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Reason to be Crabby? Ontario Court Grants Partial Summary Judgment Against Franchisor, but Makes Interesting Finding on Lease Disclosure as Grounds for Rescission

Published: 05/04/2017

By Alexandra Murphy, Derek Ronde

In 2212886 Ontario v Obsidian Group,1 the Ontario Superior Court of Justice considered at what point multiple alleged disclosure deficiencies are so fundamental as to give rise to rescission of the franchise agreement. In examining these alleged deficiencies, the Court held that the failure to provide a copy of a head lease did not constitute grounds for rescission, which appears to run contrary to the recent Ontario Superior Court of Justice decision in Raibex. (We previously wrote about Raibex here.) The decision also provides interesting commentary regarding limitation periods and Wishart Act claims, as well as the treatment of non-disclosed earnings projections for the purposes of statutory rescission.

In this case, the Court granted the franchisee’s motion for partial summary judgment for a declaration that the franchise agreement was properly rescinded under Ontario’s franchise disclosure legislation, the Arthur Wishart Act (Franchise Disclosure), 2000 (the Wishart Act). The plaintiff franchisee and the defendant, the franchisor of the “Crabby Joe’s” restaurant brand, entered into a franchise agreement on June 16, 2010 (the June agreement). On September 7, 2010, at the request of the franchisor, the parties entered into a new franchise agreement (the September agreement). The September agreement consisted of one signing page, since the document was substantially the same as the June agreement. On September 5, 2012, over two years after the June agreement but less than two years after the September agreement, the franchisee served a notice of rescission. The limitation period for rescinding a franchise agreement under the Wishart Act is two years from the date of the agreement.

The franchisee argued it was entitled to rescind the franchise agreement on the basis of several disclosure deficiencies that rendered the franchisor’s disclosure tantamount to no disclosure under the Wishart Act. Specifically, the franchisee took issue with the following alleged disclosure deficiencies:

  1. The franchisee never received a copy of the head lease;
  2. The franchisor did not inform the franchisee that it offered financing;
  3. The disclosure was piecemeal;
  4. The franchisor did not disclose the actual development costs of establishing a Crabby Joe’s franchise;
  5. The franchisor provided inadequate training and equipment; and
  6. The franchisor failed to disclose an earnings projection table in the franchise disclosure document. Prior to signing the franchise agreement, this earnings projection table was discussed with the franchisee and had been circulated to the franchisee’s bank in connection with financing arrangements.

In respect of the failure to provide a copy of the lease, the Court dismissed this outright, commenting:

The suggestion by the plaintiffs that the head lease was not disclosed, as a basis for the claim for rescission, is unfounded. There was no head lease in existence and the only lease in place was an offer to lease, which was disclosed when known.

This decision therefore arrives at the opposite conclusion of the Court in Raibex, which held that a disclosure document was inadequate because it did not contain a copy of the head lease despite the fact that the head lease had not been entered into at the time of the franchise agreement being executed. Given that Raibex is currently under appeal, it will be interesting to see how the Ontario Court of Appeal decides this issue. Franchisors should continue to exercise caution in respect of their disclosure obligations pending the Raibex appeal decision.

In respect of the other disclosure deficiencies, the franchisee was unsuccessful on all of them except for the franchisor’s failure to disclose the earnings projection table. The Court found this omission to be so significant and material as to constitute no disclosure, giving the franchisee the right to rescind. In reaching this conclusion, the Court found that earnings projections are potentially “the most important information that a potential franchisee would want to know.” The Court contextualized this obligation by noting:

Although I agree with the defendants that they did not have to disclose earning projections, once these projections are provided (both at the meeting in May 2010 and to the bank on June 22, 2010) they must be disclosed as part of or in addition to the disclosure document.

The Court also rejected the franchisor’s argument that the September agreement did not create a new franchise agreement between the parties. Had the Court found differently, the franchisee would be out of time to rescind the franchise agreement because the June agreement was signed more than two years prior to the notice of rescission. In determining that the September agreement constituted a new franchise agreement, the Court focused on the consumer protection aspect of the Wishart Act, coupled with the fact that the September agreement was the franchisor’s initiative.

The case provides an interesting contrary view to the disclosure obligations discussed in Raibex in respect of leases but by no means should serve as a definitive position on this topic, as the final word will lie with the Court of Appeal. Moreover, it addresses the need for franchisors to be careful in respect of the disclosure of earnings projections and indicates how Ontario courts may treat staggered or multi-part franchise agreements for the purposes of limitation periods.

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1 2212886 Ontario v Obsidian Group, 2017 ONSC 1643 (CanLII), <http://canlii.ca/t/h2ppp>.