To date, there have been precious few decisions dealing, even peripherally, with how to quantify damages under section 6 of the Arthur Wishart Act (Franchise Disclosure), 2000 (the "Act") where a franchisee has successfully sought rescission of its franchise agreement. A recent decision of the Ontario Court of Appeal, Trade Secrets International Ltd. v. Jalaly, provides guidance with regards to the scope of section 6(6)(d) of the Act, and more specifically, the extent of compensation a franchisee may obtain from a franchisor upon rescission.
Under this subsection, the Act provides that within 60 days from the rescission of a franchise agreement, the franchisor must compensate the franchisee for any losses that were incurred in "acquiring, setting up and operating the franchise."
The scope of this provision is broad and does not specifically identify the types of losses that would entitle a franchisee to compensation. In this case, the Court looked at whether losses under the Act include monies that are paid to a lender for the purpose of paying off a prior franchisee's indebtedness. This decision suggests that such monies are compensable under the Act, as they are undoubtedly incurred as a result of "acquiring, setting up and operating a franchise."
Franchisors and their advisors must be mindful of any payments made by a franchisee to acquire the assets and the goodwill of a franchise, as such costs incurred fall squarely within the scope of losses requiring compensation under the Act.