Franchise

Statement of claim is not a notice of rescission: Adler

By Jennifer Brown, AdvocateDaily.com Senior Editor

A recent case illustrates that when seeking to rescind an agreement with a franchisor, a franchisee must give proper notice and can’t do it at the eleventh hour in a lawsuit, says Toronto franchise lawyer Joseph Adler.

The case involved owners of a burger franchise in Ontario and a franchisor who terminated the franchisee’s franchise agreement. In turn, the franchisee’s lender sued the franchisee to recover the loan it had provided. The franchisee then sued the franchisor and made a claim for the first time that it was seeking to rescind the franchise agreement.

The court ruled that the claim could not be considered proper notice under s. 6(3) of the Arthur Wishart Act (AWA).

“What the court confirmed is that a statement of claim is not a notice of rescission,” says Adler, a partner with Hoffer Adler LLP.

Under the AWA, Ontario’s franchise legislation, a franchisee is entitled to rescind (i.e. unwind) its agreement with a franchisor within two years of the date of the franchise agreement if the franchisor failed to provide adequate disclosure to the franchisee before the agreement was signed. A franchisee has an obligation to provide notice of rescission to the franchisor in order to properly engage the franchisee’s statutory rights of rescission.

“To make a proper claim for rescission, the franchisee must deliver to the franchisor a notice of rescission and thereby provide the franchisee with an opportunity to respond within the statutory period of time. The latest the notice can be delivered is two years after the franchisee enters into an agreement with the franchisor,” explains Adler, who was not involved in the matter and comments generally.

“If they would have sought franchise counsel, the first question a lawyer would ask is, ‘When did you sign the franchise agreement?’ The two-year rescission period is critical, and if you miss it, it’s fatal,” Adler tells AdvocateDaily.com. “You can make a claim for rescission under the common law, but it doesn’t have the same force that the statutory remedy does for numerous reasons.”

The matter relied on previous case law, but Adler says the most poignant argument the judge made is that in s. 6 of the AWA — the notice of rescission section requires that the franchisor be given 60 days to respond to the notice of rescission and potentially compensate the franchisee for its costs.

“You can’t get away with simply issuing a statement of claim because you’re not giving the franchisor an opportunity to respond to the notice of rescission. The judge correctly said that would be very unfair,” Adler says.

In the decision, the judge stated: “A pleading for rescission under the Wishart Act only crystallizes after a franchisor has failed or refused to compensate the franchisee with subsection 6(6) of the Wishart Act, and is meant to seek damages for unlawful conduct.

“To illustrate the absurd result if a pleading could act as a notice under subsection 6(3), a franchisee could sue the franchisor in a claim for rescission without the franchisor being given any time to comply with what the legislation says it must do. This would not be fair to the franchisor. This would also undermine the legislative framework set up under section 6 of the Wishart Act. Indeed, subsection 6(6) seems to be a legislative alternative to the franchisee being forced to bring a cause of action,” the decision continues.

Adler says the court has made it clear that the 60-day process has to proceed before there would be any relief because until that 60-day period has elapsed without payment by the franchisor, the franchisee has no cause of action.

“The issue here is that the franchisee missed the deadline to issue the notice of rescission, and it is looking to hang its hat on the fact it issued the statement of claim. Is that sufficient? The court definitively says no,” says Adler.

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