A recent judgment of the Ontario Superior Court of Justice will have important implications for franchisors and franchisees.
Under the Arthur Wishart Act (Franchise Disclosure), 2000, a franchisee can rescind the franchise agreement and obtain a refund of any money paid to the franchisor if the franchisor has failed to provide the disclosure required by the Act. Section 5 of the Franchise Disclosure Act, and regulations implemented under the Act, state that a franchisor must give the franchisee detailed information about the franchise business before the franchisee signs the franchise agreement. If the disclosure document is inadequate, the franchisee can cancel the deal and get a full refund within 60 days of the date he received the disclosure document. If there is no disclosure document, however, the franchisee has two years in which to rescind.
In this case, the franchisor relied on a “disclosure document” consisting of a four and a half page flyer containing two pages of photographs and one page setting out general information about the neighbourhood in which the franchise was to be located. There was also a “four item investment summary and projected financial information based on three possible scenarios.” There were no proper financial statements or balance sheets, and the franchisee was not provided with a copy of the head lease for the business premises. The franchisor admitted that this document did not comply with the disclosure requirements of the Act.
As the franchisee did not take steps to rescind the franchise agreement within the 60 day period, the first issue before the court was whether or not the flyer constituted a disclosure document, in which case the 60 day period would apply. The court concluded that the purported “disclosure document” was so deficient that it did not qualify as a disclosure document under s. 5 of the Act, and that the plaintiff therefore had two years In which to rescind:
The language of the Act is unambiguous and it is mandatory. It prescribes in clear and concise terms what is required. The fact that the plaintiff may have been satisfied with the disclosure given as alleged, is irrelevant. I find that the “disclosure document” in this case is so materially deficient as to amount to no disclosure document at all pursuant to s. 5 of the Act. … Thus, the plaintiff has a statutory right to rescind the Agreement, without penalty or obligation, no later than two years after entering into it, and he did so on March 4, 2008, well within the two-year period.
The case also establishes important principals on the question of who is a “franchisor’s associate” as this term is defined in s. 1(1) of the Act. Under s. 7 of the Act, a franchisee can sue a franchisor’s associate for damages arising out of the franchisor’s failure to disclose. The franchisee alleged that a shareholder in the franchisee corporation was personally liable for the corporation’s failure to disclose. The court accepted this argument, even though the shareholder had never been a director or officer of the corporation, and, with only 50% of the shares, did not have a clear voting majority. The shareholder was considered to be an associate because he was directly involved in marketing the franchise and offering it to the plaintiff. Also, the shareholder effectively controlled the franchisor, even though he did not have a voting majority of the shares.
As part of the franchise arrangement, the franchisee had sub-let the business premises from another company in which the shareholder had an interest. The court found that this company was also a “franchisor’s associate” as it was effectively controlled by the shareholder, and the shareholder negotiated the sub-lease on its behalf. Thus the franchisor was also entitled to rescind the sublease.
Link: MBCO Summerhill Inc. v. MBCO Associates Ontario Inc. CanLII – 2010 ONSC 5432 (CanLII)
Richard Hayles, B.A., J.D.
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