The recent decision in New Vision Renaissance MX Ltd. v. The Symposium Café Inc. , (“New Vision”) broadens the scope of franchisors’ ability to obtain binding releases from franchisees.
Further, New Vision provides a helpful interpretation of the Court of Appeal’s decision in Raibex Canada Ltd. v ASWR Franchising Corp. In dismissing the franchisee plaintiff’s claims for statutory rescission under the Arthur Wishart Act (Franchise Disclosure), 2000 (the “AWA”), the Court held that “piecemeal disclosure” will no longer constitute a fatal deficiency in and of itself; instead, following Raibex, the Court clarified that the fundamental inquiry is whether the franchisee was deprived of the opportunity to make an informed investment decision.
In New Vision, the franchisee acquired a franchise in the Symposium Café restaurant and lounge system under an original franchise agreement made as of February 2015 (the “Franchise Agreement”), and a franchise amending agreement made as of June 2015 (the “Franchise Amending Agreement”). Prior to closing, the franchisee advised representatives of the franchisor that there would be a delay in advancing funds on the scheduled closing date. The franchisor then agreed to provide a short-term loan to the franchisee to facilitate a timely closing which was memorialized in the Franchise Amending Agreement.
The loan was advanced on a condition that the franchisee sign a release. The language of the release was broad, and included releasing the franchisor for any claims for rescission for failing to provide disclosure as required by the AWA.
Ontario’s AWA, at section 11, provides a general prohibition against a waiver of statutory rights by a franchisee.
Shortly after opening, the franchisee brought an action for rescission under the Act due to alleged disclosure deficiencies, and argued that the franchisor was prohibited from relying on the release pursuant to section 11.
The franchisor argued the release was valid and enforceable under the judicially developed exception to section 11 known as the “Tutor Time” exception, derived from the decision on 1518628 Ontario Inc. v. Tutor Time Learning Centres, LLC.
Under the Tutor Time exception, a valid release must meet three criteria. It must:
- be given in settlement of a dispute,
- release only known breaches; and
- be given with the benefit of legal advice.
The motion proceeded by way of summary judgment, with the issues of liability and damages being bifurcated. The Court found as a threshold issue that the Tutor Time exception was met, and the release was valid.
The release settled a dispute
On the first requirement, the Court found there was a valid “settlement”. The fact that a dispute is not identified formally as a “dispute” was not an issue. The Court relied on the prior determination by the Ontario Court of Appeal Trillium Motor World Ltd. v. General Motors of Canada Ltd. that a “settlement” is a “voluntary arrangement that brings a dispute or potential dispute to an end”.
In New Vision, because the franchisee’s inability to advance funds in contemplation of closing was considered to be an anticipatory breach under the Franchise Agreement, the subsequent Franchise Amending Agreement (in which the short-term loan was negotiated) effectively resolved or “settled” the potential dispute.
As part of this “settlement”, the franchisee agreed to release its statutory rights arising from any disclosure deficiencies under the Act.
The preamble to the Franchise Amending Agreement also expressly stated that the release was to constitute full and final settlement and resolution of all disputes “as contemplated by Tutor Time”. The express reference to the Tutor Time case was found to corroborative of an intention to settle a potential dispute.
The franchisee argued that the release could only be limited to the “dispute” that was being settled at the end of a franchise relationship. The Court disagreed, finding that while it may be more common for disputes to be settled at the end of the relationship, “the timing is not the determinative factor”.
The Franchisee had knowledge of the facts underlying a rescission claim
On the second requirement, the Court said the following regarding the appropriate standard for determining whether a franchisee has knowledge of existing, known breaches:
the subjective knowledge of a party about whether a particular set of facts engages a statutory right is not what is required. Knowledge of contractual and statutory claims can be inferred from the factual matrix and knowledge of the franchisee of the facts that could support such claims.
Here, the claims advanced by the franchisee were in relation to circumstances occurring prior to the Franchise Amending Agreement, when the circumstances underlying these claims were known or knowable and when the plaintiffs were in a position to assert these claims.
Importantly, the decision focused (as is a feature in many franchise cases) on the specific facts:
When read in context, the release is not being relied upon to release future unknown claims. It is only in relation to the disclosure that had been made prior to the June Franchise Amending Agreement and only being relied upon in respect of alleged deficiencies arising from facts and circumstances that existed at the time of the June Franchise Amending Agreement.
On the facts of the case, the claims advanced for failures in disclosure were all known (or could have been known) at the time the release was signed, and the franchisee was in the hands of experienced counsel. Further, in negotiation of the release, there was evidence the franchisee had attempted to carve out the disclosure claims from the release. These facts led to the conclusion that it could be imputed knowledge to the franchisee about potential disclosure claims:
… I infer that the plaintiffs had sufficient knowledge of these breaches and claims from the known facts at the time that they now rely upon to support such claims. The franchisee was in a position at the time to exercise the rights they released based on the same circumstances now relied upon. It is not necessary for a claim based upon those rights to have actually been made.
The franchisee had independent legal advice
On the final Tutor Time requirement, the Court dismissed the franchisee’s argument a certificate of independent legal advice, or “ILA”, was required to prove they had received such advice. The Court noted that it was not a requirement for the lawyers to advise the franchisee to sign something saying they had read the Franchise Amending Agreement or the release just because of past cases where certificates of ILA were produced. The Court held that a certificate is simply one way of demonstrating whether ILA has been obtained. The evidence at hand, including evidence of negotiation by the franchisee’s lawyer about the scope of the release, was compelling and seemingly dispositive. Again, the Court rejected a strict interpretation, and relied on the fact-specific details of the case.
Rejection of the underlying disclosure claims
Finding the release to be valid was dispositive of the case. However, the Court nevertheless went on to analyze the underlying claim for deficient disclosure. One important feature of this analysis was whether the franchisee had been given piecemeal disclosure.
Under section 5(3) of the AWA, a franchise disclosure document (“FDD”) is required to be delivered as one document, at one time. Courts have repeatedly decided against franchisors providing piecemeal information over a period of months (instead of in one document) as it frustrates the policy objective to allow franchisees to make informed investment decisions.
In New Vision, the defendant franchisor provided the plaintiffs with an initial FDD in September 2014, pro forma financial statements in October 2014, a further FDD (containing the draft Franchise Agreements, schedules, but no site-specific information) in December 2014, and additional documentation regarding the proposed location, a copy of the lease, and certain changes to the Franchise Agreement in February 2015.
In the Court’s opinion, there was no evidence to establish that the piecemeal disclosure of the lease or any other documents interfered with the franchisee’s ability to make an informed investment decision. The Court relied on Raibex as authority for taking this purposive approach. In determining the piecemeal disclosure was not a material deficiency, the Court adopted the Raibex standard looking to whether the franchisee was effectively deprived of the opportunity to make an informed decision:
… Disclosure deficiencies justify rescission under s. 6(2) of the Wishart Act when they impair a potential franchisee’s ability to make an informed investment decision. The franchisee must demonstrate that the alleged disclosure deficiency did in fact interfere with that ability. There is no evidence that piecemeal disclosure of the lease or any other disclosure documents in this case interfered with the plaintiffs’ ability to make an informed investment decision. The evidence, if anything, is to the contrary. For example, the plaintiffs’ lawyer received and commented on the revised draft Franchise Agreement on February 15, 2015. Further, as the defendants point out, the alleged differences in the revised drafts of the Franchise Agreement have not even been identified by the plaintiffs. This makes it difficult for them to establish that the revisions impacted their ability to make an investment decision. [Emphasis added.]
It seems that the “piecemeal disclosure” analysis is now in line with the Raibex standard.
New Vision offers an important interpretation and evidences the court’s willingness to critically consider facts about the franchisees’ actual knowledge in the context of releases.
Adopting a purposive approach from Raibex focusing on whether the franchisee was effectively deprived of sufficient information to make an informed decision is an important element of the analysis. Though this rationale did not overcome all of the alleged deficiencies considered, there was a willingness to look at the more formalistic single document requirement more critically. The decision is an important one that confirms that each case must be assessed on its own particular facts, and advances the debate in favour of franchisors in respect of agreeing that the actual knowledge of franchisees is critical to the analysis.