779975 Ontario Ltd. v. Mmmuffins Canada Corp., 2009 CarswellOnt 3262

The franchisee, 779975 Ontario Ltd. (the "Franchisee"), who ran a food business, commenced an action for common law rescission based on pre-contractual misrepresentations allegedly made by the franchisor, Mmmuffins Canada Corp. (the "Franchisor"). There was no reference in the statement of claim of the Arthur Wishart Act (the "Act") nor to its statutory rescission remedy. More than two years later, having discovered the omission after the potential expiry of the limitation period, the Franchisee commenced a second action seeking a declaration that service of the statement of claim in the first action constituted notice of rescission under the Act so as to interrupt the limitation period. The Franchisor motioned to strike the Franchisee’s second action on the basis that it was commenced outside of the limitation period.

Decision

The Act is remedial legislation that was designed to address the inequality in bargaining power between franchisees and franchisors. It imposes disclosure obligations on franchisors and gives franchisees the right to rescind the franchise agreement by delivering to the franchisor a notice of rescission, without penalty or obligation, if there are deficiencies in the disclosure or if no disclosure document has been provided. There is a different time limit on the right to rescission, depending on the nature of the franchisor’s breach of the Act. The time limit is 60 days after receiving the franchise agreement in the case of deficient disclosure, and two years after entering into the franchise agreement in the case of outright absence of disclosure. Disclosure that is spread over several documents, or that is otherwise lacking important material information, will not be compliant with the statute and the franchisee will be entitled to invoke the two-year rescission period. That being said, the Act imposes a duty of fair dealing on both parties and must be interpreted in a way that balances the right of both parties and that is fair to both. The statutory right of rescission is therefore an extraordinary remedy.

Although the notice of rescission under the Act does not require specific content or a specific form, it needs to be clear that the franchisee is exercising its statutory right of rescission. Whether the two-year limitation period of the Act applies or not, the commencement of an action for rescission at common law, without any reference to the Act, cannot constitute notice of rescission so as to interrupt the statutory limitation period. The franchisee’s right to bring an action for rescission at common law is independent of, and unaffected by, the Act. The second action was plainly commenced in an effort to repair the deficiencies of the first action. The Court, therefore, concluded that the second action was time-barred and that it should be struck pursuant to rule 21.01(1) of the Rules of Civil procedure.