Does the Arthur Wishart Act Change the Law of Set-off in Ontario?

This will be an interesting case if it goes to trial, as the issues will include whether the distributorship was a franchise and what impact, if any, the Act has on the law of set-off relating to promissory notes. This case could also potentially change the manner in which franchisors must allocate funds received from franchisees to various categories of debt.

Osler, Hoskin & Harcourt LLP
May 2008

Does the Arthur Wishart Act Change the Law of Set-off in Ontario?
Dominic Mochrie

In Tupperware Canada Inc. v. 1196815 Ontario Ltd., the plaintiff sought summary judgment against one of its Tupperware distributors for payment of principal and interest owing under a July 2002 promissory note. The corporate defendants and their individual principals opposed the motion on the basis that there were genuine issues for trial.

The facts leading to the motion were relatively straightforward: Tupperware distributes the well-known Tupperware-branded products to customers through 35 regional distributors across the country. Each distributor has a sales force who stage “Tupperware parties” to sell the products to the end users. Deborah Ellison, one of the individual defendants, began her relationship with Tupperware as a salesperson in 1984 and was offered a distributorship in 1996 due to her sales record. The cost of the distributorship was $94,616, which she paid off in a few years.

Unfortunately, in 2001, the relationship began deteriorating. The defendant alleged that management changes at Tupperware had made the business more complicated and less profitable for distributors. As a result, Ellison resigned in 2002. Later that year, however, in a meeting with dissatisfied distributors, including Ellison, Tupperware made certain assurances that it recognized the problem and would fix it. Ellison agreed to stay with Tupperware and signed a promissory note for $47,692.10 in July 2002.

The problems continued over the next couple of years. On the basis of legal advice that the distributorship was a franchise under the Arthur Wishart Act (Franchise Disclosure ), 2000 (the Act), the defendants issued a notice of rescission on August 13, 2004. By then, the defendants’ debt had grown to $192,736.77, consisting of $41,906.22 owed pursuant to the note and a further $150,830.55 for inventory. Tupperware sold the defendant’s distributorship and credited the proceeds of $63,786 to the inventory account.

Motion For Summary Judgment
The defendants claimed that accounting improprieties made the valuation of the inventory account a triable issue and Tupperware agreed. However, Tupperware moved for summary judgment on the amount owing pursuant to the promissory note. The defendants opposed the summary judgment motion on the grounds that there were genuine issues to be tried. These issues included whether there was any right of set-off available against the note (including whether the Act provides a statutory method of determining the parties’ respective debts that would require set-off between the parties). Another issue was whether Tupperware was a “franchise” pursuant to the Act and, if so, whether Tupperware breached its duty of fair dealing in choosing to apply the proceeds of the sale of the distributorship to the disputed inventory account instead of the promissory note.

Legal and Equitable Set-off Not Available
Tupperware agreed that the issue of whether the distributorship was a franchise was a genuine issue for trial. However, it disputed the defendant’s claim that set-off was available. The defendants claimed that they should be entitled to set-off the amounts owed by the plaintiffs to the defendants pursuant to the rescission claim against all amounts owed by the defendants to the plaintiffs.

The court reviewed the rules of legal and equitable set-off: For legal set-off to apply, the obligations between the parties must be debts and both must be mutual cross-obligations or mutual debt. In this case, the debt owing from the defendant to the plaintiff pursuant to the note was known with certainty. However, the defendant’s claim for rescission lacked specificity and could not be immediately ascertained with certainty. The court therefore ruled that legal set-off was not available.

Next, the court considered equitable set-off, which can be available in certain situations with unliquidated damages. However, the court noted that equitable set-off does not apply to bills of exchange, and the defendants did not dispute that the note signed was a promissory note within the meaning of the Bills of Exchange Act.

Section 6(6) of the Act
The court also considered the defendant’s argument that the Act creates a statutory regime which permits the calculation of amounts owing. Specifically, section 6(6) of the Act sets out the financial obligations of a franchisor to franchisees who claim rescission. The defendants claimed that this section of the Act should supersede the law of set-off that applies to promissory notes.

Unfortunately, as this was a summary judgment motion, the court was not required to make any specific findings other than finding that these were live issues for trial. This will be an interesting case if it goes to trial, as the issues will include whether the distributorship was a franchise and what impact, if any, the Act has on the law of set-off relating to promissory notes. This case could also potentially change the manner in which franchisors must allocate funds received from franchisees to various categories of debt. Additionally, while not mentioned in the decision, the plaintiffs can be expected to raise the issue of whether the two-year rescission period had expired, as the note was dated July 31, 2002 and the notice of rescission delivered on August 13, 2004.

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Risks: Arthur Wishart Act (Franchise Disclosure), 2000, Canada, Rescission, Unintentional franchises, Canada, 20080501 Does the

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