When is a Notice of Rescission a Notice of Rescission?

  • July 30, 2020
  • Rory McGovern and Daniel Freiheit

In 2352392 Ontario Inc. v. Msi, 2020 ONCA 237 (“Msi”)[1], the Ontario Court of Appeal delivered a significant decision that will impact the application of Section 6(3) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000 c. 3 (the “Act”) (the “Notice of Rescission” section). The decision, technically read, allows court pleadings, (properly pled), to constitute a valid notice of rescission under the Act.  However, the principles applied by the Court of Appeal shed light, more broadly, on a new level for how the Act will be interpreted in favor of franchisees:  that is, by removing barriers to enforcement of franchisee rights, especially if it involves “form over substance”.

The basic facts surrounding the underlying case are common. A franchisee purchased a franchise that did not end up being financially successful. As a consequence, the franchisee’s bank sued the franchisee for defaulting on its loan. In turn, the franchisee issued a third party claim against the franchisor claiming damages and rescission of the franchise agreement for failure to provide a disclosure document as required by the Act. The franchisor defended the rescission claim by arguing that the franchisee had not delivered a notice of rescission as required under Section 6(3) of the Act. After the third party claim was issued and the franchisor defended, the franchisee sued his former lawyer who had issued the third party claim, alleging that the lawyer was negligent in failing to comply with the requirements of the Act in connection with the delivery of the notice of rescission.

At the initial motion, which dealt with both actions, both the franchisor and the franchisee argued that the third party claim did not constitute a proper notice of rescission under the Act. The motion judge accepted the franchisor and the franchisee’s arguments and the franchisee’s former lawyer appealed. The motion judge’s decision turned entirely on the Ontario Court of Appeal’s decision in 2130489 Inc. v. Philthy McNasty’s (Enterprises) Inc., 2012 ONCA 381 (“Philthy’s”), which has long been cited for the proposition that a pleading cannot constitute a notice of rescission under the Act.

Despite the decision in Philthy’s, in Msi the Ontario Court of Appeal decided that there was no reason to find that a pleading cannot constitute a notice of rescission under the Act. In coming to this decision, the Ontario Court of Appeal interpreted the Act in a generous manner (from a franchisee’s perspective) and held that the notice of rescission contemplated in Section 6(3) is not a “precondition to litigation”. The court further noted that the only requirements for the notice of rescission are that it be in writing and delivered to the franchisor. By that definition, a pleading would then qualify as a notice of rescission. Instructively for counsel, the court noted at paragraph 15:

“To conclude, although a written notice of rescission delivered by the franchisee to the franchisor before commencing litigation is the normal and preferable procedure, to preclude a franchisee from using a pleading to provide notice of rescission to a franchisor and to find that such a notice cannot comply with the Act when there is no such prohibition in the Act itself, would be to favour form over substance and create a barrier to enforcement of the rights of franchisees under the Act.

In light of this decision, as a best practice, counsel for a franchisee should always seek to deliver a notice of rescission prior to commencing litigation against the franchisor. However, in light of this decision, franchisees have an added tool in their arsenal when it comes to any technical deficiencies in enforcing their rights under the Act.  The Court of Appeal has clearly signalled that the “form over substance” approach in prior jurisprudence is not tenable if it results in barriers to the enforcement of rights granted to a franchisee under the Act.

For lawyers representing franchisors, Msi represents an important lesson as well: any strong-arm tactics relying on a franchisee’s strict compliance with the Act won’t be persuasive.  Instead, lawyers and their franchisor clients will have to focus on the substantive deficiencies that have resulted in prejudice to the franchisor.

 

[1] 2020 ONCA 237.

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