Ontario Court of Appeal Confirms Limitation Period for Rescission Actions Under Ontario’s Franchise Legislation

The Ontario Court of Appeal recently heard an appeal of a decision Cassels discussed in its February 2012 e-Communique, the Ontario Superior Court of Justice decision in 2130489 Ontario Inc. v. Philthy McNasty’s (Enterprises) Inc. (2011 ONSC 6852). In the lower court decision, the court examined the issue of limitation periods in respect of statutory rescission claims under the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”), and held that, under the Limitations Act, 2002, a franchisee had two years from when (a) the franchisor rejects a valid rescission claim, or (b) sixty days expire from the delivery of the rescission notice, whichever is earlier, to bring an action against the franchisor.

On appeal, the Ontario Court of Appeal upheld the lower court decision and provided a precise description of how limitation periods in statutory rescission cases are to be determined once a valid 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.” Although it is rare for litigation to not immediately follow the issuance of a notice of rescission, the Court of Appeal has clearly determined that the franchisee’s knowledge that the franchisor will be resisting the notice of rescission is sufficient to start the clock for the purposes of the two-year notice period.

Again, this decision is helpful in clarifying the limitation period with respect to rescission actions. Even if a franchisee issues a notice of rescission within the appropriate time allowed, the franchisee still has to ensure that an action is brought as soon as that franchisee is aware that the franchisor will be disputing the rescission claim. Franchisors should pay close attention to this limitation period as a defence when dealing with rescission claims under Ontario’s franchise legislation.