Ontario Court of Appeal Considers Interplay Between Rescission Remedy and Mandatory Mediation

In PQ Licensing S.A. v. LPQ Central Canada Inc., 2018 ONCA 331, the Ontario Court of Appeal considered whether a mandatory mediation provision in a franchise agreement had the effect of postponing the running of a limitation period for statutory recession.

The parties’ franchise agreement required disputes to be mediated before arbitration proceedings could be commenced. The mandatory mediation requirement would be satisfied if one party requested mediation and the other party ignored the request for 60 days or if the mediation itself proceeded for at least 6 hours.

The franchisee delivered a notice of rescission in 2009, approximately one year after signing the franchise agreement, but then waited until 2013 to issue its notice of arbitration to enforce its rescission rights.

The franchisor took the position before the arbitrator that the franchisee’s rescission claim was statute barred under the Limitations Act, 2002, S.O. 2002, c. 24, as the franchisee ought to have commenced the arbitration within two years of delivering the notice of rescission.

The arbitrator rejected the franchisor’s argument and the Court of Appeal confirmed the arbitrator’s decision. The primary basis for the decision was that the franchisee could not have reasonably discovered its claim until the mandatory mediation process had completed, which was less than two years before the notice of arbitration was issued.

The franchisor argued that the mandatory mediation provision in the franchise agreement was void under s. 10 of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3, since it required mediations to be held in Delaware (rather than in Ontario).  The Court of Appeal accepted the arbitrator’s decision that the words “in Delaware” could be severed from the mandatory mediation provision.  According to the Court, severing the offending words better preserved the parties’ intentions, particularly in light of a broadly worded severance provision in the franchise agreement.

The franchisor also argued that it was unfair to make discovery of the rescission claim contingent on the completion of the mandatory mediation process, since it could cause undue delay by the franchisee. However, the Court accepted the arbitrator’s decision on this issue.  The franchise agreement made mediation a precondition to beginning an arbitration, and either party could invoke the mediation process at their own option.  The franchisor was free to invoke the mediation process upon receipt of the franchisee’s notice of rescission in 2009.

As a result, the franchisee’s rescission claim was permitted to proceed through the arbitration process.

Please see our webpage for more information on McCarthy Tétrault’s Retail and Consumer Markets Group.

Franchise & Distribution litigation

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