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 the profits.
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The Plaintiffs successfully obtained partial summary judgment declaring that the franchise documents were validly rescinded and that the Franchisor was liable to pay compensation to the Plaintiffs.1 The Franchisors appealed this decision to the Court of Appeal on the basis that the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.
Footnotes
1 2010 ONSC 3695.
2 2011 ONCA 467.
3 2012 ONSC 3344.
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