



COURT OF APPEAL FOR ONTARIO

CITATION:
2130489 Ontario
    Inc. v. Philthy McNasty's (Enterprises) Inc., 2012 ONCA 381

DATE: 20120606

DOCKET: C54736

MacPherson, Gillese and Ducharme JJ.A.

BETWEEN

2130489 Ontario Inc., Jegatheeswaran
    Sivasothirajah and Thanusha Jegatheeswaran

Applicants (Respondents in Appeal)

and

Philthy McNastys (Enterprises) Inc., Philthy
    McNastys Restaurants Inc., and Terry Tsianos

Respondents (Appellants)

Gregory Govedaris, for the appellants

David Altshuller and Kristina Davies, for the
    respondents

Heard: May 11, 2012

On appeal from the order of Justice Kevin Whitaker of the
    Superior Court of Justice, dated November 18, 2011.

MacPherson J.A.
:

A.

INTRODUCTION

[1]

In 2007, the parties entered into two franchise agreements.  In
    September 2009, the respondents attempted to rescind the agreement.  In
    November, 2009, the appellants disputed the purported rescission.  In November
    2010, the respondents brought an application seeking a declaration that they
    were entitled to rescind the agreement.

[2]

In two sets of reasons dated October 11 and November 18, 2011, the
    application judge held that: (1) it was appropriate to resolve the dispute by
    way of application; (2) the second Franchise Agreement was a franchise
    agreement within the meaning of s. 1(b) of the
Arthur Wishart Act
    (Franchise Disclosure), 2000
, S.O. 2000, c. 3 (the 
Wishart Act
);
    and (3) the respondents application was brought in a timely fashion; it was
    not outside the time lines of either the
Wishart Act
or the
Limitations
    Act, 2002
, S.O. 2002, c. 24 (the 
Limitations Act
).

[3]

The appellants appeal the application judges decision.  They contend
    that all three of his conclusions are erroneous.

B.

FACTS

(1)

The parties and events

[4]

The appellant Philthy McNastys (Enterprises) Inc. (PME) is an Ontario
    corporation that carries on business as a franchisor of restaurants/pubs.  The
    appellant Philthy McNastys Restaurants Inc. is an Ontario corporation that
    carries on business as a sublessor of restaurants/pubs.  The appellant Terry
    Tsianos (Tsianos) is the sole director/principal of the appellant corporations.

[5]

The respondent Jegatheeswaran Sivasothirajah (JS) is a businessman
    with experience in several businesses, including a bar and a Pizza Pizza
    franchise.

[6]

The respondent Thanusha Jegatheeswaran (TJ) is married to JS.  She
    immigrated to Canada in 2006, married JS at age 19, and has no prior business
    or work experience.

[7]

The respondent 2130489 Ontario Inc. (213) is the company incorporated
    by JS.

[8]

In January 2007, JS, acting through an intermediary, approached Tsianos
    about purchasing a franchise.  On February 23, 2007, Tsianos provided JS with a
    purported disclosure document.

[9]

On March 20, 2007, PME entered into a franchise agreement with 213.  JS
    signed the agreement on behalf of 213 and in his personal capacity as
    guarantor.

[10]

Under
    the auspices of PME, the parties attempted to obtain a small business loan for
    213.  Their negotiations with the Bank of Montreal ultimately proved fruitless.

[11]

In
    August 2007, JS gave PME $100,000 pursuant to the first Franchise Agreement.

[12]

The
    parties shifted gears in their attempt to secure a small business loan for the
    respondents.  In early October 2007, TS, JSs wife, obtained a loan for $240,000
    from the Royal Bank of Canada (RBC).  At the same time, TS replaced JS as
    sole director and principal of 213.

[13]

On
    October 9, 2007, TJ, on behalf of 213 and in her personal capacity as guarantor,
    signed the second Franchise Agreement.  The appellants did not provide either
    213 or TS with a second disclosure document.

[14]

On
    October 25, 2007, RBC transferred $240,000 to PME pursuant to the small
    business loan to TS.

[15]

The
    franchise failed from the outset.  On September 23, 2009, 213 served a Notice
    of Rescission of the second Franchise Agreement and demanded a return of the
    franchise fees it had paid.

[16]

On
    November 3, 2009, PME responded to the Notice of Rescission and denied
    liability.  PME stated,
inter alia
, that your Notice of Rescission is
    out of time.

[17]

The
    respondents commenced their application on November 29, 2010.

C.

ISSUES

[18]

The
    issues on the appeal are:

(1)

Did the application judge err by
    determining that there were no genuine issues requiring a trial?

(2)

Did the application judge err by
    determining that the Second Franchise Agreement was a franchise agreement
    within the meaning of s. 1(b) of the
Wishart Act
?

(3)

Did the application judge err by
    determining that the respondents application was not barred by the interaction
    of the limitation periods in the
Wishart Act
and the
Limitations
    Act
?

D.

ANALYSIS

(1)

Application or action

[19]

Rule
    14.05(3)(d) of the
Rules of Civil Procedure
, R.R.O. 1990, Reg. 194,
    provides:

14.05(3) A proceeding may be brought by
    application... where the relief claimed is,

(d) the determination of
    rights that depend on the interpretation of a... contract ....

[20]

The
    application judge held that the issues in dispute were rather narrow and
    could be resolved as an application based on material facts not contested.

[21]

The
    appellants contend that the application judge erred in reaching this
    conclusion.  They say that because there were two franchise agreements in play,
viva voce
evidence was required to determine the intention of the
    parties concerning both agreements.  This would have included all the evidence
    concerning the execution of both agreements as well as the conduct of both
    parties before and after the execution of the agreements.

[22]

I
    do not accept this submission.  The application judge determined that the
    essence of the legal dispute was centered on two issues: (1) whether 213 and TS
    could rescind the second Franchise Agreement, which included consideration of
    the statutory definition of franchise agreement; and (2) whether the
    respondents had brought their application in a timely fashion in light of
    relevant time lines in both the
Wishart Act
and the
Limitations
    Act
.  In light of the uncontested facts, which he set out in paragraphs
    10-19 of his reasons, the application judge determined that there was a
    sufficient foundation of undisputed material facts on which to ground his legal
    analysis and conclusions relating to these two issues.  I agree with his
    assessment.  The two issues were essentially legal issues appropriate for
    resolution on an application.

(2)

The second Franchise Agreement

[23]

There
    are two Franchise Agreements involving the parties.  In the first Franchise
    Agreement on March 20, 2007, JS signed on behalf of 213 and in his personal
    capacity.  In the second Franchise Agreement on October 9, 2007, TS signed on
    behalf of 213 and in her personal capacity.  The appellants provided 213 and JS
    with the statutory disclosure document in advance of the first Franchise
    Agreement.  The appellants did not provide 213 and TS with the statutory disclosure
    document in relation to the second Franchise Agreement at any time.

[24]

The
    application judge concluded that the second Franchise Agreement was a
    franchise agreement within the meaning of s. 1(b) of the
Wishart Act
,
    thus triggering a disclosure obligation on the appellants.  He reasoned:

Applying the very broad language of section 1 of the
Act
which defines the term franchise agreement I can come to no other conclusion
    than the document executed on October 9, 2007 must be a franchise agreement as
    that term is understood and described in the legislation.  The document is an
    agreement between a franchisor (the respondents) and a franchisee (213) that
    relates to a franchise between them.  These seem to be the three criteria which
    are to be used to identify a franchise agreement.

As the document is a franchise agreement that was entered into
    voluntarily by the respondents, the disclosure document obligations under
    section 5.1 of the
Act
are triggered.

I conclude that the responding
    parties failed to provide a disclosure document with respect to the franchise
    agreement entered into on October 9, 2007 and for this reason, 213 was entitled
    to issue a Notice of Rescission no later than 60 days after October 9, 2009.

[25]

The
    appellants challenge this analysis.  They submit that the application judge
    failed to find, as was clear from the evidence, that the only purpose of the
    second Franchise Agreement was to obtain financing from RBC.  Accordingly, the
    application judge should have found that the common intention of the
    contracting parties at all material times was that the first Franchise
    Agreement governed their commercial relationship.  The second Franchise
    Agreement was not a fresh agreement; it was merely a document to provide to
    RBC to evidence the involvement of TS in the franchise business.

[26]

I
    do not accept this submission.  The umbrella under which this issue needs to be
    addressed is a recognition that the purpose of the
Wishart Act
is the
    protection of franchisees: see
405341 Ontario Ltd. v. Midas Canada Inc.
,
2010 ONCA 478, 264 O.A.C. 111, at
    para. 30.  As expressed by Winkler C.J.O. in
Salah v. Timothys Coffees of
    the World Inc.
, 2010 ONCA 673, 268 O.A.C. 279, at para. 26:

The
Wishart Act
is
sui
    generis
remedial legislation.  It deserves a broad and generous interpretation. 
    The purpose of the statute is clear: it is intended to redress the imbalance of
    power as between franchisor and franchisee; it is also intended to provide a
    remedy for abuses stemming from this imbalance.

[27]

In
    this context, the disclosure requirement in the
Wishart Act
is a
    crucial one.  As explained by MacFarland J.A. in
6792341 Canada Inc. v.
    Dollar It Ltd.
2009 ONCA 385, 95 O.R. (3d) 291, at para. 72:

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.

[28]

The
    contents of the disclosure requirement have been clearly stated by MacFarland J.A.
    in
1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd.
, (2005)
256 D.L.R. (4th) 451
(Ont. C.A.),
    at paras. 18-19:

There is no issue of substantive versus procedural
    compliance.  The requirement that disclosure occur in the form of a single document
    is not an empty formal requirement.  The legislature clearly envisioned that
    the purpose of the legislation  i.e. ensuring that a decision to enter into a
    franchise agreement is an informed one  would best be fulfilled by giving
    prospective franchisees the opportunity to review a single document or
    documents, so that all the information is before them at the same time.  It is
    simple commonsense that people have more difficulty processing and assessing
    information given at different times, some of it orally, than they do
    information provided in a single, written document.

The language of the Act is
    unambiguous, and it is mandatory.  It prescribes in clear and precise terms
    what is required.

[29]

Against
    this backdrop, it is clear that the second Franchise Agreement was not, as the
    appellants assert, merely a document designed to give comfort to the lender
    RBC.

[30]

In
    the first Franchise Agreement, TS was invisible.  She was not involved in the
    enterprise or legal document in any way.  In the second Franchise Agreement,
    the picture changed completely.  213 remained as the franchisee, but TS became
    the sole director of 213.  TS executed the second Franchise Agreement on behalf
    of 213.  The appellants required TS to execute a new sublease agreement with PM
    Restaurants Inc.  TS became a guarantor of 213s obligations under the second
    Franchise Agreement.

[31]

Combining
    the umbrella of the relevant franchise case law and the constellation of facts
    relating to the second Franchise Agreement and TSs role in it, it seems to me
    that the application judges conclusion that the second Franchise Agreement was
    a franchise agreement within the meaning of s. 1(b) of the
Wishart Act
is clearly correct.  If follows that the appellants breached the Act by not
    providing TS with a disclosure document.

(3)

The limitation issue

[32]

The
    appellants submit that the application judge erred by determining that the
    respondents application was not barred by the interaction of the relevant
    limitation periods in the
Wishart Act
and the
Limitations Act
.

[33]

The
    basic limitation period is set out in s. 4 of the
Limitations Act
:

4. Unless this Act
    provides otherwise, a proceeding shall not be commenced in respect of a claim
    after the second anniversary of the day on which the claim was discovered.

[34]

The
    relevant provision of the
Wishart Act
is s. 6, which provides:

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.

(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 franchisors 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).

[35]

Because the appellants
    provided no disclosure document relating to the second Franchise Agreement, the
    relevant rescission provision is s. 6(2) of the
Wishart Act
, not s.
    6(1): see
4287975 Canada Inc. v. Imvescor Restaurants Inc.
, 2009 ONCA
    308, 247 O.A.C. 391, at paras. 27-29, leave to appeal refused [2009] S.C.C.A.
    No. 244.

[36]

The
    application judge dealt with the interplay among ss. 6(2) and (6) of the
Wishart
    Act
and s. 4 of the
Limitations Act
in this fashion:

With respect to the
Limitations Act
argument, section
    6(2) of the
Act
permits the franchisee to rescind the agreement no
    later than two years after entering into the agreement, where as here, no
    disclosure has been provided.

Section 6(6) of the
Act
obliges the franchisor to meet
    its statutory obligations to the franchisee, within a period of 60 days
    following the effective date of rescission.

As the franchise agreement was rescinded on September 23, 2009,
    the franchisor had a further period of 60 days  to November 23, 2009  in
    which to satisfy its obligations.  Until the expiry of this 60 day period, the
    franchisee could not know with certainty whether the franchisor would comply
    with section 6(6).

On November 3, 2009, counsel for the respondents advised the
    applicants that the notice of rescission was disputed.  It is fair to say that
    at this point, the applicants were on notice that the respondents were not
    prepared to satisfy their obligations on rescission.

I conclude that the claim was discovered on receipt of this
    letter from counsel.  The two year limitation period for purposes of section 4
    of the
Limitations Act
began to run from November 3, 2009, ending on
    November 3, 2011.

As this application was commenced
    on November 29, 2010, it is not barred by the
Limitations Act
.

[37]

The
    appellants contend that the application judge erred by stating that the claim
    was discovered on receipt of this letter from counsel.

[38]

I
    disagree.  Pursuant to s. 6(6) of the
Wishart Act
, once the franchisee
    delivers a Notice of Rescission, the franchisor has 60 days from the effective
    date of rescission in which to fulfil its statutory obligations.  It is the
    Notice of Rescission, nothing else, that triggers these obligations.

[39]

Once
    the Notice of Rescission is delivered, the ball moves to the franchisors side
    of the court.  Until the franchisor decides to not fulfil the obligations in s.
    6(6), the franchisee has no cause of action for compensatory damages; at most,
    the franchisee has a latent or potential cause of action.  Accordingly, the
    franchisee only has a cause of action at the earlier of (a) when the franchisor
    fails to pay compensation pursuant to s. 6(6) by the end of the 60 day period
    following the effective date of the Notice of Rescission or (b) when the
    franchisor communicates its refusal to do so at some point before expiry of the
    60 days, as happened in this case on November 3, 2009.

[40]

In
    sum, I agree with the application judges reasoning and conclusion on this
    issue.

E.

DISPOSITION

[41]

I
    would dismiss the appeal.  The respondents are entitled to their costs of the
    appeal which I would fix at $10,000 inclusive of disbursements and applicable
    taxes.

Released: June 6, 2012 (J.M.)

J.C. MacPherson J.A.

I agree. E.E. Gillese J.A.

I agree. E. Ducharme J.A.


