The disclosure obligations for franchisors expanded with a recent Ontario Superior Court of Justice ruling, and will change the way deals are struck in the province, says franchise lawyer Peter Dillon.
In Raibex Canada Ltd. v. ASWR Franchising Corp., 2016 ONSC 5575 (CanLII), the judge found the development cost estimate provided to the franchisee was materially deficient and, as such, formed the basis of a valid rescission claim, he tells AdvocateDaily.com.
Dillon, a partner with Siskinds LLP, says the ruling could make it difficult for franchisors to properly disclose all details to potential franchisees, as it requires them to supply information that may not be available for legitimate reasons.
In Raibex, Justice Wendy M. Matheson ruled the franchisee was entitled to rescind the franchise agreement because the disclosure document didn’t include a copy of the head lease for the location and because there was insufficient disclosure with respect to the estimated development costs of the restaurant.
“Among other things, the plaintiffs submit that the defendants are not excused from their statutory mandatory disclosure obligations simply because the location of this proposed franchise was not identified before the Franchise Agreement was signed. I agree,” wrote Matheson.
She found the “Franchise Disclosure Document failed to meet the disclosure requirements of s. 5 of the AWA and O. Reg 581/00, and that the right of rescission was properly exercised under s. 6(2) of the AWA, among other findings.”
Although the development expenses were in line with the “pro forma development cost in the disclosure document,” Dillon says they related to construction from a “shell” structure, as opposed to the conversion of an existing location.
He suggests the franchisee participated in the negotiation of the head lease and was offered the opportunity to decline the location.
“What more would have been achieved by waiting to provide disclosure?” Dillon asks. “The landlord may have had another person that wanted to sign the lease and the location would be lost. This is an extreme form of paternalism and protectionism that denies the realities.”
The franchisee made a rescission claim — based on failure to include a copy of the head lease, not disclosing adequate estimates for the development costs, and deficiencies in the disclosure certificate itself, among others — and brought a summary judgment motion, Dillon says.
“Was this a proper disclosure? As someone who practises exclusively in this area, proper disclosure means you disclose what the Act and regulations say you must, but you can’t make up stuff.
“The moral of the story now, as the court said, you can’t provide proper disclosure until all material facts are known,'” he says. “So franchisors must now consider not only if the document includes all the known material facts, but also what other details might occur in the future that would perhaps negate any disclosure I make now.”
Dillon says the decision essentially requires franchisors to disclose information they don’t have and that the domino effect could stifle franchising activity going forward.
“The franchisor can’t start training because you are not going to train somebody who hasn’t paid the franchise fee and signed the confidentiality agreement,” Dillon says. “You can’t do any of the preparatory work, and is the franchisee going to be involved in the site selection process if they haven’t signed any kind of agreement with the franchisor?
The ruling “is turning a commonly accepted practice on its ear because you have to wait now until all of the ducks are in a row,” Dillon says. “It also ignores the reality of this situation, including the purpose of the Act, which is that the franchisee has the material facts and the information necessary to make an informed decision.”
(Note, this article originally appeared on AdvocateDaily.com)