COURT FILE NO.:  05-CL-5983

DATE:  20060721

ONTARIO

SUPERIOR COURT OF JUSTICE

REASONS FOR DECISION

CUMMING J.

The Motion

[1]              The plaintiffs bring a motion for partial summary judgment, claiming the defendants failed to disclose as required by the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 , as am. (the “Act”) and hence, the plaintiffs are entitled to claim statutory rescission of a franchise agreement together with damages.

[2]              The motion raises several novel issues as to the interpretation and application of the Act.

The Parties

[3]              The plaintiff Nancy Van Dorp (“Van Dorp”) was the sole shareholder, officer and director of the corporate plaintiff, 1518628 Ontario Inc. (“151”), an Ontario corporation, at the material times. The plaintiff Dean McCoy (“McCoy”) is the spouse of Ms. Van Dorp.

[4]              The corporate defendant, Tutor Time Learning Centres, LLC (“TTLC”) is a Michigan corporation, operating many corporate owned and franchised “Tutor Time” daycare learning centers in the United States. The individual defendants are officers and directors of TTLC. At the conclusion of the submissions the plaintiffs advised they were no longer pursuing their claim against the individual defendants.

[5]              The corporate defendant counterclaims for liquidated damages for alleged breaches of the franchise agreement.

The Franchise Agreement

[6]              At the material times, TTLC had a single franchised day care learning location in Canada, situated in Burlington, Ontario, which is the subject of the action at hand (hereafter, the “ Burlington franchise” or “ Burlington location”).

[7]              On December 1, 2003, 151 acquired the Burlington franchise through a share purchase of 1557935 Ontario Inc. (“155”), the then existing franchisee, consented to by TTLC. The Tutor Time Franchise Agreement for the Burlington franchise had first come into effect September 28, 2000, with a predecessor franchisee.

[8]              The Share Purchase Agreement between 151 and the vendor had been executed October 29, 2003. The Share Purchase Agreement provided in s. 6(1)(c) that the vendor, Mr. Goldanloo (a shareholder of 155), was to obtain the consent of the franchisor, TTLC, with the purchaser, 151, to pay the transfer fee required by TTLC.

[9]              On October 30, 2003, TTLC, being in receipt of the Purchase Agreement, had responded to the principals of 155 about their request to transfer 155’s business to 151, recognizing Ms. Van Dorp as the principal of the purchaser, and advising as to what was required by TTLC to complete the proposed transaction.

[10]           A series of emails were exchanged by TTLC and Ms. Van Dorp. On November 5, 2003 Ms. Van Dorp enquired about getting a Uniform Franchise Offering Circular (“UFOC”). On November 6 TTLC responded that the UFOC for Ontario was in process, and would be delivered as soon as TTLC had a UFOC specifically designed to meet Canadian requirements. TTLC stated that for information purposes only, it would provide a current US disclosure, pointing out there were differences in the regulations. The 200 page U.S. UFOC, prepared in accordance with U.S. Federal and state laws, was sent by mail November 24, 2003.The U.S. UFOC included detailed information as to the franchise along with copies of the Franchise Agreement, Personal Guaranty, Nondisclosure Agreement, and financial statements.

[11]           On November 24 TTLC enquired of Ms. Van Dorp as to whether she was the sole shareholder of 151, with Mr. McCoy responding by email that she was, and TTLC then forwarding in a later email that day the form of Consent to the transaction, advising that both Ms. Van Dorp and Mr. McCoy would have to sign the Personal Guaranty and Subordination and Nondisclosure commitments.

[12]           The corporation profile reports of 151 state that Ms. Van Dorp has been the sole officer and director of 151 at all material times.

[13]           On November 26, 2003 the Consent to Transfer of Shares and Sale of Assets was executed by TTLC recognizing Ms. Van Dorp or her assignee, 151, as the transferee.  Ms. Van Dorp and Mr. McCoy agreed to “assume all personal obligations in accordance with the Franchise Agreement.”

[14]           The plaintiffs were ultimately unsuccessful in operating the Burlington franchise. On October 23, 2004, Mr. McCoy stated to TTLC that 151 had been unsuccessful in seeking to sell the day care learning centre. The business was ultimately sold as a daycare operation March 28, 2005, for some $530,000.00 but without any franchise arrangement between the new purchaser and TTLC.

[15]           The plaintiffs delivered to TTLC a Notice of Rescission under s. 6(2) of the Act October 23, 2004 and eventually commenced their action before the Court by statement of claim filed July 14, 2005.

[16]           The plaintiffs seek a declaration through the motion at hand that their claimed rescission was efficacious and seek damages as afforded under the Act.

Analysis

[17]           Section 5 of the Act reads:

5. (1) A franchisor shall provide a prospective franchisee with a disclosure document and the prospective franchisee shall receive the disclosure document not less than 14 days before the earlier of,

(a)                the signing by the prospective franchisee of the franchise agreement or any other agreement relating to the franchise; and

(b)                the payment of any consideration by or on behalf of the prospective franchisee to the franchisor or franchisor’s associate relating to the franchise.

Methods of delivery

(2)  A disclosure document may be delivered personally, by registered mail or by any other prescribed method.

Same

(3)  A disclosure document must be one document, delivered as required under subsections (1) and (2) as one document at one time.

Contents of disclosure document

(4)  The disclosure document shall contain,

(a)                all material facts, including material facts as prescribed;

(b)                financial statements as prescribed;

(c)                copies of all proposed franchise agreements and other agreements relating to the franchise to be signed by the prospective franchisee;

(d)                statements as prescribed for the purposes of assisting the prospective franchisee in making informed investment decisions; and

(e)                other information and copies of documents as prescribed.

Material change

(5)  The franchisor shall provide the prospective franchisee with a written statement of any material change, and the franchisee must receive such statement, as soon as practicable after the change has occurred and before the earlier of,

(a)                the signing by the prospective franchisee of the franchise agreement or any other agreement relating to the franchise; and

(b)                the payment of any consideration by or on behalf of the prospective franchisee to the franchisor or franchisor’s associate relating to the franchise.

Information to be accurate, clear, concise

(6)  All information in a disclosure document and a statement of a material change shall be accurately, clearly and concisely set out.

Exemptions

(7)  This section does not apply to

(a)                the grant of a franchise by a franchisee if,

(i)                   the franchisee is not the franchisor, an associate of the franchisor or a director, officer or employee of the franchisor or of the franchisor’s associate,

(ii)                the grant of the franchise is for the franchisee’s own account,

(iii)                in the case of a master franchise, the entire franchise is granted, and

(iv)               the grant of the franchise is not effected by or through the franchisor;

(b)                the grant of a franchise to a person who has been an officer or director of the franchisor or of the franchisor’s associate for at least six months, for that person’s own account;

(c)                the grant of an additional franchise to an existing franchisee if that additional franchise is substantially the same as the existing franchise that the franchisee is operating and if there has been no material change since the existing franchise agreement or latest renewal or extension of the existing franchise agreement was entered into;

(d)                the grant of a franchise by an executor, administrator, sheriff, receiver, trustee, trustee in bankruptcy or guardian on behalf of a person other than the franchisor or the estate of the franchisor;

(e)                the grant of a franchise to a person to sell goods or services within a business in which that person has an interest if the sales arising from those goods or services, as anticipated by the parties or that should be anticipated by the parties at the time the franchise agreement is entered into do not exceed, in relation to the total sales of the business, a prescribed percentage;

(f)                  the renewal of extension of a franchise agreement where there has been no interruption in the operation of the business operated by the franchisee under the franchise agreement and there has been no material change since the franchise agreement or latest renewal or extension of the franchise agreement was entered into;

(g)                the grant of a franchise if,

(i)                   the prospective franchisee is required to make a total annual investment to acquire and operate the franchise in an amount that does not exceed a prescribed amount,

(ii)                the franchise agreement is not valid for longer than one year and does not involve the payment of a non-refundable franchise fee, or

(iii)                the franchisor is governed by section 55 of the Competition Act ( Canada);

(h)                the grant of a franchise where the prospective franchisee is investing in the acquisition and operation of the franchise, over a prescribed period, an amount greater than a prescribed amount

Same

(8)  For the purpose of subclause (7) (a) (iv), a grant is not effected by or through a franchisor merely because,

(a)                the franchisor has a right, exercisable on reasonable grounds, to approve or disapprove the grant; or

(b)                a transfer fee must be paid to the franchisor in an amount set out in the franchise agreement or in an amount that does not exceed the reasonable actual costs incurred by the franchisor to process the grant.

[18]           Section 5 (1) to (6) of the Act and s. 2, O. Reg. 199/05 obligate a franchisor to provide a prospective franchisee with a single disclosure document with specified contents at least 14 days prior to signing any agreement relating to the franchise and the payment of any consideration to the franchisor.

The application of s. 5 and its disclosure requirement

[19]           TTLC submits that the disclosure requirement of s. 5 does not apply to it because s. 5 came into force January 31, 2001 whereas the Franchise Agreement at issue first came into force in September 28, 2000. I disagree.

[20]           Section 2(1) of the Act provides that the Act applies with respect to a franchise agreement entered into after July 1, 2000. The obligation to disclose applies after January 1, 2001 to any “prospective franchisee”, being defined as any person who has indicated to the franchisor an interest in entering into a franchise agreement. The plaintiffs 151 and Ms. Van Dorp first indicated this interest as prospective franchisees to TTLC after January 1, 2001, indeed, in October 2003.

The right to rescind under s. 6 of the Act

[21]           TTLC submits that the purported rescission was ineffective for several reasons. First, TTLC relies upon s. 6(1) of the Act which provides:

6.   (1) A franchisee may rescind the franchise agreement, without penalty or obligation, no later than 60 days after receiving the disclosure document, if the franchisor failed to provide the disclosure document or a statement of material change within the time required by section 5 or if the contents of the disclosure document did not meet the requirements of section 5.

[22]           TTLC submits the grant of the Burlington franchise was not effected by or through TTLC because 151 purchased the shares of TTLC’s franchisee, 155, without TTLC’s involvement. Hence, TTLC submits, the disclosure provisions of the Act do not apply. I disagree.

[23]           The word “grant” is defined in s. 1(1) of the Act to include “the sale or disposition of the franchise or of an interest in the franchise …[and interest] includes the ownership of shares in the corporation that owns the franchise”.

[24]           Section 5(7)(a) (iv) requires that “the grant of the franchise is not effected by or through the franchisor” as a prerequisite to an exemption (my emphasis). The fact that the share purchase was to be directly between 155 and 151 is in itself irrelevant. In the absence of being within the exemption, TTLC’s obligation to provide disclosure to 151/Ms. Van Dorp as required by s. 5 of the Act arises because it was granting a franchise to 151/Ms. Van Dorp within the meaning of the legislation.

[25]           This submission by TTLC overlooks the reality of the relationship between the plaintiffs and TTLC. Section 6.2(c) of the Share Purchase Agreement provided that TTLC’s consent to the transfer would be required. TTLC consented to the transfer of the shares in 155 to 151 and TTLC only after the payment of a $10,000.00 transfer fee and only after requiring 151 and Ms. Van Dorp to assume responsibility for the obligations of the franchisee.  On November 26, 2003, TTLC delivered by email to the plaintiffs a Consent for them to assume the obligations of the franchisee, a Personal Guaranty and Subordination Agreement and a Nondisclosure, Noninterference and Noncompetition Agreement to be signed by them as purchasers. By virtue of the Franchise Agreement, a franchisee is given a licence to use TTLC’s intellectual property and has access to TTLC’s programs, software, training literature and related systems. It would not serve the best interests of TTLC or that of its network of franchisees to allow a franchise to be transferred without an assessment of the proposed transferee’s character, experience and credit worthiness.

[26]           A “transfer” under s. 3.23 of the Franchise Agreement includes a change of ownership in the transferee. 155 would remain the franchisee but its shares were now to be owned by 151.

[27]           Accordingly, TTLC required compliance with Part 10 of the Franchise Agreement. Section 10.4 of the Franchise Agreement reads:

10.4.    Conditions for Consent to Transfer.

The consent of Tutor Time is subject to certain conditions (which shall not apply if Tutor Time or its assigns is the transferee), including all of the following:

(a)                Satisfaction of Tutor Time that the proposed transferee meets all of the criteria of character, Learning Center experience, financial responsibility, net worth and other standards that Tutor Time customarily applies to new franchisees at the time of Transfer;

(b)                You are in Good Standing;

(c)                Signing by the transferee of the then-current form of franchise agreement with an addendum that shortens the term to the remainder of the current term and waives payment of an initial fee by the proposed transferee.

(d)                Your payment of the transfer fee described in Section 6 of this Agreement; and

(e)                Completion by the transferee of the Tutor Time initial training program to Tutor Time’s satisfaction and payment of applicable training fees.

(f)                  You (and all of your transferring owners) have executed a general release in form and content satisfactory to us, of any and all claims against us and our Affiliates and our and their shareholders, officers, directors, employees and agents.

[28]           The “conditions” set forth relate to 151 and Ms. Van Dorp, having the new ownership of the continuing franchisee, 155. Section 12.20 of the Franchise Agreement sets forth the requirements imposed upon 151 and Ms. Van Dorp, being a prospective franchisee. 

[29]           As discussed above, s. 5(7) (a) (iv) of the Act provides an exemption whereby s. 5 does not apply in respect of a resale of the franchise if the grant of the franchise “is not effected by or through the franchisor.” Section 5(8) (a) provides further that a grant is not so effected by or through the franchisor merely because the franchisor “has a right, exercisable on reasonable grounds, to approve or disapprove the grant”. By s. 12 the onus of proof is upon the party claiming an exemption, that is, the franchisor, TTLC, in the instant situation.

[30]           The reach of s. 10.4 of the Franchise Agreement in imposing conditions is in respect of the existing franchisee and a new franchisee, or a new party stepping into the shoes of a continuing franchisee through a change of ownership, as in the situation at hand. Hence, for example, TTLC could refuse its consent to the transfer of ownership if Ms. Van Dorp refused to provide the Personal Guaranty required under s. 12.19 of the Franchise Agreement. This would arguably be a right of the franchisor exercisable on reasonable grounds, to approve or disapprove the grant.

[31]           If Ms. Van Dorp did not meet the standards TTLC customarily applies to “the proposed transferee”, then TTLC could disapprove the transfer. However, the practice of TTLC goes further and imposes obligations upon the spouse of a transferee. TTLC says as a prerequisite to approval TTLC requires the spouse (Mr. McCoy in the instant situation) to also sign the Personal Guaranty.

[32]           In Walden v. 887985 Alberta Ltd. (c.o.b. Ag Connexions),[2005] O.J. No. 257 (S.C.J.) the inclusion of the franchisee’s wife to a fresh franchise agreement by the franchisor activated the disclosure obligations.

[33]           The interpretation of the Act is to be consistent with the “true intent, meaning and spirit” underlying s. 5(7), (8): Interpretation Act, R.S.O. 1990, c. I-11, s. 10 .

[34]           TTLC submits it is exempted because the words “effected or through” in s. 5(7)(a)(iv) of the Act connote an active participation by the franchisor in the grant of the franchise. Bryan A. Garner, ed., Black’s Law Dictionary, 7 th ed. (St. Paul: West Group, 1999). See generally Edward N. Levitt, Canadian Franchise Legislation ( Markham: Butterworths, 2001) at 7.54 to 7.55. TTLC submits it was not an active participant in finding the purchaser and in the sale process. See for example MAA Diners Inc. v.  3 for 1 Pizza & Wings ( Canada) Inc., [2003] O.J. No. 430 (S.C.J.).

[35]           In my view, in imposing the condition that the spouse, Mr. McCoy, sign the Personal Guaranty, the grant of the franchise to the new purchaser (through the resale of the existing franchise) was “effected by or through the franchisor”, TTLC, within the meaning of the Act.

[36]           TTLC further submits that the grant of the franchise to 151 was “not effected by or through” TTLC because TTLC had “a right, exercisable on reasonable grounds” within the meaning of s. 5(8)(a) to determine whether it would consent to the grant; hence, TTLC submits that disclosure was not required by TTLC in compliance with s. 5 (1) to (6). See for example 917246 Alberta Ltd. v. Panda Flowers (1999) Ltd.,[2004] A.J. No. 468 (Q.B.).

[37]           Section 10.4 of the Franchise Agreement sets forth the “Conditions for Consent to Transfer” as “…including all of the following” list of specific matters such as the payment of a prescribed transfer fee, assumption by the transferee of the obligations under the then current form of franchise agreement and the completion of a training program. However, TTLC also insisted that Mr. McCoy, as the spouse to Ms. Van Dorp, assume the personal obligations under the Franchise Agreement and execute a personal guaranty in respect of the obligations of the transferee, 151.

[38]           TTLC submits that the word “including” allows TTLC to go beyond the five specific conditions. TTLC argues that “including” necessarily means that TTLC is not limited to refusing to consent to a transfer only if one or more of the five specific conditions is not met.

[39]           Mr. McCoy was intimately involved in the purchase of the Burlington Centre. He conducted the due diligence with respect to the share purchase, consulted with the lawyer and accountant with respect to the transaction, and actively communicated with TTLC with respect to the transfer of the franchise.

[40]           The record establishes Mr. McCoy was a key employee of the Burlington franchise. Mr. McCoy had possession of and had read the Tutor Time Franchise Agreement in November  2003. He confirmed on his discovery that he knew the basic obligations required of the franchisee. Mr. McCoy had his accountant review some of the financial statements and also sent copies to his lawyer. Mr. McCoy checked the bank statements and the cancelled cheques and invoices he was provided.

[41]           TTLC submits that it is reasonable to include Mr. McCoy as a guarantor because TTLC does not know how Ms. Van Dorp and Mr. McCoy may hold their family assets as between themselves. TTLC follows this practice of requiring spousal guarantees as a matter of course in respect of all its franchisees.

[42]           Without a guarantee, the franchisor takes the risk that, if the corporate franchisee encounters financial difficulties and fails to pay amounts due to the franchisor, the corporation may not have sufficient assets to satisfy such obligations. See generally Frank Zaid, Canadian Franchise Guide, vol. 1 ( Toronto: Thomson, 2005) at 2-806.

[43]           I agree this practice can be considered as reasonably prudent for a franchisor. However, in my view, that does not in itself bring a franchisor within the s. 5(8) (a) exemption which refers to a franchisor having “a right, exercisable on reasonable grounds….”

[44]           A “right” is different from simply being in a position of “power”. In my view, a “right” means a condition in the franchise agreement, that is, an express contractual right between franchisor and franchisee. TTLC had the “power” to refuse to consent to the transfer on any basis it wished unless a condition imposed by it was met. TTLC might exercise such “power” on reasonable grounds. However, in such instance, the franchisor could not be said to have a “right” to impose the condition within the meaning of the exempting provision, being s. 5(8) (a) of the Act.

[45]           Section 12.19 of the Franchise Agreement states that if the transferee is a corporation, such as 151, with assets of less than $5 million and net worth of less than $2 million, then the personal guarantee of all officers and shareholders with a 10% or greater interest must execute the Personal Guaranty requested by TTLC.

[46]           This would entitle TTLC to request Ms. Van Dorp to sign the Personal Guaranty, as TTLC did. Ms. Van Dorp was the sole officer and shareholder of 151 at all material times.

[47]           It is also noted incidentally that the Personal Guaranty is in fact a contract of indemnity rather than a mere contract of guarantee. In a contract of indemnity a surety assumes a primary liability, whether alone or jointly with the principal debtor. With a contract of guarantee a surety assumes a secondary liability to answer for a debtor who remains primarily liable. Mr. McCoy was asked to be a surety through signing the Consent and Personal Guaranty, which amounts to an assumption of primary liability with the franchisee (here, 151). See Zurich Insurance Co. v. Modern Marine Industries Ltd.,  [1996] N.J. No. 292 (C.A.) at paras. 37 to 40 per Cameron J.A.

[48]           TTLC required Mr. McCoy to in effect become an additional transferee under the Franchise Agreement by stipulating he must execute the Consent and the Personal Guaranty.

[49]           The exemption of s. 5(8)(a) stipulates that “ a grant is not effected by or through a franchisor merely because the franchisor has a right, exercisable on reasonable grounds, to approve or disapprove the grant” (my emphasis). In my view, a franchisor who exercises the power, albeit on reasonable grounds and pursuant to its usual practice, to require a non-officer, non-shareholder spouse (Mr. McCoy) to in effect become a co-franchisee is not merely engaging in the relatively passive act of approval of the transfer of the franchise as between the parties contemplated in the agreement between the transferor franchisee (155/Mr. Goldanloo) and intended transferee franchisee (151/ Ms. Van Dorp). Rather, the grant is being effected by or through the franchisor.

[50]           For the reasons given, in my view and I so find, the grant of the franchise to 151/Ms. Van Dorp was “effected by or through” TTLC within the ambit of a s. 5 of the Act. The exemption provisions do not take TTLC outside the operation of s. 5.

Does the U.S. UFOC constitute the requisite disclosure under Ontario law?

[51]           TTLC submits further that in all events it provided a disclosure document because it provided the U.S. UFOC. I disagree.

[52]           Learned commentators differ upon the adequacy of a U.S. UFOC in meeting the requirements of the Act. See generally, Peter Macrae Dillon, “The Case for the Use of Wrap-Around Disclosure Documents in Canada” (Fall 2004) Franchise Law Journal  p. 73 and Debi M. Sutin and Arthur J. Trebilcock, “The Case Against the Use of Wrap-Around Disclosure Documents in Canada” (Fall 2004) Franchise Law Journal p.83.

[53]           The short answer to this submission is that TTLC recognized it was not complying with Ontario law when it sent the U.S. UFOC November 24, 2003 to Ms. Van Dorp (received November 25, 2003, a few days before the Consent and Personal Guaranty were signed), with TTLC stipulating the U.S. UFOC was sent exclusively for informational purposes.

[54]           Section 7(1) of the Regulation states that every disclosure document shall include a certificate certifying not only that the document contains no untrue information, representations or statements but also that the document “includes every material fact, financial statement and other information required by the Act and this Regulation.” Section 5(4) requires the disclosure document to include “all material facts”.

[55]           Under Canadian common law, a franchisor, so long as it does not make a misrepresentation, has no legal duty to disclose material facts within its knowledge but which are unknown to a prospective franchisee, even if the franchisor knows that the prospective franchisee has formed an incorrect impression that would be corrected by disclosure. The disclosure requirement of the Act has the purpose of overcoming this failure of the common law. Disclosure of all material facts is required.

[56]           As well, unlike the U.S. UFOC, an Ontario disclosure document is “evergreen”, and must be updated to reflect all material facts as they exist on the date that it is delivered to the prospective franchisee. Sutin and Trebilcock supra at p. 85. 

[57]           The financial statements of 155 in evidence, being as at August 31, 2003, and as at October 31, 2003, do not indicate any outstanding franchise fees or royalties. The purchase was a share purchase of the shares in 155 so that any corporate debts of 155 would remain outstanding. Any misrepresentations in closing would be a matter as between the vendor, Mr. Goldanloo, and the purchaser, 151.  Mr. McCoy states that Mr. Goldanloo indicated there were not outstanding defaults under the Franchise Agreement.

[58]           However, TTLC had advised Mr. Goldanloo by letter dated August 4, 2003 of his obligation at that point to pay outstanding arrearages of US $6,111.80 plus a new monthly charge for advertising of 0.5% of monthly gross revenues. By s. 9.14 of the Franchise Agreement the franchisee was obliged to pay 1.25% of monthly gross revenues towards an Advertising Fund. Ms. Van Dorp was advised by TTLC of the 0.5% fee by email November 6, 2003.

[59]           Mr. McCoy says he relied simply upon the financial statements as to the revenues of the business. Mr. McCoy emailed TTLC December 5, 2003, advising he had become aware of the arrearages, saying that since taking over he and Ms. Van Dorp had discovered “numerous irregularities as well as additional invoices from suppliers and the landlord that were previously undeclared to us.”

[60]           Mr. McCoy complained in his letter of May 3, 2004 to TTLC of other non-disclosure issues, including:

▪       Failure to notify the appropriate authorities that children were in peril by not properly being documented….The Ministry of Social Services had later cited the Centre for over 20 violations of the Day Nurseries Act resulting in only a six month licence renewal.

▪       Numerous accounting irregularities and altering of documents that the Police are now investigating….

[61]           However, TTLC was not responsible for the day-to-day operations of the Burlington franchise. Mr. Young states in his affidavit as affiant for TTLC that TTLC was unaware of violations by the Goldanloo group of the regulations under the Day Nurseries Act R.S.O. 1990, c. D.2 but only learned of this after the plaintiffs took over the operations. (Such violations are presumably a matter of public record and would be ascertainable by 151/Ms. Van Dorp/Mr. McCoy through due diligence before taking over the Burlington franchise.)

[62]           TTLC had its representative, Ms. Sharon Soper, come from the United States in August 2003, and again in September 2003. In her reports in each instance she cites serious problems with the accounts, billings, financial arrangements with family users and the overall management by 155/Goldanloo. These reports were not disclosed to 151/Ms. Van Dorp by TTLC before completing the transfer of the interest in the franchise. The plaintiffs received the two Site Visit reports of Ms. Soper from TTLC only in mid-December 2003.

[63]           In my view, Ms. Soper’s findings were such that they would constitute material facts required to be disclosed to a prospective transferee in the position of 151/Ms. Van Dorp. The reported problems by Ms. Soper would materially impact upon the decision of any reasonable person to proceed with a transfer of the interest in the franchise within a few months after the reports.

[64]           The General Counsel for TTLC replied to Ms. Van Dorp and Mr. McCoy May 14, 2004, stating in part:

…[O] ur contractual relationship was with Mr. Goldanloo and not you, we had no obligations to interfere with the contract between Mr. Goldanloo and yourselves, nor were we obligated to disclose any information related to our contractual relationship with Mr. Goldanloo to a party to whom we had no obligations. In fact, for us to take any of the actions you suggest would have been a breach of our contractual obligations with Mr. Goldanloo. The purchase of his business was a transaction between yourselves and Mr. Goldanloo. Tutor Time was not a party to the transaction other than consenting to you as a franchisee. You did not buy a franchise from Tutor Time, but rather from Mr. Goldanloo.

[65]           The intended purchase of the business was indeed from Mr. Goldanloo/155 and not from TTLC. But given that TTLC required that it, as franchisor, consent to the transfer of the benefits and obligations under the Franchise Agreement to Ms. Van Dorp/151 for the purchase to be effectuated, the Act mandated a disclosure document which included “all material facts”. This was a statutory obligation imposed upon TTLC. Compliance was required irrespective of any contractual arrangements between TTLC and the vendor, Mr. Goldanloo/155.

[66]           Presumably Mr. Goldanloo/155 would readily consent to material facts information being released by TTLC to 151/Ms. Van Dorp because the prospective vendors wanted to complete the sale. By s. 10.1 of the Franchise Agreement TTLC can reasonably withhold its consent to a transfer. Refusal of a vendor franchisee to consent to the release of material fact information to a prospective purchaser transferee would mean TTLC could reasonably withhold its consent to the transfer under this provision.

[67]           TTLC submits the delivery of the U.S. UFOC activates the rescission provisions of s. 6(1), but not s. 6(2). Section 6(1) provides that when a disclosure document is provided late or is incomplete in terms of contents then rescission can be invoked within a 60 day period (i.e. by January 26, 2004 in the instant situation). The notice of rescission was not delivered until October 23, 2004.

[68]           Section 6(2) of the Act provides:

(2) A franchisee may rescind the franchise agreement, without penalty or obligation, no later than two years after entering into the franchise agreement if the franchisor never provided the disclosure document.

[69]           When a franchisor “never provided the disclosure document”, s. 6(2) applies, with the right to rescind being within two years after entering into the franchise agreement. 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd., [2004] O.J. No. 3008 (S.C.J.) at para. 19, aff’d [2005] O.J. No. 3040 ( C.A.).

[70]           Did TTLC provide a disclosure document within the meaning of s. 5 which was simply incomplete and therefore, s. 6 (1) rather than s. 6(2) is operative?

[71]           The U.S. UFOC does provide much of the information required of an Ontario UFOC. However, the U.S. UFOC was expressly not provided for disclosure purposes by TTLC, but rather simply for “informational” purposes and was provided only a few days before the transaction was completed, being December 1, 2003. The US UFOC did not provide the material facts pertinent to the Burlington franchise (set forth in the two Site Visit reports of Ms. Soper to TTLC). In my view, this non-disclosure of material facts in itself meant there was not compliance with the Act as to the required disclosure.

[72]           In my view, for the reasons given, the U.S. UFOC did not meet the disclosure requirements mandated by the Act and the Regulations.

[73]           Even though the U.S. UFOC would provide some of the information required by an Ontario UFOC, in my view, given the circumstances of this case, TTLC “never provided the disclosure document” within the meaning of s. 6(2).

The Settlement Agreement of May 15, 2004 and its Release

[74]           151, Ms. Van Dorp and Mr. McCoy were represented by counsel throughout the transaction involving the acquisition of the Burlington franchise, and the ongoing disputes with TTLC.

[75]           Effective May 15, 2004, TTLC and the plaintiffs entered into a Settlement Agreement relating to outstanding issues “regarding performance of the business of [155], including arrearages of fees owed [to TTLC while operated by the Goldanloos] and continued after the transfer to [151]”. TTLC agreed to waive US $4,518.80 of the arrearages, provided a credit for royalties and technology fees arising from April to September 2004 to increase 151’s cash flow, and reimbursed 151 in the amount of US$1,000.00 relating to winter season advertising.

[76]           Mr. McCoy emailed Mr. Young (with a copy to Mr. McCoy’s lawyer) April 1, 2004, saying in part,

As you know the whole disclosure issue has been something I haven’t been to[o] happy with and am unfortunately having to deal with the previous owner legally in this area…. We would like to put this behind us but need financial help. We can do it with arrears, royalties whatever. I’m open but we can’t do it alone…

[77]           Moreover, Mr. McCoy referred Mr. Young in the April 1, 2004 email to internet links. The referenced web site includes the Ontario Government’s News Releases on the Act and its regulations being proclaimed and in effect January 31, 2001. The “Backgrounder” together with two commentaries by franchise specialist lawyers as to the scheme and basic provisions of the Act (in particular, the requirement for fair dealing, good faith and the disclosure of material facts and material changes) set out clearly the dictates of the new legislation. In my view, Mr. McCoy was well aware of the shortcomings and failure of TTLC in meeting the Act’s requirements before signing (in June 2004) the Settlement Agreement dated May 15, 2004.

[78]            Mr. McCoy refers to the issues of non disclosure in part by referencing the Report of Ms. Soper and having talked “with her a number of times.”

[79]           Mr. Young made a proposal to Ms. Van Dorp and Mr. McCoy by letter dated April 21, 2004 in respect of his requests to deal with arrearages and relief from the ongoing payment of royalties and other fees. This letter included the statement that if the proposal were accepted, then “Both parties will execute mutual general releases through the date of our settlement [and] a formal letter agreement will be exchanged upon your acceptance of the proposed terms.”

[80]           Mr. McCoy sent an electronically mailed letter to Mr. Young May 3, 2004 (with a copy to his lawyer) listing specific non-disclosure issues, including violations of the Day Nurseries Act, accounting irregularities and royalty arrearages.

[81]           Mr. Young replied May 14, 2004, saying in part,

After further discussion [internally within TTLC], Tutor Time is willing to forgive any of the outstanding $12,000 (USD) arrearage owed by your company at the time of your purchase. We will further agree to grant a deferral of royalty and technology fee payments due to be paid in 2004….

[82]           Mr. McCoy replied to Mr. Young with a four page letter May 17, 2004, referring in detail to the problems of non-disclosure (including not disclosing the August 12, 2003 and September 10, 2003 reports by Ms. Soper) and non-compliance by TTLC with terms of the Franchise Agreement.

[83]           Negotiations toward a settlement continued. Mr. McCoy emailed Mr. Young May 31, 2004 stating his lawyer “made a couple of changes and I’ve attached the revision….” The Settlement Agreement was signed in June 2004, effective May 15, 2004.

[84]           By section 2 of the Settlement Agreement, TTLC waived US$4,518.80 in arrearages, accrued while Mr. Goldanloo/155 operated the Burlington franchise. Mr. McCoy had emailed Mr. Young March 21, 2004 about this issue.

[85]           By section 3, TTLC granted the Burlington franchise an “Operating Supplement for royalties and technology fees” due in April through September 2004, by crediting back to the Burlington franchise such fees otherwise payable to TTLC. By section 4 the Burlington Franchise would receive US $1,000 as reimbursement for advertising charges and a further credit of US $133.63 against its Advertising Fund contributions.

[86]            Sections 7 and 8 of the Settlement Agreement provide:

7.   Release     the Parties do hereby fully release and forever discharge each other, all employees, directors, officers and agents, from all rights, claims, damages, causes of action of any nature they may have had, or may hereafter have against the other party by reason of any matter occurring to the dates prior to the effective date of this Settlement Agreement including but not limited to all rights all rights, claims, damages causes of action of arising out of the business/franchise relationship between the parties.

8. No Alteration   Except as may be expressly set forth herein, the Franchise Agreement and all other ancillary documents remain in full force and effect with no alterations.

[87]           At first appearance, the plaintiffs arguably released and discharged the claims raised in this motion by this Settlement Agreement. I shall return to this issue after dealing with the March 24, 2005, Release by TTLC

The Release by TTLC dated March 24, 2005

[88]           About March 29, 2005 the assets of the Burlington franchise other than franchise-related material owned by TTLC, were sold by 151 to a third party purchaser, Mr. Zahur.

[89]           The letter from the plaintiffs claiming rescission had been sent October 23, 2004. Counsel for the plaintiffs faxed a letter to corporate counsel for TTLC November 23, 2004, advising as to the intended asset sale by 151 to an arm’s length purchaser and that the new purchaser would not be operating as a TTLC franchise. The letter says “in the spirit of compromise, our client is prepared to settle all outstanding matters with Tutor Time on the basis that the parties release any claims they may have against the other and execute a satisfactory mutual release in this regard.”

[90]           It appears the plaintiffs required a release from TTLC to comfort the new purchaser of the assets of the day care learning center as a prerequisite to closing that sale.

[91]           However, Toronto counsel for TTLC replied November 25, 2004, to the effect that 151 was in breach of the Franchise Agreement and demanding US$419,077.17 in liquidated damages from the plaintiffs. TTLC relies upon s. 8 of the May 15, 2004 Settlement Agreement in asserting that the Franchise Agreement remained in place after the Settlement Agreement of May 15, 2004 with full ongoing force in respect of the obligations imposed..

[92]           By letter dated November 26, 2004, counsel for 151, Ms. Van Dorp and Mr. McCoy wrote with an offer of settlement. By letter dated December 2, 2004, TTLC rejected the plaintiffs’ offer and making a counter-offer to settle the ongoing dispute on a certain basis. By further letters of December 7 and 9, 2004, counsel for TTLC reiterated TTLC’s position.

[93]           Ultimately, TTLC received $60,000 from the new purchaser, Mr. Zahur, of the Burlington location (who also purchased TTLC’s corporate-owned location in London, Ontario).  TTLC executed and forwarded a release in favor of several so-called “Releasees” (including, amongst others, 151, Ms. Van Dorp, Mr. McCoy, 155 and Mr. Zahur) dated March 24, 2005. Mr. Young, general counsel to TTLC, in his reply affidavit says (and the statement of defence says in para. 35) that this release was given upon an undertaking by the plaintiffs to deliver a release in favour of TTLC. TTLC claims the plaintiffs have reneged upon this undertaking to give a release, have acted in bad faith and hence, cannot rely upon the release of March 24, 2005 given by TTLC.

[94]           While the evidentiary record is sparse in respect of this March 24, 2005 Release, there is no reference in the record to any undertaking by the plaintiffs to give a release. The inference from the existing record is that Mr. Zahur dealt directly with TTLC in obtaining the TTLC March 24, 2005 Release. Mr. McCoy says he knew nothing about the March 24, 2005 Release until this litigation. However, it seems unlikely that this Release would not have been included in the closing documentation seen by all parties in the sale to Mr. Zahur.

[95]           In my view, the evidentiary record does not establish that the plaintiffs undertook to give a release to TTLC in exchange for the March 24, 2005 Release by TTLC in favour of various persons, including the plaintiffs, given to Mr. Zahur.

[96]           While it is not necessary to my decision in respect of the motion at hand, as an aside I state that, in my view, the March 24, 2005 Release by TTLC in favour of the plaintiffs as third party beneficiaries to that Release, is an absolute defence to the counterclaim.

Disposition

[97]           I return to a consideration of the effect of the May 15, 2004 Release signed by the plaintiffs in favour of TTLC.

[98]           Upon a rescission, a franchisor has statutory obligations by s. 6 (6) of the Act:

 (6) The franchisor, or franchisor’s associate, as the case may be, shall, within 60 days of the effective date of the rescission,

(a)                refund to the franchisee any money received from or on behalf of the franchisee, other than money for inventory, supplies or equipment;

(b)                purchase from the franchisee any inventory that the franchisee had purchased pursuant to the franchise agreement and remaining at the effective date of rescission, at a price equal to the purchase price paid by the franchisee;

(c)                purchase from the franchisee any supplies and equipment that the franchisee had purchased pursuant to the franchise agreement, at a price equal to the purchase price paid by the franchisee; and

(d)                compensate the franchisee for any losses that the franchisee incurred in acquiring, setting up and operating the franchise, less the amounts set out in clauses (a) to (c).

[99]           Section 7(1) to (4) provides:

Damages for misrepresentation, failure to disclose

7. (1)  If a franchisee suffers a loss because of a misrepresentation contained in the disclosure document or in a statement of a material change or as a result of the franchisor’s failure to comply in any way with section 5, the franchisee has a right of action for damages against,

(a)                the franchisor;

(b)                the franchisor’s agent;

(c)                the franchisor’s broker, being a person other than the franchisor, franchisor’s associate, franchisor’s agent or franchisee, who grants, markets or otherwise offers to grant a franchise, or who arranges for the grant of a franchise;

(d)                the franchisor’s associate; and

(e)                every person who signed the disclosure document or statement of material change.

Deemed reliance on misrepresentation

(2)                If a disclosure document or statement of material change contains a misrepresentation, a franchisee who acquired a franchise to which the disclosure document or statement of material change relates shall be deemed to have relied on the misrepresentation.

Deemed reliance on disclosure document

(3)                If a franchisor failed to comply with section 5 with respect to a statement of material change, a franchisee who acquired a franchise to which the material change relates shall be deemed to have relied on the information set out in the disclosure document.

Defence

(4)                A person is not liable in an action under this section for misrepresentation if the person proves that the franchisee acquired the franchise with knowledge of the misrepresentation or of the material change, as the case may be.

[100]       The broad, plain language of s. 7 of the May 15, 2004  Release gives a release “….from all rights, claims, damages, causes of action of any nature….” the plaintiffs may have had “….arising out of the business/franchise relationship between the parties” and hence, purports to include a release of a damages claim arising out of any statutory right of rescission.

[101]       The general principles guiding the interpretation of releases originate from the House of Lords in London & South Western Railway Co. (Directors): Blackmore (1870), L.R. 4 H.L. 610 at 623 per Lord Westbury:

The general words in a release are limited always to those things, which were specifically in the contemplation of the parties at the time when the release was given.

[102]       In determining what was “in the contemplation of the parties” courts will consider the language of the document itself, the circumstances leading up to its execution and evidence as to the intention of the parties. Taske Technology Inc. v. Prairie Software Inc., (2004), 3 B.L.R. (4 th) 244 at 250 (S.C.J).

[103]       The email correspondence between Mr. McCoy and Mr. Young is clear that Mr. McCoy was well aware before signing the Settlement Agreement of the non-disclosure by TTLC and its failure to not comply with the dictates of the Act. As well, Mr. McCoy was aware of the plaintiffs’ rights under the Act.  Moreover, the plaintiffs signed the Settlement Agreement after receiving the advice of counsel.

[104]       The Settlement Agreement of May 15, 2004 constituted a valid contract. Its terms are to be measured against an objective test as to what a reasonable person would consider to be the promises and reasonable expectations with resulting obligations thereby created.

[105]       In my view, and I so find, s. 7 of the May 15, 2004 Settlement Agreement is properly to be interpreted as constituting a release in favour of TTLC by the plaintiffs for any claim for damages the plaintiffs may have had because of TTLC’s failure to provide the requisite disclosure under the Act.

[106]        Parties who reach a settlement are to be held to their bargain. Cellular Rental Systems Inc. v. bell Mobility Cellular Inc., [1995] O.J. No. 721 at para. 45; aff’d, [1995] O.J. No. 3773 (C.A.). The policy reasons for enforcing a valid release mirror the policy principles underlying the doctrines of res judicata and issue estoppel; Taske, supra  at 250.

[107]       The plaintiffs take the position the Act prohibits any waiver of the statutory right of rescission and hence, the “Release” is of no effect, given s.11 of the Act which reads:

11.               Any purported waiver or release by a franchisee of a right given under this Act or of an obligation or requirement imposed on a franchisor or franchisor’s associate by or under this Act is void.

[108]       In my view, s. 11 does not have application to a release given (with the advice of counsel) by a franchisee in the settlement of a dispute for existing, known breaches of the Act by the franchisor in respect of its disclosure obligations, which would otherwise entitle the franchisee to a statutory rescission.

[109]       The settlement of a claim arising from and consequential to an existing statutory right of rescission is not in itself “a waiver or a release” of that statutory right to rescission. It is a release of the claim arising from having exercised the right of rescission or being in the position to exercise the right of rescission. In my view, if a franchisee, as in the instant situation, with full knowledge of a breach of the franchisor’s obligations to disclose as required by the Act and regulations, and with the benefit of independent legal advice, chooses to affirm the franchise agreement as a term of a settlement of the claims that arise from the franchisor’s breach, then the franchisee can no longer rescind and make a claim to the remedies afforded by s. 6(6) of the Act.

[110]       For the reasons given, the motion is dismissed.

[111]       The norm is that costs follow the event. In my view, considering all the circumstances of this motion, this is a situation that warrants being an exception to the norm. I exercise my discretion to not award costs to any party.

___________________________

CUMMING J.

Released:       July 21, 2006

COURT FILE NO.:  05-CL-5983

DATE:  20060721

Released:          July 21, 2006