Philthy McNasty’s case clarifies franchise limitations periods
September 17th, 2012
Philthy McNasty’s did not fare well when the Ontario Court of Appeal recently examined the issue of limitation periods in respect of statutory rescission claims under the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”). Earlier this year, a judge of the Superior Court of Justice held that under the Limitations Act, 2002, a franchisee has two years from the earlier of (a) the franchisor’s rejection of a valid rescission claim or (b) the expiry of 60 days from the delivery the notice of rescission, to bring an action against the franchisor. The Court of Appeal upheld this decision, clarifying uncertainty within the Act – how long a franchisee has to start a claim with respect to the franchisor’s failure to abide by the notice of rescission.
In 2130489 Ontario Inc. v. Philthy McNasty’s (Enterprises) Inc. (2102 ONCA 381) the franchise agreement was executed on October 9, 2007. Philthy McNasty’s did not provide a disclosure document at this time. The franchise failed from the outset. On September 23, 2009, the franchisee served a rescission notice and demanded a return of the franchise fees it had paid. On November 3, 2009, Philthy McNasty’s responded to the notice of rescission, denying liability. The franchisee commenced a court action on November 29, 2010.
The application judge recognized that the Act was intended to address the power imbalance between franchisor and franchisee by the imposition of strict disclosure requirements and strict penalties for failure to comply. In order to serve this purpose, the Act will be interpreted generously. In this context, the application judge determined that the franchisee had properly issued its’ rescission notice.
The application judge then examined the issue of when a franchisee’s cause of action arose where a franchisor resists a notice of rescission. Under the provisions of the Limitations Act 2002 the franchisee has two years from the date when the franchisor rejects the rescission claim to bring an action against the franchisor. The franchisor had a further 60 days in which to satisfy its statutory obligations. Until the expiry of the 60 day period the franchisee could not know with certainty whether the franchisor would comply with its statutory obligations.
In this case, counsel for the franchisor advised the franchisee that the notice of rescission was disputed on November 3, 2009. At this point the franchisee was on notice that Philthy McNasty’s was not prepared to satisfy their statutory obligations. Accordingly, the franchisee’s claim was discovered on the receipt of the letter from counsel. The two year limitation period started to run on November 3, 2009. Since the application was commenced on November 29, 2010, it was not statute barred.
The Court of Appeal upheld the application judge’s decision, providing clarity on when the limitations clock starts running in statutory rescission cases once a notice of rescission has been issued:
Until the franchisor decides to not fulfil the obligations in s. 6(6), the franchisee has no cause of action for compensatory damages; at most, the franchisee has a latent or potential cause of action. Accordingly, the franchisee only has a cause of action at the earlier of (a) when the franchisor fails to pay compensation pursuant to s. 6(6) by the end of the 60 day period following the effective date of the Notice of Rescission or (b) when the franchisor communicates its refusal to do so at some point before expiry of the 60 days, as happened in this case on November 3, 2009.
Issuing a valid notice of rescission does not mean a franchisee can rest easy with respect to limitations periods. A franchisee must ensure to commence any action against a franchisor in a timely manner once they know that the franchisor will be resisting the notice of rescission. Similarly, franchisors must pay attention to this limitation period as a potential defence to a rescission claim under the Act.