Caffé Demetre v. 2249027 Ontario Inc. is an
important case for franchisors. The court, in this case, found that
the franchisee was not permitted to rescind its franchise agreement
just because the franchisor had not disclosed that, among other
things, it was contemplating litigation against a former franchisee
for breach of the non-competition clause in the franchise
The court found it difficult to see how the existence of a
lawsuit against a former franchisee, for the benefit of the
franchise system, could have had a significant effect on the
decision by the prospective franchisee to purchase the franchised
business or the price to be paid for the franchised business.
The judge did however accept that if a franchisor is involved in
ongoing litigation, this fact ought be disclosed to prospective
The court found that while the disclosure document may have been
deficient, it was not so deficient as to allow the franchisee more
than 60 days within which to rescind its franchise
agreement. As the franchisee purported to rescind its
agreement more than 60 days after receiving a disclosure document,
its claim for rescission was dismissed.2 The ability to
seek rescission for up to two years after entering into the
franchise agreement is restricted to "instances of a complete
failure to provide a disclosure document".3
Here, the judge pointed out that the lawsuit commenced by the
franchisor was initiated at the request of the franchisees and was
clearly for the franchisees' benefit. It did not constitute a
potential liability that might attach to the franchise system as a
whole. In addition, the defendants were aware of this litigation
shortly after signing the franchise agreement but did not raise it
as a concern until their Statement of Defence and Counterclaim was
filed two years later. If the existence of the lawsuit had been a
"material fact" that could reasonably be expected to have
a significant impact on the price the defendants paid for the
franchise, one would have expected the franchisee to have
complained when, or shortly after, they found out about it.
As the failure to disclose the lawsuit did not amount to a
material deficiency, the court concluded that the defendant had no
right of rescission.
12240802 Ontario Inc. v. Springdale
Pizza, 2013 ONSC 7288 at para. 48.
2Arthur Wishart Act, SO
2000, c 3, s 6.
34287975 Canada Inc. v. Imvescor
Restaurants Inc.  OJ No 1508 (CA).
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