Ontario Court of Appeal Uphold Rescission Against Franchisor and its Director Based on Representations and Missing Certificate

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By: Mandana Niknejad, Law Works
Editor: Ben Hanuka, Law Works

In 2483038 Ontario Inc. v. 2082100 Ontario Inc, a decision of the Ontario Court of Appeal released on June 9, 2022, the Court of Appeal dismissed the appeal by the franchisor and the individuals from the trial decision of the Superior Court of Justice which granted rescission on the grounds that the disclosure document failed to include a signed certificate, and that the sole officer and director of the franchisor was a “franchisor’s associate”.

The trial decision

The disclosure document contained a section signed by the franchisor’s sole officer and director, on page four.  The statements on pages two to four of the disclosure document contained information about the franchise.  That is the section that was signed.  The official certificate page was unsigned.

The parties entered into a franchise agreement to operate a restaurant on October 19, 2015. The franchisee rescinded the agreement almost two years later, on August 1, 2017.

The trial judge granted the rescission because the disclosure document failed to include the signed certificate by the franchisor’s officer or director, as required under section 7 of the Regulation to the Arthur Wishart Act (Franchise Disclosure), 2000.  This disclosure failure was a fatal flaw and amounted to complete lack of disclosure.

The trial judge also found that pages two to four of the disclosure documents promoted the franchise as worthy of investment.  As a result, the trial judge held that the franchisor’s sole officer and director was a “franchisor’s associate” within the meaning of section 1 of the Act, on the basis that he made representations to the prospective franchisee in those pages for the purpose of granting the franchise, marketing the franchise, or otherwise offering to grant the franchise.

Court of Appeal affirmed the trial judge’s decision

On appeal, the franchisor argued that the trial judge erred in applying the informed investment decision test to the missing signature on the certificate.  In other words, it argued that the failure to certify the disclosure document was not enough to find that there was substantially no disclosure to allow rescission.

The Court of Appeal ruled that the trial judge was correct in her conclusion that the Court of Appeal’s earlier decision in Raibex did not impact the “informed investment decision” analysis in the context of a defective certificate.  As such, a franchisee did not require to show that it was unable to make an informed investment decision if a disclosure document failed to contain a deficient certificate.

Holding otherwise would undermine one of the purposes of the Act, which is to attach personal liability to the signatories, to ensure the contents of the disclosure documents are accurate.  The court held that the attachment of personal liability to signatories of a disclosure document is a free-standing objective and is not tied to any impact on the prospective franchisee.

As to the trial judge’s finding of personal liability against the franchisor’s officer and director, the franchisor argued that the trial judge had erred since the individual was not directly involved in the granting of the franchise.  It argued that the definition of “franchisor’s associate” in the Act required direct involvement in the grant of the franchise or in the making of representations, etc.

The Court of Appeal disagreed and characterized the franchisor’s argument as “unnatural”, as standing for the proposition that the representation itself had to be direct (as opposed to “direct involvement”).  The Court of Appeal held that this argument sought to add the word “direct” to the word ‘representation’, yet it only existed in relation to “representation” (“direct representation”). It held that the interpretation of the franchisor was inconsistent with a reasonable interpretation of the Act and not within the contemplation of the legislature.

The Court of Appeal also found that the trial judge had found the franchisor’s sole officer and director to be franchisor’s associate based on evidentiary record that the statements made at pages two to four of the disclosure documents were “representations” for the purpose of granting, marketing, or offering to grant the franchise. These findings of fact were open to the trial judge and therefore were entitled to deference. In addition, the court relied on the fact that the sole officer and director testified that he intended to be personally liable for his signature on page four.  Based on these facts, the court held that the sole officer and director was directly involved in the grant of the franchise and was thus a “franchisor’s associate”.

* Note: Law Works acted as counsel for the appellants in this case – the franchisor and the individual.