Khachikian v. Williams

Between
Narbeh Khachikian and 1521514 Ontario Limited, and
Patrice Williams and 1288235 Ontario Limited carrying on
business as Classical Martial Arts Canada Toronto DOJO
also known as CMAC Toronto

[2003] O.J. No. 5876
Court File No. 02-CV-233261SR

Ontario Superior Court of Justice
Toronto, Ontario
Matlow J.

November 24, 2003.
(23 paras.)

Statutes, Regulations and Rules Cited:

Arthur Wishart (Franchise Disclosure) Act, ss. 1(1), 2(3)7, 6(2), 6(6), 7(1)(a), 7(1)(b).

Counsel:

Narbeh Khachikian, on his own behalf (defendant).

Steven H. Goldman, for Patrice Williams (plaintiff).

1    MATLOW J. (endorsement):— Judgment is to issue in favour of the plaintiffs against both defendants for rescission of the franchise agreement which is the subject of this action, for damages in the sum of $23,190.29 in accordance with the plaintiffs' "calculation of out of pocket expenses" filed and for punitive damages in the sum of $10,000.00. The plaintiffs are also entitled to prejudgment interest in accordance with the Courts of Justice Act.

2      Counsel for the plaintiffs and the defendant, Patrice Williams ("the defendant"), may make submissions regarding costs at a time to be fixed or, on consent, in writing within a reasonable time.

3      If there is any difficulty in allocating the relief granted as between the plaintiff, Narbeh Khachikian ("the plaintiff", and the plaintiff, 1521514 Ontario Limited ("the corporate plaintiff"), I will allocate it specifically.

4      I am satisfied that all of the facts that have to be proved in order to entitle the plaintiffs to the relief granted have been proved on a balance of probabilities. In particular, without restricting my findings to the following facts, I am satisfied that the plaintiff and the defendant ("the parties") entered into a franchise agreement within the definition of that term in section 1(1) of the Arthur Wishart Act (Franchise Disclousure) ("the Act") in which the defendant was the franchiser and the plaintiff was the franchisee for the operation by the plaintiff of a martial arts studio on Queen St East in Toronto under the name "Classical Martial Arts Canada Beaches" and that the defendant did not provide the plaintiff with a disclosure statement at anytime as required by the Act. As well, I am satisfied that the plaintiff's cheque in the sum of $10,000.00 dated March 26, 2002, given in payment of a "licence fee" as recorded on the cheque constitutes evidence of "a material term or aspect of the relationship or arrangement between the parties within the meaning of section 2(3)7 of the Act so as to make the Act applicable to it.

5      The evidence in this case is very unusual and, in order to be understood correctly must be interpreted carefully in the context of the relationship between the parties. In essence, the plaintiff had been a student of the defendant who is a teacher of certain martial arts and who has, in various forms, carried on the business of teaching students through his schools or "dojos" as they are commonly called in the world of martial arts. As a result of the relationship which had developed between them, the plaintiff was obliged, in accordance with custom, to show unwavering respect and obedience to the defendant which had to be reflected in many ways some having nothing apparent to do with instruction in martial arts.

6      In early 2002, after the plaintiff had lost his employment, he decided to proceed with a long-held plan of his to open his own martial arts school and to affiliate it with the defendant's school as a franchisee under a franchise agreement. The defendant agreed to cooperate with the plaintiff's endeavour, provided him with precedents for creating a business plan and engaged in negotiations with him that culminated in a firm and binding agreement, albeit not reduced to writing. As stated above, on March 26, 2002, the plaintiff paid to the defendant by cheque the initial "licence fee" for the franchise he was acquiring and the defendant deposited the cheque into a bank account which he controlled.

7      Pursuant to the agreement, the plaintiff found and arranged to lease suitable premises in the beaches area of Toronto and commenced making preparations to open his school.

8      At about that time the plaintiff intervened and began to increase the control that he exercised over the plaintiff and the plaintiffs preparations. This included taking effective control over the plaintiff's financial matters pertaining to the school such as, for example, by taking over the lease of the premises and imposing various restrictions on the plaintiff to which the latter dutifully acceded. One of those restrictions required the plaintiff to make all payments to creditors through the defendant's company, 1288235 Ontario Limited, ("the corporate defendant"). One example of this was the payment of $4800.00 by the plaintiff to the corporate defendant for what the parties then believed was the total of the first and last months' rent under the lease.

9      By the end of April, 2002, the school, was ready to be opened and to receive students and it seemed that everything was progressing more or less at it should.

10      However, in early May, 2002, an event occurred which resulted in a dramatic change in the relationship between the plaintiff and the defendant. At that time the plaintiff attended a seminar described as a "master key" seminar which he believed that he was required to attend as part of his martial arts grading. That seminar was conducted, in part, by the defendant and by Wallace Platt who was in charge of it. Platt was the recognized head of the loosely organized but tightly controlled organization of martial arts schools with which the defendant was affiliated and he received part of the licence fee paid by the plaintiff to the defendant. Although the stated purpose of the seminar was to introduce those who attended to certain principles of positive thinking as developed by a certain author, portions of the seminar were devoted to video presentations which the plaintiff and some others viewed as unrelated to the subject of the seminar containing anti-Semitic and other offensive material. The defendant, who operated the video viewer when the videos were shown, was perceived by the plaintiff and some others to be supportive of the views which they regarded to be offensive.

11      I pause here to state that whether or not the portions challenged were actually offensive by common standards is of no relevance to the issues in this case other than, perhaps, to explain the evolution of the deterioration of the relationship between the parties and part of the reason why the plaintiff subsequently decided to disengage himself from his relationship with the plaintiff. The character of the views expressed in the seminar and whether or not they were actually shared by the defendant have no bearing on the outcome of this action.

12      In May, 2002, following the seminar, the plaintiff engaged in a series of written and oral telephone communications with the defendant in which the plaintiff accepted the defendant's offer to extricate himself from his association with the defendant and continue to operate his school independently. However, on May 29, 2002, after the plaintiff had given notice to the defendant of his intention to accept the defendant's offer, the defendant arrived unannounced at the plaintiff's school and forcefully removed the plaintiff and took possession of the premises. Later, on the same day, he turned over the plaintiff's school to Chet Dixon, another of Wallace Platt's associates, who continues to operate the school at the same location to the present. No compensation was offered or given to the plaintiff for the money, time and effort he had invested in establishing the school or for the value the school had achieved.

13      By letter dated June 4, 2002, sent by the plaintiff's solicitors to the defendants, the plaintiffs then gave notice that, pursuant to section 6(2) of the Act, they rescinded the franchise agreement and, pursuant to section 6(6) claimed other relief. It is this relief that is being granted to the plaintiffs in this action.

14      According to the defendant, the agreement made with the plaintiff was not a franchise agreement and it was not the Intention of the parties that the plaintiff would be the owner of the school in the beaches right away. Rather, according to his evidence, the school was to remain owned by defendant for a period of three years during which the plaintiff would be on probation and, at the end of that period, it would be turned over to the plaintiff upon payment by the plaintiff of an additional sum of money. As well, according to the defendant the $10,000.00 paid to him by the plaintiff was not really a licence fee as shown on the face of the cheque but a payment made by the plaintiff for instruction provided and to be provided by him to the plaintiff in the proper operation of a martial arts school.

15      The defendant conducted his own defence during the trial of this action and did not seek to conduct the defence of the corporate defendant. However, he did not oppose judgment being granted against the corporate defendant because it was insolvent. Although he has no formal legal training, he conducted himself with considerable skill and perfect courtesy and respect for the court and he deserves and is given my admiration and appreciation for that.

16      However, as a witness it is my conclusion that he Is unworthy of belief and I reject his version of the facts where they conflict with the evidence of the plaintiff. His version is in conflict with the clearly established facts not in dispute and with the evidence of witnesses whose evidence I accept. It also makes no sense in the circumstances of this case and it is beyond belief that the plaintiff would agree to the arrangement described by him.

17      In my view, the defendant is a person of great intelligence and guile who was able to use his personal skills to exercise control over the plaintiff, to receive money and other forms of payment from him and then to remove him when the plaintiff no longer suited his purpose. What he did to the plaintiff was a deliberate and carefully crafted scheme to exploit their relationship and take advantage of him.

18      At all material times the corporate defendant was controlled exclusively by the defendant who owned all of its outstanding shares. The defendant used the corporation for a variety of purposes, some of which were presumably legitimate and related to the operation of the defendant's own school and others which clearly were not. One of the latter purposes was to facilitate the planned and deliberate scheme to take advantage of the plaintiff as described above. It follows that each defendant was the "franchisor's associate" of the other as defined in section 1(1) of the Act. It follows that, pursuant to section 7(1)(a) and (b) of the Act, the plaintiff's right of action for damages could be asserted against both defendants and that the judgment for damages should be issued against both defendants and that their respective liability should be joint and several.

19      In addition to the defendant, 10 other witnesses were called to give evidence on his behalf. The first group consisted of Samuel Puricelli, Martin O'Connell, Algeron Williams, the defendant's brother, Terrence Cantwell, Wallace Platt and Chet Dixon. All of these people were associates of the defendant and all, except Platt, were associates of Platt. All of them were subject to Platt's authority and all of them had some interest in contributing to the success of the defense. Platt and Dixon had also received financial benefits as a result of the defendant's actions in relation to the plaintiff and Dixon faced certain financial consequences if the defence were to fail. In my view none of the evidence given by these witnesses could be trusted. All of these witnesses were determined to support the defendant as a team and it was clear to me that they were motivated largely by their collective determination to maintain the authority of Platt and the defendant and to punish anyone, including the plaintiff, who had the audacity to stand up to either of them. They presented themselves as intolerant bullies and as witnesses whose concept of the obligation to tell the truth was secondary to advancing their collective interests. The second group consisted of Andrew Ugozsek, Emily Naretto, Mark DeQuetteville and Sam Mossad. Although I have considered the evidence of each of these four witnesses, I consider it as unreliable or otherwise unhelpful.

20      In contrast, the plaintiff impressed me as an honest and generally reliable witness and I accept his evidence. By his demeanor and the content of his evidence, he persuaded me that he genuinely tried, and almost always succeeded, to tell the truth. I am satisfied that his version of his agreement with the defendant was the correct one. I am also satisfied that his evidence regarding the events, including his notes and memory of the telephone messages which the defendant left for him and his ejection from his school by the defendant, was substantially correct. Much of what he said was consistent with the clearly established facts, the evidence of other witnesses and all of it made common sense in the unusual context of this case. Although he possessed enough intelligence to graduate from a recognized University, it was remarkable that his relationship with the defendant led him to put aside his common sense and good judgment and dedicate himself, until near the end, to unwavering respect and obedience to the defendant.

21      In contrast, the other witnesses called on behalf of the plaintiff also impressed me as honest and generally reliable witnesses. In particular, I found Peter Carey to be an exceptional witness and I accept the totality of his evidence including that part relating to admissions made to him by the defendant. It is even more remarkable that he too was, for a long time, taken in by the defendant and conducted himself toward the defendant with similar respect and obedience. As well, I accept the evidence of Laurie Williams including that regarding the defendant's ejection of the plaintiff from his school and the warning given to her subsequently by Algeron Williams that she was not to associate any further with the plaintiff.

22      It is just, in these circumstances, that the plaintiff be allowed to extricate himself from his agreement with the defendant by rescission of the agreement and that he be compensated for his financial loss incurred as a result of having been induced to enter into a franchise agreement without the protection of a prior disclosure statement as required by the Act. He is also entitled to this relief on the alternate grounds asserted, namely, breach of contract and conversion.

23      The award of damages granted is supported by the judgment of the Supreme Court of Canada in Whiten v Pilot Insurance Co, 209 D.L.R. (4th) 257. The defendant deliberately took advantage of the plaintiff's vulnerability as his student and in violation of the Act induced him to enter into a franchise agreement without providing him with the required disclosure notice. As well, the defendant likely made sure that the agreement would not be reduced to writing so that no clear evidence would be created that could reflect its true terms and provisions. This type of conduct requires that my judgment include a provision that reflects this court's denunciation of what the defendant did and will serve as a deterrent to others who might also be inclined to use the concept of franchising as a means of taking undue and improper advantage of another person.

MATLOW J.