In this update we summarize some of the more significant franchise law cases and legislative developments that occurred in 2022.

Top 6 Case and Legislative Highlights in Franchise Law in 2022

  • The Ontario Court of Appeal confirmed in two decisions that franchisees are not required to show that disclosure deficiencies subjectively impaired their ability to make an informed investment decision to succeed in claims for rescission. Following the 2018 Court of Appeal's decision in Raibex, there was some uncertainty as to whether fundamental disclosure deficiencies also required subjective proof that the franchisee was unable to make an informed investment decision.
  • The first decision reported under New Brunswick's Franchises Act discusses the necessity of providing statute-compliant financial statements. 1
  • The Ontario Court of Appeal held that continued performance after the expiry of a franchise agreement had the effect of extending the agreement. 2
  • The Ontario Superior Court of Justice noted that goodwill associated with a trademark can be established by obtaining evidence from potential franchisees. 3
  • Small business franchisors may be eligible for additional funding and loans due to the amendments to the Canada Small Business Financing Regulations and Canada Small Business Financing Act.
  • The Single-use Plastics Prohibition Regulations under the Canadian Environmental Protection Act, 1999 has ushered in the prohibition of the manufacture, import and sale of single-use plastics.

Case Law Highlights

Franchise Disclosure Document Deficiencies

In 2022, the courts continued to examine what constitutes a "fatal flaw" or other deficiencies in franchise disclosure documents ("FDDs") that entitle franchisees to rescind their franchise agreements for up to 2 years after the date of signing. Some of the key cases in this regard are summarized below:

261707 Ontario Inc. v. Freshly Squeezed Franchise Juice Corporation (Freshly Squeezed), 2021 ONSC 2323 aff'd 2022 ONCA 437

The Ontario Court of Appeal ("ONCA") found that the failure to provide complete financial statements and include an Agreement to Lease were material disclosure deficiencies or "fatal flaws". Further, the failure to highlight that the franchised business would be the first to operate in a non-mall retail environment amounted to failing to disclose a "material fact" (as defined in the Arthur Wishart Act (Franchise Disclosure), 2000, (the "AWA")). These deficiencies entitled the franchisee to rescind the franchise agreement under section 6(2) of the AWA, and the franchisee was not required to provide evidence of actual impairment of their ability to make an informed investment decision. Central to the Court's analysis was the fact that the franchisor withheld information that was within its power to disclose. For a full analysis of the Ontario Supreme Court's decision, please see our bulletin here.

2483038 Ontario Inc. v. 2082100 Ontario Inc. (Fit for Life), 2022 ONCA 453

The ONCA confirmed that failure to certify an FDD is sufficient to entitle a franchisee to rescind the franchise agreement under section 6(2) of the AWA. Section 7 of the regulation under the AWA requires that every disclosure document include a signed and dated certificate. In this case, the franchisor only signed one page of the FDD, which did not adequately confirm that the document was accurate and complete. The ONCA noted that where there is a defective certificate, there is no further requirement of the franchisee to demonstrate they were unable make an "informed investment" in order to be entitled to rescission.

Alphataho Inc., et al v. Maaco Canada Partnership LP, et al., 2022 NBQB 25

In the first reported decision under New Brunswick's Franchises Act, the Court held that the franchisor's failure to provide statutecompliant financial statements amounted to a fatal defect in disclosure and entitled the franchisee to rescind the franchise agreement. In this case, the franchisor provided financial statements that were older than was required by the Franchises Act. While the franchisor argued it could have qualified for an exemption from the financial statement disclosure requirement, the Court held that failure to claim the exemption is "not a mere technical defect".4 When franchisors qualify for and intend to rely on an exemption to disclose financial statements, caution should be exercised before financial statements are automatically included in the FDD. For a full analysis of this decision, please see our bulletin here.

1901709 Ontario Inc. et. al. v. Dakin News Systems Inc., 2022 ONSC 6008

The AWA provides that no FDD is required where the grant of a franchise to a third-party is not effected by or through a franchisor (section 5(7) (a)(iv)). The Court confirmed this exception is inapplicable if the franchisor is involved in the transfer beyond exercising a right to consent. Analysis of this section will consider the "pith and substance" of a transaction to determine if it is truly a mere assignment that falls within the AWA's exception. In this case, the Court found the franchisor was involved beyond exercising a right to consent to the transfer, by requiring the parties to sign a new franchise agreement and pay new consideration as part of its transfer procedure. This demonstrated that the franchisor had "effected" the transfer, rendering the FDD exception in the AWA inapplicable.

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1. Alphataho Inc., et al v. Maaco Canada Partnership LP, et al., 2022 NBQB 25.

2. Coffee Time Donuts v. 2197938 Ontario Inc., 2022 ONCA 435.

3. 2788610 Ontario Inc. v. Bhagwani, 2022 ONSC 6098

4. Alphataho v Maaco, 2022 NBQB 25 at para 52

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2021