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Ontario Court Focuses on Franchisee’s Ability To Make An “Informed Decision” In Denying Rescission Claim

Published: 11/28/2016

By Colin Pendrith

In Mendoza v. Active Tire & Auto Centre Inc., Justice Dow of the Ontario Superior Court of Justice appears to have put a new gloss on the test for rescission under section 6(2) of the Wishart Act.  Specifically, the Court overlooked certain deficiencies in the franchise disclosure document and focussed on whether the franchisee made an “informed decision” to enter into the franchise agreement.

The franchisee retained a broker to assist in obtaining a franchise in or around January 2015. Negotiations with the franchisor began in January 2015, culminating in the signing of a franchise agreement that was effective June 1, 2015.

During negotiations, the franchisee was provided with various documents at different times, including a disclosure statement, signed by the franchisor’s Franchisee Development Manager, but not by the officers or directors identified in the franchise disclosure document.

On August 31, 2015, the franchisee served a notice of rescission, alleging five key deficiencies in the franchise disclosure document, as follows:

  1. The disclosure certificate was not signed by two officers or directors;
  2. The financial statements were not provided, at least in part, prepared on a “review engagement basis” and were not complete;
  3. The required documents were not delivered as a single document;
  4. An irrevocable letter of credit, described in the application for dealership was different than the version actually signed; and
  5. The franchise disclosure document did not disclose the required assumptions and information as part of its financial projections.

Justice Dow acknowledged that there were deficiencies in the disclosure document, and in particular, referred to the absence of a second officer or director’s signature on the disclosure certificate and to the incomplete financial statements. Despite these noted deficiencies, the Court concluded that the franchisee has made an “informed decision” to enter into the franchise.

In reaching this conclusion, the Court appears to have placed significant reliance on the “extensive nature of the material” provided by the franchisor to the franchisee during the negotiations, as well as the franchisee’s refusal to answer questions about the misleading or deficient portions of the 175 page disclosure document.

The Court ultimately concluded that the “disclosure document provided was not in full compliance with the Wishart Act but the deficiencies were not significant or misleading. As a result, my conclusion is rescission is not available to Mendoza under Section 6(2).”

Justice Dow’s decision appears to depart from a strictly objective analysis of the disclosure document for compliance with the Wishart Act and its regulations, and instead, shifts the focus to whether the franchisee made an “informed decision”.  This analysis contrasts with prior jurisprudence, which has held that deficiencies, such as the failure to deliver a single disclosure document, the failure to provide financial statements in accordance with the Wishart Act and the failure to provide a certificate signed by two directors, are “fatal deficiencies” that entitle the franchisee to rescission under section 6(2). Yet it is a welcome decision for franchisors in Ontario being held to too high a standard when determining Wishart Act compliance.

This decision will likely generate significant discussion in Ontario franchising circles, and Cassels Brock will continue to monitor the decision to see if its findings are upheld if it is appealed.

A copy of the full decision can be found here.