In 4287975 Canada Inc. v. Imvescor Restaurants Inc., a decision of the Ontario Superior Court of Justice dated August 18, 2008, Justice F.J.C. Newbould was asked to determine a motion by way of a special case under Rule 22 of the Ontario Rules of Civil Procedure dealing with the interpretation and application of certain provisions of the Arthur Wishart Act (Franchise Disclosure), 2000 (the Act). The relevant sections of the Act were 6(1) and 6(2) relating to a franchisee’s right to rescind a franchise agreement.

Right of Rescission Under the Act

Under section 6(1) of the Act, a franchisee may rescind the franchise agreement, without penalty or obligation, no later than 60 days after receiving the disclosure document, if the franchisor failed to provide the disclosure document or a statement of material change within the time required by section 5 of the Act or if the contents of the disclosure document did not meet the requirements of section 5 of the Act. Section 5 of the Act requires the franchisee’s receipt of a disclosure document not less than 14 days before the earlier of the signing by the prospective franchisee of the franchise agreement or any other agreement relating to the franchise, and the payment of any consideration relating to the franchise.

Under section 6(2) of the Act, a franchisee may rescind the franchise agreement, without penalty or obligation, no later than two years after entering into the franchise agreement, if the franchisor never provided the disclosure document.

Facts of the Case

The key facts before the court were as follows:

  1. On June 8, 2005 the applicant, as a prospective franchisee, paid $15,000 to the franchisor; 
  2. On August 15, 2005, prior to the execution of any franchise agreement, the applicant received a disclosure document; 
  3. For the purposes of this special case only, the contents of the disclosure document were assumed to have complied with the provisions of section 5(4) of the Act; 
  4. On February 17, 2006, approximately six months after delivery of the disclosure document, the applicant executed a franchise agreement with the franchisor; and 
  5. On February 15, 2008, just shy of two years from the date the franchisee executed the franchise agreement with the franchisor, the franchisee delivered a notice of rescission.

Issues and Position of Parties

The question put to Justice Newbould was whether, on these facts, the franchisee had a right to rescind the franchise agreement no later than two years after entering into the franchise agreement in accordance with section 6(2) of the Act, or whether that rescission right was limited to 60 days from the date the franchisee received the disclosure document in accordance with section 6(1) of the Act.

The position of the franchisor was that because the franchisee had agreed, for purposes of the special case, that the disclosure document complied with section 5(4) of the Act (which deals with the contents of the disclosure document), any rescission rights were contained in section 6(1) of the Act. Simply put, the franchisor claimed that section 6(2) of the Act could not apply because it could not be said that a disclosure document had never been provided.

The position of the franchisee was that section 6(2) of the Act should apply since the franchise agreement was signed more than 60 days after the disclosure document was received, thereby rendering it impossible for the franchisee to rescind under section 6(1) of the Act. Were it otherwise, the franchisee would be required to rescind the franchise agreement long before it was even made. The franchisee also argued that since the disclosure document had not been provided within the time required by section 5(1) of the Act (being no less than 14 days before the execution of the franchise agreement and payment of any consideration), there effectively had been no disclosure document delivered. In this case, a payment had been made before the franchise agreement was delivered.

“Plain Reading” of Act

Justice Newbould found in favour of the franchisor on the basis of what he described as “a plain reading of section 6.” According to His Honour, a franchisee only has the right to rescind a franchise agreement up to two years after the agreement was entered into if the franchisor never provided a disclosure document. If a disclosure document was delivered, as in this case, then the right to rescind is under section 6(1) of the Act and must be exercised no later than 60 days after the disclosure document was received.

Justice Newbould rejected the argument that there had been no disclosure document since the franchisor had taken money from the franchisee prior to delivery of the disclosure document. Section 6(1) of the Act expressly provides for a 60-day rescission period if a disclosure document has been provided outside of the time period required by section 5. If section 6(2) of the Act were to apply when a disclosure document has been delivered outside of the time period required by section 5(1) of the Act, such application would contradict section 6(1) of the Act, which expressly deals with the situation where a disclosure document has been provided outside of the time period required by section 5(1) of the Act. Accordingly, the franchisee did not have the right to rescind the franchise agreement under section 6(2) of the Act.

Further, Justice Newbould found that the franchisee did not have the right to rescind the franchise agreement under section 6(1) of the Act because the agreement had not been entered into within 60 days of the receipt of the disclosure document. There was no franchise agreement to rescind. Had the franchisee signed a franchise agreement before receiving a disclosure document, rather than paying money to the franchisor before signing the franchise agreement, the franchisee would have been able to rescind the franchise agreement under section 6(1) of the Act, provided it did so within 60 days from the date it received the disclosure document.

In considering the correct interpretation of the Act, Justice Newbould specifically took into account principles of statutory interpretation. Those principles require that the words of a statute be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme and object of the statute, and the intention of Parliament. Those principles also require that every enactment be given such fair, large and liberal construction as best ensures the attainment of the enactment’s objects.

In Justice Newbould’s opinion, the interpretation of sections 6(1) and (2) of the Act proposed by the franchisor does not defeat the purposes of the Act (i.e., to provide a prospective franchisee with full information on which to make an informed investment decision). Under the Act, 14 days has been determined to be sufficient time for a prospective franchisee to review a disclosure document before signing a franchise agreement. If a disclosure document is provided outside of the time period required by section 5(1) of the Act, the franchisee has 60 days from the date the disclosure document is received to decide whether or not to rescind the franchise agreement.

In this case, the franchisee had six months (far more than the 14 days provided for in section 5(1) of the Act) to review the disclosure document before signing the franchise agreement. During that six-month period, the franchisee could have decided to not enter into a franchise agreement and, as the franchisee had conceded, have been entitled to the return of the $15,000 paid to the franchisor before receiving the disclosure document. The franchisee, however, chose to sign the franchise agreement.

Action for Damages

Although Justice Newbould did not comment on this in his reasons, the fact that rescission under either section 6(1) or section 6(2) of the Act is not available to a franchisee who pays money to a franchisor in advance of receiving a disclosure document (as opposed to a franchisee who signs a franchise agreement in advance of receiving a disclosure document) does not mean that the franchisee has no remedy under the Act. If a franchisee can prove that it suffered a loss because of the franchisor’s failure to deliver a disclosure document not less than 14 days before receiving consideration from the franchisee, the franchisee has a right of action for damages against the franchisor and others under section 7(1) of the Act.

On the facts of this case, presumably there were no damages arising out of the franchisor’s failure to deliver a disclosure document prior to taking money from the franchisee. In spite of an opportunity to not enter into a franchise agreement after having received disclosure, the franchisee went ahead and did so and, in consideration of the payment of $15,000 and likely other monies, received the benefits typically afforded by a franchise agreement.

This decision is under an expedited appeal to the Ontario Court of Appeal.