In our previous posts (See
Part 1 and
Part 2), we reviewed restrictive covenants and cancellation
rights under franchise laws. In a recent decision of the Ontario
Court of Appeal, the dispute focused on the right of rescission. As
the court put it, the case of Caffé Demetre Franchising
Corp. v. 2249027 Ontario Inc., 2015 ONCA 258 "is another case from the
franchise world involving whether the franchisor met its disclosure
Specifically, the franchisee complained that the
franchisor's disclosure document was deficient - so deficient,
in fact, that it entitled the franchisee to rescind the franchise
agreement. In the disclosure document, the franchisor failed to
disclose ongoing litigation commenced by the franchisor against a
competitor. Was this failure a material deficiency giving rise to a
right of rescission?
A disclosure document must disclose "all material
facts." A material fact is described in the legislation as any
information about the business or operations of the franchisor, or
about the franchise system "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."
The Court in Caffé Demetre Franchising Corp.
decided that the failure to disclose the franchisor's
litigation was a deficiency but not "sufficiently
significant" that the franchisee was entitled to a right of
rescission. To qualify as a deficiency that gives rise to a right
of rescission, the disclosure document must suffer from "stark
and material deficiencies," such that a Court can conclude
that it amounts to no disclosure at all. It is worth noting that
the court was clear that litigation must be disclosed if it falls
within the description contained in s. 2(5) of the Ontario
regulations (the equivalent in Alberta is the Franchises
Regulation, Alta Reg 240/1995), which mandates disclosure of
any past or pending lawsuit or court order which involves
allegations of "misrepresentation, unfair or deceptive
business practices," including a failure to provide proper
franchise disclosure. If the litigation in question involved any of
these issues, then the decision would have been different.
What are the lessons? Franchisees should be very careful and
conduct their own thorough investigations and due diligence before
formalizing a franchise agreement, as even material deficiencies in
the disclosure may not empower the franchisee to rescind the
agreement. Of course, both parties should always seek appropriate
legal advice when entering into and concluding franchising
relationships in Alberta.
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.
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