Franchise Rescissions in Ontario: A Disclosure Document Primer

As noted by way of an introduction to the critical statutory franchise rescission remedy in Ontario in a Law Works Franchise Justice Blog Post on September 8, 2013, “Terminating a Franchise Agreement: A Primer“, if a franchisor fails to deliver a disclosure document as required under Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 and its Regulation, General Ontario Regulation 581/00, a franchisee is entitled to cancel (legally “rescind”) the entire purchase of the franchised business from the start of the transaction, including all franchise and related agreements, and claim a return of all his or her investment and losses.

The Two Different Rescission Rights in the Act

The Act provides a franchisee with a rescission remedy in two different circumstances:

(a) under section 6(1), where the prospective franchisee receives a deficient Disclosure Document, and delivers to the franchisor a Notice of Rescission within sixty days from the date of receiving the Disclosure Document, and

(b) under section 6(2), where the prospective franchisee has never received a Disclosure Document and delivers to the franchisor a Notice of Rescission within two years from the date of entering into a Franchise Agreement.

The difference between these two rights lies in the nature of the deficiencies in the Disclosure Document. If the disclosure deficiencies are technical and non-material, only the first option, under section 6(1), would apply, giving the franchisee sixty days to rescind the purchase from the date of receiving the Disclosure Document. If the disclosure deficiencies are so material that they fail to satisfy the substantive requirements of the Act, the second option, under section 6(2), would apply, giving the franchisee two years to rescind the purchase from the date of entering into the Franchise Agreement.

The Ontario Superior Court of Justice, for the first time explained the difference between the two rescission rights under the Act in the “Houston’s Steaks” case of Sovereignty Investment Holdings, Inc. v. 9127-6907 Quebec Inc., as follows:

• Section 6(1) is directed to the situation in which 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. Section 6(2) is directed to the situation in which the franchisee is unable to make an informed decision at all because of fundamental deficiencies in the disclosure provided to it. There may be circumstances in which the dividing line is hard to draw. Indeed, whether such a distinction is practicable in the context of franchising practice, as compared with the practice in respect of the distribution of securities, which appears to be the model for this statutory approach, may be questioned but is beyond the role of the Court.

Sixty Day Rescission Period

Under section 6(1) of the Act, a franchisee is entitled to review a Disclosure Document that contains all Franchise Agreements and all other required information for a period of at least fourteen days.

Failure to comply with this timing requirement would typically entitle a franchisee to rescind the Franchise Agreements within sixty days from the date that the franchisee (while still a “prospective franchisee”) received the Disclosure Document.

Two Year Rescission Period

Under section 6(2) of the Act, if the franchisor fails to deliver a Disclosure Document, or fails to deliver a Disclosure Document that contains all the key or material disclosure components as required under the Act and the Regulation, a franchisee is entitled to a rescission within two years from the date of signing the Franchise Agreements.

A Disclosure Document may not be considered as a “Disclosure Document” under the Act and the Regulation if it fails to contain key requirements under the Act and Regulations. Delivering such a materially deficient Disclosure Document has the same effect as failing to deliver a Disclosure Document at all.

For example, if it is found that the Disclosure Document does not contain the required information with respect to the following disclosure elements, it may have the same effect as if no Disclosure Document has been delivered (the following are some examples and there are many other possible rescission grounds that are not listed here):

• Franchisor’s Certificate, signed by the franchisor’s directors and officers, as required under the Regulation;
• Financial Statements of the franchisor, prepared by qualified accountants on a “review engagement” or audited basis, as required under the Regulation;
• If financial projections – whether historical performance figures or “future oriented” projections – are included, the necessary assumptions and supporting information, as required under the Regulation;
• Copies of all documents and agreements related to the franchise, in one document, at one time;
• All “materials facts”, as required under the Act and Regulation.

Notice of Rescission

A rescission, whether in relation to the sixty day or two year periods described above, is exercised by first delivering to the franchisor a written Notice of Rescission that complies with the requirements of the Act and the case law.

Each of these rescission time periods is a strict limitation period. Failure to comply with these limitation periods will disentitle the franchisee to the statutory rescission rights.

Other Claims

Outside of those statutory rescission rights, a franchisee may be entitled to statutory misrepresentation claims. In addition, any common law rights to which a franchisee may be entitled are unaffected by these statutory rights.

In general, all franchise related civil claims, whether statutory or common law, are subject to a general two-year limitation period in Ontario to commence a legal action under Ontario’s Limitations Act, 2002.

Compensation

Upon rescission, the franchisor is required to refund to the franchisee all of the franchisee’s costs and expenses in connection with his or her purchase, setup and operation of the franchise. More specifically, a franchisee is entitled to repayment of the following (without double counting):

• the purchase price of the franchise;
• the cost of setting up the business;
• the cost of all inventory and supplies
• all franchise and related fees paid to the franchisor as part of the purchase;
• all royalties and ongoing payments paid to the franchisor, and
• >all other losses in the operation of the franchise.

For more information, please go to Law Works’ Franchise Rescissions Practice page.