In 6792341 Canada Inc. v. Dollar It Ltd. (Dollar It No. 1), the Ontario Court of Appeal continued a recent judicial trend in finding that, although it appeared that a single disclosure document had been delivered, the document was so deficient that it did not constitute disclosure at all under the Arthur Wishart Act (Act). The franchisee successfully relied on s. 6(2) of the Act which allows for a two-year rescission period from the date of the franchise agreement where a disclosure document was not delivered. The franchisor had argued that although there were deficiencies in the disclosure document, the deficiencies did not constitute a complete lack of disclosure under s. 6(2). The franchisor argued that, instead, the shorter 60-day rescission period found in s. 6(1) – which had expired – should apply.
At trial, the judge of the Superior Court of Justice agreed with the franchisor, holding that where any disclosure document is given, s. 6(1) must be applied unless the disclosure document was void ab initio. The disclosure document at issue in this case is the same as the one considered by the Superior Court in 6862829 Ontario Inc. v. Dollar It (Dollar It No. 2). (For a summary of this case, please see the February 2009 issue of the Osler Franchise Review.) The Court of Appeal overturned the trial judge’s decision - agreeing with the judge in Dollar it No. 2 – finding that deficiencies in the disclosure document were substantial enough to find that no disclosure was provided.
McFarlane J.A. of the Court of Appeal held:
A document does not become a disclosure document for the purposes of the Act just because it is called a disclosure document. Put another way, calling something a disclosure document doesn't make it one ... On the application judge's reasoning, the provision of any document purporting to be a disclosure document would meet the s. 6(2) requirement. No matter how deficient that document was, a franchisee would only have the right to rescind for 60 days after receipt of that document. This cannot be the intent of the legislation. Such an interpretation would lead to absurdity.
With respect to franchise legislation generally, McFarlane J.A. stated:
The purpose of the legislation is to protect franchisees and the mechanism for so doing is the imposition of rigorous disclosure requirements and strict penalties for non-compliance. The legislation must be considered and interpreted in light of this purpose.
Specific Deficiencies in the Dollar It Disclosure Document
There were many deficiencies in the disclosure document at issue; however, McFarlane J.A.’s analysis of three deficiencies is particularly noteworthy. The provision of an unsigned, undated certificate was held to give rise to the longer two-year rescission period, as was the failure to provide financials. In addition, the failure to provide a copy of the head lease to the franchisee was found to constitute an undisclosed material fact which, at a minimum, would trigger the shorter, 60-day rescission period.
A. Certificate Neither Dated nor Signed
In adopting the decision of the Alberta Court of Queen’s Bench in Hi Hotel Ltd. Partnership v. Holiday Hospitality Franchising Inc., McFarlane J.A. held “...that the failure to include the mandated Certificate alone would be enough to conclude that there was not disclosure as required by the Act.” As a result, the longer two-year rescission remedy was available to the franchisee.
B. Financial Statements not Included
The franchisor provided no financial statements in the disclosure document. Again, this deficiency was sufficient on its own to give rise to the two-year rescission right. McFarlane J.A. held:
When one considers that the purpose of disclosure is to enable a prospective franchisee to make an informed decision about whether or not to invest in a franchise, financial disclosure is of the utmost importance. In relation to this disclosure obligation, the respondents' actions in no way resembled "substantial" compliance. There was a complete failure on their part to make disclosure as required by the Act.
C. Head Lease not Produced
The franchisee was required to enter into a sub-lease with an affiliate of the franchisor but was not provided the head lease between the franchisor and its affiliate. The Court of Appeal held that the head lease was material as it contained acknowledgments of the franchisee sub-tenant which the franchisee could not possibly accept without reviewing the head lease. The Court also stated that it is important that the franchisee be able to satisfy itself that the affiliate sub-landlord had the right to enter into a sub-lease.
This decision highlights the importance of having a fully compliant disclosure document as the courts are continuing to apply the two-year rescission remedy, even where there may be only a single deficiency in the disclosure document. The treatment of the head lease as a material fact also serves as a warning to franchisors that certain facts, information or documents, which may seem innocuous, could later be considered material, thereby providing the franchisee, at a minimum, with access to the 60-day rescission period for failure to disclose.