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Sovereignty (Houston Stakes)

Full Case Name: Sovereignty Investment Holdings, Inc. v. 9127-6907 Quebec Inc. (2008)

This is an influential Ontario court decision under the Arthur Wishart Act (Franchise Disclosure), 2000, on the issue of what constitutes a materially deficient disclosure document.

The franchisee purchased a large restaurant in the Vaughan-Mills Shopping Centre that is located in Vaughan. The franchisor was a Quebec franchise startup.

About a year after purchasing the restaurant, the franchisee was forced to close it down as a result of mounting losses.

The disclosure document did not contain key required components under the Act. The franchisee brought a court action to cancel (rescind) the franchise purchase and receive compensation.

The court held for the first time that a disclosure document is inoperable and is not considered a “disclosure document” under the Act if it fails to contain any one of the following fundamental components: (i) a signed franchisor’s certificate, (ii) financial statements, (iii) if earning projections are included, the required supporting information about, and (iv) that the disclosure document contain all required information and documents in one document, delivered to a prospective franchisee at one time.

The decision was made by a senior judge of the Ontario court, sitting on the specialized Commercial List, Mr. Justice Wilton-Siegel.

This case has played a pivotal role in shaping some fundamental aspects of Ontario franchise disclosure law under the Act with respect to the main requirements of a disclosure document under the Act.

In addition, this was the first Ontario case that held a successor franchisor – a purchasing franchisor that acquired the rights to the franchise system from the original franchisor – was liable to a franchisee for the original franchisor’s rescission obligations.

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