Ontario Court of Appeal Upholds Rescission Against Franchisor, its Director and Director of Franchising Based on Representations and Missing Financials

Article Content

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

In 2619506 Ontario Inc. v. 2082100 Ontario Inc., a decision of Ontario Court of Appeal released on October 12, 2021, the Court of Appeal dismissed the franchisor’s appeal from summary judgment granting rescission to the franchisee.

Facts

In or around April 2018, the franchisee’s representative met with the franchisor’s director of franchising and development.  Following the meeting, he sent the  disclosure document to the franchisee’s representative.  The disclosure document failed to include the franchisor’s most recent financial statements.  The financial statements were unaudited statements from 2016, over two years earlier.  The disclosure document was signed by the franchisor’s sole officer and director.

In May 2019, the franchisee delivered notice of rescission and later brought an action for rescission.

The motion judge held that the disclosure document was materially deficient, amounting to no disclosure under s. 6(2) of the Arthur Wishart Act (the Franchise Disclosure), 2000.  She also found that both individual defendants, the franchisor’s officer and director, and its director of franchising, were “franchisor’s associates” under s.1(1) the Act, and as such were jointly and severally liable for rescission damages pursuant.

Court of Appeal – informed investment decision test

On appeal, the franchisor argued that the motion judge misapplied the “informed investment decision test” in finding that the deficiencies in the disclosure document amounted to the absence of disclosure.  In particular, it argued that the Court of Appeal’s earlier decision in Raibex Canada Ltd. v. ASWR Franchising Corp., required the motion judge to conduct a more detailed analysis of whether the prospective franchisee was able to make a properly informed investment decision.

The Court of Appeal disagreed and held that the motion judge had correctly considered the purpose of the Act, and the evolution of the test in the case law in properly in reaching her decision.  The Court confirmed that the purpose of Act is to redress the imbalance of power between franchisors and franchisees.

The Court of Appeal also upheld the motion judge’s analysis of the test for non-disclosure under section 6(2) of the Act.  While it held in Raibex that non-compliance with section 5 of the Act would not always constitute sufficient grounds for rescission under s. 6(2), a purported disclosure document may be so deficient as to effectively amount to no disclosure, thereby permitting rescission under s. 6(2).  In the case at bar, the disclosure document contained nothing other than the unaudited 2016 financial statements of the franchisor.  The absence of recent financial information rendered the disclosure document so deficient as to amount to no disclosure at all.

Court of Appeal – individuals were “franchisor’s associates”

The Court of Appeal upheld the motion judge’s finding that the sole officer and director of the franchisor was a franchisor’s associate under the Act.  He controlled the franchisor and signed the certificate in the disclosure document.  As such, he was “directly involved in the grant of the franchise”, within the definition of “franchisor’s associate” under the Act.

The court held similarly with respect to the other individual defendant.  It rejected the franchisor’s argument that he was merely an employee.  It affirmed the motion judge’s finding that the individual was “controlled by another person who also controls directly or indirectly the franchisor”, that is the franchisor’s officer and director, and therefore fell within the first part of the definition for franchisor’s associate.

Based on the evidence on the record, the individual also met the second part of the definition: by marketing on behalf of the franchisor and meeting with the franchisee to discuss its application, 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”.

As a result, the court also upheld the imposition of joint and several liability on the franchisor and the two individuals.