Canadian franchise law has had a relatively short development life and regulates the obligations and rights of both franchisors and franchisees during the prospective and active franchising periods. Franchise laws are not federal, but within the purview of the provinces; in addition to Ontario, provinces that have enacted franchise disclosure legislation include British Columbia, Alberta, Manitoba, New Brunswick, and Prince Edward Island.
Ontario’s Arthur Wishart Act is nearing two decades since enactment; its short jurisprudential history makes proactive strategy the main avenue available to franchisors to mitigate the rescission risks within the act.
Franchisors’ significant disclosure obligations under Ontario’s Franchise Act
The Franchise Act creates a legal framework that holds franchisors to a higher standard than in other commercial and contractual contexts by mandating the disclosure of specific information to prospective franchisees, with the view to allowing franchisees to make informed decisions about the franchise opportunities presented. Franchisors must (no less than fourteen days before the signing of an agreement and/or payment by a prospective franchisee, with limited exception accurately, clearly, and concisely present the following information
- all material facts
- financial statements
- signed copies of all proposed franchise and other agreements relating to the franchise
- statements to assist the prospective franchisee in making informed investment decisions
- other information and copies of documents as prescribed by the Franchise Act
Franchisors’ disclosure must be delivered personally or by registered mail as one package. Franchisors are also obligated to disclose any material changes to the franchisor or franchise operations during the fourteen-day disclosure period by way of a written Statement of Material Change; this statement qualifies as disclosure and must occur before the franchisee signs any binding agreement, or payment in consideration thereof.
Rescission: draconian effects of defective disclosure
Rescission is the revocation, cancellation, or repeal of the associated franchise agreements and commitments; it is the most significant relief available to franchisees where a franchisor is alleged to have breached its disclosure obligations. In essence, the legislation attempts to put the franchisee back in its pre-contractual position where the franchisor’s disclosure is deemed defective. This exceptional remedy is unique to the franchisor-franchisee relationship that, where available, entitles the franchisee to a full refund of money paid for the franchise and perhaps for the supplies, equipment and/or inventory bought pursuant to the signed agreement.
The Ontario Courts have broadly established four common grounds entitling franchisees to rescission. Each is related to some aspect of deficiency of the franchisor’s disclosure obligations, with the consequences ranging from unactionable immaterial deficiency or insufficiency equating to non-disclosure to actual lack of disclosure. Accordingly, insufficient disclosure has been defined in various terms: “materially deficient,” “serious non-compliance,” “inadequate and deficient disclosure,” or “stark and material deficiencies”.
Failure to properly deliver disclosure
Disclosure must be delivered as one document at one time; otherwise, the disclosure is seen as “piecemeal,” which can trigger rescission. Additionally, when the document is delivered may also impact a franchisee’s ability to rescind. Electronic service of disclosure was only added to the legislative scheme in 2016 which mandates that sufficient disclosure must be able to be stored, retrieved, and printed, contain no links to external documents or content, contain a file index setting out each file name/subject matter, describing the content; franchisors must receive written acknowledgement disclosure has been received.
Failure to include all material facts
Sufficiency of disclosure will always be fact-specific, and must amount to more than mere imperfection. The failure to include material facts has been seen in some instances as being so “fundamentally deficient in omitting such material facts as to constitute no disclosure.”
Failure to include Section 5 information
Pursuant to Section 5 of the Franchise Act, set out the other information required beyond all material facts discussed above. Franchisors should err on the side of caution when choosing what to withhold from franchisees and be especially mindful of the information that was available at the time disclosure was made, but not provided to franchisees, such as available financial information or business plans. Such deficiencies in disclosure make it impossible for the franchisees to make an informed decision.
Failure to notify of material change
While no jurisprudence yet has dealt with failure to notify of a material change, franchisors should keep the obligation in mind throughout the franchising relationship. Under the Act, a material change is defined as any “change in the business, operations, capital or control of the franchisor or franchisor’s associate, a change in the franchise system or a change… that would reasonably be expected to have a significant adverse effect on the value or price of the franchise to be granted or on the decision to acquire the franchise.” Importantly, deficiencies in disclosure cannot be cured by a subsequent Statement of Material Change; deficient disclosure can only be cured through the service of a new and complete disclosure package.
Considerations upon rescission: supplies, equipment and damages
Where a franchisor provides a late disclosure package, a 60-day rescission period is activated automatically, in which a franchisee may rescind without penalty. Once a franchisor has received the required written notice of rescission, a franchisor will be required to provide the above-mentioned refunds and repurchases, where applicable. Where there is a nondisclosure (as defined above), a franchisee has an automatic two-year right of rescission from the date of the franchise agreement.
Lastly, a party is not necessarily insulated from this obligation simply by stating the relationship is not a franchise. Where on the facts an agreement takes on the characteristics of a franchise, a lack of disclosure can trigger a rescission right.
Rescission is draconian – franchisors would do well to take all necessary steps to avoid the risk by strategically and closely managing all aspects of disclosure.
- Arthur Wishart Act (Franchise Disclosure), 2000 S.O., c. 3 (the “Franchise Act”)
- Arthur Wishart Act, s 5(1)(b)(i)-(iii).
- Ibid., s 5(3)-(6).
- Payne Environmental Inc v Lord and Partners Ltd,  ONCJ 1770 at para 13. Raibex Canada Ltd. V ASWR Franchising Corp., 2016 ONSC 5575 at paras 46-49.
- Ibid., s 6(6).
- Mendoza v Active Tire & Auto Inc., 2017 ONCA 471.
- 2212886 ON Inc v Obsidian Group, 2017 ONSC 1643.
- 6792341 Canada Inc. v Dollar It Limited, 2009 ONCA 385.
- 1490664 Ontario Ltd. V Dig This Garden Retailers Ltd, 2005 ONCA 256.
- Raibex at para 48; 4297975 Canada Inc. v Imvescor Restaurants Inc., 2009 ONCA 308 at para 37.
- Obsidian at para 53.
- Supra note 1 at s 1(1).
- Stephanie Ruta, “26th East Region Solicitors Conference Virtual Program Part 2: Corporate/Commercial – Franchise Disclosure Common Errors” (23 October 2020) online: CanLii .
- Supra note 1 at s 6(3)-(4).
- Fyfe v Vardy (Dial a Bottle), 2018 ONSC 5066 at para 33. Factors which favoured the finding of a franchise relationship between two parties to an exclusivity agreement were: the plaintiffs requirement to making continuing payments; the defendant’s granted use of their trademark, and exercised “significant control over the plaintiff’s method of operation.”