Franchisors should take notice of a recent decision from the
Ontario Court of Appeal, 2189205 Ontario Inc. v. Springdale
Pizza Depot Ltd., which upholds several decisions from the
Superior Court of Justice and the principles articulated in them.
The key take-away from this case is that a franchisor must provide
a complete and specific disclosure document to a potential
franchisee or face harsh remedies, including the potential for a
profitable franchisee to rescind their franchise agreement and keep
In this decision, the Plaintiff Franchisees purchased a Pizza
Depot franchise from an existing franchisee. After operating the
franchise for several months, the Plaintiffs served a Notice of
Rescission for failing to receive proper disclosure pursuant to the
Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000,
c.3 ("Wishart Act") and commenced an action
against the Franchisor and the previous franchisee.
The Plaintiffs successfully obtained partial summary judgment
declaring that the franchise documents were validly rescinded and
that the Franchisor was liable to pay compensation to the
Plaintiffs.1 The Franchisors appealed this
decision to the Court of Appeal on the basis that the motion judge
had erred in failing to exempt the Franchisor from its disclosure
obligations because it was a "resale" of the franchise by
a franchisee and there was, therefore, no obligation to
disclose. The appeal was dismissed.2 The
Court of Appeal held that the Franchisor was not exempt from the
obligation to disclose because the Franchisor had been actively
involved in the sale, by requiring the Plaintiffs to sign fresh
contracts as a condition to providing its consent to the transfer
of the franchise.
The matter again worked its way back up to the Court of Appeal
when the Franchisors appealed an order that the Franchisor pay the
Plaintiff a total of $290,830.72 in compensation pursuant to
section 6(6) of the Wishart Act.3
The Court of Appeal upheld the Plaintiffs' section 6
rescission claim, affirming that if a franchisor fails to properly
disclose the opportunity to the franchisee candidate and the
franchisee rescinds their franchise agreement within the time
prescribed by the Arthur Wishart Act, then the franchisor
will be required to return monies received from the franchisee and
comply with the rescission remedy even if the franchisee earned a
profit from the operation of the franchised business.
Where a valid rescission claim is made, a franchisor or the
franchisor's associate, as the case may be, is required to
refund to the franchisee any money received from the franchisee;
repurchase all supplies and equipment at cost; repurchase any
inventory remaining as of the date of the rescission, at cost and
compensate the franchisee for any losses incurred in the acquiring,
setting up and operating of the franchise, if any.
The Court held that it was not appropriate to offset a gain
against the amounts to be repaid to the franchisee. The Franchisor
had argued that the rescission remedy was intended to put the
Plaintiffs back into their pre-franchise position, and that if not
for the franchise, the Plaintiffs would not have made a profit at
all. However, the court held that the Arthur Wishart Act
does not provide for a discount or offset.
1 2010 ONSC 3695.
2 2011 ONCA 467.
3 2012 ONSC 3344.
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