Canada: Reason To Be Crabby? Ontario Court Grants Partial Summary Judgment Against Franchisor, But Makes Interesting Finding On Lease Disclosure As Grounds For Rescission

In 2212886 Ontario v Obsidian Group,1 the Ontario Superior Court of Justice considered at what point multiple alleged disclosure deficiencies are so fundamental as to give rise to rescission of the franchise agreement. In examining these alleged deficiencies, the Court held that the failure to provide a copy of a head lease did not constitute grounds for rescission, which appears to run contrary to the recent Ontario Superior Court of Justice decision in Raibex. ( We previously wrote about Raibex here.) The decision also provides interesting commentary regarding limitation periods and Wishart Act claims, as well as the treatment of non-disclosed earnings projections for the purposes of statutory rescission.

In this case, the Court granted the franchisee's motion for partial summary judgment for a declaration that the franchise agreement was properly rescinded under Ontario's franchise disclosure legislation, the Arthur Wishart Act (Franchise Disclosure), 2000 (the Wishart Act). The plaintiff franchisee and the defendant, the franchisor of the "Crabby Joe's" restaurant brand, entered into a franchise agreement on June 16, 2010 (the June agreement). On September 7, 2010, at the request of the franchisor, the parties entered into a new franchise agreement (the September agreement). The September agreement consisted of one signing page, since the document was substantially the same as the June agreement. On September 5, 2012, over two years after the June agreement but less than two years after the September agreement, the franchisee served a notice of rescission. The limitation period for rescinding a franchise agreement under the Wishart Act is two years from the date of the agreement.

The franchisee argued it was entitled to rescind the franchise agreement on the basis of several disclosure deficiencies that rendered the franchisor's disclosure tantamount to no disclosure under the Wishart Act. Specifically, the franchisee took issue with the following alleged disclosure deficiencies:

  1. The franchisee never received a copy of the head lease;
  2. The franchisor did not inform the franchisee that it offered financing;
  3. The disclosure was piecemeal;
  4. The franchisor did not disclose the actual development costs of establishing a Crabby Joe's franchise;
  5. The franchisor provided inadequate training and equipment; and
  6. The franchisor failed to disclose an earnings projection table in the franchise disclosure document. Prior to signing the franchise agreement, this earnings projection table was discussed with the franchisee and had been circulated to the franchisee's bank in connection with financing arrangements.

In respect of the failure to provide a copy of the lease, the Court dismissed this outright, commenting:

The suggestion by the plaintiffs that the head lease was not disclosed, as a basis for the claim for rescission, is unfounded. There was no head lease in existence and the only lease in place was an offer to lease, which was disclosed when known.

This decision therefore arrives at the opposite conclusion of the Court in Raibex, which held that a disclosure document was inadequate because it did not contain a copy of the head lease despite the fact that the head lease had not been entered into at the time of the franchise agreement being executed. Given that Raibex is currently under appeal, it will be interesting to see how the Ontario Court of Appeal decides this issue. Franchisors should continue to exercise caution in respect of their disclosure obligations pending the Raibex appeal decision.

In respect of the other disclosure deficiencies, the franchisee was unsuccessful on all of them except for the franchisor's failure to disclose the earnings projection table. The Court found this omission to be so significant and material as to constitute no disclosure, giving the franchisee the right to rescind. In reaching this conclusion, the Court found that earnings projections are potentially "the most important information that a potential franchisee would want to know." The Court contextualized this obligation by noting:

Although I agree with the defendants that they did not have to disclose earning projections, once these projections are provided (both at the meeting in May 2010 and to the bank on June 22, 2010) they must be disclosed as part of or in addition to the disclosure document.

The Court also rejected the franchisor's argument that the September agreement did not create a new franchise agreement between the parties. Had the Court found differently, the franchisee would be out of time to rescind the franchise agreement because the June agreement was signed more than two years prior to the notice of rescission. In determining that the September agreement constituted a new franchise agreement, the Court focused on the consumer protection aspect of the Wishart Act, coupled with the fact that the September agreement was the franchisor's initiative.

The case provides an interesting contrary view to the disclosure obligations discussed in Raibex in respect of leases but by no means should serve as a definitive position on this topic, as the final word will lie with the Court of Appeal. Moreover, it addresses the need for franchisors to be careful in respect of the disclosure of earnings projections and indicates how Ontario courts may treat staggered or multi-part franchise agreements for the purposes of limitation periods.

Footnote

2212886 Ontario v Obsidian Group, 2017 ONSC 1643 (CanLII), <http://canlii.ca/t/h2ppp>.

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.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.