Potential Remedies Available To Franchisees In The Event Their Franchisor Is In Breach Of Its Disclosure Obligations

The Arthur Wishart Act provides two potential remedies to franchisees in relation to franchisors' non-compliant disclosure document, the statutory remedies available are:

1. damages pursuant to Section 7, if the franchisee suffers a loss because of a misrepresentation contained in the disclosure document or statement of material change or as a result of the franchisor's failure to comply in any way with Section 5 of the Arthur Wishart Act (Franchisor's Obligation to Disclose); and
2. rescission of the franchise agreement pursuant to Section 6.

Rescission

The Arthur Wishart Act permits a franchisee to rescind its franchise agreement pursuant to Section 6 of the Arthur Wishart Act, within:

1. 60 days of receiving the disclosure document, if the disclosure document or statement of material change was not delivered in accordance with the timing requirements of the Arthur Wishart Act or if the content of the disclosure document failed to comply with the requirements of Section 5 of the Arthur Wishart Act (Franchisor's Obligation to Disclose); or
2. two years of entering into the franchise agreement if the franchisor never provided the disclosure document.

Whether a franchisee has 60 days versus two years to rescind their franchise agreement is significant. Franchisees are often only in the infancy stages of operating their franchise business 60 days after receiving the disclosure document, or may not have even commenced operating the franchise business within 60 days. Whereas, two years after entering into the franchise agreement, franchisees often have been operating their business for an adequate time to determine if the business they invested in, is operating as they expected based upon their due diligence and if not, the franchisee may question the accuracy of and review the disclosure document it received from the franchisor and seek legal advice regarding its legal options.

One might think that Section 6(2) of the Arthur Wishart Act, (the two year rescission period) is not applicable in the event that the franchisor delivered a disclosure document to the franchisee. However, the Courts have been interpreting Section 6(2), in such a manner that even if a disclosure document was delivered to a prospective franchisee, in some instances, the disclosure document delivered is found to be tantamount to, no disclosure document being provided. Thereby, resulting in a finding that the franchisor failed to deliver a disclosure document to the franchisee, providing the franchisee two years to rescind the franchise agreement. Whether the disclosure provided is tantamount to no disclosure, depends on whether the information missing from the disclosure deprived the prospective franchisee from making an informed investment decision prior to committing and/or investing in the franchise. Was the information missing from the disclosure document, material?

Comments from Cases Illustrating How the Courts are Interpreting the Disclosure Requirements Pursuant to Arthur Wishart Act

In Premium Host Inc. v. Paramount Franchise Group, 2023 ONSC 1507 (CanLII ),the Court stated, the Act and Regulation impose a number of requirements on franchisors to fully disclose financial and other information a prospective franchisee would normally need in order to decide whether to become a franchisee. The Act then provides remedies to the franchisee where the franchisor does not meet the statutory obligations, including certain rights of rescission in Section 6 and damages in Section 7; See Mendoza at para. 14. Any suggestion that the disclosure requirements or the penalties imposed for non-disclosure should be narrowly construed must be met with skepticism: see Personal Service at para. 28. Disclosure requirements are not merely formalistic: see Dig this Garden at paras. 18-19".

In Brister v. 2145128 Ontario Inc., 2014 ONSC 6714 the Court stated "The franchisor has all the information and dictates the terms of the agreement. In this context, disclosure is intended to provide a prospective and often inexperienced franchisee with sufficient and readily accessible information to make informed decisions. The remedies for failure to comply with the strict disclosure requirements are also intended to remedy abuses by franchisors. As noted by MacFarland J.A., in 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd. (2005), 2005 CanLII 25181 (ON CA), 256 D.L.R. (4th) 451 (C.A.), at para. 12, it "is evident that the thrust of the Act is to set standards for adequate disclosure and to create significant penalties for failing to meet those standards".

In 2619506 Ontario Inc., v. 2082100 Ontario Inc., 2021 ONCA 702, the Court stated that the Act is intended to redress the imbalance of power between franchisors and franchisees and that it does so by imposing rigorous disclosure obligations on franchisors, with strict penalties for non-compliance.

In 4287975 Canada Inc. v. Imvescor Restaurants Inc., 2009 ONCA 308 (CanLII), the Court of Appeal set the test to distinguish cases of non-compliance with disclosure requirements from cases where disclosure is so incomplete so as to amount to no disclosure at all. At paragraph 43 Laforme J.A. wrote:

"These cases do not stand for the broader conclusion, proposed by the appellant, that any failure to comply with s. 5 results in a finding of no disclosure and therefore a s. 6(2) remedy. On my reading of the two cases, they hold that if the disclosure document that is provided turns out to be materially deficient, then no disclosure will be found to be have been made".

Fatal Flaws

Below are some of the franchisors' disclosure failures which the Courts have determined to be fatal flaws, that is, disclosure failures which result in a determination that no disclosure document was delivered.

In 2483038 Ontario Inc. v. 2082100 Ontario Inc., 2022 ONCA 453, the Court of Appeal upheld the trial judge's findings, that the failure to include a properly signed and dated certificate in the disclosure document is a fatal flaw, even if the balance of the disclosure document is compliant with the legislation.

The rationale for requiring that two, or more, directors or officers personally investigate and then certify correctness and completeness of the disclosure document is to ensure personal responsibility and liability in the accuracy of disclosure documents.

In Sovereignty Investment Holdings, Inc. v. 9127-6907 Quebec Inc. (2008), 2008 CanLII 57450 (ON SC),Wilton-Siegel J. stated that the presence of a fatal flaw is sufficient for the Court to deem the disclosure document to be no disclosure at all for the purposes of the Act. The four "fatal flaws" found were the following:

1. failure of the franchisor to include financial statements as required under the Act;
2. failure of the Franchisor to include a statement specifying the basis for the earnings projections set out in its disclosure document, as well as a statement of the assumptions underlying the estimates and the projections and a location where information is available for inspection that substantiates the estimates and projections;
3. the documentation provided to the franchisee was not a single document nor was it delivered at the same time.This is contrary to the specific requirement of Section 5(3) of the Act: see the statement of MacFarland J.A. in 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd. (2005), 2005 CanLII 25181 (ON CA), 201 O.A.C. 95 (C.A.) at paras. 15-19; and
4. the document delivered did not include a certificate of the franchisor as required.

Test to be Applied For Rescission

The Courts have determined that the test to be applied for all rescission claims is an objective test, not subjective. It is irrelevant what the franchisee did with or did not do with the disclosure material provided by the franchisor.

As confirmed by the Court of Appeal in 2611707 Ontario Inc. v. Freshly Squeezed Franchise, 2022 ONCA 437 (CanLII), the correct test for valid recission is objective . The Court affirmed its decision in "Mendoza v. Active Tire & Auto Inc., 2017 ONCA 471, 414 D.L.R. (4th) 676, leave to appeal refused, [2017] S.C.C.A. No. 405, that the test for a valid rescission is of an objective nature. There, Feldman J.A. wrote, that a franchisor's obligations do not change depending on the actions or reactions of a particular franchisee. The s. 6(2) test focuses on the disclosure itself, not its recipient, because the Act seeks to ensure that the franchisor provides the same disclosure to every potential franchisee". The Court clarified that the test is an objective one and it does not matter whether the deficient disclosure actually impaired the franchisee's ability to make an informed decision or if the particular franchisee acted or reacted in a specific way to the disclosure provided. As such, it is clear from this decision that the Court will not look into the mind of a plaintiff franchisee seeking to rescind or scrutinize their conduct to determine whether their ability to make an informed decision was impaired. Rather, the Court will consider, objectively, whether a reasonable franchisee in the plaintiff's circumstances would be impaired as a result of the alleged deficiencies.

Furthermore the objective approach was confirmed in Jayasena Management Corp. et al. v. Savannah Wells Holdings Inc. et al., 2023 ONSC 1008 the Court stated "While there is no doubt that the plaintiffs did not do any meaningful due diligence before purchasing the franchise, that is not the issue here. The obligation to provide a disclosure document is a statutory one as the Court of Appeal held in 2611707 Ontario Inc. v. Freshly Squeezed Franchise, 2022 ONCA 437, at paras. 13-14, a franchisor's obligations do not change depending on the action or reactions of a franchisee. Rather, the test in s. 6(2) focuses on the disclosure itself, not the recipient, because the Wishart Act seeks to ensure that the franchisor provides the same disclosure to every potential franchisee".

Understanding franchise law is crucial for both franchisors and franchisees/prospective franchisees. The complexities of franchise agreements, disclosure requirements, and regulatory compliance demand careful consideration and expert guidance. By staying informed about the key aspects of franchise law, businesses can navigate the legal landscape more effectively, ensuring that their franchise operations are both legally sound and successful. For anyone involved in the franchise industry, remaining updated on legal developments and seeking professional advice can make a significant difference in achieving long-term success.

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