Author: Anthony Pugh, Law Works

Editor: Ben Hanuka, Law Works

In 2352392 Ontario Inc. v. Msi, a March 20, 2020, decision of the Court of Appeal for Ontario, the court held that a franchisee’s pleading that it served on the franchisor qualified as a notice of rescission under section 6(3) of the Arthur Wishart Act (Franchise Disclosure), 2000.

Key Facts

RBC claimed against the franchisee for payment on a bank loan that was used to finance the purchase of the franchised restaurant.  The franchisee, in turn, started a Third-Party Claim against the franchisor, The Works Burger, claiming damages and rescission of the franchise agreement for failure to deliver the required disclosure documents.

In its defence, The Works took the position that the franchisee’s claim was barred for failing to deliver the notice of rescission required under section 6(3) of the Act within two years.

The franchisee then hired new counsel and started a negligence action against its former lawyer.

After direction from the court, both the franchisor, in the rescission action, and the franchisee, in the negligence action, brought motions under rule 21 of the Rules of Civil Procedure to determine a question of law – whether the Third Party claim constituted a notice of rescission.  Both the Works and the franchisee argued that it did not.

The Motion Judge’s Decision

The motion judge held that a pleading could not serve as a notice of rescission.  Relying on the cases of 779975 Ontario Limited v. Mmmuffins Canada Corp. and 2130489 Ontario Inc. v. Philthy McNasty’s (Enterprises) Inc., the motion judge held that, essentially, the franchisee had no cause of action for rescission until it delivered a notice of rescission to the franchisor and the franchisor has either not compensated the franchisee within 60 days or advised that it would not compensate the franchisee.

For a more detailed summary of the motion judge’s decision in our blog, please see this article:
Ontario Court rules that a court pleading is not a franchise notice of rescission

The Court of Appeal’s Decision

The Court of Appeal reversed the motion judge’s decision.  It held that subsection 6(3) of the Act only requires that the notice be in writing and delivered to the franchisor.   In this case, the notice in the pleading met these requirements.  Though the Act appears to contemplate that notice will be given outside the context of litigation, it does not prevent a franchisee from using its pleading as notice.

Furthermore, unlike in the Mmmuffins case, the language of the Third-Party Pleading was not imprecise so as to prejudice the franchisor.  Though the pleading may have been premature (since the franchisor may have accepted the notice of rescission), it was a procedural matter that may have been addressed by the parties by, for example, issuing new statements of claim.

Takeaway

Underlying the Court of Appeal’s decision was the principal that the Act is remedial legislation and should therefore be interpreted in a manner to redress the power imbalance between franchisors and franchisees.

Having said that, using a pleading as a notice of rescission is not good practice and is not recommended because of the risk associated with it.  Other than avoiding the potential risk of not complying with the statutory requirements of a notice of rescission, a detailed and well-grounded notice of rescission may prompt settlement discussions and allow the parties to resolve the dispute without litigation.  Further, many franchise agreements contain a mediation precondition the bars the franchisee from starting a claim before mediation.

In addition, it is not entirely clear how the issue in this case – whether the particular Third-Party Claim can qualify as a notice of rescission – is a question of law rather than a question of mixed fact and law.  The question posed is not independent of the document that the franchisee provided.  The decision therefore shows how courts may sometimes be flexible about what constitutes a question of law.

 

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