Canada: What Are the Rules in Ontario's 'Neverland'?

The Canada-based, Louisiana-flavored B'ton Rouge franchise system features ribs, beef, and fish in a casual-dining atmosphere, with about 20 franchised restaurants operating in Qu'bec and Ontario. One of the Ontario locations is the battleground for the case to be outlined in this article: 4287975 Canada Inc. v. Imvescor Restaurants Inc. et. al, 2008 CarswellOnt 4812.

Franchise Disclosure

Section 5 of Ontario's franchise pre-sale disclosure statute, The Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (“Wishart Act”) sets out an expressly imperative sequence of pre-sale disclosure events. In short, unless there is an applicable express exemption from the obligation (subsection 5(7)), if the franchise “is to be operated partly or wholly in Ontario” (subsection 2(1)), the franchisor ' at least 14 days before having the prospect sign a franchise agreement or pay any consideration relation to the franchise ' shall provide, and prospect shall receive, a conformable disclosure document. Ostensibly, if the franchisor fails to observe this imperative sequence, the franchisee will enjoy several statutory-based remedies, chief among which is rescission, exercisable without penalty or obligation, so long as delivers its notice of rescission on a timely basis.

A digression to make one critical observation: When the Wishart Act was drafted and came into force in two stages in 2000 and 2001, there was also in force in Ontario a statute called the Interpretation Act, since repealed, but only in 2006. Section 29(2) of the Interpretation Act clearly mandated that in every Act of the Ontario legislature, “the word 'shall,' shall be construed as imperative.”

Section 6 of the Wishart Act ' complete with headings ' reads as follows:

Rescission for late disclosure

6.(1) A franchisee may rescind the franchise agreement, without penalty or obligation, no later than 60 days after receiving the disclosure document, if the franchisor failed to provide the disclosure document or a statement of material change within the time required by Section 5 or if the contents of the disclosure document did not meet the requirements of Section 5. 2000, c. 3, s. 6 (1).

Rescission for no disclosure

(2) A franchisee may rescind the franchise agreement, without penalty or obligation, no later than two years after entering into the franchise agreement if the franchisor never provided the disclosure document. 2000, c. 3, s. 6 (2).

Identifying the triggering event for the rescission remedy is fundamental to and at the crux of this case. If it is one particular event, the time horizon is only 60 days in duration (i.e., after receiving the disclosure document). If it is another, the horizon lengthens to two years (i.e., after entering into the franchise agreement).

The Facts

In Canada Inc., the events outlined by Section 5 of the Wishart Act occurred out of sequence. Step one: On June 8, 2005, the prospective franchisee paid on account of the initial franchise fee the sum of $15,000 to the franchisor. Step two: In August 2005, a disclosure document was provided to the prospect. Step three: Just over six months later, the franchisee entered into the franchise agreement. More than 60 days after the disclosure document was delivered, but less than two years after the franchise agreement was signed, the franchisee delivered a notice of rescission purporting to trigger the rescission remedy provisions of Sections 6, etc., of the Wishart Act. The franchisor simply took the position that the franchisee's rescission remedy was no longer available, the notice having been delivered out of time.

The franchisee applied to the Ontario Superior Court for a determination of the issue, urging the court to find that the triggering event was not the late delivery of the disclosure document, but the signing of the franchise agreement urging that “never provided” the disclosure document meant “never in accordance with the imperative sequencing scheme of Section 5 of the Act.”

The Decision

After initially reserving his decision, Judge James Campbell Newbould eventually returned to write that since a disclosure document had been provided before the prospect signed the franchise agreement, all the prospect had to do to resile from the deal was refrain from signing the agreement and ask for his money back, and he had been given as much as six months to make that decision. In such circumstances, reliance on statutory rescission became moot.

Reminiscent of the politico-linguistic chicanery of recent memory, everything depends on what the meaning of “never” is. Is it “never” in absolute terms, or is it “never” in the context of the statutory time frame established by Section 5 of the Wishart Act? If the former, then the decision of Newbould is correct; if the latter, then likely not. The statute required the disclosure document to be delivered not less than 14 days before either of the “activity events.” The money was paid and received more than two months before the disclosure document was provided. Arguably, once the first period of 14 days had passed, the franchisor could not validly provide the disclosure document without returning the money it had received to the franchisee so that the statutory imperative could be observed. Once “out of time” in the statutory context, the disclosure document could never be validly delivered as required by law.

Moreover, the prospect was not yet “a franchisee.” Therefore, there was no existing contract to rescind.

Analysis, Policy and Appeal

Recalling the references above to the now-repealed Interpretation Act, if the imperative is ignored, then there may be no real penalty for failure to follow the statutory imperative. In this case, one must couple questionable drafting with the disappearance of the Interpretation Act as twin impediments to public policy implementation. (Interestingly, although forcefully put to him in argument by franchisee's counsel as an aid to interpretation and construction of the imperative nature of the franchisor's obligation, the judge did not reference the Interpretation Act in his opinion.)

And the policy behind the sequencing of events seems clear: Once the prospective franchisee's money is in the franchisor's hands, the prospect is highly disadvantaged. Who knows how the money was raised and what the franchisee might have to face in altering arrangements? If this approach is commonly adopted by franchisors, it may afford the means to avoid the very real obligations imposed by the statute. Can this really be the result of what the legislators intended?

The answer should be driven by the purposive construction principle of statutory interpretation, where all of the relevant sections work together to achieve the legislative objective. The plain and clear meaning of the words used in the legislation should prevail unless absurdity results, leading to schemes devised to avoid clear obligations. Accordingly, it may be argued, if Section 5 of the Wishart Act is to have any meaning, then Section 6 cannot mean what Newbould says it does. Subsection 5(3) defines a disclosure document as one that is “delivered as required under subsections (1) and (2)”; namely, within 14 days preceding the prospect either (a) signing a franchise agreement or (b) paying any consideration. Anything less, and, arguably, the document otherwise delivered fails to meet the statutory definition of a “disclosure document.” In that event, we are left with a logical conundrum that defies the judicious application of purposive construction and plain meaning, because the meaning is anything but plain. This is decidedly unsatisfactory.

Conclusion

Just as difficult facts make bad law, so does inadequate statutory draftsmanship.

The franchisee's notice of appeal to Ontario's Court of Appeal, the province's highest court, has been filed and served, so the last of this tale remains to be told. As has been said: “The law never 'is': It's always 'about to be' ” (per Professor J. B. Milner, University of Toronto Law School, 1962).

Markus Cohen, Q.C., LL.M., is a franchise attorney in Toronto, Ontario, Canada. He can be contacted at [email protected] or at 416-413-9822.

The Canada-based, Louisiana-flavored B'ton Rouge franchise system features ribs, beef, and fish in a casual-dining atmosphere, with about 20 franchised restaurants operating in Qu'bec and Ontario. One of the Ontario locations is the battleground for the case to be outlined in this article: 4287975 Canada Inc. v. Imvescor Restaurants Inc. et. al , 2008 CarswellOnt 4812.

Franchise Disclosure

Section 5 of Ontario's franchise pre-sale disclosure statute, The Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (“Wishart Act”) sets out an expressly imperative sequence of pre-sale disclosure events. In short, unless there is an applicable express exemption from the obligation (subsection 5(7)), if the franchise “is to be operated partly or wholly in Ontario” (subsection 2(1)), the franchisor ' at least 14 days before having the prospect sign a franchise agreement or pay any consideration relation to the franchise ' shall provide, and prospect shall receive, a conformable disclosure document. Ostensibly, if the franchisor fails to observe this imperative sequence, the franchisee will enjoy several statutory-based remedies, chief among which is rescission, exercisable without penalty or obligation, so long as delivers its notice of rescission on a timely basis.

A digression to make one critical observation: When the Wishart Act was drafted and came into force in two stages in 2000 and 2001, there was also in force in Ontario a statute called the Interpretation Act, since repealed, but only in 2006. Section 29(2) of the Interpretation Act clearly mandated that in every Act of the Ontario legislature, “the word 'shall,' shall be construed as imperative.”

Section 6 of the Wishart Act ' complete with headings ' reads as follows:

Rescission for late disclosure

6.(1) A franchisee may rescind the franchise agreement, without penalty or obligation, no later than 60 days after receiving the disclosure document, if the franchisor failed to provide the disclosure document or a statement of material change within the time required by Section 5 or if the contents of the disclosure document did not meet the requirements of Section 5. 2000, c. 3, s. 6 (1).

Rescission for no disclosure

(2) A franchisee may rescind the franchise agreement, without penalty or obligation, no later than two years after entering into the franchise agreement if the franchisor never provided the disclosure document. 2000, c. 3, s. 6 (2).

Identifying the triggering event for the rescission remedy is fundamental to and at the crux of this case. If it is one particular event, the time horizon is only 60 days in duration (i.e., after receiving the disclosure document). If it is another, the horizon lengthens to two years (i.e., after entering into the franchise agreement).

The Facts

In Canada Inc., the events outlined by Section 5 of the Wishart Act occurred out of sequence. Step one: On June 8, 2005, the prospective franchisee paid on account of the initial franchise fee the sum of $15,000 to the franchisor. Step two: In August 2005, a disclosure document was provided to the prospect. Step three: Just over six months later, the franchisee entered into the franchise agreement. More than 60 days after the disclosure document was delivered, but less than two years after the franchise agreement was signed, the franchisee delivered a notice of rescission purporting to trigger the rescission remedy provisions of Sections 6, etc., of the Wishart Act. The franchisor simply took the position that the franchisee's rescission remedy was no longer available, the notice having been delivered out of time.

The franchisee applied to the Ontario Superior Court for a determination of the issue, urging the court to find that the triggering event was not the late delivery of the disclosure document, but the signing of the franchise agreement urging that “never provided” the disclosure document meant “never in accordance with the imperative sequencing scheme of Section 5 of the Act.”

The Decision

After initially reserving his decision, Judge James Campbell Newbould eventually returned to write that since a disclosure document had been provided before the prospect signed the franchise agreement, all the prospect had to do to resile from the deal was refrain from signing the agreement and ask for his money back, and he had been given as much as six months to make that decision. In such circumstances, reliance on statutory rescission became moot.

Reminiscent of the politico-linguistic chicanery of recent memory, everything depends on what the meaning of “never” is. Is it “never” in absolute terms, or is it “never” in the context of the statutory time frame established by Section 5 of the Wishart Act? If the former, then the decision of Newbould is correct; if the latter, then likely not. The statute required the disclosure document to be delivered not less than 14 days before either of the “activity events.” The money was paid and received more than two months before the disclosure document was provided. Arguably, once the first period of 14 days had passed, the franchisor could not validly provide the disclosure document without returning the money it had received to the franchisee so that the statutory imperative could be observed. Once “out of time” in the statutory context, the disclosure document could never be validly delivered as required by law.

Moreover, the prospect was not yet “a franchisee.” Therefore, there was no existing contract to rescind.

Analysis, Policy and Appeal

Recalling the references above to the now-repealed Interpretation Act, if the imperative is ignored, then there may be no real penalty for failure to follow the statutory imperative. In this case, one must couple questionable drafting with the disappearance of the Interpretation Act as twin impediments to public policy implementation. (Interestingly, although forcefully put to him in argument by franchisee's counsel as an aid to interpretation and construction of the imperative nature of the franchisor's obligation, the judge did not reference the Interpretation Act in his opinion.)

And the policy behind the sequencing of events seems clear: Once the prospective franchisee's money is in the franchisor's hands, the prospect is highly disadvantaged. Who knows how the money was raised and what the franchisee might have to face in altering arrangements? If this approach is commonly adopted by franchisors, it may afford the means to avoid the very real obligations imposed by the statute. Can this really be the result of what the legislators intended?

The answer should be driven by the purposive construction principle of statutory interpretation, where all of the relevant sections work together to achieve the legislative objective. The plain and clear meaning of the words used in the legislation should prevail unless absurdity results, leading to schemes devised to avoid clear obligations. Accordingly, it may be argued, if Section 5 of the Wishart Act is to have any meaning, then Section 6 cannot mean what Newbould says it does. Subsection 5(3) defines a disclosure document as one that is “delivered as required under subsections (1) and (2)”; namely, within 14 days preceding the prospect either (a) signing a franchise agreement or (b) paying any consideration. Anything less, and, arguably, the document otherwise delivered fails to meet the statutory definition of a “disclosure document.” In that event, we are left with a logical conundrum that defies the judicious application of purposive construction and plain meaning, because the meaning is anything but plain. This is decidedly unsatisfactory.

Conclusion

Just as difficult facts make bad law, so does inadequate statutory draftsmanship.

The franchisee's notice of appeal to Ontario's Court of Appeal, the province's highest court, has been filed and served, so the last of this tale remains to be told. As has been said: “The law never 'is': It's always 'about to be' ” (per Professor J. B. Milner, University of Toronto Law School, 1962).

Markus Cohen, Q.C., LL.M., is a franchise attorney in Toronto, Ontario, Canada. He can be contacted at [email protected] or at 416-413-9822.