind:
a. A franchisee’s default under the franchise agreement which triggers the franchisor’s right to terminate the agreement may be the result, in whole or in part, of a lack of disclosure. For instance, a franchisee may be having financial difficulties and not be able to make required payments under the franchise agreement because its financial planning was inadequate as a result of inadequate financial disclosure by the franchisor. Denying the right to rescind in these circumstances would be unfair to the franchisee who is in a situation of default at least in part because of the franchisor’s failure to comply with its disclosure obligations.
b. Allowing a termination to trump the right to rescind could trigger a race to termination on the part of a franchisor as soon as minor issues arise in order to avoid the consequences of a rescission.
c. When a contract is terminated, the parties are discharged from future obligations, but rights and obligations that have already matured are not extinguished: see Guarantee Co. of North America v. Gordon Capital Corp., 1999 CanLII 664 (SCC), [1999] 3 S.C.R. 423 at para. 40. Thus, a franchisor terminating a franchise agreement can sue the former franchisee for damages for past breaches of the franchise agreement. It would be unfair for a franchisee who has a valid right to rescind not to be able to exercise its right in such circumstances just because it was not the first to terminate the relationship.
[369] Accordingly, I conclude that the termination of the Premium Host Franchise Agreement by Paramount does not preclude Premium Host from making a rescission claim. In light of this conclusion, I do not need to decide whether the termination was valid.
3. Validity of the rescissions
[370] Given that none of the disclosure exemptions apply and that I have rejected Paramount’s two defences, Paramount had an obligation to provide a disclosure document to each of the three Franchisees under the Act.
[371] Pursuant to subsection 6(2) of the Act, where a franchisor fails to provide a disclosure document, a franchisee may rescind the franchise agreement, without penalty or obligation, no later than two years after entering into the franchise agreement. As stated above, subsection 6(2) is also engaged where a disclosure document is provided, but the disclosure is so deficient that it prevents the franchisee from making an informed choice about whether or not to invest in the franchise.
[372] The actual subjective use by the Franchisees of the information disclosed is irrelevant under the statutory scheme: see 2147191 Ontario Inc. v. Springdale Pizza Depot Ltd., 2014 ONSC 3442 at para. 19; aff’d by 2015 ONCA 116. As stated above, the test for a valid rescission, i.e. whether the information provided impaired the franchisee’s ability to make an informed decision, is an objective one.
[373] If, after a notice of rescission is received, the franchisor fails to pay statutory compensation in accordance with subsection 6(6), or otherwise challenges the validity of the rescission, the franchisee may bring an action in respect of the rescission. In the subsequent action, the onus is on the franchisee to demonstrate that: (a) it had valid grounds to rescind the franchise agreements; and (b) it effected the rescission in accordance with the Act.
[374] The delivery of a disclosure document is largely a question of fact: see Lettieri at para. [61](https://www.canlii.org/en/on/onsc/doc/2016/2016on