A recent decision arising out of the Ontario Superior Court of Justice has addressed the issue of whether a franchisee has the right to rescind where the only deficiency for disclosure is the method by which it was delivered.

Background

In Vijh v. Mediterranean Franchise Inc., both the franchisor and the franchisee were in agreement that, other than with respect to the method of delivery, the franchisor fully complied with the disclosure requirements set out in the Arthur Wishart Act (Franchise Disclosure),2000 (the “Act”).  The issue turned on whether the franchisee, after waiting almost two years, could rescind the franchise agreement pursuant to the Act based solely on the fact that the disclosure document was e-mailed rather than delivered personally or by registered mail as required by the Act.  In this instance, the franchisee had provided consent for the disclosure document to be e-mailed.

Decision

The Court concluded that where a complete disclosure document was provided to the franchisee, such as in this case and the only deficiency was the method by which the document was delivered, the two-year right of rescission will not be available.

In considering the legislative intent of the Act, the Court stated that the purpose of the Act is to provide two routes for rescission:

  1. a 60-day right of rescission if a disclosure document was provided late or lacked the required content pursuant to section 6(1); and
  2. a two-year right of rescission if no disclosure document was ever provided pursuant to section 6(2).

The reason for these two options is to make clear that the two-year rescission right is set aside for situations that are much more serious, such as where no disclosure document was provided.  If the franchisee is allowed to rescind for up to two years for any breach of the Act, despite how minor it may be, then why have section 6(1)?  Why differentiate between the 60-day rescission right for late or incomplete delivery of the disclosure document and the two-year rescission right for no delivery?

In support of its ruling, the Court made reference to the Ontario Court of Appeal’s decision in 4287975 Canada Inc. v. Imvescor Restaurants Inc. which concluded that not every breach of disclosure requirements will justify rescission.  In other words, the two-year right of rescission is only available where there is “a complete failure to provide a disclosure document” or where the disclosure document provided was “materially deficient” but not where it was “merely late”.

The court held that if a breach of the requirements for timing and content under the Act allows for only a 60-day right of rescission, it would seem illogical that a mere breach of the delivery requirement, which is much less significant, would warrant a two-year right of rescission under section 6(2).

Comment

While this case should not be taken to mean that franchisors do not have to abide by the delivery methods as required by the Act, it should be taken as a lesson to both franchisees and franchisors that there is a reason why the Act provides for two routes of rescission and further, that a deficient delivery method, especially in the instance where such a method was consented to by the franchisee, may not be a severe enough breach to trigger the two-year right of rescission.