Ontario Court Grants Rescission: FFL

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By: Alex Sinenko, Law Works
Editor: Ben Hanuka, Law Works

In 2619506 Ontario Inc. v 2082100 Ontario Inc., et al, a decision of the Ontario Superior Court of Justice on a motion for summary judgment, released on November 6, 2020, the court granted rescission to the plaintiff franchisee under subsection 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2002.

The financial statements in the disclosure document were not compliant with the requirements of the Wishart Act and its Regulation. This was a sufficient basis for the motion judge to conclude that the plaintiff had a right to rescind the franchise agreement.

The court also found that the individual defendants were “franchisor’s associates” as defined in the Wishart Act.  One was the sole director and shareholder, as well as the president and CEO of the franchisor.  The other was controlled by the CEO by working for one of his companies.  In addition, he representations to the prospective franchisee on behalf of the franchisor for the purpose of marketing the franchise.

Key facts

Before purchasing the franchise, the franchisee’s principal, Vaishali Paralekar, met with one of the individual defendants to discuss her franchise application.

Later, the individual defendant sent the disclosure document to Paralekar.  The financial statements that were in the disclosure document were unaudited statements from over two years earlier.

The franchisee struggled to operate the business with low income.  After unsuccessful attempts to sell the restaurant, it served the notice of rescission under subsection 6(2) of the Wishart Act alleging inadequate disclosure in the disclosure document.

Financial statements

The court held that inadequate financial disclosure was sufficient to find that the franchisor had never provided a disclosure document within the meaning of the Wishart Act.

The court reiterated that the financial statements are a vital piece of information required for prospective franchisees to be able to make an informed investment decision.  In this case, the fiscal year ended in January 2018, and the franchise agreement was signed on May 7, 2018.  The disclosure document was required to contain financial statements for the period ending January 2017 but only contained unaudited financial statements for the previous year, 2016.  It therefore did not satisfy this requirement.  The court held that it did not matter that the location was a Treats Café before the franchisee bought it.

Franchisor’s associates

The court found that the franchisor’s sole officer and director met the first requirement of control under subsection 1(1) of the Wishart Act, as the sole director and shareholder, as well as the president and CEO of the franchisor.  It found that the individual was also involved in the grant of the franchise because he signed the franchisor’s certificate in the disclosure document.  In doing so, the court found that he made representations in the disclosure document to the franchisee, meeting the second requirement of subsection 1(1).

The court also found that the second individual also met the first requirement of subsection 1(1) because he was controlled by the franchisor’s sole director.  This individual’s title was director of franchising and development for the group of companies that included the franchisor.  Although he was technically an employee of a related company which operated another brand, that company also part of the group of companies and was owned and controlled by sole officer and director.

The court also found that this individual’s involvement met the second requirement of subsection 1(1) because he made “representations to the prospective franchisee on behalf of the franchisor for the purpose of granting the franchise, marketing the franchise or otherwise offering to grant the franchise.”  The court did not accept the defendants’ argument that he did not have control over the decision to grant the franchise.  It was enough for the court that the franchisor’s director controlled this individual, who in turn made representations to the prospective franchisee for the purpose of marketing the franchise.