





CITATION:
2189205 Ontario
          Inc. v. Springdale Pizza Depot Ltd., 2011 ONCA 467



DATE:  20110622



DOCKET: C52462



COURT OF APPEAL FOR ONTARIO



Sharpe, Gillese and Karakatsanis JJ.A.



BETWEEN



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



Respondents



and



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



Appellants



David S. Altshuller and Kristina Davies, for the appellants



Allan D.J. Dick, for the respondents



Heard:  March 23, 2011



On appeal from the judgment of Justice Darla A. Wilson of the
          Superior Court of Justice, dated June 29, 2010.



Karakatsanis J.A.:



[1]

At issue in this appeal are ss. 5(7
)(
a)(iv) and (8)(a) of the
Arthur Wishart Act (Franchise Disclosure), 2000
, S.O. 2000, c. 3 (the
    Act), exempting a franchisor from the disclosure obligations on a resale of the
    franchise by a franchisee.

[2]

The appellant franchisor appeals from the
    decision of D.A. Wilson J. granting partial summary judgment, declaring that
    the Franchise Agreement documents were validly rescinded and that the franchisor
    is liable to pay damages required by s. 6(6) of the Act.

[3]

After the franchisor directed the respondents
    to an existing Pizza Depot restaurant that was available for sale, the
    respondents purchased the assets of the restaurant from the franchisee (the
    vendors). The franchisor required the respondents to execute various documents
    in order to provide its consent to the transfer of the franchise. The franchisor
    did not provide a disclosure document to the respondents. After operating the
    business for several months, the respondents served the appellants with a
    Notice of Rescission and commenced these proceedings against the franchisor and
    the vendors.

[4]

The summary motion judge found that there
    was no genuine issue requiring trial and that the resale exemption in s. 5(7
)(
a)(iv) of the Act did not apply to relieve the franchisor
    of its disclosure obligations.

[5]

The franchisor raises two grounds of
    appeal. First, the motion judge erred in deciding a novel and unsettled issue
    of statutory interpretation in a summary judgment motion. Second, the motion
    judge erred in her interpretation and application of ss. 5(7
)(
a)(iv) and 5(8)(a) by finding that the signing of the
    franchise documents was sufficient to take this case outside the resale
    exemption. The vendors are not a party to this appeal.

[6]

For the reasons that follow, I would
    dismiss the appeal.

Background Facts

[7]

The respondents contacted the franchisors head office to
    acquire a franchise
to operate a Pizza Depot restaurant. The franchisor
    directed the respondents to the vendors existing franchised restaurant that
    was available for sale in Milton, Ontario.

The respondents evidence was that [a]ll of the parties of this action
    negotiated together to bring about the sale of [the vendors business] to [the
    respondents] and for [the respondents] to become a franchisee of Springdale as
    a result.

[8]

The respondents purchased the assets of
    the pizza business from the vendors. The agreement provided for the purchase of
    the assets and equipment of the business for
the sum of $220,000.00
. It also
    provided that the purchaser would pay $5,000 (50%) of the Pizza Depot
    franchisors transfer fee and required that [t]he buyer must obtain the Franchisors
    consent and a satisfactory Assignment of the Lease at its expense. The seller
    shall facilitate this process.

[9]

Clause 18.3 of the vendors Franchise Agreement
    provided that no sale or assignment of the franchise was effective without the
    written approval of the franchisor, and that such approval was not to be
    unreasonably withheld provided that all of the requirements set forth in clause
    18.4 have been satisfied.

[10]

Clause 18.4(3) provided that any consent will be
    conditional on at least the following, including

the
assignee executing a
    franchise agreement and related documents with the Franchisors in the
    Franchisor then current standard form, undertaking to bring the Franchised
    Outlet immediately into conformity with the then current requirements of the
    Retail Marketing Plan.

[11]

In December 2008, the respondents executed an
    Assignment of Franchise Agreement and (where applicable a separate) License
    Agreement and Guarantee/Indemnity, as well as five Franchise Agreements that
    had been previously signed by the vendors: a General Security Agreement, a Guarantee,
    Subordination and Transfer Restriction Agreement, a License Agreement, a Franchise
    Agreement, and a sublease agreement with a company which was an affiliate of the
    franchisor.

[12]

To this extent the respondents stepped into the shoes
    of the vendor franchisee. However, the franchisor also required the respondents
    to sign two additional documents that had not been required of the vendors: (i)
    an Undertaking for car wrapping on any delivery vehicles and (ii) an
    Acknowledgment. The Acknowledgement signed by the respondents provided:  We do not rely in any way on the Franchisor
    in confirming, substantiating or reporting to us the sales figures of the
    Business carried on at the Premises. Once the documents were executed, the
    franchisor consented to the transfer of the Franchise Agreement.

[13]

After operating the business for several months, the
    respondents served the franchisor with a Notice of Rescission.

[14]

In the summary judgment motion, the franchisor took the position that
    disclosure documentation as required by the Act had been provided but that, in any event, it was exempt from
    any disclosure requirements pursuant to s. 5(7) of the Act.  On appeal, t
he franchisor does not
    challenge the motion judges finding that
the franchisor had not provided the
    disclosure documentation
.
As a result, the respondents would be entitled to rescission under s. 6(2)
    of the Act unless the resale exemption applies.

Analysis

I.

Did the
    motion judge err in finding there was no genuine issue requiring a trial?

[15]

The appellant submits that the motion judge erred in finding
    that there was no genuine issue requiring trial. The franchisor submits that
    the interpretation of ss. 5(7
)(
a)(iv) and 5(8)(a)
    of the Act is unsettled and requires a contextual analysis that ought to be
    done with the benefit of a full and fair record. In particular, the franchisor
    submits that what qualifies under s. 5(8
)(
a) as a
    right, exercisable on reasonable ground, to approve or disapprove the grant
    remains a novel question of mixed fact and law, which is better determined in
    the context of a trial.

[16]

In this case, the motion judge turned her mind to her
    powers under Rule 20 and acknowledged the Courts new powers of weighing
    evidence and drawing any reasonable inference from the evidence. The relevant
    evidence in the motion record was not in dispute. There were no
    cross-examinations on the affidavits. The motion judge decided whether there
    was a genuine issue requiring a trial on the basis of uncontested evidence and
    the relevant provisions of the statute.  As discussed below, her findings are consistent with decisions
    interpreting the relevant provisions of the statute. In my view, she did not
    err in determining that there was no genuine issue regarding the franchisors
    role in this transaction or in interpreting and applying ss. 5(7) and (8) of
    the Act on summary judgment.

II.

The resale
    exemption

i.

The decision

[17]

The motion judge, at para. 10, considered whether there
    was a genuine issue requiring trial as to whether disclosure was exempted by ss.
    5(7)(a)(iv) and 5(8) of the Act:

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.

[18]

I do not accept the franchisors characterization of
    the motion judges decision as a finding that the mere signing of franchise
    documents was sufficient to defeat the resale exemption. Nor do I accept that
    she failed to consider the nature or the content of the franchise documents
    signed. While her reasons on this particular issue were relatively brief, in
    rejecting the franchisors position that it was not involved in the sale, the
    motion judge relied upon the evidence filed and the various documents that were
    required by the franchisor.

ii.

Position of
    the Parties

[19]

The franchisors position is that the grant of the
    franchise to the respondents was not effected by or through a franchisor and
    the franchisor was therefore exempt from the obligation to provide disclosure
    under s. 5(7
)(
a). The franchisor submits that it
    played no role in the sale process or in arranging the agreement of purchase
    and sale. Further, the franchisor maintains that it did not go beyond the
    minimum requirements for consent set out in clause 18.4 of the Franchise
    Agreement in providing its consent to the assignment of the Franchise Agreement.
    The franchisor argues that it therefore merely exercised its rights on
    reasonable grounds to consent to the assignment as contemplated by s. 5(8
)(
a) and did not effect the grant of franchise under s. 5(7)(a)(iv).

[20]

The respondents submit that the motion
    judge considered the applicability of the resale exemption and adverted to the evidence
    filed, the role of the franchisor in the transaction, and the documents
    required to be submitted by the franchisor. They submit that there was no
    genuine issue regarding the facts about the franchisors conduct and the nature
    of the documents signed. Further, they submit that the motion judge correctly
    concluded, based upon the legislation and the caselaw, that the franchisors conduct
    in the sale and its exercise of its powers to require additional documents as a
    condition of its consent took it outside of the exemption and triggered its
    disclosure obligation.

iii.

The
    Relevant Statutory Provisions

[21]

A
    purposive approach to statutory interpretation requires that words of an Act
    are to be read in their entire context and in their grammatical and ordinary
    sense harmoniously with the scheme of the Act, the object of the Act, and the
    intention of Parliament. Elmer Driedger,
Construction
    of Statutes
, 2d ed. (Toronto: Butterworths, 1983), at p. 87. See
Rizzo
    & Rizzo Shoes Ltd. (Re)
, [1998] 1 S.C.R. 27, at para. 21;
Bristol-Myers
    Squibb Co. v. Canada (Attorney General)
, [2005] 1 S.C.R. 533, at paras. 95-96.


[22]

The
Legislation Act, 2006
, S.O. 2006, c.
    21, Sch. F, s. 64(1) provides: An Act shall be interpreted as being remedial
    and shall be given such fair, large and liberal interpretation as best ensures
    the attainment of its objects
.


[23]

In
Salah v.
    Timothys Coffees of the World Inc.
(2010), 268 O.A.C. 279 (C.A.), at para.
    26,  Winkler C.J.O. observed:

The
Wishart
    Act
is
sui generis
remedial
    legislation. It deserves a broad and generous interpretation. The purpose of
    the statue 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.

[24]

The franchisor has all the information
    and dictates the terms of the agreement. In this context, disclosure is
    intended to provide a prospective and often inexperienced franchisee with
    sufficient and readily accessible information to make informed decisions.
The remedies for failure
    to comply with the strict disclosure requirements are also intended to remedy abuses
    by franchisors.
As noted by MacFarland J.A., in
1490664 Ontario Ltd. v. Dig This Garden
    Retailers Ltd.
(2005), 256 D.L.R. (4th) 451 (C.A.), at para. 12, it is
    evident that the thrust of the Act is to set standards for adequate disclosure
    and to create significant penalties for failing to meet those standards.

[25]

Section 5 of the Act sets out the specific
    disclosure obligations for franchisors and s. 6 provides the consequences for
    failure to strictly comply with those requirements, including rights of
    rescission and compensation. Exemptions from the disclosure requirements are
    set out in ss. 5(7) and 5(8).

[26]

The disclosure exemptions in s. 5(7) exempt a
    franchisor from the disclosure obligations where:

·

the grant of the franchise is not from the
    franchisor or on behalf of the franchisor (ss. 5(7)(a) and (d));

·

the grant is to an individual associated with
    the franchisor (s. 5(7)(b));

·

the grant is an expansion, renewal or extension of
    an existing franchise and there has been no material change (ss. 5(7)(c) and
    (f)); and

·

the
grant does not meet
    threshold values as determined by regulation (ss. 5(7)(e), (g) and (h)).


[27]

The provisions of the Act relating to
    the resale exemption

provide:

5
(7)

This
section does not apply to,

(a)
the
grant of a franchise by a franchisee if,

(i)
the
franchisee is not the franchisor, an    associate
    of the franchisor or a director,            officer
    or employee of the franchisor or       of
    the franchisors associate,

(ii)
the
grant of the
    franchise is for the           franchisees
    own account,

(iii)
in
the case of a
    master franchise, the       entire
    franchise is granted, and

(iv)
the
grant of the
    franchise is not effected by or through
    the franchisor;

...

5
(8)
For the purpose of subclause (7
)(
a)(iv), a grant is
    not effected by or through a franchisor merely because,

(a)
the
franchisor has a right, exercisable on reasonable
    grounds, to approve or disapprove the grant; or

(b)
a
transfer fee must be paid to the franchisor in an amount
    set out in the franchise agreement or in an amount that does not exceed the
    reasonable actual costs incurred by the franchisor to process the grant.

[28]

Pursuant to s. 6(2), the failure to provide any
    disclosure permits a franchisee to rescind the Franchise Agreement without penalty
    within two years of the Franchise Agreement. As a result of s. 12, the onus is
    on the franchisor to prove that an exemption applies.

[29]

The franchisor submits that in the context of a
    primary franchise sale, the franchisee must place heavy reliance on the disclosure
    document provided by the franchisor to assess the potential financial viability
    of the franchise. On the other hand, the prospective franchisee in a franchise resale
    market is better positioned to make an informed decision concerning whether to
    invest in a franchise. The prospective franchisee in this second scenario has
    the opportunity to observe the franchisee as a business, discuss the business
    with the incumbent franchisee and review business records.

[30]

However, the disclosure exemption in s. 5(7
)(
a) does not simply focus upon whether there has been a
    pre-existing franchise. If the disclosure exemption was only concerned with a
    pre-existing franchise, there would be no need to qualify the exemption
    relating to a grant from a franchisee.

[31]

W
hile s. 5(7
)(
a)
    exempts a franchisor from the disclosure obligations when the grant of the
    franchise is directly from a franchisee, the provisions limit the role that the
    franchisor may play in such a grant without triggering the disclosure
    obligation. T
he
    focus of ss. 5(7
)(
a)(iv) and 5(8) is on the role of
    the franchisor in the resale. The disclosure exemption is not available where
    the grant of the franchise is from the franchisee but is 
effected
by or through the franchisor. Subsection 8 provides that a grant is not
    effected by or through a franchisor merely because  the franchisor has a
    right, exercisable on reasonable grounds, to approve or disapprove the grant
    or because the franchisor may charge a reasonable fee for its approval.

[32]

Given the purpose and context of the Act, the
    exemptions to disclosure set out in ss. 5(7
)(
a)(iv)
    and 5(8) must be narrowly construed.

[33]

The
Concise
    Oxford English Dictionary
defines the verb effect as cause to happen,
    bring about:
Concise

Oxford

English

Dictionary
, 11th ed.,
sub
    verbo
effect.  Taken together, t
he language of ss. 5(7
)(
a)(iv)
    and (8)
exempt a franchisor from its disclosure obligations only when
the
    franchisor is not an active participant in bringing about the grant and does
    nothing more than merely exercise its rights to consent to the transfer. In
    such circumstances, the power imbalance does not bear upon the decision to
    become a franchisee and plays no role in effecting the grant.

[34]

A number of cases have considered the conduct of a
    franchisor that has resulted in the transfer of the grant to be 
effected
by or through the franchisor.

[35]

In
MAA Diners
    Inc. v. 3 for 1 Pizza & Wings (Canada) Inc.,
2003 CanLII 10615 (Ont.
    S.C.), affd 2004 CanLII 19240, Speigel J. found that the vendor franchisee and
    the franchisor were the same. She further found at para 29:

The respondents have also failed to satisfy me that
    the grant of the franchise as not effected by or through the franchisor. [The
    franchisors operation manager] took an active role in the franchise
    arrangements with the applicants. All of the meetings between the parties took
    place at the offices of [the franchisor]. [He] prepared the contractual
    documents. He also provided the bill of sale and the sublease ... [He]
    testified during cross-examination that he was asked to facilitate or manage
    the transaction with the applicants.

[36]

In
1518628
    Ontario Inc. v. Tutor Time Learning Centres, LCC
, 2006 CanLII 25276 (Ont.
    S.C.), Cumming J. considered when a franchisors requirements for providing its
    consent to the assignment goes beyond the mere right, exercisable on
    reasonable grounds, to approve or disapprove the grant, within the meaning of
    s. 5(8
)(
a), to become a grant effected by or through
    the franchisor within the meaning of s. 5(7)(a)(iv).

[37]

In
Tutor Time
,
    the franchisor required the execution of certain documents as a condition of
    consenting to the assignment of the franchise. The franchisor argued (as does
    the franchisor in this case) that it was not an active participant in finding
    the purchaser and in the sale process and that it merely exercised its right,
    on reasonable grounds, to consent to the assignment. The Franchise Agreement
    provided conditions for the franchisors consent to transfer, including
    enumerated requirements. As in the agreement in this case, the franchisor had
    the power to impose further requirements for its consent to an assignment of
    the Franchise Agreement. In that case, the franchisor did not participate in
    the sale, but required the purchasers spouse to sign the Personal Guaranty
    before it would consent to the assignment of the franchise.

[38]

Justice Cumming found that by imposing conditions beyond
    the specific requirements of the Franchise Agreement, the grant of the
    franchise to the new purchaser (through the resale of the existing franchise)
    was effected by or through the franchisor within the meaning of the Act: para.
    35.

[39]

Justice Cumming
    held that if the proposed purchaser had refused to sign a document specifically
    required by the transfer provisions of the Franchise Agreement, the franchisor
    could reasonably have withheld its approval. He noted, [t]his would arguably
    be a right of the franchisor exercisable on reasonable grounds, to approve or
    disapprove the grant: para. 30. He distinguished, at para. 44, between the
    franchisors right to impose such conditions specifically required by the Franchise
    Agreement and the franchisors power to impose additional conditions:

A right is different from simply being in a
    position of power. In my view, a right means a condition in the franchise
    agreement, that is, an express contractual right between franchisor and
    franchisee. TTLC had the power to refuse to consent to the transfer on any
    basis it wished unless a condition imposed by it was met. TTLC might exercise
    such power on reasonable grounds. However, in such instance, the franchisor
    could not be said to have a right to impose the condition within the meaning
    of the exempting provision, being s. 5(8)(a) of the Act.

[40]

He concluded at para. 49:

The exemption in s. 5(8
)(
a)
    stipulates that a grant is not effected by or through a franchisor
merely
because the franchisor has a
    right, exercisable on reasonable grounds, to approve or disapprove the grant
    (my emphasis). In my view, a franchisor who exercises the power, albeit on
    reasonable grounds and pursuant to its usual practice, to require a
    non-officer, non-shareholder spouse ... to in effect become a co-franchisee is
    not merely engaging in the relatively passive act of approval of the transfer
    of the franchise as between the parties contemplated in the agreement between
    the transferor franchisee ... and intended transferee franchisee ... Rather,
    the grant is being effected by or through the franchisor.

[41]

Clearly, the level of the franchisors involvement in the
    present case does not approach the level of that in
MAA Diners Inc.
, where the court found that the franchisor was also
    the vendor. Section 5(7
)(
a)(i) makes the exemption
    unavailable in such circumstances. However, s. 5(7
)(
a)(iv)
    captures the indirect involvement of a franchisor. In this case, there was
    uncontradicted evidence before the motion judge that the franchisor did not
    simply play a passive role in the resale of this franchised business, limited
    to the specific requirements required for its consent under the Franchise Agreement.

[42]

In this case, the franchisor directed the prospective
    vendor to this particular business. The franchisor had detailed financial
    information about all franchises and the right of first refusal.  Further, the franchisor had some involvement
    in the negotiations for the agreement of purchase and sale of the assets of the
    business. As noted above, all of the parties of this action negotiated together
    to bring about the sale of the vendors business to the respondents and for the
    respondents to become a franchisee of Springdale as a result. Furthermore, the
    agreement of purchase and sale required the respondents to obtain the consent
    of the franchisor, and thus deal directly with the franchisor. In conclusion,
    the franchisor was directly involved with the respondents in the purchase of
    this business. The franchisor was not merely a passive participant in this resale.

[43]

In addition, the franchisor did not merely demand
    execution of the Franchise Agreement and related documents that had been signed
    by the vendor as required in clause 18.4(3) of the Franchise Agreement.
    Although they may not have been as significant as the guarantee required in
Tutor Time
, the franchisor required two
    additional documents that had not been signed by the vendor, the Undertaking for
    car wrapping and the Acknowledgement in order to consent to the assignment.

[44]

The franchisor
    submits that the undertaking to use the specified car wrapping was required to
    bring the franchise into conformity with Pizza Depots then current Retail
    Marketing Plan. However, the vendor had not signed a similar undertaking with
    the franchisor. There was no evidence before the motion judge that this was
    required to conform to the current Retail Marketing Plan. Further, the
    undertaking signed by the respondents provides that a breach of the undertaking
    regarding the car wrap was considered a breach of the Franchise Agreement.

[45]

The Acknowledgement included a signed statement by the
    respondents that they did not rely in any way on the representations by the
    franchisor about the sales figures of the business. I cannot agree with the
    appellants that this additional protection against recourse for the
    misrepresentation of financial figures was insignificant to the consent.

[46]

The franchisor submits that, in any event, the
    Undertaking for car wrapping and the Acknowledgement would not have been a
    prerequisite for the consent to the assignment and that the franchisor could
    not have reasonably refused to consent if the respondents had refused to sign them.
    However, that position is entirely speculative as the evidence was that the
    franchisor required the five documents in order to consent. The franchisor had
    the power to impose additional conditions under the Franchise Agreement and
    chose to do so. As in
Tutor Time
, it
    does not matter if these additional conditions were reasonable.

[47]

It may be that any of these individual circumstances
    would not have been enough to support a finding that the grant was 
effected
by or through the franchisor. However, there are a
    number of circumstances that, taken together, support the motion judges
    conclusion that the resale was brought about or caused to happen by or through
    the franchisor:

·

the franchisor directed the respondents to this
    particular purchaser;

·

the franchisor negotiated together with the vendor
    and the respondents to bring about the sale of the business and the assignment
    of the franchise;

·

under the agreement the onus was on the
    respondents to obtain the consent of the franchisor; and

·

the franchisor required execution of documents
    that the vendor had not been required to sign, the Undertaking for car wrapping
    and the specific acknowledgement that there was no reliance by the respondents
    on any financial representations by the franchisors.

[48]

The motion judge considered the applicability of the resale
    exemption. She adverted to the role of the franchisor in the transaction and
    the documents it required from the respondents. In this case the franchisor
    went beyond the passive role of merely exercising its right, on reasonable
    grounds, to approve the resale of the franchise business within the meaning of
    s. 5(8
)(
a). The franchisor was involved in the sale
    and sale process and required the respondents to execute documents which were
    not specified in the Franchise Agreement, as a condition of its consent. For
    these reasons, the motion judge did not err in concluding that the grant from
    the franchisee was effected by or through the franchisor and did not fall
    within the disclosure exemption in s. 5(7
)(
a)(iv). On
    this record, there was no genuine issue requiring a trial.

Conclusion

[49]

We are indebted to both counsel for their able argument
    and assistance.

[50]

I would dismiss the appeal and fix costs to the
    respondents in the amount of $5,000 all inclusive.

RELEASED:  June 22,
    2011 RJS

Karakatsanis
    J.A.

I
    agree Robert J. Sharpe J.A.

I
    agree E.E. Gillese J.A.


