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

CITATION: 2189205 Ontario Inc. v. Springdale Pizza Depot Ltd., 2010 ONSC 3695

                                                                                         COURT FILE NO.: CV-09-385359

DATE: 20100629

SUPERIOR COURT OF JUSTICE - ONTARIO

RE:                 2189205 Ontario Inc., Parminder Mutti, and Navjot Kaur Chandi,

Plaintiffs

and

Springdale Pizza Depot Ltd., Ranjit Singh Mahil, Delawar Singh Khakh,

2147390 Ontario Inc. and Kulwinder Singh,

Defendants

BEFORE:      Madam Justice Darla A. Wilson

COUNSEL:   Allan D.J. Dick, for the Plaintiffs

Barrie Attzs, for the Defendants Springdale Pizza Depot Ltd., Ranjit Singh Mahil and Delawar Singh Khakh;

Gurpreet S. Jassal for the Defendants 2147390 Ontario Inc. and Kulwinder Singh

HEARD:         June 22, 2010

ENDORSEMENT

[1]               This is a motion for partial summary judgment brought by the Plaintiffs, 2189205 Ontario Inc. (“218”), Parminder Mutti (“Mutti”) and Navjot Kaur Chandi (“Chandi”), for a declaration that they validly rescinded their franchise agreements with the Defendants pursuant to section 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000 (“the Act”) and that they are entitled to compensation under the Act.  This motion is opposed by the Defendants, Springdale Pizza Depot Ltd. (“Springdale”), Ranjit Singh Mahil (“Mahil”), Dilawar Singh Khakh (“Khakh”), 2147390 Ontario Inc. (“214”) and Kulwinder Singh (“Singh”), who argue that the Plaintiffs have failed to satisfy the onus to demonstrate that there is no genuine issue for trial and thus, the motion ought to be dismissed with costs.

Background

[2]               Mutti and his sister Chandi are the principals of the corporate Plaintiff, 218.  They decided they wanted to purchase a franchise of the Defendant Springdale, who was the franchisor, and operate a restaurant known as Pizza Depot.  They contacted the head office of Springdale and learned that a franchise located at 611 Holly Avenue in Milton, Ontario was available for purchase.  That store was being operated by the defendant, 214.  Mutti and Chandi entered into an agreement of purchase and sale with the Defendant 214 on October 14, 2008 for the sum of $220,000.00.

[3]               The franchise agreement between 214 and Springdale required Springdale’s consent to an assignment of the franchise agreement.  The Plaintiffs were required to sign several documents in furtherance of securing the consent of the franchisor including an Assignment of Franchise Agreement and Guarantee/Indemnity, general security agreement, new guarantee, subordination and transfer restriction agreement, undertaking for car wrapping, a sublease agreement with a company which was an affiliate of Springdale and an Acknowledgement, all of which were signed in December, 2008. 

[4]               After operating the pizza franchise for several months, the Plaintiffs who had no prior experience in franchises, learned that they did not have the proper disclosure pursuant to the Act. They served a Notice of Rescission of the Assignment of the Franchise Agreement on Springdale on July 16, 2009.  This action was commenced on August 19, 2009.  The Statement of Defence and Crossclaim of Springdale, Mahil and Khakh pleads that disclosure documentation as required by the Act was provided and that, in any event, they were exempt from any disclosure requirements pursuant to Section 5(7) of the Act.  The Plaintiffs continued to operate the pizza business for a few months and attempts were made to resolve the issues between the parties.  These ultimately failed and on October 21, 2009, the Plaintiffs ceased operating the business and left the premises.

Positions of the parties

The Plaintiffs—Purchasers of Franchise

[5]               The Plaintiffs submit that they did not receive a disclosure document in accordance with the Act and are therefore entitled to rescission of the franchise agreements as well as compensation.  Subsequent to launching this litigation, the Plaintiffs received a purported disclosure document which did not constitute a disclosure document under the Act and Regulation as it was deficient in numerous respects.

The Defendants Springdale, Mahil and Khakh--Franchisor

[6]               These Defendants deny that disclosure was not provided to the Plaintiffs and note that the Plaintiffs operated the franchise for approximately one and a half (1 ½) months prior to the actual closing of the sale.  They list a number of documents that were given to the Plaintiffs in October 2008 and point out that the Plaintiffs were represented by a lawyer at the time of entering into the deal.  The intent of the Act is to ensure that a potential franchisee will be able to make an informed decision concerning whether or not to invest in the franchise and, in this case, the Plaintiffs had sufficient information to make that determination. The Act provides exemptions and the facts of this case entitle these Defendants to claim an exemption from the disclosure provisions. Furthermore, the Plaintiffs have failed to satisfy the Court that there is no genuine issue for trial and therefore, summary judgment ought not to be granted.

The Defendants 214 and Singh—Existing Franchisee

[7]               They agree that numerous documents were provided to the Plaintiffs for their solicitor’s review in October 2008, including the balance sheet for the business as of June 30, 2008.  In addition, Mutti and Chandi attended the pizza store on several occasions to observe the operations and these defendants assisted the plaintiffs for a couple of weeks after the transaction closed in order to ensure they were familiar with the operation of the business.  These defendants were not served with a Notice of Rescission from the Plaintiffs and were unaware of the events that were occurring.

[8]               These Defendants argue that the provisions of the Act have been interpreted in a broad manner to give effect to the purpose of the legislation and rescission is an extraordinary remedy.  They argue that the Plaintiffs have failed to discharge the onus of satisfying the Court there is no genuine issue for trial and the motion ought to be dismissed.

Analysis

[9]               It is clear that one of the main purposes of the Act is to ensure that proper disclosure is made to a potential franchisee so that an informed decision can be made about whether or not to buy the franchise.  Justice MacFarland summarized the relevant provisions of the legislation in  1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd. 2005 CanLII 25181 (ON C.A.), (2005),256 D.L.R.(4th) 451 (Ont. C.A.) when she stated:

…Section 5 imposes a duty of disclosure on the franchisor: disclosure must be provided in a single disclosure document delivered to the prospective franchisee at least fourteen days prior to the execution of the franchise agreement or the payment of any consideration to the franchisor.  Section 6 then provides certain rights of rescission in the event of inadequate disclosure.  Finally, s. 7 provides the right to an action for damages in the event, inter alia, of the failure to meet the requirements of the s. 5 disclosure provision.  It is evident then that the thrust of the Act is to set standards for adequate disclosure and to create significant penalties for failing to meet those standards…

[10]           In my view, in order to determine if the statutory requirements have been met, the facts of each case must be examined. I do not accept the submission of counsel for the franchisor that the disclosure provisions do not apply because this case falls into an exemption set out in section 5 of the Act,specifically that this was a resale of a franchise.  It was argued that the franchisor was not involved in the sale of the franchise, apart from providing its consent to the transaction.  This argument, however, is not supported by the evidence, in particular the various documents that the Plaintiffs were required to sign involving Springdale or one of its affiliates.  This was not a case of the sale of a franchise being effected from the existing franchisee only to the new purchaser.  That view is also inconsistent with the affidavit evidence filed by the Defendants. 

[11]           In the case before me, Mutti has sworn that neither the existing franchisee nor the franchisor provided the Plaintiffs with a disclosure document prior to the deal being signed (paragraph 11 of his affidavit).  Counsel for the Plaintiffs submitted that it was not disputed that a disclosure document was not provided prior to the execution of the agreement and that it was not until September 2009 in response to a Request To Inspect Documents from his office that the alleged “disclosure document” was provided.  This submission is incorrect from my review of the evidence. Springdale in its Statement of Defence and Crossclaim pleads that the Plaintiffs received the proper disclosure documentation required by the Act and that they acknowledged this.  In the alternative, it is pleaded that these Defendants are exempt from any disclosure requirements pursuant to section 5(7) of the Act.  In its crossclaim, Springdale pleads that 214 was to provide the disclosure document to the Plaintiffs.

[12]           Furthermore, in the affidavit of Singh sworn June 14, 2010, he deposes in paragraph 6 that in October 2008, he provided the Plaintiff with the disclosure statement along with other documents which he lists. There is a dispute between the parties as to whether or not the disclosure document was provided to the Plaintiffs prior to the signing of the agreement.

[13]            Acceding to the defence position that the disclosure document was provided in a timely fashion, I will consider whether the disclosure document meets the requirements set out in the Act.  The document that was provided was dated September 2007 and was not provided by the franchisor as stipulated under the Act but rather was provided by the existing franchisee and is clearly the disclosure document that was given to Singh at the time that 214 purchased the franchise in September 2007.  It was not updated to reflect the fact that the franchise had been in operation for more than a year nor did it include the financial statements, they were admittedly sent later.

[14]           According to the affidavit of Mahil, various other documents were provided to the Plaintiffs in October 2008. Given that 214 purchased the franchise from Springdale in September of 2007, it appears that the documents Mahil refers to are those that were prepared for the sale of the franchise to 214 as opposed to updated documents intended to inform the new purchasers of the current financial status of the franchise. The 2008 financial statements of the franchisor were not provided. The issue that I must determine is whether the document that was delivered contained deficiencies that are sufficiently material for me to conclude that this document fails to satisfy the requirements of the Act.

[15]           At the outset, I will say that the position of Springdale is problematic as it attempts to put the burden of disclosure on the existing franchisee, 214 and it cannot do so under the Act.  Section 5 is specific that the franchisor shall provide a prospective franchisee with a disclosure document and the evidence does not indicate that this was done.  Rather, Springdale deposes that it “did not play an active role in the sale of the franchise”. (Paragraph 7 of the Mahil affidavit).

[16]           In any event, it is clear from a review of the evidence that the alleged disclosure document was deficient in several respects and did not contain the necessary information as set out in the Regulation:  there was no certificate certifying that the document included every material fact, financial statement and contained nothing that was untrue and it was not signed by the franchisor; it admittedly did not contain the required audited financial statements; it did not contain the head lease for the premises; and the document did not contain earnings projections.

[17]           The Defendants argue that while there may not have been technical compliance with the Act and Regulations, financial documentation was provided and furthermore, the Plaintiffs had an opportunity to attend the pizza store and inform themselves about the operation.  This argument, however, cannot be accepted.  The language of the Act is clear and it is mandatory. It sets out what must be produced in order to give effect to the intent of the legislation.  As Justice MacFarland observed in the 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd. case supra:

…It is perfectly clear from the language used in s. 5 of the Act that disclosure is to be made in one “disclosure document”. All of the required and prescribed information is to be included in that one document and it is to be accurate, clear, and concise—and all delivered at one time….One of the prime purposes of the Act is to obligate 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…The language of the Act is unambiguous, and it is mandatory.  It prescribes in clear and precise terms what is required…

[18]           It is clear that what was delivered was not in accordance with the requirements set out in the Act.  This was the first occasion that the Plaintiffs had been involved with a franchise and thus, it was of the utmost importance that strict compliance be made with the Act to ensure that the Plaintiffs were able to make an intelligent decision about whether to purchase the franchise, one that was informed by the provision of the requisite information.  This was not done and it is no answer to say that the Plaintiffs were permitted to attend at the store and observe the operations and were given training by the existing franchisee.  The legislation is clear and sets out exactly what must be provided and the consequences if it is not.

[19]           I agree with the approach taken by Justice MacFarland in a more recent case, 6792341 Canada Inc. v. Dollar It Ltd. 95 O.R.(3d) 291 (Ont. C.A.), a case which has similarities to the one before me.  While a purported disclosure document was delivered in the Dollar It case, it did not comply with theAct and Regulations and Justice MacFarland considered whether the deficiencies were such that the document could not be considered a disclosure document under the Act.  In reviewing the missing documents and information, Justice MacFarland noted the certificate, financial statements, head lease and other information were not included in the purported disclosure document. In determining that the disclosure document in that case was deficient, she stated:

…The purpose of the legislation is to protect franchisees and the mechanism for so doing is the imposition of rigorous disclosure requirements and strict penalties for non-compliance.  The legislation must be considered and interpreted in light of this purpose…A document does not become a disclosure document for the purposes of the Act just because it is called a disclosure document.  Put another way, calling something a disclosure document doesn’t make it one…” 

I agree. In the case before me, I have no difficulty in concluding that the alleged disclosure document was deficient in numerous material ways and that it did not comply with the requirements under the Act and Regulations.

[20]           In considering whether there is a genuine issue for trial, bearing in mind the Court’s new powers of weighing evidence and drawing any reasonable inference from the evidence, I am satisfied that I am in as strong a position as a trial judge would be to determine if the Defendants complied with the disclosure requirements imposed on them under the Act.  The language of the Act is clear and unambiguous and I have available to me the documents that are relied on by the parties.  I find that the Plaintiffs have satisfied the onus imposed upon them under Rule 20 of the Rules of Civil Procedure to demonstrate that there is no genuine issue for trial concerning whether the Plaintiffs received a disclosure document as required by section 5 of the Act.  Accordingly, I conclude that the Plaintiffs are entitled to exercise a right to rescind the agreement under s. 6(2) of the Act, which they did.

[21]           The Plaintiffs’ motion for partial summary judgment is granted and a declaration shall issue that the following documents, constituting the Franchise Agreement, were validly rescinded by the Plaintiffs by the delivery of the Notice of Rescission dated July 16, 2009: Assignment of Franchise Agreement and (where applicable a separate) Licence Agreement and Guarantee/Indemnity; General Security Agreement; Guarantee, Subordination and Transfer Restriction Agreement; Undertaking as to car wrapping; Sublease Agreement with an affiliate of Springdale; and Acknowledgement.

[22]           An order shall issue that the Defendants, Springdale, Mahil and Khakh are liable to pay to the Plaintiffs the amounts as required by section 6(6) of the Act, such amounts to be determined through a reference if counsel cannot agree on these amounts.

[23]           If the parties cannot agree on costs, I will accept brief written submissions of no more than 5 pages from the Plaintiffs within 5 days of the release of these reasons and from the Defendants within 5 days of receipt of the submissions from the Plaintiffs, following which I will fix the costs.

D.A. Wilson, J

Date: 2010 06 29