COURT FILE NO.: 06-CV-308463PD1

DATE: 20080516

ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

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WILLIAM KIN FONG CHU,

KA-HAY COMPUTER CONSULTING INC. and 2056545 ONTARIO INC.

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Ben V. Hanuka, for the Plaintiffs

Plaintiffs

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- and -

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KISHORE CHOWDHURY O/A LIBERTY

CAR AND TRUCK RENTAL, and

1250320 ONTARIO INC.

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Alan J. Davis and Sheldon Erentzen, for the

Defendants

Defendants

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HEARD: May 2, 2008

CHAPNIK J.

ENDORSEMENT

[1] This is a motion for summary judgment brought by the plaintiffs for a declaration rescinding two licensing agreements. The plaintiffs seek an order for the return of the “rescission payments” and compensation pursuant to subsection 6(6) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3, as amended (the Act).

BACKGROUND

[2] The plaintiff William Kin Fong Chu (Chu) is the principal of both plaintiff corporations, Ka-Hay Computer Consulting Inc. (Ka-Hay) and 2056545 Ontario Inc. (205). The defendant Kishore Chowdhury, also known as Ramendra Chowdhury (Chowdhury) is president of the defendant corporation 1250320 Ontario Inc. (125). At the material times, 125 carried on business in the firm name and style of “Liberty Car and Truck Rental,” as a retailer and licensor in the car and truck rental industry.

[3] The parties entered into two agreements, as follows:

1) A licensing agreement as between Kishore Chowdhury o/a Liberty Car and Truck Rental and the plaintiff 205 via a purchase of shares in October 2005, dated November 9, 2004 (the Central Parkway Agreement); and

2) a licensing agreement between Chowdhury and Ka-Hay Computer Consulting and Chu, dated August 25, 2005 (the Rexdale Boulevard Agreement).

[4] The parties agree that both the Rexdale Blvd. and Central Parkway locations were “Liberty Car and Truck Rental” franchise businesses within the meaning of s. 1(1) of the Act.

[5] On November 28, 2005 and December 2, 2005, Chu and 205 respectively, sent letters or notices of rescission to Chowdhury with respect to the two agreements. On December 9, 2005, the plaintiffs shut down both the Rexdale Blvd. and Central Parkway locations.

[6] The plaintiffs claim the return of payments of $60,000 and $50,000 made to Chowdhury and losses sustained in the course of the operation of the businesses, during the time of their operation in the fall of 2005.

[7] In their factum, the plaintiffs set out three main issues on the motion as follows:

(a) whether the two locations were Liberty Car and Truck Rental franchised businesses within the meaning of section 1(1) of the Act;

(b) whether Chowdhury delivered a “disclosure document” to the plaintiffs within the meaning of section 5(1) of the Act and its Regulation; and

(c) what amounts the plaintiffs are entitled to receive as a result of their rescission.

[8] Prior to the hearing, it was agreed that the two locations comprised franchised businesses within the meaning of the Act, and issue no. 3 would be referred for assessment, other than the return of the principal payments of $60,000 and $50,000 purportedly made to Chowdhury. Thus, the real issue for determination at this stage is whether the information provided to the plaintiffs by Chowdhury constituted a “disclosure document” within the meaning of the legislation. For the purpose of this motion, the issue of delivery of the document was conceded by the plaintiffs.

The Legislation

[9] The franchisor’s duty to disclose is imposed by s. 5(1) of the Act, which provides:

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.

[10] Section 5(2) of the Act, dealing with methods of delivery, permits the disclosure document to be delivered personally, by registered mail or by any other prescribed method. The contents of the disclosure document are described generally in s. 5(4) of the Act and detailed in O. Reg. 581/00, passed pursuant to the legislation.

[11] Section 5(4) of the Act reads:

5(4) Contents of disclosure document

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.

[12] The other sections of the Act relevant to this motion are reproduced below:

6(1) Rescission for late disclosure

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.

6(2) Rescission for no disclosure

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.

6(3) Notice of rescission

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.

ANALYSIS

[13] The plaintiffs concede that the information provided to the franchisee was deficient and incomplete. The issue then is whether the disclosure they did supply was simply incomplete such as to bring into operation s. 6(1) of the Act, or was so deficient as to invoke s. 6(2).

[14] Both counsel indicated that the sufficiency of a disclosure notice within the meaning of s. 5 of the Act, has not yet been judicially determined.

[15] In a case where the information the franchisees received approximated 70% of that required to be disclosed, and was given piecemeal over a number of months, the court held that no disclosure had been provided within the meaning of section 5; and thus s. 6(1) was rendered inoperative. See 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd. 2005 CanLII 25181 (ON C.A.), (2005), 256 D.L.R. (4th) 451 (C.A.). However, that case turned on the fact that s. 6(1) presupposes the existence of a single disclosure document as mandated by s. 5(3) of the Act. In the instant case, the disclosure was given at one time and in one particular document.

[16] Clearly, where no disclosure document is provided, as occurred in Personal Service Coffee Corp. v. Beer (c.o.b. Elite Coffee Newcastle) 2005 CanLII 25180 (ON C.A.), (2005), 200 O.A.C. 282 (C.A.), the courts will endorse rescission pursuant to s. 6(2). As noted by the court in that case, at para. 32: “Where there is non-disclosure, the statutory right to rescind appears to be absolute.”

[17] In a case in which an American Uniform Franchise Offering Circular was provided for information purposes only, a few days before the transaction was completed and no material facts relating to the particular franchise were offered, the court held that the non-disclosure of material facts in itself meant there was non-compliance with the Act. See 1518628 Ontario Inc. v. Tutor Time Learning Centres, LLC, [2006] O.J. No. 3011 at para. 70 (S.C.J.).

[18] In the case at bar, Chowdhury sent the “disclosure document” to Chu by letter dated July 15, 2005, containing a pamphlet that included a sales report, unaudited financial statements of 125 for the periods ending June 30, 2003 and June 30, 2004, and an overview of the Liberty Car and Truck Rental requirements and business.

[19] The plaintiffs allege that only three of the numerous items required under O. Reg. 581/00 were complied with in the document. The three items outlined were:

1) the business background of the franchisor, including the name under which the franchisor engages in or intends to engage in business (s. 2(1)(ii));

2) the length of time the franchisor has engaged in the line of business associated with the franchise (s. 2(1)(vi)); and

3) a description of all restrictions or conditions in the franchise agreement related to the transfer of the franchise (s. 6.18(ii)).

[20] Though the defendants concede the insufficiency of the disclosure document, they claim at least another seven to eight items are covered in the document, including, the name and address of the franchisor (s. 2(1)(i); form of business of the franchisor (s. 2(1)(iv); length of time the franchisor has offered franchises (s. 2(1)(vii); financial statements for the prior fiscal year (s. 3(2); a recommendation for independent legal advice (s. 4(2); a description of training provided (s. 6(5)); and a statement regarding the franchisee’s required commitment (s. 6(11)).

[21] Clearly, as alleged by the plaintiffs, not all items provided are in strict compliance with the legislation. For example, the financial statements for the franchising operations in the prior fiscal year were not prepared as “review engagements”, pursuant to regulation 3(1)(b); and some details regarding the training of franchisees such as cost and whether it is mandatory, as set out in s. 6(5), are not included in the description of training set out in the document. Yet, such matters may well be inferred in the fairly comprehensive section entitled “Training” that reads:

“New franchises and all new staff, undergo an extensive four-week training program at LIBERTY TRAINING CENTER located at the Toronto Head Office. The facility includes classrooms and a fully operational location, providing trainees with intensive hands on experience of LIBERTY sales and services. Strong emphasis is placed on customer satisfaction and brand loyalty, equipment maintenance and safety.”

At the same time, several items, such as the certificate required by s. 7(1) of O. Reg. 581/00 are omitted entirely from the document provided to the franchisee.

[22] It is evident that neither party had legal advice either in the preparation or in the signing of the agreements. The disclosure in this case was undoubtedly deficient and did not fully fulfill the requirements of the Act.

[23] Nevertheless, s. 6(1) of the Act specifically permits a franchisee to rescind a franchise agreement within 60 days of receipt of a disclosure document if the franchisor failed to meet the requirements of s. 5, either because disclosure was late or incomplete.

[24] It is common ground that the franchisee did not avail himself of this opportunity within the mandated time frame.

[25] One of the main purposes of the Act is to oblige a franchisor to make full and accurate disclosure to a potential franchisee so that the latter can make a properly informed decision about whether or not to invest in a franchise. I am not prepared to find, on the evidence before me, that there is no genuine issue for trial as to the effect of the incomplete disclosure on the franchisee in this case, or the sufficiency of the documentation in these particular circumstances.

[26] The issue as placed before me is a material question of mixed fact and law. Such a question can only be determined after canvassing the evidence, which only a trial can provide. See Dawson v. Rexcraft Storage and Warehouse Inc., [1998] O.J. No. 3240 at para 18 (C.A.).

[27] The defendants have raised a number of other issues surrounding the transactions which are in serious dispute, including:

• the effect of the fact that KH Consulting Inc. (the stated name of the licensee) was a non-legal entity when the August 25, 2005, licensing agreement was entered into for the Rexdale location;

• the fact that the Central Parkway agreement was originally entered into in November 2004 by Joseph Ashun personally; yet, the share purchase agreement with Chu related to the shares of 205;

• with regard to the latter agreement, no written consent to the transfer was requested or given by the franchisor as required by s. 7 of the Act;

• whether the November 28, 2005 correspondence from the plaintiffs’ solicitors regarding the Rexdale agreement, represented a notice of rescission in accordance with s. 6(3) of the Act; and the effect of the December 2, 2005 notice of rescission; and

• the disputed payments made and credited under both agreements.

[28] The court’s role is limited to deciding whether a genuine issue exists as to material facts, which require a trial. It is not to assess credibility, weigh the evidence or find facts. Aguonie v. Galion Solid Waste Material Inc., 1998 CanLII 954 (ON C.A.), (1998), 38 O.R. (3d) 161 (C.A.) and Dawson, supra.

CONCLUSION

[29] The plaintiffs have not satisfied the onus of proving there is no genuine issue for trial in this case. Accordingly, this motion for a declaration rescinding two licensing agreements and for the rescission payments and compensation, is dismissed.

[30] Costs are reserved to the trial judge.

___________________________

CHAPNIK J.

Released: May 16, 2008

COURT FILE NO.: 06-CV-308463PD1

DATE: 20080516

SUPERIOR COURT OF JUSTICE – ONTARIO

B E T W E E N:

WILLIAM KIN FONG CHU, et al.

Plaintiffs

- and -

KISHORE CHOWDURY o/a LIBERTY CAR AND TRUCT RENTAL, et al.

Defendants

ENDORSEMENT

CHAPNIK J.

Released: May 16, 2008