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Franchise - Inadequate Disclosure. 2619506 Ontario Inc., v. 2082100 Ontario Inc. ['informed investor' standard; s.6(2) rescission for non-disclosure]
In 2619506 Ontario Inc., v. 2082100 Ontario Inc. (Ont CA, 2021) the Court of Appeal considered whether statutory disclosure had been met in this franchise situation, using the 'informed investor' measure and in the context of s.6(2) [rescission for no disclosure]:[3] The appellants raise two main grounds of appeal. First, they argue that the motion judge misapplied the “informed investment decision test” in finding that the deficiencies in the disclosure document amounted to absence of disclosure, thus allowing rescission pursuant to s. 6(2) of the Act within two years. In particular, they argue that Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62, 419 D.L.R. (4th) 53 obliged her to conduct a more detailed analysis of whether a potential franchisee is able to make a properly informed investment decision. The motion judge’s failure to do so constituted a reversible error of law.
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[7] In applying the informed investor test, the motion judge considered both the purpose of the Act and the evolution of the test. She began by observing that this court has repeatedly emphasized that the Act is intended to redress the imbalance of power between franchisors and franchisees and that it does so by imposing rigorous disclosure obligations on franchisors, with strict penalties for non-compliance: Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673, 268 O.A.C. 279, at para. 26; Mendoza v. Active Tire & Auto Inc., 2017 ONCA 471, 139 O.R. (3d) 230, at paras. 13, 26; 6792341 Canada Inc. v. Dollar It Limited, 2009 ONCA 385, 95 O.R. (3d) 291, at para. 13. She continued with the following statement:Two guiding principles have emerged from the Court of Appeal with respect to the interpretation of s. 6(2) in particular. The first is that non-compliance with s. 5 of the Act does not always provide sufficient grounds for rescission under s. 6(2). As set out in Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62, at para. 46: “[a] franchisee that receives imperfect disclosure does not necessarily stand in the same position as a franchisee that was ‘never provided with a disclosure document.’ In Imvescor, at para. 73, this court warned that conflating those two scenarios would frustrate clear legislative intent….” . 2611707 Ontario Inc. v. Freshly Squeezed Franchise [AWAFD s.6(2) rescission for non-disclosure]
In 2611707 Ontario Inc. v. Freshly Squeezed Franchise (Ont CA, 2022) the Court of Appeal considered whether statutory disclosure had been met in this franchise situation, using the 'informed investor' measure and in the context of s.6(2) [rescission for no disclosure]:[1] The respondent franchisees successfully applied to rescind a franchise agreement with the appellant franchisors. The application judge concluded that the appellants provided a materially deficient franchise disclosure document (“FDD”). Accordingly, the respondents could validly rescind the franchise agreement under section 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3, because they had entered into the agreement without the ability to make a properly informed investment decision.
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[9] The central question in this appeal is whether the franchise agreement was validly rescinded. To justify a rescission under s. 6(2) of the Act, the franchisor’s FDD must be “so deficient as to effectively amount to a complete lack of disclosure”: Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62, 419 D.L.R. (4th) 53, at para. 47 (emphasis in original).
[10] Not every franchisee receiving imperfect disclosure will be able to validly rescind its agreement. Section 6(2) is engaged only where the deficient disclosure prevents the franchisee from making an informed decision about whether or not to invest in the franchise. Such materially deficient disclosure is treated as non-disclosure pursuant to s. 6(2) of the Act as interpreted by the case law: Raibex, at para. 49.
[11] Before this court, the appellants argue that the application judge erred in her conclusion on all three instances of non-disclosure. The heart of their appeal, however, is their submission that the application judge erred in law by failing to apply a subjective test to the question of whether the information provided impaired the franchisee’s ability to make an informed decision. They submit that the test for a valid rescission requires evidence that the material deficiencies genuinely impaired the particular franchisee’s ability to make an informed investment.
[12] The appellants say that the application judge correctly noted that the franchisee must show that the disclosure was so deficient that it was tantamount to non-disclosure. However, having recognized this onus, she erroneously determined that the respondents did not need to submit evidence of actual impairment of its ability to make informed decisions. They urge this court to set aside all three of the application judge’s findings of material non-disclosure.
[13] We disagree. In Mendoza v. Active Tire & Auto Inc., 2017 ONCA 471, 414 D.L.R. (4th) 676, leave to appeal refused, [2017] S.C.C.A. No. 405, this court affirmed the objective nature of the test for a valid rescission. There, Feldman J.A. wrote, at para. 26, that a franchisor’s “obligations do not change depending on the actions or reactions of a particular franchisee.” The s. 6(2) test focuses on the disclosure itself, not its recipient, because the Act seeks to ensure that the franchisor provides the same disclosure to every potential franchisee.
[14] Accordingly, the application judge did not err in determining that the respondents had met the test for a valid rescission without evidence of actual impairment.
[15] Moreover, we do not agree with the submission of the appellants that the application judge erred by finding that the disclosure deficiencies justified rescission in this case. Having applied the correct test, her determination that the deficiencies were material is entitled to deference absent palpable and overriding error.
[16] First, the application judge determined that the appellants’ failure to include the notes to the financial statement was a material deficiency. These notes were necessary to allow the respondents to assess the financial health of the franchise system. For example, the financial statement referenced notes concerning accounts receivables and customer’s deposits. The former represents about 73% of the appellants’ assets while the latter amounted to 60% of their liabilities. We see no error in the application judge’s conclusion on this point.
[17] Nor can we identify an error in the application judge’s finding that the appellants’ failure to disclose a negotiated agreement to lease and the absence of a head lease prevented the respondents from making an informed investment. In particular, the respondents were not advised that the landlord could terminate the head lease without compensation if the decision was made to demolish or redevelop the franchise’s location.
[18] Further, the franchise agreement did not permit the respondents to back out of the lease should its terms be unacceptable. We see no error in the application judge’s finding that the appellants’ failure to disclose their negotiated agreement to lease and the absence of a headlease obscured the respondents’ degree of risk and, therefore, prevented an informed investment.
[19] Finally, the application judge concluded that the appellants failed to disclose that the franchise was the first to be located outside of a mall, and that this failure rendered the FDD essentially worthless.
[20] The respondents could arguably have determined that the franchise was the first in a non-mall setting based on the information they had received. However, the Act imposes an obligation on the franchisor, not the franchisee. The appellants were duty-bound to inform the respondents that they were essentially test-driving the franchise in a non-mall setting. Their failure to do so caused the respondents to unknowingly invest in a business model with no track record of success. We see no error on the part of the application judge on this point.
[21] Consequently, we see no basis to interfere with the application judge’s analysis. Even in light of the high threshold for rescission under s. 6(2) of the Act, the application judge made the necessary findings of fact, applied the correct test, and reached a determination amply available on this record. . 2483038 Ontario Inc. v. 2082100 Ontario Inc. [absence of Reg s.7 certificate]
In 2483038 Ontario Inc. v. 2082100 Ontario Inc. (Ont CA, 2022) the Court of Appeal assesses whether statutory AWAFD disclosure had been met in this franchise situation, considering the 'informed investor' measure and in the context of s.6(2) [rescission for no disclosure]:[10] The trial judge considered this court’s jurisprudence stating that a failure to provide the required disclosure may be established where the financial disclosure documents are so deficient as to effectively amount to a complete lack of disclosure: Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62, 419 D.L.R. (4th) 53; 6792341 Canada Inc. v. Dollar It Limited, 2009 ONCA 385, 95 O.R. (3d) 291. The trial judge also cited jurisprudence finding that the absence of a signed and dated certificate in the financial disclosure documents is a fatal flaw: Sovereignty Investment Holdings, Inc. v. 9127-6907 Quebec Inc. (2008), 2008 CanLII 57450 (ON SC), 303 D.L.R. 4th) 515 (Ont. S.C.); Hi Hotel Limited Partnership v. Holiday Hospitality Franchising Inc., 2008 ABCA 276, 296 D.L.R. (4th) 335.
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(1) Failure to certify financial disclosure documents and recission
[17] Section 5 of the Wishart Act requires franchisors to provide prospective franchisees with a disclosure document containing specified information and documents. It requires the information and documents to be accurate, clear, and concise. Section 6(2) of the Wishart Act permits a franchisee to rescind a franchise agreement without penalty or obligation “if the franchisor never provided the disclosure document.” Section 7 of the regulation under the Wishart Act mandates the inclusion of a certificate, signed and dated by specified persons, certifying the accuracy and completeness of the financial disclosure documents.
[18] The main issue in this appeal is whether the failure to certify the financial disclosure documents is enough for a court to find that there was substantially no disclosure such that recission is possible within two years.
[19] The short answer is yes. The trial judge was correct in both her analysis and conclusion.
[20] I see no error in the trial judge’s interpretation and application of the informed investment test. I agree with the trial judge’s finding that deficiencies in disclosure documents can be fatal. The trial judge here clearly considered this court’s guidance in the applicable jurisprudence and was alive to all the relevant facts.
[21] The trial judge was correct in her conclusion that this court’s decision in Raibex does not import the requirement of an inability to make an “informed investment” into the defective certificate analysis. I agree with the trial judge that requiring a franchisee to demonstrate they were unable to make an informed investment in a deficient certificate case would undermine one of the purposes of the Wishart Act. An important purpose of franchise disclosure certificates is that they attach personal liability to the signatories, which is intended to incentivize the signatories to ensure the contents of the disclosure documents are accurate. In this case, the trial judge found that this attachment of personal liability to signatories is a free-standing objective and is not tied to any impact on the recipient. I agree with this finding.
[22] At trial, Mr. Davis testified that his team inserted the page four signature page into the financial disclosure documents. The trial judge found that this indicates that the signature did not serve the policy objective of impressing upon him the importance of ensuring the entire document was complete and accurate. I agree.
[23] She also found that the financial disclosure documents did not contain the signed and dated disclosure certificate required by s. 7 of the regulation and that there is nothing to suggest that Mr. Davis’s signature on page four applies to anything beyond that page. I see no palpable and overriding error in these findings; as such, they are owed deference by this court.
[24] I also agree with the conclusion of the trial judge that the absence of the certificate is a fatal flaw in the disclosure. Therefore, the franchisees had a right to rescind the franchise agreement without penalty under s. 6(2) of the Wishart Act and did so lawfully.
[25] Lastly, I also note that this court reached the same conclusions in 2619506 Ontario Inc. v. 2082100 Ontario Inc., 2021 ONCA 702, a case very similar to the one under appeal.
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