The case below is from the Canadian Legal Information Institute (CanLII)

Ontario Superior Court of Justice

Bekah v. Three for One Pizza

Date: 2003-09-26

B. Hanuka, for plaintiff.

J. Chidley-Hill, for defendant.

[1] Karakatsanis J. (orally): — This is a motion for judgment brought at the commencement of trial. Counsel agreed that if the motion were unsuccessful, we would proceed with the trial on the claim that the agreement was conditional upon financing as added in the amended statement of claim. Counsel also agreed on the documents that form the evidence for this motion, and they have been marked as Exhibits 1 through 9.

[2] This motion for judgment turns upon the interpretation of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3. The Act is designed to ensure that franchisors provide full disclosure to respective franchisees. If disclosure is not made, a franchisee has the right to rescind the franchise agreement and is entitled to the return of any moneys paid. A franchisee is defined as "a person to whom a franchise is granted …" [s. 1].

[3] The issue is whether a purchaser of a franchise in a transaction that has not yet closed is a franchisee within the meaning of the Act and is therefore entitled to the right of rescission under the Act.

[4] The facts are straightforward. The plaintiff entered into an agreement (Exhibit 1) for the purchase of the assets of the store, including the right to a sublease and to operate the business under the franchise. The plaintiffs signed the offer on February 20, 2002, and provided a deposit of $10,000. Triple Holdings Ltd. accepted the offer and a further deposit of $15,000 was made (Exhibits 2 and 3). It is agreed that the agreement was a franchise agreement:

MR. HANUKA: I apologize, Your Honour. There is a correction. The deposit was $25,000; $10,000 and $15,000.

THE COURT: That's what I said.

MR. HANUKA: Oh, I apologize.

THE COURT: First $10,000 and then $15,000.

MR. HANUKA: I apologize, Your Honour.

THE COURT: Yes, for a total of $25,000.

[5] It is agreed that the agreement of purchase and sale is a franchise agreement under the Act. It is further agreed that the franchisor did not provide the disclosure required under the Act. The plaintiffs were provided with the unexecuted franchise agreement (Exhibit 4), General Security Agreement (Exhibit 5), sublease (Exhibit 6) and the executed Head lease (Exhibit 7). The agreement of purchase and sale provided that the closing of the transaction would be April 5, 2002. On March 19, 2002, the plaintiffs gave written notice rescinding the agreement and requesting return of the deposits (Exhibit 8). Their solicitor delivered a formal notice of rescission on March 22, 2002 (Exhibit 9). The transaction was never completed. The defendants have not refunded the deposit.

[6] The defendants take the position that the plaintiffs are not franchisees within the meaning of the Act and are therefore not entitled to rescission under s. 6. They submit that the remedy of rescission under s. 6 of the Act is available to a franchisee only after the franchise has been granted. They take the position that in this case the plaintiffs are prospective franchisees only and that as the franchise transaction never closed, the franchise has not been granted. The plaintiffs take the position that the plaintiffs were franchisees as they had entered into a binding agreement that is a franchise agreement within the Act and that the terms "franchisee" and "prospective franchisee" are used interchangeably in the Act and regulations.

[7] For the reasons that follow, I have concluded that the plaintiffs are franchisees within the meaning of the Act and that they are entitled to the remedies under s. [6] of the Act.

[8] This legislation is new and counsel advised that there are:

MR. HANUKA: I apologize, I think it's section 6, which is the remedy.

THE COURT: You're right, section 6. I misspoke.

[9] This legislation is new and counsel advised that there are only two cases dealing with these provisions in the Act. In the case of MAA Diners Inc. v. 3 for 1 Pizza & Wings (Canada) Inc. 2003 CanLII 10615 (ON S.C.), (2003), 30 B.L.R. (3d) 279, [2003] O.J. No. 430 (QL) (S.C.J.), the plaintiff was clearly a franchisee who had paid the full purchase price and operated the business for several months prior to rescission. In the case of 1368741 Ontario Inc. v. Triple Pizza (Holdings) Inc., [2003] O.J. No. 2097 (QL) (S.C.J.), the franchisor advanced the same arguments advanced here. Justice Pitt concluded [at paras. 3 and 5]:

The respondents' main contention … is that a party cannot seek the protection of the Act unless the party "closed the transaction" that is the subject matter of agreement, since the party does not become a franchisee until the transaction is closed …

No authority has been cited for the proposition that the plaintiff is not entitled to a protection of the Act and I see no principled basis for accepting it. What is more, the subject transaction closed in the sense that the vendor received the deposit and the debt instrument that secured the balance of the vendor take back loan.

[10] In this case no debt instrument was completed; otherwise the circumstances are similar.

[11] Turning next to the legislative scheme. The legislation creates new standards of conduct in a franchise relationship and provides remedies for their breach. Section 3 of the Act provides that every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement and sets out a right of action for damages for the breach of that duty. Section 4 provides for the right of franchisees to associate and creates a right of action for damages against a franchiser who contravenes that right. Section 5 creates the franchisor's obligation to provide full and specific disclosure and to advise of any material change. Section 6 creates the right to rescind if disclosure is late or inadequate or not provided. Finally, s. 7 provides for damages for losses arising from misrepresentation or failure to fully comply with the disclosure under s. 5.

[12] Section 5(1) creates the franchiser's obligation of disclosure, and it states:

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.

[13] Section 6(2) provides:

6(2) 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.

[14] Section 6(6) requires the franchisor to "(a) refund to the franchisee any money received … and (d) compensate the franchisee for any losses that the franchisee incurred in acquiring … the franchise …".

[15] The definitions of "franchisee", "prospective franchisee" and "franchise agreement" must be read together:

"franchise agreement" means any agreement that relates to a franchise between,

(a) a franchisor or franchisor's associate; and

(b) a franchisee;

"franchisee" means a person to whom a franchise is granted … ;

. . . . .

"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[.]

[16] The defendants submit that the definition of franchisee clearly requires that the franchise has been granted and therefore would exclude a party to an agreement to purchase a franchise that has not been completed. Counsel concedes that such an interpretation would deprive such parties of the remedy set out in the Act. Counsel submits however that the legislators could have made the remedy available to prospective franchisees but chose not to. They chose to differentiate between a franchisee and a prospective franchisee, and the legislation reflects a compromise between the rights of franchisors and franchisees and prospective franchisees. Counsel submitted that in providing more onerous disclosure requirements on franchisors, the legislature chose to give the right of rescission only to a franchisee who has closed a transaction and would suffer more prejudice than a prospective franchisee that would only lose the deposit and could rely upon other remedies. Counsel submitted that under such an interpretation a prospective franchisee would have to close the transaction to be entitled to the return of the moneys.

[17] The plaintiffs submitted that the terms "franchisee" and "prospective franchisee" are used interchangeably in the Act. I disagree. Counsel points to s. 5(5) of the Act. While the language of s. 5(5) is somewhat confusing, there may be a situation in which the distinction would apply. Mr. Chidley-Hill suggested there might be limited circumstances where a franchisee has been granted a franchise without yet signing any agreements or paying any moneys. It is not open to the court to redraft the legislation to read in prospective franchisee where the legislation clearly chooses to differentiate between franchisees and prospective franchisees and gives them different definitions. Nor is it necessary.

[18] An interpretation that excludes the purchaser of a franchise where the transaction has not yet been fully completed is not required by the language of the Act and is not consistent with the overall scheme of the Act. The Act sets out a remedy for each right it creates. Damages are provided for breach of the duty of fairness and for losses arising from misrepresentation or inadequate disclosure. The only remedy set out for lack of disclosure in s. 5 flows from the right of rescission in s. 6.

[19] Furthermore, it is necessary to read the definitions together. A comparison of the definition of "franchisee" and "prospective franchisee" makes it clear that a prospective franchisee has indicated an interest in entering into a franchise agreement and is therefore not yet a party to a franchise agreement. This is also consistent with the provisions of s. 5, the only section in the Act in which the term "prospective franchisee" is used, as disclosure is required before any agreement is signed or any money is paid.

[20] As well, the definition of a franchise agreement, as any agreement that relates to a franchise between a franchisor (or franchisor's associate), and a franchisee, indicates that: one, the legislation uses the term "franchise agreement" much more broadly than what the parties referred to in their agreement of purchase and sale; and, two, the agreement is with a franchisee, not a prospective franchisee.

[21] In this case it is agreed that the agreement to purchase was a franchise agreement, in other words, between a franchisor and a franchisee. This document could not be a franchise agreement within the Act if the plaintiffs are not franchisees. To interpret the definition of franchisee otherwise would create a gap and would provide protection to those purchasers before they sign the document and after the closing of the transaction, but not to those purchasers who have a binding contract of purchase and sale.

[22] The fact that a franchisee means a person to whom a franchise is granted does not require the closing of the transaction. To insist that a franchisee must have concluded the franchise transaction is not required by the language and would illogically leave a gap in the protection of the statute. In this case there was a binding agreement for the purchase and sale of a franchise business. Moneys were paid under the agreement. Under the agreement, the purchasers were obligated to enter into a full franchise relationship. They were parties, as franchisees, to a franchise agreement as defined under the Act. They are therefore entitled to the full protection of a franchisee under the Act. To hold that they are not franchisees because the transaction had not fully closed would run counter to the scheme of the Act, the definitions of franchise agreement and prospective franchisee and would deprive the plaintiff of a remedy for the breach of a franchisor's obligation to give full disclosure.

[23] The relief sought by the plaintiffs is granted. Judgment shall go against both defendants jointly and severally.

Judgment accordingly.