This issue has long been debated since Ontario’s franchise disclosure laws came into force over 11 years ago.
The general view has been that electronic disclosure was not permitted and every franchise candidate has to be given a hard copy bound single disclosure document.
The minority view has been that the legislation actually permits it because other Ontario legislation permits electronic deliveries and that satisfies the franchise legislation’s requirement for disclosure to be given as stipulated or by “any other prescribed method.”
In a recent decision of the Ontario Superior Court of Justice, the Court considered whether a disclosure document, which was sent electronically but which otherwise was compliant with the legislation’s requirements in terms of content, could justify a franchisee’s exercise of its statutory right to rescind the franchise agreement for failure by the franchisor to have delivered a disclosure document as required by the legislation. (The rescission right permits a franchisee to terminate its franchise agreement and trigger the franchisor’s obligation to pay to the franchisee the amounts stipulated by Section 6 of the Act.)
The Court was not presented with and did not discuss or consider the debate as to whether electronic disclosure was actually permitted by the legislation.
However, the Court stated that, in circumstances where the disclosure was compliant in its substance and where there was no issue that the document was received in its entirety, it would not permit the franchisee to rescind simply because the document was technically not delivered properly.
In an important statement, the Judge commented that not every breach of Section 5 of the legislation (which describes how disclosure is to be made and what it must contain) will trigger a franchisee’s rescission right for breach of the disclosure requirements.
This decision, however, did not resolve the debate. It simply assumed that electronic disclosure was not permitted and allowed the franchisor in this case to go unpunished for having disclosed electronically.
It is our view that franchisors should not take this decision as permitting electronic disclosure even though the electronic disclosure by the franchisor in this case did not end up coming back to bite the franchisor. It is still recommended by us that franchisors not disclose electronically.
Maybe in the future a court will tackle head on whether electronic disclosure is permitted under Ontario franchise legislation rather than assuming, as this Judge did, that it was not permitted. Until then, the debate will continue as well as our advice that the assumption should be made that it is not permitted. The decision, however, will matter to franchisees and their counsel who are considering rescinding franchise agreements for what may appear to be technical breaches of the legislation where there was no apparent harm.