Ontario Court of Appeal Removes Barrier to Valid Franchise Rescission Notice

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In its recent decision in 2352392 Ontario Inc. v MSI,[1] the Ontario Court of Appeal held that a pleading in civil litigation can constitute a formal “notice of rescission” under the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the “Act”).[2] 

While franchise systems in Canada are currently focused on managing COVID-19 issues, it is important not to lose sight of developments in the case law. This is particularly the case in the area of franchise rescission, as the economic impact of COVID-19 on retail businesses might lead some franchisees to seek rescission. MSI provides a notable reminder that Canadian courts have tended not to embrace overly formalistic or technical interpretations of provincial franchise legislation. 

Summary of the Decision

In order to engage statutory rights of rescission under the Act, a franchisee must deliver a notice of rescission within the mandatory time period. The Act and regulation do not specify the form of the notice, except that the notice must be in writing and delivered to the franchisor using one of the prescribed delivery methods.[3] Later cases have imported a substantive requirement that the notice must also be sufficiently precise to communicate the franchisee’s intention to rescind, with one case suggesting that a pleading in litigation may not provide sufficient notice to meet the requirements of the Act.[4]

In MSI, the franchisee had not delivered a pre-action notice of rescission, but rather had issued a third party claim against the franchisor in defending proceedings against the franchisee’s bank. At first instance, it was held that the third party claim did not constitute sufficient notice under the Act, primarily because the purpose and process of a civil claim and a statutory notice of rescission were distinct.[5] Indeed, the rescission remedy under the Act is supposed to be invoked prior to litigation and the cause of action is not even triggered until the franchisor declines to accept the rescission and pay the damages set out in the Act.[6]

In MSI, the Court of Appeal found that the pleading did in fact provide sufficient notice under the Act, citing the broad remedial purpose of the Act.[7] While the Court held that it was “fair to say that the Act appears to contemplate that notice will be given outside the context of litigation”, it held that the pleading could nonetheless comply with the statutory notice requirements.[8] According to the Court, while the “normal and preferable procedure” is to first deliver a distinct notice prior to commencing civil proceedings, there is no requirement that these documents be distinct:

[T]o 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.[9]

Considerations for Franchise Systems

The decision affirms a generous view in favour of franchisees. Though the facts in MSI raised the issue about whether a pleading commencing litigation may be premature, the Court ultimately held this was a procedural anomaly that should not deny a franchisee the right to rescind.[10]   

This is a notable example of the courts rejecting an interpretation of Canadian franchise legislation that leads to additional formal barriers to the rescission remedy.

 

[1] 2020 ONCA 237 [MSI].

[2] See our blog on the Superior Court decision, here: https://www.mccarthy.ca/en/insights/blogs/consumer-markets-perspectives/when-pleadings-are-not-enough-franchisees-statutory-rescission-notice-obligations-clarified .

[3] Arthur Wishart Act s. 6(3).

[4] See 779975 Ontario Ltd. v. Mmmuffins Canada Corp., 2009 CanLII 28893 (ON SC).

[5] The Superior Court decision is reported at 2019 ONSC 4055.

[6] 2130489 Ontario Inc. v. Philthy McNasty's (Enterprises) Inc., 2012 ONCA 381.

[7] MSI at para. 11.

[8] MSI at para. 12.

[9] MSI at para. 15.

[10] MSI at para. 14.

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