Rescission Rights under Franchise Legislation: The Backdrop to Raibex
Section 6 of the Ontario Arthur Wishart Act (Franchise Disclosure), 2000 (the “AWA”) grants franchisees the right to rescind a franchise agreement under two circumstances:
1. section 6(1) of the AWA states franchisees may rescind a franchise agreement within 60 days of receiving a disclosure document from the franchisor if the disclosure document does not meet the requirements of the AWA; and
2. section 6(2) of the AWA states franchisees may rescind a franchise agreement within two years of entering into the agreement if the franchisor never provided the franchisee with a disclosure document.
Provisions to the same effect are included in section 6 of the B.C. Franchises Act (the “Franchises Act”).
In applying section 6 of the AWA, Ontario courts have set out a governing principle that where a franchisor provides a franchisee with a disclosure document so deficient as to effectively amount to complete lack of disclosure, the franchisee may exercise its rights under section 6(2) of the AWA to rescind the franchise agreement within two years of entering into the agreement even though the franchisor technically provided the franchisee with a disclosure document.[1] This principle gives rise to uncertainty as it is unclear what types of disclosure document deficiencies constitute complete lack of disclosure. This uncertainty is particularly significant for current and prospective franchisors as rescission damages resulting from application of section 6(2) of the AWA may be substantial.
The Raibex Decisions
The much-anticipated Ontario Court of Appeal (the “ONCA”) decision of Raibex Canada Ltd. v. ASWR Franchising Corp. provides some clarification on the threshold where deficient disclosure crosses the line to become complete lack of disclosure, and sets out certain precautionary measures for franchisors who engage in the common practice of entering into a franchise agreement before determining the location of the franchise.[2]
The lower Court in Raibex found that the disclosure document provided by a restaurant franchisor, ASWR Franchising Corp. (“ASWR”), to the franchisee, Raibex Canada Ltd. (“Raibex”), effectively amounted to no disclosure at all, as it failed to include the following information:
1. the location of the franchisee’s business;
2. the head lease associated with that location; and
3. the costs of converting a pre-existing restaurant at that location to a system compliant ASWR restaurant.
Accordingly, the Court allowed Raibex to exercise its right to rescind its franchise agreement with ASWR pursuant to section 6(2) of the AWA.
In overturning the lower Court’s decision, the ONCA emphasized that an imperfect disclosure document does not always amount to no disclosure document, and that to decide otherwise “blur[s]” the two circumstances where a franchisee may rescind a franchise agreement under the AWA into one.[3] Importantly, only disclosure document deficiencies that effectively deprive a franchisee of the opportunity to make an informed investment decision justify rescission under section 6(2) of the AWA.[4] In coming to this conclusion, the ONCA held that ASWR provided Raibex with sufficient information to make an informed investment decision for the following reasons:
1. the franchise agreement contemplated Raibex’s active participation in selecting a franchise location and constrained ASWR’s ability to enter into a lease without considering Raibex’s legitimate interests;
2. the franchise agreement provided an opt-out clause which allowed Raibex to reject a proposed location or elect to receive its money back; and
3. the disclosure document set out cost estimates for developing a new ASWR restaurant from a shell, stated that cost estimates associated with converting a pre-existing restaurant varied greatly from site to site, and warned Raibex to maintain a significant contingency reserve for this reason.
While Raibex is not compelling on our courts here in BC, it will most certainly be persuasive and should, for that reason, provide BC franchisors with some much needed relief from the uncertainty associated with the lower Court’s initial decision.
Should you have any questions regarding franchising legislation and disclosure requirements or franchising in general, please do not hesitate to contact one of the members of our Franchise Practice.
[1] 6792341 Canada Inc. v. Dollar It Ltd., 2009 ONCA 385.
[2] Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62 [Raibex].
[3] Ibid at para. 46.
[4] Ibid at para. 49.
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