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The case below is from the Canadian Legal Information Institute (CanLII)

COURT FILE NO.: 02-CV-232605CM1

DATE: 20030210


ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

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MAA Diners Inc., Karamjit Gill and Mamta Patel

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Jeffrey P. Hoffman, for the Applicants


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Applicants

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- and -

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3 for 1 Pizza & Wings (Canada) Inc., Triple Pizza (Holdings) Inc., Triple 3 Holdings Inc. and Reza Solhi also known as Farzad Bagherzadeh

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John W. Chidley-Hill, for the Respondents


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Respondents

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G. Speigel J.

The Players

[1] The applicants are seeking relief under the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c.3 (the “Act”) and its regulations.

[2] The applicant, MAA Diners Inc. (“MAA”), is a franchisee of the 3 For 1 Pizza & Wings franchise system. The individual applicants, Gill and Patel, are the officers, directors, and shareholders of MAA.

[3] The respondent, 3 For 1 Pizza & Wings (Canada) Inc. (“3 For 1”), is a Canadian corporation that has been franchising since 1997. Reza Solhi (“Solhi”) is the sole officer, director, and shareholder of 3 For 1. He is admitted to be a “franchisor’s associate” as that term is defined in the Act.

[4] Triple Pizza (Holdings) Inc. (“Triple Pizza”) and Triple 3 Holdings Inc. (“Triple 3”), are both Ontario corporations whose sole officer, director, and shareholder is Farzad Bagherzadeh (“Bagherzadeh”). Bagherzadeh did not submit an affidavit.

[5] Solhi in his affidavit claims that he is “neither a shareholder nor executive of the other corporate respondents” and that neither Triple Pizza nor Triple 3 is “an affiliate of 3 For 1”. Notwithstanding this claim, Solhi testified on cross-examination that he swore his affidavit on behalf of all the respondents.

The Deal

[6] On April 23, 2001, Gill and Triple Pizza executed an offer (the “Agreement”) to purchase all assets of a pizza business at 4141 Dixie Road, Mississauga, Ontario. Gill signed the Agreement in trust for a corporation to be incorporated. MAA became that corporation. The Agreement required the purchaser to execute a 3 For 1 franchise agreement. On or about May 14, 2001, 3 For 1, as franchisor, and Gill in trust, as franchisee, executed a franchise agreement. A general security agreement in favour of 3 For 1 subsequently became part of the franchise agreement. There was also a sublease agreement for the premises of the restaurant between Triple 3 as sublandlord and Gill, in trust, as subtenant. On or about June 6, 2001, Triple Pizza executed a bill of sale under which Triple Pizza sold MAA the assets of the restaurant and the “goodwill” of the franchised business.

[7] It is readily apparent from reviewing the documents that they were all part of the overall franchise documents. The Agreement was a standard form document in which the purchaser’s name was left blank so that it could be easily inserted by the independent salesperson who convinced a prospective franchisee to execute it. All documents had the same font and look and were, in all probability, prepared as standard forms for use by 3 For 1.

[8] Solhi in his affidavit stated the concepts underlining the franchise documents:

“(a) persons who are interested in operating restaurant that sells pizza and chicken wings apply to purchase a franchise. In this case, it was to purchase the franchise from the franchisee, Triple Pizza.

(b) the ultimate purchaser is to be a brand new corporation with no negative history or contingent liabilities. The new corporation is intended to exist as a vehicle that protects the human beings who own and operate it from liability to third parties. However, the said human beings are required to undertake personal liability to the equipment vendor (i.e. Triple Pizza), the sublessor (i.e. Triple 3 Holdings) and the franchisor (i.e. 3 For 1 (Canada)).

(c) the purchaser agrees to purchase the restaurant equipment etc. from the vendor - in this case Triple Pizza.

(d) the franchisor (i.e. 3 For 1 (Canada)) approves the purchaser to be a franchisee.

(e) the purchaser enters into a new franchise agreement with 3 For 1 (Canada).

(f) the purchaser enters into a new sublease with Triple 3 Holdings.

(g) the purchaser enters into a general security agreement.

(h) the human beings enter into personal guarantees of the obligations owed by the new corporation.”

[9] Notwithstanding that the transaction was billed as a sale of the franchise from Triple Pizza to Gill, the actual franchisee who had been running the operation was another individual who was independent of all parties. He was the real franchisee. We do not know why he left the scene.

[10] The transaction was completed in June 2001. Although the premises were to have been refurbished, they were in a deplorable state. Indeed, on July 13, 2001, MAA received a Notice of Violation, Fire Code, issued by the City of Mississauga Fire Department. There was no fire suppression system and the fan exhaust system required modification.

[11] In August 2001, after attempting to rectify a bad situation, MAA returned the keys of the premises, left the premises in the same or better condition than they received them, and delivered a notice of rescission to 3 For 1 and to Triple Pizza.

Dispute

[12] The applicants might have claimed rescission based on misrepresentation but never did so. Instead, they claimed that they never received a disclosure document from the respondents as required under the Act.

[13] The title of the Act states that its goals are “to require fair dealing between parties to franchise agreements, to ensure that franchisees have the right to associate and to impose disclosure obligations on franchisors.” Section 5 of the Act sets out the requirements of the disclosure regime put in place to achieve the goals of the Act.

[14] Section 6(2) of the Act entitles a franchisee to rescind a franchise agreement, without penalty or obligation, if the franchisor never provided it with a “disclosure document”, as that term is defined in the Act.

[15] The applicants served 3 For 1 and Triple Pizza with a notice of rescission as required by section 6(3) of the Act. The respondents did not respond to this notice. Accordingly, the applicants brought this Application for rescission of the agreements and for damages.

[16] The respondents’ main position is that they gave the disclosure statement. In the alternative, they argue that even if disclosure was not given, it was not required under the Act. Section 5(7)(a) sets out certain exemptions from the disclosure obligation. The respondents argue that since the sale was a re-sale from Triple Pizza, and not from 3 For 1, no disclosure was required.

Relationship among Respondents

[17] I have already commented on the failure of the respondents to submit the affidavit of Bagherzadeh. I draw an adverse inference from this failure. I also note that the affidavit of Solhi was replete with hearsay in contravention of Rule 39.01(5). In some cases, there was not even an attempt by Solhi to identify the source of the information or to state his belief that the information was correct.

[18] The respondents submitted an affidavit from William Chaupiz (“Chaupiz”), the operations manager of 3 For 1. He prepared all of the documents in this transaction, other than the Agreement, which I presume to have been completed on a fill-in-the-blanks standard form.

[19] Chaupiz admitted in his cross-examination that he did activities for Triple Pizza and Triple 3 from time to time. When asked about Bagherzadeh, he stated:

“Q. Does Mr. Bagherzadeh have an office in the same suite of offices as 3 for 1 Pizza?

A. Well, I don’t think he has an office there; no.

Q. Okay. Do you know where his office is?

A. You have to ask him, I don’t know.

Q. You don’t know where his office is?

A. Well, I speak with him, but I don’t know where he has a desk or anything like that.

Q. I see. When you speak with him, are you talking about in person, or over the telephone, or both?

A. Both.

Q. Where is he when you’re speaking with him in person?

A. It could be anywhere. It could be at my office, it could be on the street.

Q. I see. But you’ve never met him at his office; is that right?

A. No, I don’t think so; no.

Q. And when you telephone him, where are you phoning him? Or where is he phoning you from; do you know?

A. Well, he doesn’t report to me. So ...

Q. No, but if he is instructing you to do something, or asking you to do something on behalf of the Triple Pizza companies, from where is he speaking? Do you know?

A. Well, if he is on the phone, I don’t know.

Q. Okay.

A. I mean, it’s ...

Q. Do you ever have to send him things, like send him copies of the lease that you just got signed up, or sublease that you got signed up? And if you send things to him, where do you send them?

A. Well, usually, I ask what ... when is closing day, usually he comes.

Q. I see.

A. He is there. He’s readily available.

[20] Aside from being illustrative of the particular issue, this exchange illustrates the manner in which Chaupiz answered questions at his cross-examination.

[21] Gill alleged that she asked about the relationship of the corporate defendants before she executed the Agreement and Solhi and Chaupiz each advised him that the corporate respondents were “the same company.” I find that this is quite plausible. I find that the respondents treated the three corporations as if they were one entity.

[22] I have concluded that all of the respondent corporations were franchisors. I have also concluded that the notice of rescission that the applicants gave to 3 For 1 and to Triple Pizza was also given to Triple 3. It obviously came to the attention of Chaupiz, who is also an agent of Triple 3.

Is disclosure necessary?

[23] Section 5(1) of the Act requires that a franchisor “provide a prospective franchisee with a disclosure document”. Section 5 also sets out the timelines according to which disclosure must be given and permitted methods of delivery. Section 5(3) requires that the disclosure document must be “one document”, delivered as one document at one time. Section 5(4) sets out the mandatory contents of the disclosure document.

[24] Section 5(7) of the Act sets out an exhaustive list of exemptions from the disclosure requirement. Among these, section 5(7)(a) provides the disclosure requirements do not apply to 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.

[25] Section 5(8) notes that for purposes of subclause 5(7)(a)(iv), “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;…”

[26] Section 5(7) insulates the franchisor from disclosure requirements when an arms-length franchisee is selling to a purchaser and, aside from the franchisor consenting to the sale, the franchisor is not involved. It is akin to a tenant assigning a lease and the landlord consenting to the assignment.

[27] Subclause 5(7)(a)(iii) is irrelevant to our case. The remainder of this exemption is conjunctive; that is, in order to be exempt from disclosure, the burden of proof is on the respondents to satisfy the Court that all of the conditions in clauses (i), (ii) and (iv) are met.

[28] I have already decided that 3 For 1, Triple Pizza and Triple 3 are the franchisor. Accordingly, subclauses 5(7)(a)(i) and (ii) are not met.

[29] The respondents have also failed to satisfy me that the grant of the franchise was “not effected by or through the franchisor”. Chaupiz took an active role in the franchise arrangements with the applicants. All of the meetings between the parties took places at the offices of 3 For 1. Chaupiz prepared the contractual documents. He also provided the bill of sale and the sublease, which were contracts between the respondents, Triple Pizza and Triple 3, and the applicants. Chaupiz testified during cross-examination that he was asked to “facilitate or manage the transaction” with the applicants.

[30] This evidence is sufficient for me to conclude that the grant was effected “by or through the franchisor.” Subclause 5(7)(a)(iv) is therefore also not met.

[31] Accordingly, there is no exemption from the requirement under section 5 of the Act to provide disclosure to the franchisees.

Was disclosure given?

[32] Having determined that disclosure was required under the Act, I turn to the question of whether disclosure was in fact given.

[33] I accept the evidence of the applicants that they never received a disclosure document as required by the Act. The respondents point to the fact that Gill signed an acknowledgement saying she had received an “Agreement Package”, which the respondents claim contained “disclosure documents”. However, the respondents have not put any such document into evidence, nor have they produced any certification or copy of what was contained in the bundle of documents. There is no evidence that the bundle of documents in the “Agreement Package” contained the single comprehensive disclosure document described in great detail in section 5 of the Act and in the regulations. Moreover, the alleged deliverer, Sasha Starr, submitted no affidavit.

[34] The respondents claim that no copies of the disclosure materials were made because of “sloppy paperwork”. In my opinion, this submission must fail. Non-compliance with the disclosure requirement under the Act exposes franchisors to significant consequences, including rescission of franchise agreements. One would therefore expect franchisors to be very careful to keep records of their disclosure documentation, and to be able to produce these records when called upon to do so, such as in an action contesting a notice of rescission under the Act.

[35] The respondents also point to paragraph 22(c) of the franchise agreement, signed by the Applicants, which reads as follows:

“The Franchisee has been afforded the opportunity to receive and review a copy of this Agreement and the disclosure documents at least fourteen (14) business days prior to signing it and is satisfied with all disclosed information of the disclosure documents including the terms and conditions of this Agreement and attached schedules…”

[36] This paragraph is not an acknowledgement of “receipt” of a disclosure document as required by the Act for the following reasons:

(a) “Afforded the opportunity to receive and review a copy” does not equate to mandatory “receipt” of a disclosure document required by the Act;

(b) This paragraph makes reference to disclosure documents, plural, whereas Section 5 (3) of the Act requires one document, delivered as one document at one time;

(c) The parties cannot contract out of the Act. Section 11 of the Act reads:

“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.”

[37] Therefore, I am satisfied on the evidence that no disclosure document, as defined in the Act and regulations, was provided to the applicants.

Remedy

[38] Pursuant to section 6(2) of the Act, a franchisee may rescind the franchise agreement without penalty or obligation if disclosure was never provided.

[39] Section 6(6) of the Act sets out the franchisor’s obligations to be effected within 60 days of the effective date of rescission. The respondents did not comply with any of these obligations.

[40] The respondents submit that the applicants should not be entitled to rescission since they allegedly removed assets from the restaurant and they allegedly did not pay certain royalties to 3 For 1. On the facts of this case, there is no merit in the allegation that the applicants removed assets from the restaurant other than those few pizza boxes and supplies which they admit having given to another 3 For 1 franchisee after they closed their own store. As for the royalties, section 6(2) of the Act stipulates that a franchisee may rescind the contract when no disclosure was given “without penalty or obligation”. Further, if the applicants had paid the royalties, these royalties would simply have been added to the damages that the applicants claimed.

[41] After notice is given to the franchisor, section 6(6) of the Act then requires “the franchisor, or the franchisor’s associate, as the case may be,” to take remedial action, as follows:

(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).

[42] Under section 7(1) of the Act, damages for failure to disclose can be sought against (a) the franchisor; (b) the franchisor’s agent; (c) the franchisor’s broker; and (d) the franchisor’s associate.

[43] 3 For 1, Triple Pizza and Triple 3 are liable under section 7(1)(a). Solhi is liable under section 7(1)(d).

[44] The applicants shall be granted a declaration that the agreements entered into between them and the respondents were rescinded by notice dated August 22, 2001. This shall include rescission of the general security agreement and the sublease.

[45] The respondents took no issue with the calculation of the damages that the applicants claimed. Accordingly, I award the applicants damages against the respondents of $115,058.59. $102,537.59 represents the amounts paid by them for the franchised business and $12,521.00 represents losses suffered by them in acquiring, setting up and operating the franchised business. Solhi was shown in the title of proceedings as someone who was “also known as Farzad Bagherzadeh.” This is incorrect since the two are separate persons. The judgment will go against only Reza Solhi, without mention of the “also known as Farzad Bagherzadeh”.

[46] The applicants shall also be granted pre-judgment interest on $115,058.59 from October 26, 2001, the date when the respondents ought to have effected the rescission.

[47] Having reviewed the written submissions of the parties, I award costs on a partial indemnity basis fixed at $20,000.00.

___________________________

G. Speigel J.

Released: February 10, 2003

COURT FILE NO.: 02-CV-232605CM1

DATE: 20030210

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

MAA Diners Inc., Karamjit Gill and Mamta Patel

Applicants

- and -

3 for 1 Pizza & Wings (Canada) Inc., Triple Pizza (Holdings) Inc., Triple 3 Holdings Inc. and Reza Solhi also known as Farzad Bagherzadeh

Respondents

REASONS FOR JUDGMENT

G. Speigel J.