Canada: When Pleadings Are Not Enough – Franchisees' Statutory Rescission Notice Obligations Clarified

The recent case of 2352392 Ontario v. MSI, 2019 ONSC 4055 ("MSI") provides further guidance on a franchisee's obligation to provide notice to the franchisor in order to properly engage their statutory rights of rescission.

As is the case with all other provincial franchise legislation in Canada, Ontario's Arthur Wishart Act (Franchise Disclosure), 2000 (the "Arthur Wishart Act") gives franchisees a broad statutory right of rescission of franchise agreements where there has been a failure to provide, or deficiency in, the required disclosure.

In order to engage those rights, the franchisee must give notice of its rescission. Like other provincial legislation, the Arthur Wishart Act does not prescribe a form of notice, only that it must "be in writing and shall be delivered to the franchisor, personally, by registered mail, by fax or by any other prescribed method".¹

The substance of what a statutory notice must contain was considered in 779975 Ontario Ltd. v. Mmmuffins Canada Corp., 2009 CanLII 28893 (ON SC) ("Mmmuffins"), in which the Court held that the notice must be sufficient "to bring home to the franchisor that the franchisee is exercising its statutory right of rescission under the [Arthur Wishart Act] and to inform the franchisor that the clock has begun to run".²

Statutory notice is an important event because it impacts the determination of whether the rescission right has been properly exercised within the relevant time period, as well as starts the clock running for the franchisor to respond within the prescribed time period. If the franchisor fails to comply with its obligations upon receiving notice of rescission, then the franchisee has a right of action.

In the recent case of MSI, the franchisee argued that a statement of claim that alleged a right of action for rescission constituted sufficient statutory notice under the Arthur Wishart Act.

The case arose from a franchise agreement signed in 2012 for a "The Works" burger location in Toronto. The business was not successful, and in 2013 the franchisor re-took possession. Consequently, the franchisee's investment was lost and the bank that had provided the franchisee with financing brought a claim against the franchisee as a result of the default on its loan.

In defending against the bank's action, the franchisee brought a third-party claim against the franchisor. The third-party claim made a broad allegation and claimed a statutory right of rescission against the franchisor for failure to provide the required disclosure. However, the franchisee provided no other type of notice to the franchisor such that the issued third-party claim was the only notice given of the franchisee's intent to rescind.

The court considered the question of whether the third-party claim was sufficient to constitute notice under the Arthur Wishart Act on a motion for a determination of a point of law. In his decision, Justice Nakatsuru concluded that the claim could not be considered statutory notice.

First, he reasoned that the purposes of notice and a pleading are "very distinct" – a pleading is "intended to give notice to the other side of the case to be met" and to define the scope of the matters in issue.³ By contrast, statutory notice under the Arthur Wishart Act, as held in Mmmuffins, is intended to notify the franchisor of the franchisee's intention to rescind and begin the clock on the franchisor's time period to comply with its statutory obligations.

Second, he reasoned that a statement of claim pleading rescission and the statutory notice of rescission "are functionally and temporally distinct." As held by the Ontario Court of Appeal in 2130489 Ontario Inc. v. Philthy McNasty's (Enterprises Inc.), 2012 ONCA 381, a franchisee's right of action does not arise until the franchisor has either indicated it will not comply with its statutory obligations, or the time limitation within which it must do so has passed.⁴ Because of these distinct purposes, as held in MSI, the third-party claim cannot constitute statutory notice.⁵

Further, Justice Nakatsuru reasoned that failure to keep pleadings and statutory notices distinct could lead to unfair and absurd results, in that franchisors would necessarily be subject and open to litigation before having a chance to comply with their statutory obligations. He explained that such a result would "undermine the legislative framework" by effectively nullifying the provisions of the Arthur Wishart Act that provide a "legislative alternative" to forcing the franchisee to bring a claim in court.⁶

The decision draws from prior case law to define in more detail the statutory notice provisions. This further clarification of franchisee's obligations under the Arthur Wishart Act may also inform the interpretation of notice provisions in similar legislation across Canada.

Footnotes

[1] Arthur Wishart Act at s. 6(3).

[2] Mmmuffins at para 45.

[3] MSI at para. 42.

[4] Philthy McNasty's at para. 39.

[5] MSI at paras. 38-40.

[6] MSI at para. 45.

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