Ontario Court Rules that a Court Pleading Is Not a Franchise Notice of Rescission

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Author: Anthony Pugh and Sarah McMahon, Law Works P.C.
Editor: Ben Hanuka, Law Works P.C.

In the case of 2352392 Ontario Inc. et al. v. Vusumzi Msi et al., decided July 3, 2019, the Ontario Superior Court of Justice ruled that a pleading does not constitute a notice of rescission under s. 6 of Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000, as has been held in previous decisions.

Introduction

This was motion involving three related actions. In the first, RBC sued the franchisee to collect on its loan. In the second, the franchisee commenced a third party claim against the franchisor and other franchisor’s associates for rescission, among other things.  In the third, because the franchisor took the position that it had never received a notice of rescission in defending the third party claim, the franchisee sued its lawyer for failing to deliver a notice of rescission.

The lawyer, in his defence, took the position that since the franchisee already launched a third party claim against the franchisor, the third-party claim constituted a notice of rescission.

The franchisor objected on the basis that the claim against it did not constitute notice of rescission.

The court decision deals with the issue of whether a third party claim constitutes notice of rescission under the Wishart Act.

Key Facts

The franchisee, 2352392 Ontario Inc. (“235”) entered into a franchise agreement with the franchisor, The Works Gourmet Burger Inc. (“The Works”) for a franchised burger restaurant.  As part of the purchase, 235 took out a loan with RBC.  The franchise was ultimately unsuccessful.  A few month later, The Works had repossessed the franchise and terminated the franchise agreement.  When 235 defaulted on its loan, RBC sued 235 to collect on its loan.

As a result, 235 retained Msi to defend RBC’s lawsuit against it for repayment and commence a third party claim against The Works and other franchisor’s associates.  In the third party claim, 235 claimed rescission of the franchise agreement under the Wishart Act.   However, 235 never delivered a written notice of rescission to The Works, as required under subsection 6(3) of the Wishart Act.

In its defence, The Works took the position that the action was statute-barred, because of 235’s failure to deliver a notice of rescission within the two-year limitation period, as required under s. 6 of the Wishart Act.

As a result, 235 brought an action against Msi, alleging that he was negligent in failing to deliver a notice of rescission to The Works.   In his defence, Msi took the position that the third party claim constituted a notice of rescission under the Wishart Act.

235 brought a motion for a determination of an issue of law (under Rule 21) – whether the third party claim constituted written notice of rescission.  Both 235 and The Works argued that the third party claim was not a proper notice of rescission.  (Interestingly, in a separate action against The Works, 235 argued that a third party claim was a notice of rescission).

Bringing the Motion Under R. 21 was Appropriate

235 brought the motion under R. 21 of the Ontario Rules of Civil Procedure.  This rule provides for determination of an issue before a trial.  Msi argued that a determination under R. 21 was improper and took the position that the trials would not be shortened if the motion was brought under R. 21 and there were potentially conflicting principles of law.

The chambers judge in previous proceedings and the judge on this motion held that bringing the motion under R. 21 was appropriate.  The court ruled that even though there were also s. 7 issues for failure to disclose that were left over which would not be dealt with by this R. 21 motion, the R. 21 motion would dispose of part of the action, shorten the trials and save substantial costs.

Third Party Claim did not Constitute Notice of Rescission

The motions judge found it was “plain and obvious” that the third party claim could not constitute notice under subsection 6(3) of the Wishart Act.  He followed the decision in 2130489 Ontario Inc. v. Philthy McNasty’s (Enterprises) Inc., where the Court of Appeal for Ontario held that a notice of rescission is distinct from a pleading and does not constitute notice of rescission.

The purpose of the notice of rescission is to notify the franchisor that it has 60 days to compensate the franchisee in accordance with subsection 6(6) of the Wishart Act.  The purpose of a pleading, on the other hand, is to set out to the other side the case it has to meet and outline the causes of action.  The motions judge clarified that a pleading for rescission under the Wishart Act cannot be formed prior to either the expiry of the 60 days the franchisor has to compensate the franchisee or the franchisor’s refusal to compensate the franchisee.  He illustrated this point by noting that if a pleading could act as notice under s. 6(6) of the Wishart Act, a franchisee could sue the franchisor in a claim for rescission without the franchisor being given any time to comply with the notice of rescission.

For these reasons, a third party claim cannot constitute notice of rescission under the Wishart Act.

Conclusion

This case serves as a good reminder for lawyers practising in the area of franchise law of the importance of delivering a notice of rescission within the strict limitation period under the Wishart Act.