The Ontario Court of Appeal’s decision in the controversial Raibex Canada Ltd. v. ASWR Franchising Corp., case was released on January 25, 2018, and brings certainty to the courts’ interpretation of the disclosure requirements under the Arthur Wishart Act (Franchise Disclosure), 2000 (the "AWA"). The decision overturned the motion judge’s decision on all grounds, rejecting the franchisee’s rescission of the franchise agreement on the grounds of “premature disclosure”, and confirming that franchisors may provide a franchise disclosure document (“FDD”) to prospective franchisees, and enter into a franchise agreement, without first having a location and a lease in place.
The lower court decision created uncertainty for franchisors who commonly entered into a franchise agreement prior to a location being determined or a lease being in place for the proposed franchised business. The lower court found that location and lease information is material and required to be disclosed to a prospective franchisee . In coming to its decision the Court of Appeal stated that:
- rescission remedies under franchise disclosure laws are an extraordinary remedy;
- imperfect disclosure is distinct from, and does not necessarily amount to “never being provided [with a] disclosure document”; conflating the two scenarios will frustrate clear legislative intent”; and
- the inquiry into these factual differences must focus on whether the franchisee has been “effectively deprived … of the opportunity to make an informed investment decision.”
The Court noted that the franchisee was well aware of both the terms of the lease that was being entered into, and the possible range of costs to convert the existing site into a franchised location. Further, the franchisee was put on notice of the risks of their investment because of various safeguards in the franchise agreement which included:
- a “reasonable best efforts” clause which constrained the Franchisor’s ability to enter a lease without considering the franchisee’s legitimate interests;
- an “opt out” clause, which gave the franchisee the ability to opt out of any lease before signing if the site was not acceptable; and
- a number of risk warnings, cost estimate warnings and similar disclaimers.
Franchisors that were hesitant about what amounted to “premature” or “no disclosure” of an FDD can now rest easy with the disclosure obligation more clearly defined. This decision confirms that imperfect information in an FDD does not amount to “no disclosure” under the AWA.
The Court of Appeal’s decision can be found here: