Noted in Default Days Before a Franchise Trial in Hamilton

The situation

Kajan and Grace had both spent close to twenty years as police sergeants in Hamilton, working rotating shifts that swung between days, nights and everything in between. A few years earlier, looking for an investment that did not depend on either of them being available at fixed hours, they bought into a home-services franchise together, hiring a small crew to run the day-to-day work while they handled the books and long-term decisions in whatever hours they had free.

The relationship with the franchisor soured over territory boundaries and required purchases from an approved supplier list that Kajan and Grace felt inflated their costs without adding value. After eighteen months of back-and-forth, they gave notice terminating the franchise agreement, relying on what they believed was a right to walk away because the disclosure document they had been given before signing was missing required financial information about the franchise system. Ontario's Arthur Wishart Act, 2000 gives a franchisee a right to rescind, or unwind, a franchise agreement within a set window if the disclosure they received was materially deficient, and to recover losses connected to the investment.

The franchisor did not agree that the disclosure had been deficient. Several weeks after Kajan and Grace closed the location, they were served with a lawsuit from the franchisor, represented throughout by its regional director, Analyn, seeking roughly $620,000 for unpaid royalties, unreturned equipment, and lost future royalties over the remaining term of the agreement, plus enforcement of a non-compete clause that would have barred Kajan and Grace from any similar business for two years.

The problem: noted in default

A statement of claim starts a lawsuit and sets out what the plaintiff is asking for. A defendant who is served has a strict deadline to file a statement of defence responding to the allegations. Miss that deadline, and the plaintiff can have the defendant noted in default: a step in the court record that strips the defendant of the right to defend the claim at all unless a judge lifts it. Once noted in default, a defendant cannot file a defence, cannot contest the claim's allegations, and can have default judgment entered against them for the full amount claimed, often without a further hearing.

Kajan and Grace had retained a lawyer to respond to the claim, but the document exchange between them stalled during a stretch where both were working extended night rotations and a family medical issue pulled their attention away from the file. The deadline passed. Neither of them noticed until a letter arrived from the franchisor's side confirming they had been noted in default and that a motion for default judgment for the full $620,000 would follow within weeks.

This is a genuinely dangerous position. A defendant noted in default is, procedurally, treated as having no defence at all. The court does not weigh the merits of the underlying dispute at that stage — it simply processes the plaintiff's request for judgment, calculated from the claim as filed. Every week that passed without action moved the file closer to a default judgment that Kajan and Grace would then have to try to overturn after the fact, a far harder and more expensive position than fixing it before judgment was entered.

What we did

1. Moved immediately to set aside the noting in default. Courts will generally lift a noting in default where the defendant can show a reasonable explanation for the delay, acted promptly once the problem was discovered, and has an arguable defence worth letting the court hear. We filed the motion within days, supported by an affidavit setting out the shift schedules and the medical circumstances, and attached a draft statement of defence showing the rescission argument under the Arthur Wishart Act was a real issue for trial, not a delaying tactic.
2. Negotiated consent terms rather than fighting the motion. Rather than litigate the motion to a contested hearing, we proposed terms to the franchisor's side: Kajan and Grace would pay the costs the franchisor had thrown away dealing with the default, and would deliver a complete statement of defence within a short, fixed number of days. The franchisor's side agreed, which got the noting in default lifted faster and cheaper than a contested motion would have, while preserving the full defence.
3. Built the disclosure record early. The rescission argument turned on what was, and was not, in the disclosure document Kajan and Grace received before signing. We requested the franchisor's complete disclosure file through formal productions, the exchange of relevant documents both sides are required to make in a lawsuit, and compared it line by line against the financial disclosure requirements, confirming specific categories of required information were missing.
4. Retained a valuation expert. The franchisor's $620,000 figure rested heavily on projected future royalties over the remaining term of the agreement, calculated as though the location would have kept performing at its historical average. We had an independent expert assess whether that projection was realistic given the location's actual trend, which had been declining for over a year before termination, a figure the franchisor's own internal reports supported.
5. Prepared examinations for discovery around that weak point. At the examination for discovery, where each side questions the other under oath before trial, we focused questions on the gap between the disclosure document and the required financial information, and on the assumptions behind the franchisor's lost-royalty calculation. Analyn, examined on the franchisor's behalf, was unable to explain either gap convincingly on the record.
6. Set a realistic trial timeline and stuck to it. We confirmed expert reports, productions and examinations on the schedule the court had set, signalling to the other side that this file was headed to trial on time rather than drifting. A defendant that is visibly ready for trial has more negotiating leverage than one still scrambling as the date approaches.

The outcome

With the disclosure gap on the record and the franchisor's own reports undercutting its royalty projection, the franchisor's side opened settlement discussions about four months before the scheduled trial date. Neither side had a certain win. Kajan and Grace's rescission argument was strong but not guaranteed, since a judge could still find the missing disclosure items were not serious enough to justify unwinding the agreement. The franchisor's royalty claim was weakened but a court could still have awarded a reduced amount rather than nothing.

The parties settled on that uncertainty. Kajan and Grace agreed to pay the franchisor roughly $180,000, covering a portion of unpaid fees and equipment, in place of the original $620,000 claim. In exchange, the franchisor released the two-year non-compete clause entirely and dropped its claim for lost future royalties. Both sides gave something up: Kajan and Grace paid an amount they had hoped to avoid paying at all, and the franchisor accepted roughly seventy percent less than it had claimed and gave up the restriction that would have kept them out of similar work. Neither side got the outcome they would have chosen at the start, which is what made the settlement durable enough for both to sign.

The file never reached trial, but the trial preparation is what made the settlement possible on those terms. Without the disclosure comparison, the valuation expert, and the examination record showing the franchisor could not defend its own numbers, there would have been no leverage to negotiate down from $620,000 in the first place.

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