The Court of Appeal Clarifies Interplay Between the Limitations Act, 2002 and the Arthur Wishart Act (Franchise Disclosure), 2000

In 2130489 Ontario Inc. v. Philthy McNasty's (Enterprises) Inc., the Ontario Court of Appeal (ONCA) clarified how the limitation period in the Limitations Act, 2002 (Limitations Act) interacts with the time periods for rescission set out in the Arthur Wishart Act (Franchise Disclosure), 2000 (Act).

According to the Court, where a franchisee seeks access to the courts to enforce its statutory rescission rights under the Act, the general two-year limitation period set out in the Limitations Act will only be triggered once the franchisee "discovers" that the franchisor does not intend to comply with the financial obligations set out in s. 6(6) of the Act. Where a franchisee has a prospective statutory claim to rescission, the proper course of action is to deliver a Notice of Rescission under the Act and to wait and see if the franchisor will comply with its financial obligations under s. 6(6) of the Act, which must be discharged within 60 days. If the 60-day period passes without the franchisor meeting its obligations or if the franchisor communicates its refusal to comply in advance of the due date, the cause of action under the Limitations Act is "discovered" and the franchisee has two years within which to commence a claim in the Ontario Superior Court of Justice (ONSC).

Background

A franchisor entered into two franchise agreements with the same franchisee in respect of the same location. A disclosure document was provided in advance of the first agreement being signed. However, in order for the franchisee to obtain third-party credit, the signing officer of the franchisee needed to change, which required a second franchise agreement to be put into place, changing the identity of the principal. No disclosure document was provided by the franchisor in advance of the second agreement being signed, apparently on the theory that the franchisee had already received disclosure and that the second agreement was simply a mechanism to obtain third-party credit.

The franchisee was not profitable and ultimately failed. The franchisee served a Notice of Rescission in respect of the second agreement in advance of the expiry of the two-year period set out in s. 6(2) of the Act on the basis that no disclosure document had been provided.

The franchisor responded to the Notice of Rescission before the expiry of the 60-day period in s. 6(6) of the Act by asserting that the franchisee was out of time. The franchisee then waited approximately 12 months and commenced a claim in the ONSC for rescission.

The key issue before the ONCA was the interplay between the general limitation period set out in the Limitations Act and the time periods for rescission prescribed in the Act. The application judge in first instance had held that the Limitations Act was only triggered when the franchisor responded negatively to the Notice of Rescission. The franchisor submitted on appeal that this was an error of law and that the Limitations Act had in fact been triggered more than two years before the claim was brought in the ONSC, such that the rescission claim was statute barred.

The ONCA upheld the application judge’s decision. According to the ONCA, it is only when the franchisor refuses to comply with the financial obligations prescribed in s. 6(6) of the Act that there is "discovery" of a claim under the Limitations Act.

What to Take From the ONCA’s Reasoning

This holding is instructive for counsel to both franchisors and franchisees. Franchisees should no longer routinely serve a Statement of Claim along with their Notice of Rescission. There is no "dispute" for which a court action is necessary, unless the franchisor refuses to comply with the financial obligations flowing from the Notice of Rescission. The time frames prescribed in the Act are satisfied by delivery of a Notice of Rescission; by contrast, the limitations period in the Limitations Act is satisfied by commencing a claim in court within two years of discovering that the franchisor does not intend to comply with the Notice of Rescission.

In addition, the decision serves as further confirmation that the disclosure obligations under the Act continue to be interpreted very strictly, such that franchisors should err on the side of comprehensive disclosure at every turn, even if it appears the franchisee (or prospective franchisee) already has the information forming the subject of the potential further disclosure.

Authors