COURT FILE NO.: 08-CL-7428

DATE: 20081107

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Sovereignty Investment Holdings, Inc. v. 9127-6907 Quebec Inc., Stephane Viau, Luc Viau, 9155-6498 Quebec Inc., and 9187-0196 Quebec Inc.

BEFORE: Justice H.J. Wilton-Siegel

COUNSEL: Ben Hanuka, for the Applicant Sovereignty Investment Holdings Inc.

Colby Linthwaite, for the Respondent 9187-0196 Quebec Inc.

DATE HEARD: June 26 and July 7, 2008

E N D O R S E M E N T

[1] In this application, the applicant Sovereignty Investment Holdings, Inc. (the “applicant” or “Sovereignty”) seeks rescission of a franchise agreement dated May 12, 2006 (the “Agreement”) entered into with 9127-6907 Quebec Inc. (the “Franchisor”) for the operation of a “Houston Steaks & Ribs” restaurant established in the Vaughan Mills Shopping Centre (the “Restaurant”). It seeks to recover under section 6(6)(a) and (d) of the Act, respectively, (1) the purchase price of $1,100,000 plus GST, and (2) damages in the amount of $500,000 on account of losses allegedly suffered as a result of acquiring, setting up and operating the Restaurant.

[2] The applicant submits that it is entitled to rescission pursuant to section 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c.3 (the “Act”) on the grounds that the contents of the documentation delivered to it did not meet the requirements of section 5 of the Act such that the Franchisor failed to provide a “disclosure document” for the purposes of the Act. The complication in this proceeding is that the Franchisor has assigned all of its rights under the Franchise Agreement to 9187-0196 Quebec Inc. (“9187”). Accordingly, the applicant asserts claims under section 6(6) against 9187, as well as the Franchisor and certain other parties related to the Franchisor.

Background

[3] A representative of the Franchisor provided Sovereignty with the following documentation at different times prior to execution of the Agreement on May 12, 2006:

1. a sales package and demographic study for the Restaurant comprised of a demographic analysis, an investment summary, a lease summary, a pro forma financial analysis and a critical path statement (collectively, the “Sales Package”);

2. a disclosure document (the “Alleged Disclosure Document”);

3. pro forma financial projections for the Restaurant (the “Projections”); and

4. a draft of the Agreement.

[4] Subsequently, Sovereignty also received, among other documents, a pro forma opening balance sheet, a store development financial model, a sublease agreement for the Restaurant premises dated as of May 12, 2006 which Sovereignty executed (the “Sublease”), a copy of the head lease for the premises, and a trademark licence agreement.

[5] The total purchase price for the franchise was $1,025,000 (rather than $1,100,000 claimed in the notice of application). There is no dispute that Sovereignty paid this amount to the Franchisor over the period from May 2006 to October 2006, when construction was completed. Sovereignty says its total initial investment, including working capital, was $1,250,000.

[6] The Restaurant opened for business on October 20, 2006.

[7] There is no evidence that either 9187 or its sole officer, director and shareholder, Yvan Piquette, had any relation to the Franchisor at the time of delivery of the disclosure documentation to Sovereignty or had any involvement in the preparation of the disclosure therein. Piquette was hired by the Franchisor as a consultant in May 2007. He subsequently became president of the Franchisor in or about August 2007. There is also no evidence that Piquette was made aware of the applicant’s allegations with respect to the inadequacy of the disclosure in the Alleged Disclosure Document prior to October 31, 2007, when 9187 received an assignment of the Agreement.

[8] On December 10, 2007, Sovereignty received a letter from legal counsel for the Franchisor advising that the Franchisor had sold all of its assets, and assigned the Agreement, to 9187 effective October 31, 2007. Sovereignty had no prior notice or knowledge of this transaction. The letter included an undertaking to assume all obligations of the Franchisor under the Agreement executed by 9187 pursuant to section 19.1 of the Agreement. Pursuant to that provision, the Franchisor was released from all of its obligations under the Agreement upon delivery of the undertaking, except obligations arising prior to such delivery.

[9] On February 29, 2008, Sovereignty sent a notice of rescission under section 6 of the Act to each of the Franchisor and 9187.

Applicable Law

[10] The relevant provisions of the Act dealing with rescission are sections 6(1) and 6(2), which establish rights of rescission with differing limitation periods, and section 6(6), which describes the obligation of a franchisor, and certain other parties, in the event of a valid exercise of a right of rescission:

(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.

(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. …

(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).

Issues

[11] This application raises two principal issues:

(1) Is the applicant entitled to rescission under section 6(2) of the Act? Resolution of this issue also requires a determination of whether the contents of the documentation delivered to the applicant by the Franchisor prior to the execution of the Agreement qualify the Alleged Disclosure Document as a “disclosure document” for purposes of section 6 of the Act; and

(2) If the applicant is so entitled, whether 9187 is subject to the obligations of the Franchisor under section 6(6) of the Act? This issue requires determinations as to (i) whether an assignee is a “franchisor” for the purposes of section 6(6); and (ii) whether 9187 is obligated to comply with the provisions of paragraph 6(6)(a) even if it is found to be a “franchisor” for purposes of section 6(6).

[12] For the sake of clarity, in this Endorsement the term “assignee” refers to a third party that takes an assignment of the benefits of a franchise agreement from an original franchisor and assumes all the obligations of the original franchisor thereunder in the manner, and with the state of knowledge, of 9187.

Analysis and Conclusions

Is the Document a “Disclosure Document”?

[13] The applicant argues that the documents provided to it prior to execution of the Agreement did not satisfy the requirements of a “disclosure document” for purposes of section 6 of the Act. The documentation delivered to Sovereignty has been set out above.

[14] The applicant has identified nineteen alleged deficiencies in the documentation provided to it by the Franchisor. The respondent accepts nine of the deficiencies and disputes the remainder as either not being required under the Act or as being in substantial compliance with the requirements of the Act.

[15] The issue for the Court is whether there are any deficiencies that are sufficiently material that the Court should conclude that the Alleged Disclosure Document fails to satisfy the substantive requirements of the Act. I conclude that there are at least four such deficiencies in the disclosure provided by the Franchisor to Sovereignty, each of which, on its own, is fatal to 9187’s assertion that the Franchisor complied with the requirement of the Act to deliver a “disclosure document.”

[16] First, the Franchisor acknowledges that the document delivered to the applicant failed to include financial statements for the Franchisor as required by paragraph 5(4)(b) of the Act and section 3 of Regulation 581/00 made under the Act (the “Regulation”). The Franchisor did not obtain an exemption from such disclosure requirement under the Act. Without financial statements, the applicant was not in a position to make any assessment of the financial position of the Franchisor or of its ability to perform its obligations under the Agreement.

[17] Second, under paragraph 5(4)(a) of the Act and items 2 and 3 of section 6 of the Regulation, the Franchisor was required to include a statement specifying the basis for the earnings projections set out at page 16 of the Alleged Disclosure Document (the “Estimates”) and for the Projections, as well as a statement of the assumptions underlying the Estimates and the Projections and a location where information is available for inspection that substantiates the Estimates and Projections. No such information was provided for the Estimates. In the case of the Projections, the principal assumptions appear to have been set out but no location was identified where substantiating information could be reviewed. The applicant was therefore unable to make an informed assessment of the credibility of this financial information even though such information is highly relevant to the applicant’s investment decision.

[18] Third, the documentation provided to the applicants was not collected in a single document nor was it delivered at the same time. This is contrary to the specific requirement of section 5(3) of the Act: see the statement of MacFarland J.A. in 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd. 2005 CanLII 25181 (ON C.A.), (2005), 201 O.A.C. 95 (C.A.) at paras. 15-19.

[19] Fourth, as a related matter, the document delivered to the applicant did not include a certificate of the Franchisor covering all of the disclosure provided to the applicant as required by section 7 of the Regulation. Accordingly, none of such disclosure was subject to the certification required by the Act. The certificate is an important means of implementing the policy of the Act of ensuring complete and accurate disclosure of all material facts pertaining to a proposed franchise investment. It is also the mechanism for imposing liability for misrepresentations in the disclosure document on certain parties as contemplated by paragraph 7(1)(e) of the Act.

[20] Based on the foregoing, I conclude that the Franchisor failed to deliver a “disclosure document” for the purposes of the Act.

[21] Given the foregoing determination, it is unnecessary to address the remaining deficiencies alleged by the applicant. I would note, however, that none are sufficiently material, on their own, to disqualify the Alleged Disclosure Document for the purposes of the Act. I would also note that a number of minor deficiencies cannot, on a cumulative basis, disqualify documentation as a “disclosure document” for such purposes.

Entitlement of the Applicant to Rescission in Accordance with Section 6(2) of the Act

[22] Section 6(1) of the Act provides for a 60 day rescission period if either a franchisor fails to deliver a disclosure document within the required time periods under section 5 or the contents of a disclosure document did not meet the requirements of section 5. Section 6(2) provides for a two-year rescission period in the event of a failure by the franchisor to deliver a disclosure document.

[23] 9187 argues that the applicant is entitled to assert that the contents of the documentation provided to it did not meet the requirements of section 5 but not that the Franchisor failed to deliver a disclosure document. On this basis, it submits that the deficiencies described above permitted the applicant to exercise a right of rescission under section 6(1) of the Act but not under section 6(2).

[24] I do not agree. As set out above, the documentation provided to the applicant was deficient in four fundamental respects, which was more than sufficient to justify a finding that the disclosure did not qualify as a “disclosure document” for the purposes of the Act. In these circumstances, there can be no doubt from the case law that the applicant is entitled to exercise a right of rescission under section 6(2) of the Act: see Dig This Garden at paras. 20-23; 1518628 Ontario Inc. v. Tutor Home Learning Centres LLC, [2006] O.J. No. 3011 (Sup. Ct.) per Cumming J. at paras. 69 and 73; Beer v. Personal Service Coffee Corp. 2005 CanLII 25180 (ON C.A.), (2005), 200 O.A.C. 282 (C.A.) at para. 30.

[25] Section 6(1) is directed to the situation in which the franchisee was unable to make a fully informed decision as a result of inadequate time for consideration of such decision or inadequate disclosure of the material facts. Section 6(2) is directed to the situation in which the franchisee is unable to make an informed decision at all because of fundamental deficiencies in the disclosure provided to it. There may be circumstances in which the dividing line is hard to draw. Indeed, whether such a distinction is practicable in the context of franchising practice, as compared with the practice in respect of the distribution of securities, which appears to be the model for this statutory approach, may be questioned but is beyond the role of the Court. However, this is not a situation in which there is any difficulty drawing the dividing line.

[26] I conclude therefore that Sovereignty is entitled to exercise a right to rescind the Agreement pursuant to section 6(2) of the Act.

Parties Against Whom Rescission is Effective

[27] There is no dispute that, if the applicant was entitled to rescind the Agreement under section 6(2) of the Act, that right was validly exercised by the applicant under section 6(3) when it delivered its notice of rescission on February 29, 2008. Delivery of the notice was therefore effective to rescind the Agreement, and to trigger the provisions of section 6(6) of the Act as a consequence thereof, as between the applicant and the Franchisor. 9187 argues, however, that, as a purchaser for value without notice of the Franchisor’s defective disclosure and therefore of the applicant’s entitlement to rescind the Agreement, it cannot be subject to liability under section 6(6) notwithstanding rescission of the Agreement.

[28] This position raises two questions:

1. whether the applicant’s rescission of the Agreement is effective as between itself and 9187; and

2. if it is, whether 9187 is liable under section 6(6) as a “franchisor”, given the wording of that provision.

The first issue is addressed below. The second issue is addressed in the next section of this Endorsement.

[29] 9187 argues that the applicant’s rescission of the Agreement was not effective as between itself and 9187 because it would be inconsistent with 9187’s common law defence to an action for rescission as a purchaser for value without notice. For the reasons set out below, however, I conclude that, under the Act, the applicant’s rescission of the Agreement was also effective as between it and 9187 notwithstanding the defence available to 9187 in any common law action to rescind the Agreement.

[30] The right of rescission under section 6(2) is a statutory right that exists independently of any common law rights that might also be available to a franchisee. The nature and extent of the right is defined entirely by the wording of the statute. Two consequences that are important for this proceeding flow from this fact.

[31] First, the right of rescission in section 6(2) is not limited, by its terms, to a right to rescission of the Agreement as against the original franchisor. It can be exercised against both the original franchisor and any other person that becomes a party to the franchise agreement. This conclusion does not turn on whether or not an assignee is a “franchisor” for purposes of the Act. It proceeds entirely from the plain wording of the provision. Section 6(2) does not speak of rescission against any particular party including, in particular, against the franchisor. It provides simply that “a franchisee may rescind the franchise agreement …no later than two years after entering into the franchise agreement if the franchisor never provided the disclosure document.” There is, therefore, no basis in this language for an implied condition that the right may not be exercised if the franchise agreement has been assigned to a third party.

[32] Second, the equitable principles of rescission do not apply to the statutory right of rescission under section 6(2): see Dig This Garden, supra, at para. 38. Accordingly, the fact that 9187 may be an innocent purchaser for value is not a bar to the applicant’s exercise of its statutory right.

[33] 9187 argues that this interpretation is legally unreasonable because it is inconsistent with section 9 of the Act, which provides that “the rights conferred by this Act are in addition to and do not derogate from any other right or remedy a franchisee or franchisor may have at law.” However, this argument misconstrues the purpose of section 9. That provision preserves any rights and remedies available to a party in any independent common law action that might also be commenced in respect of the circumstances giving rise to the assertion of a statutory right or remedy under the Act. It is not intended, however, to restrict in any manner any such statutory right or remedy.

[34] This intention is evidenced in respect of actions based on allegations of misrepresentations by a franchisor. In any common law tort action based on a misrepresentation, a franchisor may assert a defence of the absence of reliance. However, the Act expressly excludes any such defence in any statutory action commenced under section 7 in respect of the same circumstances. In the same manner, I conclude the intention in respect of the right of rescission in section 6 is to exclude any defences otherwise available to an assignee purchaser for value without notice even if this is not specifically addressed in this provision. This conclusion is also consistent with the approach of the Court of Appeal in Beer v. Personal Service Coffee Corp., 2005 CanLII 25180 (ON C.A.), (2005) 200 O.A.C. 282 (C.A.) at paras. 32 and 34. While that decision dealt with counterclaims by a franchisor based on the franchisee’s conduct, the same principle should govern both situations – common law rights cannot be used to diminish the statutory rights of a franchisee.

[35] Based on the foregoing, the applicant’s rescission of the Agreement pursuant to section 6(2) of the Act was therefore effective as of February 29, 2008 as against both the Franchisor and 9187. The consequences of such rescission under the Act must therefore be addressed.

Operation of Section 6(6) of the Act in respect of the Applicant’s Rescission of the Agreement

[36] It is not disputed that, as a result of such rescission, the Franchisor is obligated to comply with the provisions of section 6(6) of the Act. However, Sovereignty also seeks a declaration that it is entitled to enforce its rights under section 6(6) against each of Stephane Viau, Luc Viau and 9155-6498 Quebec Inc. (“9155”) and against 9187. I will address each of these claims below in turn.

Application of Section 6(6) to Stephane Viau, Luc Viau and 9155-6498 Quebec Inc.

[37] Sovereignty seeks a declaration that it is entitled to enforce its rights under section 6(6) against each of Stephane Viau, Luc Viau and 9155-6498 Quebec Inc. (“9155”) on the grounds that each is a “franchisor’s associate” for purposes of the Act. None of these parties, or the Franchisor, appeared at the hearing of the application or filed any materials in this proceeding.

[38] The Alleged Disclosure Document states that Stephane Viau and Luc Viau own the Franchisor. It also states that Luc Viau and Stephane Viau are directors of the Franchisor and are respectively the chairman and chief executive officer and the president and chief operating officer of the Franchisor.

[39] The application materials include an affidavit of the president of Sovereignty in which she states that, in her dealings with the Franchisor prior to executing the Franchise Agreement, it was made clear to her that Stephane Viau and Luc Viau “would be consulting one another on all major decisions affecting the sale of the Restaurant to Sovereignty.” As these respondents failed to file any responding materials in this proceeding, this statement is uncontradicted. In addition, the application materials of Sovereignty include a corporate profile report for the Franchisor that describes Stephane Viau as the majority shareholder.

[40] The affidavit of the president of Sovereignty further states that 9155 is controlled by the Franchisor or Luc Viau and Stephane Viau. The president also states in that affidavit that 9155 is the sub-landlord under the Sublease executed by Sovereignty with respect to the Restaurant premises. This latter statement is evidenced by the Sublease. There is no evidence for the allegation respecting the control of 9155. However, the head lease respecting the Restaurant premises was executed between the landlord and the Franchisor.

[41] Based on the foregoing, I conclude that Sovereignty has established on a balance of probabilities that Luc Viau and Stephane Viau directly or indirectly controlled the Franchisor. Based on this relationship and their consequential financial interest in the Franchisor as well as the uncontradicted statement of the president of the applicant, I also conclude that they were directly involved in the grant of the franchise for the Restaurant to Sovereignty by being involved in reviewing or approving the grant of the franchise. Accordingly, each of Luc Viau and Stephane Viau qualifies as a “franchisor’s associate” under the Act.

[42] Similarly, based on the foregoing, I find that 9155 is directly or indirectly controlled by Luc Viau and Stephane Viau, and, as the sub-landlord under the Sublease, exercises significant operational control over Sovereignty and is a party to whom Sovereignty has a continuing financial obligation in respect of the franchise. Accordingly, 9155 also qualifies as a “franchisor’s associate” for purposes of the Act.

[43] Sovereignty is, therefore, also entitled to a declaration that each of Stephane Viau, Luc Viau and 9155 is subject to the obligations set out in section 6(6) of the Act by virtue of Sovereignty’s rescission of the Franchise Agreement.

Application of Section 6(6) to 9187 as the Assignee of the Franchisor

[44] Sovereignty seeks a further declaration that it is entitled to enforce its rights under section 6(6) against 9187 as the assignee of the Franchisor. It is understood that, as a practical matter, the applicant must look to 9187 if it has any chance of obtaining any recovery of its investment in the Restaurant.

[45] I am not aware of any case law or other authority on this issue. I have approached this claim by addressing two issues:

(1) is an assignee a “franchisor” under the Act? and

(2) if the answer is in the affirmative, is an assignee required to comply with the provisions imposed on a franchisor under paragraph 6(6)(a) of the Act?

Does a Franchisor Include an Assignee of a Franchisor?

[46] “Franchisor” is defined under the Act to mean “one or more persons who grant or offer to grant a franchise.” 9187 argues that this definition restricts a “franchisor” to the party that grants a franchise at the time of execution of the relevant franchise agreement and therefore excludes an assignee that takes an assignment of the franchise agreement at a later date.

[47] Does the term “franchisor” as used in the Act extend to an assignee of the franchisor for the purposes of section 6(6) of the Act? For the following five reasons, I conclude that it does.

[48] First, the principal argument of 9187 is that the definition of “franchisor” does not accommodate the concept of an assignee. This conclusion rests on the assumption that the definition speaks to the grant of a franchise as at a particular point in time. However, a franchise agreement necessarily involves continuing obligations of both the franchisor and the franchisee during the term of the franchise including, for example, the grant of the right to use the intellectual property and other rights associated with the franchise system. On this basis, a franchise agreement can also be approached conceptually as involving a continuing grant subject to on-going compliance by the franchisee with its obligations under the agreement. In the circumstances of two possible interpretations, the Court should select the interpretation that best gives effect to the policy of the Act including, in particular, the objective of protecting franchisees from losses arising out of inaccurate or incomplete disclosure.

[49] Second, treatment of an assignee as a “franchisor” is necessary to give effect to the policy of the Act which is directed, in addition to ensuring adequate disclosure, toward requiring fair dealing between parties to franchise agreements and to ensuring that franchisees have the right to associate. These objectives, which are addressed in sections 3 and 4, respectively, would be frustrated if the Act imposed these obligations only on the initial party to the franchise agreement. To be effective, the obligations in sections 3 and 4 of the Act must apply to the franchisor from time to time in respect of any particular franchise agreement, including any assignee. I will address separately the inferences to be drawn from the wording of these provisions of relevance for the issue in this application.

[50] Section 3 of the Act imposes a duty of fair dealing on each party to a franchise agreement. There can be little doubt that this obligation extends to assignees. Because they do not employ the terms “franchisor” and a “franchisee”, the provisions of section 3 easily accommodate assignees who assume obligations under a franchise agreement. 9187 submits that, because this approach was used by the draftsman in respect of provisions that are clearly intended to embrace assignees, the wording of section 3 supports its argument that, where the term “franchisor” is used in the Act, it is to be construed more narrowly.

[51] However, it is not a necessary inference from the wording of section 3 that references in the Act to a “franchisor” are intended to be restricted to the original franchisor. The absence of references to the franchisor and franchisee in section 3 reflects both the imposition of the duty of fair dealing on both parties to the franchise agreement and the possibility, as contemplated expressly in the definition of franchise agreement, that a franchise agreement may be comprised of several agreements having differing counterparties. Accordingly, the wording in section 3 does not necessarily evidence an intention that the term “franchisor” in the Act is to be restricted to the original franchisor.

[52] On the other hand, section 4 of the Act imposes obligations in sections 4(2) and 4(3), and grants a right of action in section 4(5), in respect of a “franchisor.” The purpose of section 4, which deals with a franchisee’s right to associate with other franchisees, would be frustrated in many instances if the term “franchisor” did not include an assignee during the term of a franchise agreement. Section 4 therefore provides considerable support for the conclusion that the Legislature intended the term “franchisor” to extend to assignees of the original franchisor under a franchise agreement, at least in the context of the franchisee’s right to enforce statutory rights in its favour.

[53] Similarly, the policy objective of ensuring complete and full disclosure would be negated in the case of renewals of franchise agreements if the term “franchisor” did not extend to assignees. Sections 2, 5(1)(a) and 5(7)(f), collectively, require a franchisor to provide a disclosure document on a renewal of a franchise agreement at the end of its original term in the event of a material change since the date of the franchise agreement. Because lengthy terms are not uncommon for franchise agreements, it is not unusual for assignments to occur during the life of such agreements. This disclosure obligation would therefore be frustrated in respect of any franchise agreements that had been assigned if “franchisor” did not also embrace any assignee of an original franchise under such a franchise agreement.

[54] Third, the purpose of the statutory rights set out in section 6(6) is to restore a rescinding franchisee to the position it would have been in if it had not executed the franchise agreement. It therefore deals with the circumstances of rescission in a manner which is consistent with the imposition of liability under section 6(6) on third parties who would not otherwise be liable for the actions of the franchisor. As mentioned, section 6(1) and 6(2) do not limit the exercise of rescission to circumstances in which the original franchisor remains a party to the agreement. In addition, section 6(6) specifically provides a rescinding franchisee with rights against any “franchisor’s associate”, in addition to the franchisor, in order to increase the possibility of recovery. The extension of the obligations of a franchisor under section 6(6) to an assignee of a franchisor is therefore entirely consistent with the policy of the statute.

[55] Fourth, this interpretation produces a more commercially reasonable result than the interpretation proposed by 9187. 9187 argues that it is contrary to the policy of the Act to permit rescission against an assignee that was not responsible for deficiencies in the disclosure previously given by a franchisor to a prospective franchisee. It suggests that the Act intends to impose liability on a “fault-based” basis. I do not agree.

[56] The statute is directed principally to protecting franchisees against inadequate or inaccurate disclosure and to providing rights of recovery of their investment in the event that they are victims of such disclosure. That would be frustrated in many circumstances by a “fault-based” approach to liability. It is also contradicted by the imposition of liability on any party that qualifies as a “franchisor’s associate” of the franchisor even if such party bears no responsibility for the inadequate or incorrect disclosure that has triggered the rescission.

[57] In addition, 9187’s argument does not take into account the relative positions of a franchisee and an assignee. A franchisee can take no action to prevent an assignment of its franchise agreement or to protect itself against such eventuality. On the other hand, a franchisor can protect itself in a number of ways against liability for defective disclosure by an assignor of a franchise agreement. This is addressed further below. For this reason, 9187’s argument based on the policy implications of permitting rescission against an assignee of a franchise agreement is, I think, misdirected.

[58] Lastly, 9187’s argument that such an interpretation in inconsistent with the availability of a defence to rescission in favour of an assignee purchaser for value without notice cannot succeed given the determination above that an assignee cannot assert such a defence to an action under section 6(2) of the Act.

[59] Accordingly, I conclude that, as an assignee of the Agreement, 9187 is obligated to comply with the provisions of section 6(6) of the Act pertaining to a franchisor as a result of Sovereignty’s exercise of its right of rescission under section 6(2).

Is 9187 Obligated to Comply with Section 6(6)(a) of the Act?

[60] 9187’s final argument is that, even if it is obligated to comply with the obligations of the Franchisor under section 6(6) as an assignee, it is nevertheless not obligated to comply with the provisions of paragraph 6(6)(a) of the Act because it has not received any money from the applicant. It argues that it would only be liable if the Act required it to refund any monies paid to it by the franchisee rather than monies received from the franchisee.

[61] I agree that, in the absence of language that imposes the refund obligation with respect to all monies paid to a franchisor, paragraph 6(6)(a) is susceptible of two possible interpretations. Nevertheless, I conclude that the Legislature intended that the obligation in paragraph 6(6)(a) extend to an assignee for the following reasons.

[62] First, the Court should select the interpretation of section 6(6)(a) that best gives effect to the policy of the Act – in this case, the policy of providing financial protection to franchisees – provided such interpretation does not produce a commercially unreasonable result. In this case, as mentioned above, the interpretation that imposes the obligation to comply with section 6(6)(a) on an assignee is not only reasonable but also consistent with commercial practice.

[63] Such interpretation recognizes the important reality that, as between the franchisee and the assignee, it is the latter that is in a position to protect itself. As mentioned, a franchisee typically has no ability to prevent an assignment of a franchise agreement or to protect itself against a subsequent liquidation of the original franchisor. On the other hand, the assignee has the ability to undertake due diligence to establish apparent compliance with the disclosure provisions of the Act by its vendor before agreeing to take an assignment of any franchise agreement. It also has the option at such time of bargaining for security, a guarantee, a holdback or escrow of a portion of the purchase price, or other forms of protection against subsequent claims by a franchisee. Alternatively, it can wait until expiration of the two-year limitation period under section 6(2) before completing its acquisition of any particular franchise agreement or it can require an estoppel letter or other form of comfort directly from the franchisee as a condition of taking the assignment of a franchise agreement prior to such time.

[64] Second, given that the claims in paragraphs 6(6)(b), (c) and (d) can be asserted against an assignee on the basis of the conclusion that “franchisor” includes an assignee for the purposes of section 6(6), it would be perverse to limit claims under paragraphs 6(6)(a) to the original franchisor. In view of the netting of claims provided for in paragraph 6(6)(d), such an interpretation would require a franchisee to pursue claims against both parties concurrently and to obtain a determination in its action against the original franchisor before it could quantify the relief to which it is entitled from the assignee under paragraph 6(6)(d). Such a procedure is contrary to the legislative objective in enacting the Act of facilitating claims by a franchisee based on a failure of a franchisor to comply with its disclosure obligations under the statute.

Conclusion

[65] As mentioned above, it is not disputed that Sovereignty paid $1,025,000 in respect of the franchise for the Restaurant. Sovereignty’s claim for losses is, however, disputed and was not supported in sufficient detail in its application materials. It is my understanding that both Sovereignty and 9187 agree that the assessment of Sovereignty’s actual loss for the purposes of section 6(6)(d) should be referred to a Master.

[66] Accordingly, Sovereignty is entitled to a declaration that the Agreement has been validly rescinded by Sovereignty pursuant to section 6(2) of the Act and it is ordered that:

(1) each of the respondents, including without limitation 9187, is jointly and severally obligated to comply with the provisions of section 6(6) of the Act;

(2) for the purposes of paragraph 6(6)(a) of the Act, the amount received from the franchisee is $1,025,000; and

(3) for the purposes of paragraph 6(6)(d) of the Act, the amount of the losses incurred by Sovereignty in acquiring, setting up and operating the Restaurant shall be assessed by a Master of this Court to whom this matter is hereby referred.

Costs

[67] The parties shall have 30 days from the date of these reasons to make written submissions with respect to the disposition of costs in this matter, and a further 15 days from the date of receipt of the other party’s submission to provide the Court with any reply submission they may choose to make. Submissions seeking costs shall include the costs outline required by Rule 57.01(6) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, as amended. To the extent not reflected in the costs outline, such submissions shall also identify all lawyers on the matter, their respective years of call, and rates actually charged to the client, with supporting documentation as to both time and disbursements.

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H.J. Wilton-Siegel J.

DATE: November 7, 2008