According to the Court, where a franchisee seeks access to the
courts to enforce its statutory rescission rights under the Act,
the general two-year limitation period set out in the Limitations
Act will only be triggered once the franchisee
"discovers" that the franchisor does not intend to comply
with the financial obligations set out in s. 6(6) of the Act. Where
a franchisee has a prospective statutory claim to rescission, the
proper course of action is to deliver a Notice of Rescission under
the Act and to wait and see if the franchisor will comply with its
financial obligations under s. 6(6) of the Act, which must be
discharged within 60 days. If the 60-day period passes without the
franchisor meeting its obligations or if the franchisor
communicates its refusal to comply in advance of the due date, the
cause of action under the Limitations Act is "discovered"
and the franchisee has two years within which to commence a claim
in the Ontario Superior Court of Justice (ONSC).
A franchisor entered into two franchise agreements with the same
franchisee in respect of the same location. A disclosure document
was provided in advance of the first agreement being signed.
However, in order for the franchisee to obtain third-party credit,
the signing officer of the franchisee needed to change, which
required a second franchise agreement to be put into place,
changing the identity of the principal. No disclosure document was
provided by the franchisor in advance of the second agreement being
signed, apparently on the theory that the franchisee had already
received disclosure and that the second agreement was simply a
mechanism to obtain third-party credit.
The franchisee was not profitable and ultimately failed. The
franchisee served a Notice of Rescission in respect of the second
agreement in advance of the expiry of the two-year period set out
in s. 6(2) of the Act on the basis that no disclosure document had
The franchisor responded to the Notice of Rescission before the
expiry of the 60-day period in s. 6(6) of the Act by asserting
that the franchisee was out of time. The franchisee then waited
approximately 12 months and commenced a claim in the ONSC for
The key issue before the ONCA was the interplay between the
general limitation period set out in the Limitations Act and the
time periods for rescission prescribed in the Act. The application
judge in first instance had held that the Limitations Act was only
triggered when the franchisor responded negatively to the Notice of
Rescission. The franchisor submitted on appeal that this was an
error of law and that the Limitations Act had in fact been
triggered more than two years before the claim was brought in the
ONSC, such that the rescission claim was statute barred.
The ONCA upheld the application judge's decision. According
to the ONCA, it is only when the franchisor refuses to comply with
the financial obligations prescribed in s. 6(6) of the Act that
there is "discovery" of a claim under the Limitations
What to Take From the ONCA's
This holding is instructive for counsel to both franchisors and
franchisees. Franchisees should no longer routinely serve a
Statement of Claim along with their Notice of Rescission. There is
no "dispute" for which a court action is necessary,
unless the franchisor refuses to comply with the financial
obligations flowing from the Notice of Rescission. The time frames
prescribed in the Act are satisfied by delivery of a Notice of
Rescission; by contrast, the limitations period in the Limitations
Act is satisfied by commencing a claim in court within two years of
discovering that the franchisor does not intend to comply with the
Notice of Rescission.
In addition, the decision serves as further confirmation that
the disclosure obligations under the Act continue to be interpreted
very strictly, such that franchisors should err on the side of
comprehensive disclosure at every turn, even if it appears the
franchisee (or prospective franchisee) already has the information
forming the subject of the potential further disclosure.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
While most are well aware that the sale of a business is generally a complex process, even sophisticated business owners are surprised by just how much cost and effort is required to complete the sale.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).