A franchisee of a Michigan based franchisor brought a motion for summary judgment alleging that the franchisor had not complied with its disclosure obligations under the Ontario Arthure Wishart Act (Franchise Disclosure) 20002 (the "Act"). The franchisee operated a day care learning centre located at Burlington, Ontario. The franchisee acquired the franchise through the purchase of shares of the existing franchisee, consented to by the franchisor. The franchisee inquired about obtaining a Uniform Franchise Offering Circular ("UFOC") from the franchisor. It was told that the Ontario UFOC was in process and would be delivered as soon as the franchisor had one specifically designed for use in Ontario. In the meantime, it provided the franchisee with the U.S. UFOC "for information purposes".
The franchisee was not successful in operating the Burlington location. It sought a declaration that it properly rescinded the franchise agreement and sought damages.
The franchisor argued that the franchise agreement could not be rescinded as:
(a) the franchise agreement was entered into before the coming into force of the Act. It was just being 'assigned' after the Act came into force. The court disagreed. It held that the new franchisee was a "prospective franchisee" who first expressed an interest in the franchise after the coming into force of the Act;
(b) the grant of the franchise was not effected by or through the franchisor because the franchisee purchased the shares of an existing franchisee without the franchisor's involvement. The court disagreed. By requiring the transferee to sign the then current form of franchise agreement; by requiring the principal of the franchisee to sign a personal guarantee and by requiring principal's spouse to sign a personal guarantee, this was a sale "by or through the franchisor" and the franchisor could not take advantage of a disclosure exemption under the Act;
(c) the U.S. UFOC was a disclosure document. The court again disagreed. The franchisor recognized that it had not complied with Ontario law when it sent the U.S. UFOC for "informational purposes" only;
(d) the franchisee only had sixty (60) days to rescind under s. 6 (1) of the Act and not two years to rescind. The Court did not accept this argument. It held that by providing a UFOC for informational purposes the document did not meet the requirements of s. 5 of the Act and was thus not a "disclosure document" that limited rescission rights to sixty days following its delivery.
Notwithstanding the apparent defects in the attempted use of the U.S. UFOC as an Ontario disclosure document, the Court granted the motion for summary judgment on the ground that the parties had, while represented by counsel, entered into a settlement agreement that included a release. This settlement agreement was entered into after the franchisee's disclosure concerns came to light. The release was comprehensive and included all claims, rights, damages and causes of action "arising out of the business/franchise relationship between the parties".3
The franchisee argued that the release was not binding on it because, under Section 11 of the Act a franchisee cannot waive its rights under the Act. The Court, however, held that Section 11 had:
no application to a release given (with the advice of counsel) by a franchisee in the settlement of a dispute for existing, known breaches of the Act by the franchisor in respect of its disclosure obligations, which would otherwise entitle the franchisee to a statutory rescission.4
The franchisee obtained leave to appeal this decision to the Divisional Court. Mr. Justice Matlow ruled, on December 11, 2006, that:
It can reasonably be argued that s. 11 is clear and unambiguous and that it does render the release void. This satisfies me that there is good reason to doubt the correctness of the contrary decision below.5
The comments of the Learned Motions Court Judge reagrding the disclosure obligations under the Act did not form the basis or ratio for his decision but are, nonetheless, instructive"
- Disclosure is required in respect of a franchise agreement that was made before the coming into force of the Regulations but assigned or transferred after the coming into force of the Regulations;
- When in doubt about whether a sale is effected "by or through the franchisor", a franchisor ought to deliver a disclosure document. Certainly, whenever new contracts are being asked to be signed it is prudent to deliver a disclosure document;
- The onus is on the franchisor to prove that it was exempt from the disclosure requirement (under Section 12 of the Act). This is a difficult onus to meet;
- A US UFOC may be adequate for disclosure purposes in Ontario but it was not in this case because it was only sent for "informational" purposes; was not current; did not contain all "material facts" required by the Act and was not sent on a timely basis. Care must be taken whenever a franchisor is relying upon a foreign UFOC. Any UFOC, wrap around document or statement of material change must strictly comply with the Act and Regulation regarding disclosure; and
- When drafting a release between a franchisor and franchisee that is intended to be comprehensive in scope ensure that it is a release of all matters between the parties, including but not limited to all matters under the franchise agreement [and other agreements related to the franchise], the Act, the regulations under the Act and the franchise relationship.