Rescission Claims And Damages

Article Content

Rescission under Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000, and comparable franchise disclosure legislation in other provinces, is a dramatic remedy. It entitles a franchisee to compensation of all his or her investment in the franchised business.

This includes the purchase price of the franchised business, the cost of setting it up, the cost of inventory and supplies, all royalties and franchise payments paid to the franchisor, and all losses that the franchisee incurred in the operation of the franchised business.

When a Disclosure Document is Materially Deficient

A franchise 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 may have 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; there are other 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 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.

The notice of rescission should refer to the key legal grounds on which the rescission is based, and set out the rescission damages that the franchisee is seeking, broken down by legal categories as set out in the Act.

This rescission time period is a strict limitation period. Failure to comply with this limitation period will disentitle the franchisee to the statutory rescission rights.

Rescission Damages

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

Rescission affords no entitlement to future lost income, but rather to past losses. Damages are calculated with a view to return the franchisee to the position in which he or she was before the franchise purchase.

One of the key advantages of a rescission claim (as opposed to 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.

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.

Pursuing a Rescission Claim

A franchisee will often have to launch a legal proceeding to prove that he or she is legally entitled to rescission, and to legally prove damages.

The legal proceeding is typically pursued as an action. Often, the dispute is required under the language of the franchise agreement to be resolved through private arbitration.

Whether in court or arbitration, proving the last category of damages, the losses that the franchisee incurred in the operation of the franchise, may require accounting evidence and analysis. It may be necessary to obtain a forensic accounting report about the franchisee’s losses (as opposed to actual payments made to the franchisor or third parties) from a qualified forensic accounting expert.

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.

This article is provided for information purposes only. Law Works’ Franchise Law Blog does not provide legal advice.

For more information about Law Works’ expertise and how we may be able to help you, please contact Ben Hanuka at https://www.lawworks.ca/book-a-consultation or by phone at 855-978-5293.