Ontario Court of Appeal in Lettieri Rescission Dismisses Franchisor’s Defences

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Author: Anthony Pugh, J.D., Law Works P.C.
Editor: Ben Hanuka

On October 25, 2017, the Ontario Court of Appeal released its judgment in 2122994 Ontario Inc. v. Lettieri, in which it upheld the decision of the trial judge and dismissed the franchisor’s several attempts to challenge the franchisee’s rescission claim, such as alleged bad faith and alleged improper categorization of rescission losses.

The franchisor, Lettieri, claimed that the trial judge erred by failing to allow it to cross-examine the respondent franchisee, Raisa Baila, about an arrangement that she had with TD Bank. TD was said to have loaned Baila the money to make leasehold improvements to the restaurant premises.

The Court of Appeal rejected this argument. It stated that the only relevant fact was the amount that the franchisee paid Lettieri.  This amount, $287,289, was not in dispute. Whether this amount came from Baila’s funds, from borrowing or from inheritance was irrelevant. The language of the legislation clearly gives the franchisee the entitlement to this refund.

Lettieri had made an argument at the trial level that the court should not grant relief because it alleged that Baila breached the duty of fair dealing under section 3 of the Arthur Wishart Act. The franchise agreement and other documents represented Baila as the sole shareholder, whereas Baila in reality held 50% of the shares in trust for her partner Jim Papadopoulos. This arrangement existed due to Papadopoulos’s poor credit rating and the possibility that creditors would come after his assets.

The trial judge rejected this argument because Lettieri had testified that he understood Baila and Papadopoulos were partners. However, the Court of Appeal went further than this and rejected the possibility that a breach of good faith by the franchisee could bar her from obtaining relief under section 6. The Court’s earlier judgment in Beer v. Personal Service Coffee Corp. established that a franchisee’s right to rescind under subsections 6(1) or 6(2) were in no way conditional. A franchisor cannot avoid rescission by alleging that the franchisee has breached its own duty of good faith. Instead, it must look beyond subsection 6 and assert its own claim under subsection 3 or 9 of the Act.

Additionally, the Court of Appeal stated that the trial judge correctly categorized the leasehold improvements made to the property as “money received from or on behalf of the franchisor other than money for inventory, supplies or equipment”, falling under subsection 6(6)(a). In its claim, Baila had categorized the claim under subsection 6(6)(c): “supplies and equipment”, and then attempted to re-categorize it.

The Court agreed with the trial judge that it was immaterial from Lettieri’s perspective whether leasehold improvements were categorized under subsections 6(6)(a) or 6(6)(c). Lettieri was unable at the trial level to point to any prejudice from re-categorizing the improvements. The objection was one of empty formalism.

Finally, the Court found that it was appropriate for judgment to be granted in Baila’s favour, in addition to the numbered franchise corporation of which she was the sole director and officer. She was required to provide the franchisor with her personal guarantee of the franchise agreement and sublease and it was fair in light of the way that the parties presented the arguments at trial.

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