Beyond Force Majeure: Pulling out of a Deal With a 60-Day Rescission

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By Ben Hanuka

With the unfolding crisis, the commercial Bar across Canada is naturally dealing with contractual and common law grounds relieving parties of their obligations.  Franchise transactions are under stress – prospective and recently signed-up franchisees are scrutinizing their pending deals.  Franchise law gives them a unique legal tool that has so far been rarely used: rescission under section 6(1) within 60 days of receipt of a disclosure document.

What is the legal test? While no one knows for sure, the legal threshold for this type of rescission is probably much lower than what we have come to expect under section 6(2).

The requirements in section 6(1) are a lot less onerous.  The section is broad in its wording (unlike its counterpart which requires no disclosure at all).  It is made up of two alternative parts: (a) failure to comply with the timing requirements for the delivery of a disclosure document, or (b) failure to meet the content requirements of a disclosure document.  Based on the statutory wording, it is arguable that this rescission is available for any disclosure deficiency, timing or content, however technical or inconsequential (hence the strict 60-day time limit).

But it is also possible that any technical failure – time or content – must have a material impact on the ability to make an informed investment decision.  In one of the earliest decisions on rescission, Sovereignty Investment Holdings, Wilton-Siegel J. wrote that section 6(1) was directed at situations where “the franchisee was unable to make a fully informed decision as a result of inadequate time for consideration of such decision or inadequate disclosure of the material facts”.

Must the technical failure still have a marked noteworthy impact on a franchisee’s investment decision?  If so, why do the statutes include various less significant content requirements, like standard prescribed statements, if they have no consequence?  Other than judicial discussion in obiter, there does not appear to be a court decision of a rescission claim squarely under section 6(1).  Franchise lawyers representing all sides to disputes need to be prepared to deal with this issue now probably more than ever before.