



COURT OF APPEAL FOR ONTARIO

CITATION: Mendoza v. Active Tire & Auto Inc., 2017 ONCA
    471

DATE: 20170608

DOCKET: C62878

Feldman, Cronk and Miller JJ.A.

BETWEEN

Francisco Yao Mendoza and Francis Mendoza Inc.

Plaintiffs (Appellants)

and

Active Tire & Auto Centre Inc.

Defendant (Respondent)

Ben V. Hanuka, for the appellants

Milton A. Davis and Ronald D. Davis, for the respondent

Heard: April 10, 2017

On appeal from the judgment of Justice Grant R. Dow of
    the Superior Court of Justice, dated September 29, 2016.

Feldman J.A.
:

Introduction

[1]

The appellants purchased an Active Tire franchise from the respondent.
    After operating the franchise for about three months at a loss, the appellants
    sought to rescind the agreement under s. 6(2) of the
Arthur Wishart Act
    (Franchise Disclosure), 2000
, S.O. 2000, c. 3 (the Act) on the basis
    that the disclosure that had been provided did not amount to the disclosure
    document required by the Act.

[2]

The motion judge forgave the respondents deficient disclosure, finding
    that the appellants received sufficient disclosure to make an informed decision
    to purchase the franchise and that the deficiencies were neither significant
    nor misleading.

[3]

I would allow the appeal. The motion judge erred in his interpretation
    and application of the Act and Ontario Regulation 581/00 (the Regulation).
    The respondents deficient disclosure could not constitute the disclosure
    document required by the detailed requirements of the Act and Regulation. The
    appellants were therefore entitled to rescind the agreement under s. 6(2) of
    the Act.

Facts

[4]

The parties began negotiations for the appellants to purchase the
    respondents Bridgeland Avenue franchise location in January 2015, culminating
    in the purchase on June 1, 2015. During the period principally from March to
    May 2015, the respondent provided the appellants with documents and information
    in relation to the purchase. The respondent assisted the appellants to retain
    an accounting firm that compiled what the motion judge described as a
    comprehensive three-year financial plan with positive projections on which the
    appellants relied in making the decision to purchase. The appellants also retained
    a financial and legal firm at the request of the bank from which they borrowed
    funds for the purchase and obtained a line of credit.

[5]

The individual appellant was not an inexperienced purchaser. He had
    owned and operated a construction materials business in the Philippines before
    coming to Canada; he had obtained a Bachelor of Business Administration degree
    from the University of Toronto; and he had been employed with Canadian Tire as
    a project accountant.

[6]

Once he took over the franchise in June, the individual appellant was
    not operating it successfully and was experiencing both physical and mental
    health problems over the following three months. He decided to rescind the
    agreement in August.

The decision of the motion judge

[7]

The appellants sought rescission under s. 6(2) of the Act which
    provides:

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.

[8]

In his analysis, the motion judge referred to s. 5(4) of the Act, which
    prescribes the content of the disclosure document including all material
    facts, which term is defined to include any information about the business,
    operations, capital or control of the franchisor or franchisors associate, or
    about the franchise system, that would reasonably be expected to have a
    significant effect on the value or price of the franchise to be granted or the
    decision to acquire the franchise. He also quoted from para. 15 of this
    courts long-standing decision under the Act,
1490664 Ontario Ltd. v. Dig
    This Garden Retailers Ltd.

(2005), 201 O.A.C. 95, at para. 15,
    where MacFarland J.A. stated:

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.

[9]

Before the motion judge, the appellants focused on five deficiencies in
    the disclosure document: 1) the fact that the disclosure certificate was signed
    by only one officer or director and not two, as required by s. 7(2)(c) of the Regulation;
    2) the failure to provide audited financial statements as required by s.
    5(4)(b) of the Act and s. 3(1) of the Regulation; 3) the failure to provide the
    disclosure document at one time as required by s. 5(3) of the Act; 4) the fact
    that the letter of credit actually provided did not conform with the disclosure
    document; and 5) failure to disclose the required assumptions and information
    as part of the financial projections.

[10]

The motion judge accepted that the disclosure document was deficient,
    particularly because it only contained one signature and because of the
    insufficient and non-compliant financial disclosure. Relying on statements from
    two decisions of this court,
6792341 Canada Inc. v. Dollar It Ltd.
,
    2009 ONCA 385, 95 O.R. (3d) 291, and
2240802 Ontario Inc. v. Springdale
    Pizza Depot Ltd.
, 2015 ONCA 236, 331 O.A.C. 282, and a decision of the
    Superior Court,
2337310 Ontario Inc. v. 2264145 Ontario Inc.
, 2014
    ONSC 4370, the motion judge held as a matter of law that: an analysis of the
    nature and extent of the deficiencies is required as part of reaching a
    conclusion as to whether the disclosure document exists.

[11]

Based on that test, the motion judge concluded that although the
    respondent franchisor had not complied with the requirements of the Act and Regulation,
    the documents it did provide were sufficient for the appellants to make an
    informed decision about whether or not to enter into the franchise agreement,
    and that the deficiencies were neither significant nor misleading.

Issue

[12]

Did the motion judge err in law in his interpretation and application of
    the
Arthur Wishart Act
and Regulation?

Analysis

[13]

Since its enactment in 2000 the courts of this province have reiterated
    that the
Arthur Wishart Act
is intended to be protective legislation
    for franchisees:
405341 Ontario Ltd. v. Midas Canada Inc.
, 2010 ONCA
    478, 264 O.A.C. 111, at para. 30;
Personal Service Coffee Corp. v. Beer
    (c.o.b. Elite Coffee Newcastle)
(2005), 200 O.A.C. 282 (C.A.), at para. 28;
Salah v. Timothys Coffees of the World Inc.
, 2010 ONCA 673, 268
    O.A.C. 279, at para. 26;
MDG Kingston Inc. v. MDG Computers Canada Inc.
,
    2008 ONCA 656, 92 O.R. (3d) 4, at para. 1, leave to appeal refused, [2010]
    S.C.C.A. No. 94;
6792341 Canada Inc. v. Dollar It Ltd.
, 2009 ONCA 385,
    95 O.R. (3d) 291, at para. 72;
1159607 Ontario Inc. v. Country Style Food
    Services Inc.
, 2012 ONSC 881, 2 B.L.R. (5th) 315, at para. 71, affd 2013
    ONCA 589;
779975 Ontario Ltd. v. Mmmuffins Canada Corp.
(2009)
, 62 B.L.R. (4th) 137 (Ont. S.C.),
    at para. 10.

[14]

The scheme of the Act is to impose a number of requirements on
    franchisors to fully disclose the type of financial and other information a prospective
    franchisee would normally need in order to decide whether to become a
    franchisee. It then provides remedies to the franchisee where the franchisor
    does not meet the statutory obligations, including certain rights of rescission
    in s. 6 and damages in s. 7.

[15]

Section 6 states:

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.

(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.

[16]

Section 6(1) provides for rescission in two circumstances: first where
    the disclosure document is not delivered within the time prescribed by s. 5,
    and second, where the contents of the disclosure document do not meet the
    requirements of s. 5.

[17]

The respondent states that the appellants complaint falls under the
    second branch of s. 6(1) and as the appellants served the rescission notice
    more than 60 days after receiving the disclosure document, they are out of
    time. But more importantly, the respondent submits that the appellants remedy
    is only under s. 6(1) and not s. 6(2).

[18]

This submission cannot succeed. The same argument was made and rejected
    by this court in the
Dollar It
case. At paras. 74-76, MacFarland J.A.
    held that where there are a number of material deficiencies, the purported
    disclosure document is not a disclosure document within the meaning of the Act,
    and rescission under s. 6(2) is available.

[19]

The respondent also relies on
4287975 Canada Inc. v. Imvescor
    Restaurants Inc.
,

2009 ONCA 308, 98 O.R. (3d) 187, leave to appeal
    refused, [2009] S.C.C.A. No. 244. However, the facts in that case are not
    comparable to this one. There, a complete disclosure document was delivered but
    it was delivered late. On those facts, s. 6(1) and not s. 6(2) was applicable. However,
    the court made it clear, at para. 43, that where a disclosure document is
    materially deficient, then no disclosure will be found to have been made.

[20]

In this case, the motion judge acknowledged in particular, two of the
    deficiencies that the appellants complained about: the absence of signatures of
    two directors or officers on the disclosure certificate and the failure to
    provide financial statements in compliance with the Act and Regulation, but
    found that those deficiencies were insignificant and not misleading.

[21]

While I agree with the motion judge that these two deficiencies are the
    principal ones, I do not agree that they were insignificant and not misleading.
    In my view, they represent material deficiencies and are fatal to the ability
    of the purported disclosure document to be a disclosure document within the
    meaning of the Act.

[22]

Dealing first with the requirement for two directors or officers
    signatures, s. 7 of the Regulation requires that the disclosure document
    contain a certificate that certifies the truth of the disclosed information and
    that the disclosure certificate is complete and in compliance with the
    requirements of the Act and the Regulation. Section 7(2) deals with the
    requirements for signing and dating the certificate, and clause (c) provides
    that where the franchisor is incorporated and has more than one director or
    officer, the certificate shall be signed by at least two persons who are
    officers or directors.

[23]

This provision in the Regulation links up with s. 7 of the Act, which
    provides the damages remedy for any misrepresentation in the disclosure
    statement that causes the franchisee a loss. Under s. 7(1)(e) of the Act, those
    who sign the disclosure document are liable in damages to the franchisee for
    any such misrepresentation.

[24]

In addressing this issue, the motion judge discounted the failure to
    provide two signatures because the individual appellant had met most of the
    directors and had information about their backgrounds in Part II of the
    disclosure document. However, this misses the point of s. 7(1)(e) of the Act,
    which is to give the franchisee substantive rights in damages against the
    directors and officers who sign the document, and by so doing, to impress upon
    those who sign the importance of ensuring that the document is complete and
    accurate.

[25]

The motion judge also accepted the argument by the respondent that
    because the individual appellant acknowledged that he had not personally read
    the entire disclosure document (175 pages), he could not take the position that
    its contents were of importance to him. With respect, this constituted an
    error.

[26]

The Act imposes significant disclosure obligations on franchisors for
    the benefit of franchisees. It does not make the rescission remedy conditional
    on the approach taken by a particular franchisee to the disclosed material.
    This is consonant with the intent of the Act, which is to ensure that
    franchisors who wish to enter into franchise agreements with franchisees must consistently
    provide the required documentation to every proposed franchisee. Their
    obligations do not change depending on the actions or reactions of a particular
    franchisee. Nor are those obligations diminished when a franchisee does not
    study the contents of the disclosure document. Franchisees are entitled to rely
    on its contents and the ability to later verify what they believed and
    understood when they decided to proceed with the franchise.

[27]

To conclude on the first deficiency, the Act and Regulation require the
    franchisor to certify the disclosure document with at least two signatures from
    directors or officers where the franchisor corporation has two or more
    directors or officers. This is not a meaningless requirement. Those who sign
    are personally responsible for the accuracy and sufficiency of the contents of
    the disclosure document, and that responsibility is backed up by personal
    liability to the franchisee. This is an important right for franchisees which
    the motion judge failed to consider. It is clearly material to any franchise
    agreement.

[28]

The second deficiency that was recognized but discounted by the motion
    judge was the respondents failure to provide the most recent financial
    information of the franchisor in the form and within the time prescribed by the
    Act and the Regulation.

[29]

Section 3(1)(a) and (b) and (2) of the Regulation provide:

3. (1)

Every disclosure document shall
    include,

(a) an audited financial statement for the most recently
    completed fiscal year of the franchisors operations, prepared in accordance
    with generally accepted auditing standards that are at least equivalent to those
    set out in the

Canadian
    Institute of Chartered Accountants Handbook
;

(b) a financial statement for the most recently completed
    fiscal year of the franchisors operations, prepared in accordance with
    generally accepted accounting principles that are at least equivalent to the
    review and reporting standards applicable to review engagements set out in the

Canadian
    Institute of Chartered Accountants Handbook
; or

[]

(2)

Despite subsection (1), if 180 days
    have not yet passed since the end of the most recently completed fiscal year
    and a financial statement has not been prepared and reported for that year, the
    disclosure document shall include a financial statement for the previous fiscal
    year that is prepared in accordance with the requirements in clause (1) (a) or
    (b).

[30]

The respondents financial year-end is in August. When the parties were
    negotiating in early 2015, the respondent had not completed its 2014 financial
    statement. It therefore could not comply with the requirements of s. 3(1). The
    respondent then delivered its previous years statement from August, 2013 on
    March 17, 2015, i.e. over two weeks beyond the 180 day grace period allowed by
    s. 3(2).

[31]

As a result, the appellants had to make the decision whether to buy the
    franchise based on financial statements of the franchisor for the year ending
    August, 2013, a period over 18 months earlier. The respondent never produced
    its financial statements for its 2014 year.

[32]

I cannot agree with the motion judge that this non-compliance with the
    Act and Regulation was insignificant. To the contrary, the Regulation requires
    that a franchisor provide the prospective franchisee with audited financial
    statements from its most recently completed fiscal year, or if there are no
    audited statements for that period, then statements that are equivalent to the
    standard of a review engagement as described in the CICA Handbook. It then
    allows a 180 day grace period for franchisors who do not yet have the financial
    statement for their most recent fiscal year prepared. During that period, they
    may produce the financial statement for the previous year.

[33]

In this case, the respondent did not produce its 2014 financial
    statement as required. It only produced its 2013 statement, beyond the 180 day
    grace period. Financial statements are clearly an extremely significant
    component of the information a prospective franchisee requires in order to
    assess the viability of the franchisors franchise operations and the safety
    and security of becoming a franchisee in that franchisors system.

[34]

The Act and Regulation prescribe what financial statements must be
    produced and a time parameter for doing so. The effect of these requirements is
    that anyone who wants to be a franchisor must be in a position to provide the
    required information to prospective franchisees within the prescribed time. If
    a franchisor cannot do that, that is, it cannot comply with the Act because it
    does not have current financial statements, then it cannot proceed to engage
    with prospective franchisees or operate a franchise system as defined in the
    Act.

[35]

To accept the position of the respondent, that the deficiency was not
    material because the former years financial statements were only delivered two
    weeks after the statutory grace period, would mean that franchisors would be
    free to ignore the statutory requirements regarding the obligation to produce
    current financial statements, and franchisees would be unable to rely on the
    protections contained in the Act.

[36]

The respondent also failed to comply with other provisions of the Act
    and Regulation in connection with the disclosure document, including providing
    information piecemeal over a period of months instead of in one document at one
    time as required by s. 5(3) of the Act.

[37]

In my view, the motion judge erred in finding that the appellants
    received a disclosure document within the meaning of the Act. The respondents
    serious non-compliance with its statutory obligations resulted in no disclosure
    document being delivered.

[38]

The respondent submits that the appellants should not be entitled to a
    remedy under the Act, because they initially did not seek rescission based on
    deficiencies in the disclosure document, but rather, because the franchise did
    not do well and the individual appellant regretted his decision. There are two
    responses to this submission. First, one cannot know whether the failure of the
    franchise location to thrive financially was connected to deficiencies in the
    disclosure. In any event, the remedy in s. 6(2) turns only on the failure of
    the franchisor to deliver a disclosure document. It is not dependent on later conduct
    of the franchisee.

Conclusion

[39]

I would allow the appeal, set aside the judgment, and grant summary
    judgment to the appellants rescinding the franchise agreement, with costs of
    the appeal fixed at $7,500 plus HST.

Released: K.F. June 8, 2017

K. Feldman J.A.

I agree. E.A. Cronk J.A.

I agree. B.W. Miller J.A.


