The Raibex Decision and the Definition of ‘Material Fact’ (Part II)

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This article, written by Ben Hanuka, was originally published by The Lawyer’s Daily February 8, 2018. Click here to view the published article.

By Ben Hanuka

Are the key reasons in this decision similar to and different from the “material fact” definition in the Act?

As elaborated in the first part of this article, the Court of Appeal for Ontario held that disclosure deficiencies justify rescission under subsection 6(2) of the Act if the franchisee cannot “make a properly informed decision on whether to invest in the franchise.”

Epstein J.A. did not expressly identify the key facts underlying the court’s decision (see Part I of the article for the key facts) as “material facts” under the Act, although she referred to the motion judge’s characterization as material facts of certain disclosure omissions.

But the reasoning and focus on the franchisee’s ability to make an informed decision about whether to invest in the franchise appears very much based on the definition of “material fact” under the Act.

Subsection 1(1) of the Act defines ‘material fact’ as follows (underlined added for emphasis):

“material fact” includes any information about the business, operations, capital or control of the franchisor or franchisor’s associate, or about the franchise system, that would reasonably be expected to have a significant effect on the value or price of the franchise to be granted or the decision to acquire the franchise;

This definition focuses on, among other things, any information about business or operation of the franchisor or the franchise system that would reasonably be excepted to have a significant effect on either the buyer’s decision to buy the franchise or the price that he or she is willing the pay.  Epstein J.A.’s test focuses on the franchisee’s ability to make an informed decision about whether to invest in the franchise.

In the context of the facts that were in contention in this case – about the head lease and restaurant conversion costs – there does not seem to be much of a difference between the two tests:

• The ‘material fact’ definition under the Act is in my opinion a hybrid objective/subjective legal test: would the information impact the decision of a reasonable buyer, in the circumstances of that buyer – based on what the buyer knew and what the franchisor disclosed to him?
• Epstein J.A.’s focus is precisely in line with this approach: could the plaintiff, in the circumstances of what he knew and what ASWR disclosed to him, have made an informed decision?

In my opinion, the two analyses are perfectly in line with each other in the circumstances of this case.

What rights and obligations are there about an otherwise ‘imperfect’ disclosure?

While the disclosure deficiencies in this case did not amount to “no disclosure at all” under section 6(2) of the Act, the court left open the possibility that this failure to disclose in certain circumstances may amount to “imperfect disclosure.”

This would presumably entitle a franchisee to rescission under subsection 6(1) which allows a franchisee to rescind a franchise agreement within sixty days after receipt of the FDD for more minor disclosure failures.

Franchisor’s Certificate is valid

The court upheld the motion judge’s decision that the franchisor’s certificate was valid.  The motion judge ruled that one of the individuals in question was not a de facto officer or director.  This leaves open the question of whether a person who is found to be a de facto officer or director is required to sign a franchisor’s certificate.

Franchisor’s damages

ASWR was held entitled to damages against the franchisee, based on breach of the franchise agreement, for (a) unpaid construction fees, plus (b) the significant lease deposit that ASWR paid to the landlord, but less any profits that ASWR earned from the operation of the restaurant.

Franchisee’s cascading claims from rescission to bad faith and misrepresentation

The court held that the franchisee’s failed rescission claims could not ‘cascade’ onto its other claims.  The franchisee largely ignored its own claims for breach of the duty of fair dealing and misrepresentation. The motion judge found that it had not put its best foot forward on these claims and the court upheld that finding.  This should not be confused with a general legal right to jointly pursue rescission and misrepresentation claims.

Marshalling the evidence

Last but certainly not least is the issue of the evidence and suitability for a motion for summary judgment, trial, or somewhere in between, like a hybrid trial.

The Raibex decision was decided on the basis of a summary judgment motion.  But Epstein J.A. wrote repeatedly that the determination of whether a franchisee is entitled to a rescission under subsection 6(2) of the Act in these types of cases (different from the “Mendoza” type of cases that are based on major disclosure deficiencies – see Part I of the article) is on a case by case basis.  The court also wrote that this must be made with reference to all relevant circumstances about whether the franchisee can make a properly informed decision.

This requires a detailed assessment of the evidence.  Many cases in these types of disputes will invariably not qualify for a summary judgment motion, and will need to be adjudicated on the basis of some form of trial, be it full, hybrid, etc.

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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 in Ontario at (855) 978-5293 and in British Columbia at (604) 262-1711.