Court Sets Aside Default Against Franchisor but Awards Costs to Franchisee

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Author: Robert Jones, Law Works P.C.
Editor: Ben Hanuka, Law Works P.C.

In 2355305 Ontario Inc. v. Savannah Wells Holdings Inc., a February 20, 2019, decision of a Master of the Ontario Superior Court, the court set aside a noting of default against a franchisor in a franchise rescission case and allowed the franchisor to deliver a Statement of Defence, despite a very long delay by the franchisor in bringing a motion to set aside the noting in default.  

While the franchisor was technically successful in setting aside the noting of default, the court awarded significant costs thrown away to the franchisee.  

Key facts

The franchisee, 23550305 Ontario Inc. (“235”), purchased a franchised business as a resale.  In September 2015, 235 served a Statement of Claim on the franchisor, Savannah Wells Holdings Inc. (“Savannah”), claiming rescission damages under the Wishart Act.

In October 2015, 235 noted Savannah in default for failing to deliver a Statement of Defence.  235 advised Savannah that it had noted Savannah in default. In March 2016, counsel for Savannah learned of the action and served a Notice of Intent to Defend.  In April 2016, 235 advised Savannah that it would not consent to set aside the noting in default. However, Savannah took no further steps to participate in the proceeding until 235 brought a motion for default judgment in the fall of 2018.  

In total, there was a delay of over three years between the time that Savannah was noted in default and when it brought this motion to set aside the noting in default.  

Savannah was allowed to defend 235’s rescission action

The court exercised its discretion under Rule 19.03(1) to set aside Savannah’s noting in default.  It concluded that the interests of justice favoured allowing Savannah to serve a Statement of Defence.  

While Savannah had no satisfactory explanation for its complete inactivity from April 2016 onwards, it showed some intention of participating in the proceeding.  It served a Notice of Intent to Defend and brought this motion after being served with 235’s default judgment materials.

Another factor in favour of setting aside the noting in default was that the amounts at stake were substantial.  235 claimed over $600,000 in rescission damages. In addition, the court found that Savannah raised an arguable defence on the merits of the rescission action under s.5(7)(a) of the Wishart Act, that it did not “effect the sale” of the franchised business to 177.  It also held that the prejudice that Savannah caused to 235 by delaying the proceeding could be compensated by costs.  

235 was awarded costs thrown away

235 sought costs thrown away on a partial indemnity scale in the amount of $36,567.  In assessing 235’s costs, the court considered the following factors:

1. 235 attempted to involve Savannah in the proceeding for a long time;
2. Savannah ignored the fact that it was noted in default;
3. Savannah had no satisfactory explanation for delaying this motion for over three years;
4. the delay resulted in inefficiencies, such as 235’s wasted motion for default judgment;
5. Savannah was afforded a significant time indulgence by 235, and the costs award “is the price of the indulgence”; and
6. not all of 235’s efforts were wasted, such as the examinations of Savannah’s principal.

Based on these factors, the court concluded that it was fair and reasonable for Savannah to pay $12,000 to 235 in costs thrown away, which was about a third of 235’s cost claim.

Conclusion

The decision reflects the judicial policy of allowing actions to be decided on the merits, even in the face of lengthy delay, subject to fair and reasonable compensation through cost awards.  The amount of the cost award is based on many factors, including the length of the delay, reasons for the delay, the amount of notice and involvement offered to the defaulting party, and efforts that were wasted as a result.  

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