In a case that continues the trend of courts in Ontario, MBCO Summerhill Inc. v. MBCO Associates Ontario Inc. 2010 ONSC 5432, the Ontario subfranchisor of the MBCO restaurant bakery concept, and related parties, were found to have delivered no disclosure document at all and summary judgment was granted to the plaintiff franchisee on a claim for rescission.
As in many such cases, the franchisor attempted to defend against the motion for summary judgment by claiming that the materials delivered to the then prospective franchisee candidates amounted to no more than a deficient disclosure document, leaving the franchisee with only a 60 day right of rescission of the franchise agreement. The franchisee argued that the materials delivered were so deficient so as to constitute no disclosure document at all, leaving them with the absolute right to rescind for 2 years from the signing of the franchise agreement.
In the Court’s written decision, the materials delivered to the then prospective franchisee were described as “…a flyer of four and one-half pages, containing two pages of photographs; one page setting out general information concerning the neighbourhood as well as a four-item investment summary and projected financial information on three possible scenarios.”
The court summarily dismissed this as even a deficient disclosure document, noting it contained numerous deficiencies, including no certificate signed by the franchisor’s directors and officers, no proper financial statements, no copy of the lease, and so many other that the court did not bother to list them all.
The court also found that a related lease holding company, and the individual 50% shareholder of the subfranchisor who dealt at length with the franchisee in regard to the franchise sales process, were each a “franchisor’s associate” under the Wishart Act, and therefore jointly and severally liable with the franchisor.
In the end, the franchisee’s motion for summary judgment succeeded.
The result in this case is not unexpected, and continues the trend of situations where franchisors who were either ignorant of the Ontario franchise law, or did not take the obligations seriously, made no good faith attempt to prepare a compliant franchise disclosure document. Then, after a rescission claim is launched, they try to argue that a smattering of brochures, loose documents, etc, were “good enough.” In fact, as courts are finding, they were not even good enough to constitute a “deficient disclosure document.” Most franchisors do treat these obligations seriously and make good efforts at compliance. Unfortunately there are others who do not, and these type of written decisions are the result.