Fit for Rescission?

  • May 13, 2020
  • Jennifer Pocock, Sakshi Pachisia, and David Kornhauser

In January 2018, the Ontario Court of Appeal released its decision in Raibex Canada Ltd. v. ASWR Franchising Corp., (2018 ONCA 62) (“Raibex”). In Raibex the ONCA narrowed the availability of rescission for franchisees, stating that the availability of rescission under s. 6(2) of the Arthur Wishart Act (Franchise Disclosure) (the “Act”) was dependent on whether the franchisee was effectively deprived of the opportunity to make an “informed investment decision”.

Franchise litigation lawyers have been seeking further guidance about the application of Raibex since it was released, and in the recent decision of 2483038 Ontario Inc. v. 2082100 Ontario Inc., (2020 ONSC 475) (“Fit For Life”), the Ontario Superior Court of Justice provided clarification on this issue and on who might constitute a franchisor’s associate (a defined term) pursuant to the Act.   

Facts

In Fit For Life, the plaintiffs (the “Franchisees”) were provided with a Franchise Disclosure Document (the “FDD”) prior to their purchase of a “Fit For Life” franchise (the “Franchise”). The first four pages of the FDD contained some prescribed information about the franchise system.  Following this information, there was a signature block on page 4 of the FDD which was signed by Samuel Davis (“Davis”), the sole director and officer of the franchisor, 2082100 Ontario Inc. (the “Franchisor”). This signature block was not a part of any certificate, and the actual certificate at page 27 of the FDD did not contain a signature block and was not endorsed by Davis.  Davis testified that it was his intention to endorse the FDD in its entirety and be personally liable when he had signed on page 4.    

The parties entered into a franchise agreement and its ancillary agreements in September 2015. On or about August 11, 2017, the Franchisees issued a notice of rescission pursuant to their rights under subsection 6(2) of the Act, alleging that there had been no disclosure at all, primarily because the FDD did not contain a signed certificate. The Franchisees claimed damages in the amount of $624,821.06 pursuant to subsection 6(6) of the Act (rescission damages), or alternatively, under subsection 7(1) of the Act (failure to comply with section 5 of the Act or misrepresentation). The Franchisees alleged that Davis was a franchisor’s associate.

Issues

The primary contentious issues in this case were:

  1. Were the Franchisees entitled to rescind the franchise agreement pursuant to subsection 6(2) of the Act?
  2. Was Davis a franchisor’s associate and as such, personally liable for the damages claimed by the Franchisees?

Analysis

In addressing the first issue about whether the failure to include a certificate constituted a fatal flaw, Justice Kimmel reviewed prior case law surrounding subsection 6(2) of the Act and found that these cases are informed by two policy objectives, namely:

  1. informed investment decision making; and
  2. impressing upon those who sign a disclosure certificate the importance of ensuring the disclosure document is complete and accurate.

Justice Kimmel, quoting Justice Wilton-Siegel in Sovereignty Investment Holdings, Inc. v. 9127-6907 Quebec Inc.  ((2008) CanLII 57450 (ON SC), 303 D.L.R. (4th)), stated that that the certification requirement is “an important means of ensuring complete and accurate disclosure of all material facts pertaining to a proposed franchise investment…and the mechanism for imposing liability for misrepresentations in the disclosure document on certain parties as contemplated by paragraph 7(1) of the Act.”  Justice Kimmel also referred to similar policy considerations in Hi Hotel Limited Partnership v. Holiday Hospitality Franchising Inc. (2008 ABCA 276), 6792341 Ontario Ltd. v. Dollar It Ltd., (2009 ONCA 385) and in Mendoza v. Active Tire & Auto Centre Inc., (2017 ONCA 471, 139 O.R. (3d) 230).

Justice Kimmel stated that the purpose of a certificate is to address the second policy objective, and as such, the absence of a signed and dated disclosure certificate is a fatal flaw on its own giving rise to rescission pursuant to subsection 6(2) of the Act. It did not matter that the decision of the Franchisees to invest in the Franchise was not affected by any defect or untrue, inaccurate or misleading statement in the disclosure contained in the FDD.

Justice Kimmel stated that there was nothing to indicate that Davis’ signature on page 4 applied to anything on the following pages 5 to 27 of the FDD and no signature appeared on page 27 under the certificate language in the FDD.  Justice Kimmel found that Davis’ signature on page 4 did not serve the policy objective of a disclosure certificate to ensure that the entire document was complete and accurate and did not meet the prescribed requirements in section 7 of the Regulation to the Act. On this basis, Justice Kimmel granted rescission to the Franchisees pursuant to subsection 6(2) of the Act.

Significantly, Justice Kimmel disagreed with the Franchisor and Davis by holding that Raibex did not import into the analysis the requirement for a franchisee to demonstrate they were deprived of their ability to make an informed investment decision. Instead, Justice Kimmel found that requiring a franchisee to demonstrate they were unable to make an informed investment decision in a deficient certificate case would shift the onus of the Act in a manner that undermines its purposes. Justice Kimmel stated that “disclosure certificates incentivize the signatories to ensure the contents of the disclosure document are accurate. This is not tied to any impact on the recipient but is a free-standing and laudatory objective.”  

On the second issue of whether Davis was a franchisor’s associate, Justice Kimmel applied the two-part test for a franchisor’s associate found in the Act. Justice Kimmel held that Davis satisfied the first part of the test as he directly controlled the Franchisor due to his position as the sole director and officer. With respect to the second part of the test, Justice Kimmel found that “the statements above Samuel Davis’ signature on page 4 can be fairly characterized as promoting the Fit for Life franchise concept as one worthy of investment” and, based on an objective reading, were representations made for the purpose of granting, marketing the or otherwise offering to grant, the Franchise.

In coming to this conclusion, Justice Kimmel expressly recognized “the irony and potential unfairness” of Davis’ signature being on the one hand insufficient to constitute a valid disclosure certificate, while on the other, being sufficient to meet the test for a franchisor’s associate. Justice Kimmel confirmed that fairness is not part of this analysis and the right approach is to adopt a contextual and grammatical reading of the definition of franchisor’s associate in the Act.  As a result, Justice Kimmel found that Davis was a franchisor’s associate and was, together with the Franchisor, liable for the damages claimed by the Franchisees.  

Fit for Life reiterates the importance of strict compliance with franchise legislation and regulations. This case further reiterates that Raibex does not change the fundamental disclosure obligations of a franchisor, or the rights of a franchisee to rescind in the face of improper disclosure for fatal deficiencies.   Finally, and most importantly, franchisor counsel should ensure that when they deliver a disclosure document to their franchisor client, they instruct the franchisor client on the proper execution (how many, and whom, should sign as well as the date of the certificate) and delivery of a disclosure document to a prospective franchisee.  

Authors Note:  Counsel for the Franchisor and Davis has appealed the decision on the basis that the learned judge: 1) should not have rejected the informed investment decision legal test; and 2) applied an incorrect test in concluding that the signed statements on page 4 of the FDD constituted representations about the franchise. 

About the authors

Jennifer Pocock is legal counsel at Recipe Unlimited Corporation; Sakshi Pachisia (HBA, JD) is a student-at-law; and David Kornhauser (MBA, LLB) is corporate counsel at Macdonald Sager Manis, LLP.

Any article or other information or content expressed or made available in this Section is that of the respective author(s) and not of the OBA.