A Comparison Of Franchise Rescission And Misrepresentation Claims

There are significant differences between a claim for rescission and a claim for misrepresentation under the Arthur Wishart Act (Franchise Disclosure), 2000, as they apply to franchisees’ potential claims and franchisors’ defences.

A claim for rescission

A claim for rescission seeks a cancellation of the entire transaction and an end to the franchise relationship.

A rescission claim is based on a fundamental failure to provide a disclosure document or material fact disclosure. (For more information about entitlement to rescission, you may wish to read the Law Works Franchise Blog article titled, Franchise Rescissions in Ontario: A Disclosure Document Primer).

Once entitlement to rescission is established, entitlement to damages is automatic.

Damages are calculated with a view to return the franchisee to the position in which he or she was before the franchise purchase.

Rescission affords no entitlement to future lost income, but rather to past losses.

A claim for a rescission is subject to a limitation period under the Act: a prerequisite is the delivery of a notice of rescission within two years from the date of the franchise agreement.

Thereafter, the franchisee has two years from the delivery date of the notice of rescission to commence a legal proceeding.

A claim for misrepresentation

A claim under section 7 of the Act seeks damages for either (i) misrepresentation by a franchisor of a material fact, or (ii) failure by a franchisor to otherwise comply with disclosure obligations under the Act.

Either claim under section 7 does not seek to end the franchise relationship between the franchisor and franchisee.

For instance, if a franchisee alleges that earnings projections contained in a franchise disclosure document are misleading, such a claim may better fit within a claim for misrepresentation rather than a claim for rescission, because it more closely relates to the issue of misleading information rather than omitting material fact disclosure (this is assuming the necessary prescribed information about the earnings projections is properly contained in the disclosure document).

There is no automatic entitlement to damages. The franchisee has to prove in court two key legal requirements: first, that damages resulted from the misrepresentation (called in law “causation”); second, the amount of damages that resulted from the misrepresentation.

Damages may be claimed for past losses, future losses, or both.

Advantages of claiming rescission

One of the key advantages of a rescission claim (and disadvantage of a misrepresentation claim) is that some parts of damages are much easier to prove – there is no requirement to prove that damages were caused as a result of the franchisor’s failure to provide disclosure.

Similarly, there is no requirement to link between the amount of damages and the disclosure failure – the amount of damages is framed in section 6 of the Act, and is designed to bring the franchisee back to the position in which he or she was before the franchise purchase.

Advantages of claiming misrepresentation

Some of the key advantages of a misrepresentation claim (and disadvantages of a rescission claim) are as follows – assuming there is no termination of the franchise agreement (for more about termination of franchise agreements, you may wish to read the Law Works Franchise Blog article titled, Top Five Franchise Termination Considerations):

• A misrepresentation claim is not premised on the delivery of a notice of rescission within two years from the date of the franchise agreement. It is only subject to the general Ontario limitation period for commencing proceedings under theLimitations Act, 2002.
• There is no need to prove a fundamental failure of disclosure. Although practically in the circumstances of many cases where the franchise disclosure document is technically compliant, both rescission and misrepresentation claims require proof of a failure to disclose material facts. (For an explanation of the requirements of material fact, you may wish to read the Law Works Franchise Blog article titled, Material Facts Explained: A Disclosure Document Primer.) Still, a misrepresentation claim can be narrower in the nature of the key aspects of the failed disclosure.
• A misrepresentation claim does not seek to cancel or reverse the franchise purchase, but merely seeks damages for losses, whether past or future. The franchisee is technically able to continue owning and operating the franchised business (whereas a rescission generally is consistent with a return of the franchised business to the franchisor).
• Unlike in a rescission claim, a franchisee need not worry about post-termination restrictive covenants in the franchise agreement, such as non-compete and non-solicitation covenants, since a misrepresentation claim does not seek to end the franchise relationship.

It is possible to claim both rescission and misrepresentation in the alternative.