



COURT OF APPEAL FOR ONTARIO

CITATION: 2352392 Ontario Inc. v. Msi, 2020
    ONCA 237

DATE: 20200323

DOCKET: C67245

Feldman, Huscroft and Harvison Young
    JJ.A.

BETWEEN

2352392 Ontario Inc. and Brent Shearer

Plaintiffs/Moving Parties (Respondents)

and

Vusumzi Msi and Vusumzi Msi,
    Professional Corporation

Defendants/Responding Parties (Appellants)

AND BETWEEN

2352392 Ontario Inc., Brent Shearer

Plaintiffs/Moving Parties (Respondents)

and

The Works Gourmet Burger Bistro
    Inc., The Works Realty Corp., Fresh Brands Inc., Andrew OBrien aka Thomas
    Andrew OBrien, Sean Bell, and David Wilson

Defendants/Moving Parties (Respondents)

Jean-Marc Leclerc, for the appellants

Stephany
    Mandin and Steven H. Goldman, for the respondents 2352392 Ontario Inc. and
    Brent Shearer

Jennifer
    Dolman and Sarah McLeod, for the respondents The Works Gourmet Burger Bistro
    Inc., The Works Realty Corp., Fresh Brands Inc., Andrew OBrien aka Thomas
    Andrew OBrien, Sean Bell, and David Wilson

Heard: March 6, 2020

On appeal from the order of Justice
    Shaun S. Nakatsuru of the Superior Court of Justice, dated July 3, 2019, with
    reasons reported at 2019 ONSC 4055.

Feldman J.A.:

[1]

The question of law to be determined in this
    case under ss. 6(2) and 6(3) of the
Arthur Wishart Act (Franchise
    Disclosure)
,

2000
, S.O. 2000, c. 3, is whether a notice of
    rescission of a franchise agreement is sufficient if it is contained in a
    pleading, or, specifically in this case, a third party claim.

Background

[2]

The issue arises in the following circumstances.
    The franchise was not financially successful. The franchisees bank sued the
    franchisee for default on its loan for the acquisition of the franchise. The
    franchisee issued a third party claim against the franchisor claiming damages
    and rescission of the franchise agreement for failure to deliver the required disclosure
    documents under the Act. The franchisor responded that the franchisee could not
    claim rescission under the Act because it had not delivered the required notice
    under s. 6 of the Act.

[3]

Subsequently, the lawyer who drafted the third
    party claim for the franchisee became involved in his personal capacity. New
    counsel for the franchisee issued a new statement of claim against the
    franchisor, taking the position that the third party claim in the bank action
    constituted the required notice under the Act. The franchisee then issued a
    statement of claim against his former lawyer, alleging that he was negligent in
    failing to comply with the requirements of the
Arthur Wishart Act
.

[4]

In a motion within both actions, the franchisor
    and the franchisee each argued that the third party claim did not constitute
    notice under the Act. The motion judge accepted that position. This appeal is
    brought by the lawyer who issued the third party claim, and is opposed by both
    the franchisor and the franchisee.

Legislative context

[5]

Sections 6(2), 6(3), and 6(6) of the Act provide:

6(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.

(3)
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 franchisors address for service or to any other person
    designated for that purpose in the franchise agreement.



(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).

The motion judges decision

[6]

The motion judge held that a pleading could not
    constitute the notice required under s. 6(3). He referred to a number of cases
    that he acknowledged did not address the issue directly, as well as to the
    decision of the Superior Court in
Ahmed v. Ontario
, [2004] O.T.C. 923
    (S.C.), which held that a pleading can fulfill the notice requirement under s.
    7(1) of the
Proceedings Against the Crown Act
, R.S.O. 1990, c. P.27. In
    that case, Low J. found that the original statement of claim, which was
    ultimately struck out, nevertheless served the purpose of the notice
    requirement of providing the Crown with notice of the claim and was sufficient
    compliance with the Act.

[7]

The motion judge ultimately relied on the
    decision of this court in
2130489 Ontario Inc. v. Philthy McNastys
    (Enterprises) Inc.
, 2012 ONCA 381, 350 D.L.R. (4th) 326. The issue in that
    case was when the cause of action arose for compensatory damages for a
    franchisors failure to comply with the statutory obligations following receipt
    of a notice of rescission under s. 6(6) of the
Arthur Wishart Act
, and
    whether the claim for such damages was commenced within the two-year limitation
    period under s. 4 of the
Limitations Act
, 2002
, S.O. 2002, c.
    24, Sched. B. In that case, the franchisee gave notice of rescission for the
    franchisors failure to provide the disclosure document; after receiving the
    notice, the franchisor failed to comply with s. 6(6) of the Act within 60 days;
    and the franchisee then commenced the proceeding against the franchisor within
    two years of its failure to comply. In concluding that the application was
    commenced in time, the court held that [u]ntil the franchisor decides to not
    fulfil the obligations in s. 6(6), the franchisee has no cause of action for
    compensatory damages: at para. 39.

[8]

Relying on
Philthy McNastys
, the
    motion judge concluded, at para. 40:

Thus, since a notice under subsection 6(3)
    serves a different purpose from a pleading, this Third Party Claim in the case
    at bar cannot constitute such a notice. It is plain and obvious the Third Party
    Claim which is based upon a cause of action dependant upon a failure of the
    franchisor to abide by its obligations under subsection 6(6), cannot constitute
    notice since there is no cause of action until such notice has been given. Logically,
    the Third Party Claim cannot serve the same function as notice.

[9]

At para. 34, the motion judge distinguished the
Ahmed
case on the basis that a notice under [the
Proceedings Against the Crown
    Act
] serves a very different purpose than that under subsection 6(3) of
    the
Wishart Act
and does not carry with it the extraordinary
    consequences that follow service of the notice under subsection 6(3).

Analysis

[10]

In effect, the notice of rescission and the
    claim for rescission were brought contemporaneously in this case. Is there a
    reason to interpret the Act in a way that requires a separate notice, and does
    not allow the third party claim, issued within two years after entering into
    the franchise agreement as required by s. 6(2), to constitute the required notice?
    In my view, there is not.

[11]

As the
Arthur Wishart Act
is remedial
    legislation, it should be interpreted in a generous manner to redress the
    imbalance of power in franchising relationships, while also balancing the
    rights of both franchisees and franchisors:
Mendoza v. Active Tire &
    Auto Inc.
, 2017 ONCA 471, 139 O.R. (3d) 230, at para. 13, leave to appeal
    refused, [2017] S.C.C.A. No. 405;

Salah v. Timothys Coffees of the
    World Inc.
, 2010 ONCA 673, 268 O.A.C. 279, at para. 26;
4287975
    Canada Inc. v. Imvescor Restaurants Inc. et al.
, 2009 ONCA 308, 98 O.R.
    (3d) 187, at para. 40, leave to appeal refused, [2009] S.C.C.A. No. 244.

[12]

Under s. 6(2) of the Act, a franchisee has the
    right to rescind the franchise agreement within two years if the franchisor did
    not provide the statutory disclosure document. To do so, the franchisee must
    provide written notice of rescission. The purpose of the notice is to advise
    the franchisor that the franchisee is rescinding. Its purpose is not as a
    precondition to litigation. In fact, a review of the Hansard debate at the time
    the Act was introduced confirms that s. 6 was intended to allow the parties to
    extricate themselves from the agreement without litigation if the franchisor
    accepts the notice of rescission and complies with all the requirements in s. 6(6)
    within 60 days of receiving the notice: see Ontario, Legislative Assembly,
    Standing Committee on Regulations and Private Bills,
Subcommittee Report:
    Franchise Disclosure Act, 1999, Bill 33
, 37-1, (19 April 2000) at 11:10
    (Joseph Hoffman, Director, Policy and Agency Relations Branch, Ministry of
    Consumer and Commercial Relations).

[13]

Under s. 6(3), the only requirements for the
    notice are that it be in writing and delivered to the franchisor. Although it
    is fair to say that the Act appears to contemplate that notice will be given
    outside the context of litigation, a pleading can comply with the Acts requirements.
    It did in this case. Moreover, it was not the respondents position that the language
    of the third party claim was too imprecise to give notice to the franchisor, as
    was the case in
779975 Ontario Ltd. v. Mmmuffins Canada Corp.
(2009), 62
    B.L.R. (4th) 137 (Ont. S.C.). This was not a case in which the franchisor was
    somehow prejudiced by the manner in which notice was given, nor did the
    respondents submit otherwise. Their position was that no pleading could constitute
    the required notice under the Act.

[14]

The issue identified by the motion judge is that
    the pleading itself may be premature, particularly to the extent that it claims
    the damages and payments provided in s. 6(6) before the 60 days have gone by. However,
    the prematurity of the pleadings is a procedural matter that may have to be
    addressed by the parties, depending what positions they take. In this case, as in
    the
Ahmed
case, the pleading served only as notice and the parties
    subsequently issued new statements of claim. Although this procedure is anomalous,
    and certainly not the ideal or recommended approach, I see no basis to find
    that the third party claim could not constitute the written notice required under
    s. 6(3) of the Act  a finding that would have the effect of denying the
    franchisees right to rescind.

[15]

To conclude, although a written notice of
    rescission delivered by the franchisee to the franchisor before commencing litigation
    is the normal and preferable procedure, to preclude a franchisee from using a
    pleading to provide notice of rescission to a franchisor and to find that such
    a notice cannot comply with the Act when there is no such prohibition in the
    Act itself, would be to favour form over substance and create a barrier to
    enforcement of the rights of franchisees under the Act.

Disposition

[16]

For these reasons, I would allow the appeal with
    costs to the appellant in the agreed amount of $10,000, inclusive of disbursements
    and HST. I would also order costs of $10,000 in the motion below to be paid to
    the appellant.

Released: K.F. March 23, 2020

K. Feldman J.A.

I agree. Grant Huscroft J.A.

I agree. Harvison Young J.A.


