Franchise Rescission in Ontario; The Purpose of Disclosure

Posted Mon, 2009/04/20 - 21:40 by Paul Jones

Back in August, 2008 I reported on the decision of the Ontario Superior Court of Justice in 4287975 Canada Inc v Imvescor Restaurants. The franchisee paid $15,000.00 to the franchisor before receiving a disclosure document for an upscale restaurant chain. The franchisee then did not sign the franchise agreement until almost six months later.

Just under the two year limitation period for rescission for non-disclosure a noted franchise litigator brought an action on behalf of the franchisee asking how to interpret the rescission provisions of Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 in these circumstances. The provisions allow for rescission for 60 days from the date of the receipt of the disclosure document where the disclosure document is late or incomplete. But in this case at that point in time the franchise agreement had not yet been signed so there was nothing to rescind based on the late disclosure.

At trial the judge said that the purpose of the Act is to ensure that franchisees have adequate information on which to make a decision. In this case the franchisee had six months to review the document. It also had the option of not entering into the franchise agreement. There no right of rescission for failing to deliver a disclosure document.

The franchisee was unhappy with this and appealed.

This decision came out last week. The franchisee lost again. The Court of Appeal said:

"The Act, interpreted in the light of this modern interpretive approach, is clear that a rescission remedy is available to the franchisee in two separate situations, and that the two situations are not to be blurred into one. This interpretation is further bolstered by the purpose of the Act, which is in part to ensure that the franchisee has at least fourteen days to review a disclosure document before signing an agreement. “

Still in Ontario it is likely that some franchisees and their counsel will try to seek ways around the 60 day limitation period for late or incomplete disclosure. Rescission is such an attractive remedy. But it is the overall purpose of the Act that governs.

Average:

Your rating: None

Franchise topic:
- legal

6 Comments

Court of Appeal Reverses 60 Day Limit by michael webster

Submitted by michael webster on Tue, 2009/05/12 - 16:43.

As I had argued previously, the key concept was whether a disclosure document which was utterly deficient could give rise to a two year period of recission.

The Court of Appeal recently decided that in the case of extremely bad disclosure the two year limit and and not the 60 limit applied.

Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"

reply

Judge seems reasonable to me by Paul Steinberg

Submitted by Paul Steinberg on Wed, 2009/04/22 - 14:43.

In paragraph 33 of the ruling, the judge noted: "In fact, the appellant took six months from the receipt of the disclosure document to decide whether to be bound by the franchise agreement at all."

Even giving the franchisee the benefit of the doubt, the outcome was reasonable.

As to the rescission remedy: in Canada, would this have been merely for the amount(s) paid to the franchisor?

If so, it would seem that election of the rescission remedy would barely warrant the legal fees involved, let alone the other costs (build-out, equipment, permits, etc).

Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400

Paul Steinberg, Franchisee Attorney, New York City, Ph: 212-529-5400

reply

Author's Response by Paul Jones

Submitted by Paul Jones on Wed, 2009/04/22 - 17:08.

Section 6(6) of the Arthur Wishart Act requires not only the refund of the monies paid but also the purchase by the franchisor of any inventory, supplies and equipment and the franchisor must compensate the franchisee for losses. The wording is as follows: (6)The franchisor, or franchisor’s associate, as the case may be, shall, within 60 days of the effective date of the rescission, (a) refund to the franchisee any money received from or on behalf of the franchisee, other than money for inventory, supplies or equipment; (b) purchase from the franchisee any inventory that the franchisee had purchased pursuant to the franchise agreement and remaining at the effective date of rescission, at a price equal to the purchase price paid by the franchisee; (c) purchase from the franchisee any supplies and equipment that the franchisee had purchased pursuant to the franchise agreement, at a price equal to the purchase price paid by the franchisee; and (d) compensate the franchisee for any losses that the franchisee incurred in acquiring, setting up and operating the franchise, less the amounts set out in clauses (a) to (c) So obtaining rescission is a big deal, financially. As to Mr. Webster’s comment I agree that it may not have a large impact on pleading, but I do know that many considered it a significant case when the trial decision was announced. Mr. Roher, the franchisee’s counsel, personally told me that he would take it to the Supreme Court if he had too. I told him that he would lose on appeal. The key to me is the purposive interpretation that overrides the technical concerns. Many Ontario franchise lawyers are using a narrow technical reading of the regulations in order to advise their franchisor clients that earnings claims (now called financial performance representations) are optional in Ontario. I predict that when the issue comes before a judge they will lose. In Ontario the Act saws that franchisors are required to disclose all material facts, including items specified in the regulations. As long as the earnings information (such as historical sales figures) is a “material fact” as defined in the Act I think that a judge will hold that the information needs to be disclosed.

--

Paul Jones
<a href="http://www.jonesco-law.ca">Jones & Co Law Office </a>
Toronto, Ontario

reply

Earnings Claims in Ontario by michael webster

Submitted by michael webster on Wed, 2009/04/22 - 20:05.

Paul Jones writes: "Many Ontario franchise lawyers are using a narrow technical reading of the regulations in order to advise their franchisor clients that earnings claims (now called financial performance representations) are optional in Ontario.
I predict that when the issue comes before a judge they will lose. In Ontario the Act saws that franchisors are required to disclose all material facts, including items specified in the regulations.
As long as the earnings information (such as historical sales figures) is a “material fact” as defined in the Act I think that a judge will hold that the information needs to be disclosed."

I agree entirely with this, and hope that the issue shows up in a resale with an extended term.

Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"

reply

Ruling is Reasonable by michael webster

Submitted by michael webster on Wed, 2009/04/22 - 15:05.

Paul, the ruling is reasonable. But it simply doesn't stand for what a number of franchise lawyers have claimed - that if there is disclosure, then the statutory remedy has a 60 day limitation period.

Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"

reply

Ian Roher's Rule 22 Motion by michael webster

Submitted by michael webster on Mon, 2009/04/20 - 22:07.

Ian Roher is a noted franchisor litigator.

In this case, he brought a motion on behalf of a franchisee and for the purposes of the motion both parties agreed that 6(2) was not in play.

Section 6(2) is the section of the Wishart Act that franchisee attorneys use to get around the limitation period in 6(1) of 60 days.

This decision does not address the standard technique of pleading that whatever disclosure that was given was so incomplete as to be no disclosure, triggering section 6(2).

This is a minor case having no siginficant impact on pleading in Ontario.

Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"

reply

Franchise Rescission in Ontario; The Purpose of Disclosure

6 Comments

Comment viewing options

Search by company