Case reference: Caffé Demetre Franchising Corp. v. 2249027 Ontario Inc., 2015 ONCA 258
This historical case summary discusses the decision identified above. Later decisions and legislative changes may affect how it applies today. Obtain legal advice about your circumstances.
The plaintiff franchisor sued the defendant franchisees for a declaration that the franchise agreement was at an end and damages for breach of contract. The franchisees counterclaimed, claiming rescission of the franchise agreement under s. 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000 on the basis of the franchisor’s failure to disclose the existence of ongoing litigation commenced by it against a competing business. The franchisor brought a motion for partial summary judgment seeking a declaration that the franchisees were not entitled to rescission. The motion judge granted the motion, holding that the litigation was a “material fact” which should have been disclosed, but that it was not a stark and material deficiency which entitled the franchisees to rescission under s. 6(2) of the Act. The franchisees appealed.
Held, the appeal should be dismissed.
The motion judge did not err in finding that the rescission claim could be determined by way of a summary judgment motion.
The litigation, which was commenced to protect the interests of franchisees, did not constitute a potential liability that might attach to the franchise system. The litigation was not a material fact. Even if it was a material fact, it was not a stark and material deficiency that entitled the franchisees to rescission under the Act. Failure to mention the litigation did not effectively deprive the franchisees of the opportunity to make a properly informed decision to invest in the franchise. The omission of the litigation from the franchisor’s disclosure document fell well short of putting the document into the category of no disclosure at all, as contemplated by s. 6(2) of the Act.
The Statutory Framework
[22] Section 5 of the Act sets out a franchisor’s disclosure obligations. It requires that a franchisor provide a franchise disclosure document to a prospective franchisee no fewer than 14 days before the earlier of the signing by the prospective franchisee of the franchise agreement and the payment of any consideration by the franchisee relating to the franchise. Section 5 also governs, among other things, the means for delivery of the disclosure document, the requirements for disclosure of material changes and the contents of the disclosure document.
[23] Subsection 5(4)(a) requires the franchisor to include in the disclosure document “all material facts”. The Act defines “material fact” broadly in s. 1(1) to include any information about the business, operations, capital or control of the franchisor or the franchise system that would reasonably be expected to have a significant effect on the value or price of the franchise to be granted or the decision to acquire the franchise.
[24] Regulations under the Act provide further details of the disclosure the Act mandates. Relevant to the issues here, s. 2 of O. Reg. 581/00 provides that every disclosure document shall contain:
5. A statement, including a description of details, indicating whether the franchisor, the franchisor’s associate or a director, general partner or officer of the franchisor has been found liable in a civil action of misrepresentation, unfair or deceptive business practices or violating a law that regulates franchises or businesses, including a failure to provide proper disclosure to a franchisee, or if a civil action involving such allegations is pending against the person.
(Emphasis added)
[25] Section 6 of the Act provides the consequences for failing to strictly comply with the requirements set out in s. 5 and the regulations. These consequences include rights of rescission and compensation. Section 6 provides two separate time periods within which the franchisee can rescind:
6(1) A franchisee may rescind the franchise agreement, without penalty or obligation, no later than 60 days after receiving the disclosure document, if the franchisor failed to provide the disclosure document or a statement of material change within the time required by section 5 or if the contents of the disclosure document did not meet the requirements of section 5.
(2) A franchisee may rescind the franchise agreement, without penalty or obligation, no later than two years after entering into the franchise agreement if the franchisor never provided the disclosure document.
Standard for rescission for non-disclosure under s. 6(2) of the Act
[29] Relying on 4287975 Canada Inc. v. Imvescor Restaurants Inc. (2009), 98 O.R. (3d) 187, [2009] O.J. No. 1508, 2009 ONCA 308, the motion judge observed that the test for rescission under s. 6(2) of the Act for failure to provide a disclosure document must be distinguished from the test under s. 6(1) of the Act for rescission where the “contents of the disclosure document did not meet the requirements of section 5”. The motion judge then cited this court’s decision in 6792341 Canada Inc. v. Dollar It Ltd. (2009), 95 O.R. (3d) 291, [2009] O.J. No. 1881, 2009 ONCA 385 for the proposition that where there are “stark and material deficiencies” in the disclosure document, the document cannot be considered a disclosure document at all and a franchisee may have a right of rescission under s. 6(2).
*source: Ontario Reports
