A recent decision by the Ontario Court of
Appeal1 has narrowed the circumstances under which
litigation involving a franchisor may constitute a "material
fact" for the purposes of disclosure obligations under the
Arthur Wishart Act.2
The appeal arose from a summary judgment motion3 in
which the defendant franchisee's counterclaim for rescission of
a franchise agreement was denied on the basis that three of four
alleged disclosure omissions were not actual disclosure
deficiencies.4 The fourth alleged deficiency
— the failure of the franchisor to disclose the existence of
litigation by the franchisor against a competitor — was found
by the motions judge to constitute a disclosure omission, but one
that did not rise to the level of a deficiency entitling the
franchisee to rescission for failure to provide a disclosure
The motion decision was notable at the time, in part because it
was an instance in which the court's newly expanded ability to
grant summary judgment (following the Supreme Court of Canada's
ruling in Hryniak v Mauldin6) was applied in a
franchise case, and in part because it suggested that failure to
disclose the existence of litigation commenced by the
franchisor against a competitor to protect the brand could
give rise to a claim for rescission by the franchisee.
The general Regulation under the Act requires that the
franchisor's disclosure document must include:
A statement, including a description of details, indicating
whether the franchisor...has been found liable in a civil action of
or deceptive business practices or violating a law that regulates
franchises or businesses, including a failure to provide
proper disclosure to a franchisee, or if a civil action involving
such allegations is pending against the
The Regulation focuses on litigation commenced against
the franchisor, not by the franchisor.
The franchisee argued that failure to disclose the existence of
such litigation amounted to a failure to disclose a "material
fact" within the meaning of the Act (which includes
information that "that would reasonably be expected to have a
significant effect on the value or price of the franchise to be
granted or the decision to acquire the
franchise")8 and entitled the franchisee to
exercise its right of rescission under s.6(2) of the Act.
The motions judge found, as summarized by the Court of Appeal,
"any litigation involving a franchisor amounts to a material
fact – no matter what the nature and circumstances of the
litigation might be."9 However, the motion
judge disagreed that the disclosure omission was sufficient to
allow rescission under s.6(2) of the Act.
The Court of Appeal's decision retreats from this position
and confirms that not just "any litigation involving a
franchisor" will amount to a "material fact," but
leaves open the possibility that litigation other than the
type defined in Regulation s.2(5) may constitute a
material fact under the right circumstances:
Ongoing or prospective litigation involving the franchisor is
not, by definition, a material fact. Of course, the litigation must
be disclosed if it falls within the description contained in s.
2(5) of the regulations. But if the litigation in issue
does not fall within that description, then whether it is a
material fact, as contemplated by the Act, will be a question of fact determined on
a case-by-case basis. Because the analysis is highly
fact-specific, no bright-line rule can be
In sum, the Court's decision removes the presumption that
failure to disclose litigation commenced by a franchisor will
entitle a franchisee to rescind the franchise agreement, but
franchisors should still weigh carefully a decision not to disclose
information about cases they have commenced. As always, they
should ask themselves whether the information, if shared, might
reasonably make franchisees think twice about investing or affect
their view of the price.
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