On June 6, 2012, the Ontario Court of Appeal dismissed the Philthy McNasty’s (Enterprises) Inc. (Philthy) appeal of the decision of Justice Whitaker of the Ontario Superior Court of Justice in 2130489 Ontario Inc. v. Philthy McNasty’s (Enterprises) Inc, 2011 ONSC 6852 (the Philthy Decision).

In the Philthy Decision, Justice Whitaker held that the limitation period for a claim of rescission damages starts to run, or is discoverable, at the point at which the franchisee knows that the franchisor will not be honouring a claim as set out in a Notice of Rescission. The Philthy Decision was the first ruling of an Ontario court on the issue of the intersection of damages for rescission under the Arthur Wishart Act (the Act) and the discoverability principles of the Limitations Act, 2000, (the Limitations Act). Until the Philthy’s Decision it was an open issue as to how courts would apply the principle of discoverability to a claim for rescission damages in the face of the clearly and strictly time-limited statutory rescission remedy under the Act.

In its dismissal of Philthy’s appeal, the Court of Appeal confirmed the manner in which limitation periods are calculated with regard to claims for rescission damages. While there were other issues dealt with in the Philthy Decision, this review and comment focuses solely on the limitation period issue.

Key Facts

On October 9, 2007, 2130489 Ontario Inc. (the Franchisee) entered into a franchise agreement with Philthy, a chain of restaurant/pubs, and the Franchisee was not provided with any disclosure document at that time. The franchise failed, and on September 23, 2009, the Franchisee served Philthy’s with a Notice of Rescission and demanded compensation pursuant to s. 6 of the Act.  On November 3, 2009, Philthy’s advised the Franchisee that it would be disputing the Notice of Rescission. The Franchisee commenced its application on November 29, 2010.

Decision on the Initial Application

The Franchisee brought an application under Rule 14.05(3) seeking declaratory and other relief, in particular a declaration affirming its right to rescission and rescission damages under the Act.  Justice Whitaker held that the Franchisee was entitled to issue a Notice of Rescission pursuant to s. 6(2) of the Act up to October 9, 2009, two years following the signing of the franchise agreement.  Justice Whitaker further held that the Franchisee’s claim for rescission damages did not crystallize until the franchisor advised the franchisee of its intention to dispute the Notice of Rescission on November 3, 2009.

The franchisor appealed Justice Whitaker’s decision on several grounds, including that Justice Whitaker erred in determining that the Franchisee’s application was not barred by the interaction of the limitation periods in the Act and the Limitations Act.

Appeal Decision on the Interaction between the Act and the Limitations Act

Philthy’s argued on appeal that the Franchisee’s application was barred by way of the interaction of relevant limitation periods in the Act and the Limitations Act.  The franchisor argued that the two-year limitation period for issuing a Notice of Rescission under the Act coincided with the general two-year limitation period under the Limitations Act for bringing a claim in damages.  Consequently, although the Franchisee may have delivered its Notice of Rescission within the mandated two-year window, the claim for statutory damages – which the Franchisee brought fourteen months later – was time barred.

However, the Court affirmed Justice Whitaker’s holding that the Franchisee’s claim did not crystallize until Philthy’s advised the Franchisee that it would not be fulfilling its statutory obligations with regard to the claim set out in the Notice of Rescission, and that before that time the Franchisee had at best only a “latent or potential cause of action.”

The Philthy Appeal confirms that a claim for rescission damages does not arise until a franchisor either:

  • advises the franchisee that it is denying its claim as set out in a Notice of Rescission; or
  • allows the 60-day period for responding to the claim in a Notice of Rescission to expire without honouring it. This effectively means that as long as a franchisee serves its Notice of Rescission on time, it may have up to four years and 60 days from the date of entering into a franchise agreement to claim damages for rescission.

Practice Point: The common practice of including claims for both the enforcement of rescission as well as for rescission damages in one Statement of Claim, and serving that Statement of Claim at the same time as the Notice of Rescission (or at another time prior to the expiry of the 60-day period under subsection 6(6) of the Act) is incorrect. A more appropriate approach would be for a franchisee to issue its Notice of Rescission within two years after entering into the franchise agreement in order to ensure its claim is not statute-barred.  The franchisee could then bring an action to enforce rescission, and later amend that action, as necessary, to incorporate claims for compensatory rescission damages.