In a spate of recently decided cases on the issue of rescission, the Ontario Court of Appeal has now weighed in on the issue of whether a franchisor’s failure to deliver a disclosure document on a timely basis is fatal to the entire disclosure process.  Section 5 of the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”) requires a franchisor to deliver a disclosure document at least fourteen days before the signing of a franchise agreement or payment of any monies related to the franchise.  Failure to meet this requirement would allow a franchisee to rescind the agreement and recover all amounts paid. The battle, as in most cases dealing with rescission, is whether the franchisee would have sixty days from disclosure or two years from the signing of the agreement to exercise this option.

In 4287975 Canada Inc. v. Imvescor Restaurants Inc. , the franchisee sought rescission of its franchise agreement regarding a Baton Rouge Restaurant in Oakville, Ontario.  With respect to the franchisor’s disclosure obligations, the parties agreed to the following facts:

• On June 8, 2005, prior to delivery of a disclosure document by the franchisor, the franchisee paid $15,000 to the franchisor for the franchise.

• On August 15, 2005, before execution of the franchise agreement, the franchisee then received the franchisor’s disclosure document.

• On February 17, 2006 – approximately 6 months after delivery of the disclosure document – the franchisee executed the franchise agreement.

• On February 15, 2008, the franchisee served on the franchisor a notice of rescission in respect of the franchise agreement under the Act.

The basis of the franchisee’s argument was that the breach by the franchisor of its disclosure obligations under subsection 5(1) of the Act – to provide disclosure fourteen days before any payment was made – gave rise to the franchisee’s right under subsection 6(2) to rescind the franchise agreement within a two year limitation period and recover all monies paid to the franchisor. In essence, the franchisee contended that a breach by the franchisor regarding the timing of disclosure should be incurable and treated as if a disclosure document were never delivered.

The motion judge initially hearing the matter disagreed with the franchisee and determined that the franchisee’s right to rescission, if any, was governed by subsection 6(1) of the Act, which provided only a 60-day limitation period and which expired before the franchisee delivered its notice of rescission. The franchisee appealed from this decision.

In arriving at the conclusion to dismiss the franchisee’s appeal, Mr. Justice LaForme, in a unanimous decision of the Ontario Court of Appeal, commented as follows regarding the interaction between sections 5 and 6 of the Act:

In respect to timing, s. 5 of the Act ensures that a prospective franchisee has at least fourteen days to review and consider a disclosure document before signing a franchise agreement or paying consideration in relation to a franchise. In the event that the franchisor does not comply with s. 5, the Act provides the franchisee with an extraordinary remedy: the right to rescind the franchise agreement with two different limitation periods, depending on when and whether the franchisor provides a disclosure document.

First, s. 6(1) permits rescission within sixty days of receipt of the disclosure document if the disclosure document is not provided “within the time required by s. 5”. Not only did the appellant [franchisee] not provide a notice of rescission within sixty days of receiving the document, but it also had six months to consider the disclosure document before entering into the agreement.

Second, under s. 6(2), a franchisee may rescind a franchise agreement within two years, but only if there was no disclosure document provided by the franchisor. In particular, for s. 6(2) to apply, the franchisor must never have provided the disclosure document. The time for rescission under s. 6(2) starts to run from the date when the franchise agreement was signed, owing to the fact that unlike under s. 6(1) – where the applicable time starts when a proper disclosure document is provided – s. 6(2) applies to a situation where there is no disclosure document provided at all.

At the end of the day, the Court agreed with the view of the motion judge that the franchisee had ample time to review the disclosure document before executing the franchise agreement. With the deficiency in timing, the franchisee had 60 days from receiving the document to provide notice of rescission and recover its payment of $15,000.  Instead, the franchisee took 6 months from receipt of the document to consider the franchise and eventually agreed to be bound by the terms of the franchise agreement.

From this decision of the Court of Appeal, it now appears that any failure of a franchisor to provide a disclosure document fourteen days before any payment or execution of an agreement related to the franchise may be “remedied” by the subsequent delivery of a disclosure document. That is, even if monies have been paid and a franchise agreement signed before delivery of a disclosure document, it may still be considered prudent for a franchisor to nevertheless deliver a disclosure document after the fact since presumably by doing so it may shorten the rescission limitation period from two years from the time of signing of the franchise agreement to sixty days of delivery of the disclosure document.

This proposition may also be helpful to a franchisor that has failed to comply with other disclosure requirements under the Act, which may have otherwise rendered the entire disclosure process in doubt.  

Applying the principles from Imvescor, a franchisor may conceivably limit the rescission period resulting from such fatal deficiencies to sixty days from two years by delivering a proper disclosure document.

As a final caution to any franchisor that may develop a habit of failing to provide timely disclosure, it may be important to note that in Imvescor, the parties had agreed to an assumed set of facts for the purposes of the motion. As such the Court only reviewed the issue of the timing of disclosure and not its adequacy.  With the six-month period between delivery of the disclosure document and signing of the franchise agreement, it would have also been incumbent upon the franchisor to make sure that a statement of material change be delivered for any material facts that may have been altered in the interim. Failing this, the franchisor may still be exposed to a claim of misrepresentation for any inaccuracies or omissions under section 7 of the Act.

For more information on franchising, please contact Derwin Wong at (416) 368-0600 or by email at dwong@businesslawyers.com.

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