In 2240802 Ontario Inc. v. Springdale Pizza Depot Ltd., the Ontario Court of Appeal (the “Court”) held that a franchise disclosure document provided by a franchisor to a franchisee contained certain material deficiencies such that it effectively amounted to no disclosure under the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the “Act”). This entitled the franchisee to rescind the franchise agreement and to receive financial compensation.
The Court outlined the following three deficiencies in the disclosure document: (i) financial statements which were compiled but not audited or reviewed; (ii) a certificate executed by only one director or officer of the franchisor in circumstances where the franchisor has more than one director or officer; and (iii) an omission to disclose that the franchisor was at the time of the signing of the disclosure document involved in franchise rescission lawsuit with another franchisee.
With respect to the compiled financial statements, the Court found that the Act’s requirements for audited or reviewed financial statements is clear and mandatory. Prospective franchisees are entitled to receive financial statements of a franchisor that have been independently verified by an accountant to an audit engagement or review engagement level. A compilation of the franchisor’s financials, which is often accompanied by a “Notice to Reader” stating that the accountant “has not audited, reviewed or otherwise attempted to verify the accuracy or completeness”, may lead to a finding that there exists a material deficiency in the disclosure document.
The existence of the other two deficiencies outlined above provided additional comfort to the Court to conclude that the disclosure document was materially deficient. As a result, the franchisee was entitled to rescission and damages.
The decision serves as another reminder to franchisors to ensure that their disclosure follows the requirements set forth in the Act and that the perceived benefits of taking a conservative approach to disclosure should be considered in light of the risks of rescission.