According to Alberta’s Franchises Act and Ontario’s Wishart Act, franchisees are entitled to rescind their Franchise Agreements within two years if they receive no disclosure or within sixty days if they receive incomplete or deficient disclosure from their intended franchisor. Rescission is a drastic remedy with potentially significant damages. Therefore, in order to avail themselves of the two year window of opportunity, franchisees are frequently arguing that their disclosure documents were so deficient that, in essence, no disclosure was provided at all. Three recent court cases have discussed this issue with seemingly different results.
In Hi Hotel Limited Partnership v. Holiday Hospitality Franchising Inc., 2008 ABCA 276, the Alberta Court of Appeal determined that the failure to provide a signed director or officer’s certificate in a franchise disclosure document in and of itself rendered that disclosure so faulty that the document could not be considered a disclosure document. Therefore, the franchisees were able to rescind their Franchise Agreement within two years. Meanwhile, two recent cases from the Ontario Superior Court of Justice considered the same general question and seemed to give franchisors far more latitude before finding their disclosure documents invalid.
In Chu v. Chowdry (c.o.b. Liberty Car and Truck Rental), 2008 CanLII 36909, the applicant-franchisee sought a declaration of entitlement to rescind its two licensing agreements for being so deficient that effectively, no disclosure was provided. In dismissing the motion, the Court stated that the two year rescission period has only previously been triggered where a disclosure document was not provided in any form, or where foreign disclosure documents were provided for informational purposes only. The Court found that the disclosure did not meet each of the statutory requirements under the Act but that key information had been provided to the franchisee in a single document. The Court therefore found that the franchisee had been given enough information to make a informed decision about whether to purchase the franchised business, and was therefore not prepared to view the disclosure as fatally deficient.
In 4287975 Canada Inc. v. Imvescor Restaurants Inc., 2008 CanLII 48123, the applicant-franchisee brought a motion seeking a declaration of entitlement to rescind its franchise agreement because the applicant had paid a franchise fee prior to receipt of a disclosure document. The franchisor argued that the franchisee had had 60 days to rescind after receipt of the disclosure document. In dismissing the motion, the court held that the two year rescission period applies only where a disclosure document is not provided at all.
The flood of cases opining on how much disclosure is “enough” disclosure will no doubt continue to flow. And, while the ultimate impact of the Hi Hotel case in Ontario remains uncertain, it nonetheless stands as a warning to franchisors to ensure that their disclosure documents are up to date and complete each time they are given to prospective franchisees!