Caffé Demetre v. 2249027 Ontario Inc. is an important case for franchisors. The court, in this case, found that the franchisee was not permitted to rescind its franchise agreement just because the franchisor had not disclosed that, among other things, it was contemplating litigation against a former franchisee for breach of the non-competition clause in the franchise agreement.
The court found it difficult to see how the existence of a lawsuit against a former franchisee, for the benefit of the franchise system, could have had a significant effect on the decision by the prospective franchisee to purchase the franchised business or the price to be paid for the franchised business.
The judge did however accept that if a franchisor is involved in ongoing litigation, this fact ought be disclosed to prospective franchisees.1
The court found that while the disclosure document may have been deficient, it was not so deficient as to allow the franchisee more than 60 days within which to rescind its franchise agreement. As the franchisee purported to rescind its agreement more than 60 days after receiving a disclosure document, its claim for rescission was dismissed.2 The ability to seek rescission for up to two years after entering into the franchise agreement is restricted to “instances of a complete failure to provide a disclosure document”.3
Here, the judge pointed out that the lawsuit commenced by the franchisor was initiated at the request of the franchisees and was clearly for the franchisees’ benefit. It did not constitute a potential liability that might attach to the franchise system as a whole. In addition, the defendants were aware of this litigation shortly after signing the franchise agreement but did not raise it as a concern until their Statement of Defence and Counterclaim was filed two years later. If the existence of the lawsuit had been a “material fact” that could reasonably be expected to have a significant impact on the price the defendants paid for the franchise, one would have expected the franchisee to have complained when, or shortly after, they found out about it.
As the failure to disclose the lawsuit did not amount to a material deficiency, the court concluded that the defendant had no right of rescission.