In Apblouin Imports Ltd. v. Global Diaper Services Inc., the Ontario Superior Court of Justice held that a franchisor’s disclosure obligations do not change when dealing with sophisticated franchisees, and reaffirmed that there is no substitute for disclosure requirements under the Arthur Wishart Act (Franchise Disclosure), 2000 (the Act).
Under the Act, a franchisee can rescind the franchise agreement within 60 days if the franchisor does not provide a disclosure document or statement of material change at least 14 days before the prospective franchisee signs the franchise agreement, or any agreement relating to the franchise, or before a prospective franchisee makes a payment to the franchisor or the franchisor’s associate. However, if a franchisor never provides a franchisee with a disclosure document, the franchisee has up to two years after entering into the franchise agreement to rescind that agreement.
Key Facts and Findings
In Apblouin Imports, the franchisee brought a motion for partial summary judgment in a franchise dispute against the franchisor, Global Diaper Services, claiming that it (Apblouin Imports) validly rescinded its franchise agreement with the franchisor. The franchisee argued that the franchisor’s disclosure had been so deficient that it amounted to no disclosure at all, entitling the franchisee to rescind the agreement within two years. The Court agreed, finding that the franchisee had validly rescinded its franchise agreement and granting the franchisee partial summary judgment. Among the fatal deficiencies that led the Court to conclude that the franchisor’s disclosure was so deficient as to amount to no disclosure included that the franchisor failed to provide:
- disclosure on behalf of the correct corporate entity
- a location where information substantiating the earnings projections would be available for inspection
- financial statements that met the requirements under the Act
- a properly signed certificate
Importantly, the Court rejected the franchisor’s argument that because the franchisee was a sophisticated businessperson with considerable franchise experience, he should not be able to complain of deficiencies in the franchisor’s disclosure. There was evidence that the franchisee had pointed out several errors in the franchisor’s disclosure materials. The Court held that the franchisor’s suggestion that it should be held to different disclosure requirements based on the sophistication of the franchisee “was not a suitable approach” to the issue, although it was “superficially attractive.” The Court observed that the effect of the franchisor’s proposed approach would be to vary the form and level of the franchisor’s required disclosure according to the level of sophistication of a prospective franchisee, requiring subjective, case-by-case assessment, which is not contemplated by the Act.
With respect to financial statements, the franchisor argued that because it provided the prospective franchisee with access to the franchisor’s electronic financial data, including a printout of electronic statements, the franchisee had been provided with the most up-to-date financial information to enable it to make an informed decision. The Court did not accept that the electronic access to financial information and statements provided was any substitute for the financial statement requirement under the Act’s regulations. Under the Act, every disclosure document must include a financial statement for the most recently completed fiscal year of the franchisor’s operations, prepared in accordance with generally accepted accounting principles.
Apblouin Imports serves as another recent reminder to franchisors of the importance of strict compliance with disclosure requirements under the Act and of the significant remedy available to franchisees for non-disclosure.