By: Anthony Pugh, Law Works
Editor: Ben Hanuka, Law Works
In 2483038 Ontario Inc. v. 2082100 Ontario Inc., a January 30, 2020, decision of the Ontario Superior Court of Justice, the court granted rescission under section 6(2) on the basis of a single ground: that the franchisor’s certificate was not signed by the franchisor’s sole officer and director.
The court also held that the franchisor’s sole officer and director was personally liable as a ‘franchisor’s associate’ because he signed another part of the disclosure document. The court ruled that this part made representations to the prospective franchisee.
In October 2015, the plaintiff franchisees entered into a franchise agreement with the franchisor. Almost two years later, in August 2017, the franchisees rescinded the franchise agreement, alleging that the disclosure document that they had received from the franchisor was fatally flawed because the franchisor’s sole officer and director did not sign the disclosure certificate. Instead, the director signed another part of the disclosure document.
The franchisor disputed the rescission and the franchisees started a claim against the franchisor, as well as the franchisor’s director. The franchisees claimed that the director made representations to them in the disclosure document and was involved in the review and approval of the grant.
The lack of a signed certificate was a fatal flaw
Even though the director signed the disclosure document, the court ruled that the disclosure document was deficient because he did not sign the certificate. The court rejected the argument that the franchisees needed to show that they were deprived of the ability to make an informed investment decision in a deficient certificate case. Instead, the court held that another policy objective of the legislation governed the certificate requirement – the obligation of the franchisor to review the disclosure document to ensure its completeness and accuracy.
The court found that there was no evidence that the director reviewed the disclosure document, or that he had the whole document in front of him, before he signed it. It did not matter than the franchisees’ decision to invest in the franchise was not impacted by any disclosure flaw. The court held that the policy rational behind the certificate requirement was not satisfied, and the disclosure document was fatally flawed.
The director was a franchisor’s associate
The court also held that the director was a franchisor’s associate because, by signing the disclosure document on its fourth page, he was responsible for the representations on those pages. The director was liable for all the franchisees’ rescission damages.
The court rejected other arguments of the franchisees: that the director was involved in the review and approval of the franchisees. The court held that there was no evidence of the director’s meaningful involvement in the sale process.
The franchisees also argued that other managers of the franchisor who handled the approval process were acting as agents of the director personally. The court rejected this argument, holding that it was antithetical to the corporate veil and that it was more likely that those managers were agents of the franchisor.
Lease payments to the landlord were not refundable
The franchisees argued that payments that the made directly to the landlord, which was unrelated to Fit For Life, were refundable under section 6(6)(a) of the Wishart Act, as refundable franchise payments, since these payments were made under a sublease with the franchisor. The court rejected this argument. The franchisor had never received the rent payments, which the franchisees paid directly to the landlord. Those damages could be claimed only under section 6(6)(d) as part of overall losses.
Note: Law Works acted as counsel for the franchisor in this case.