Ontario Court of Appeal Confirms Strict Approach to Franchise Disclosure
A recent decision of the Ontario Court of Appeal confirms the strict nature of the disclosure requirements under the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the “Act”).
In Mendoza v. Active Tire & Auto Inc., 2017 ONCA 471, the Court of Appeal made the following five key findings:
1. First, the Court reviewed the case law on the test for whether a disclosure document is fatally deficient under the Act, thus entitling the franchisee to rescind the franchise agreement within two years of the date that the franchise agreement is signed. The Court confirmed that where a disclosure document is “materially deficient,” it amounts to “no disclosure”, thus providing the franchisee with a two-year rescission window.
The “material deficiency” test – which has been applied by lower courts in Ontario - suggests that any omission to include a material fact in a disclosure document, or a deficiency on a material issue, amounts to no disclosure having been provided.
2. Second, the Court held that a disclosure document is fatally deficient where the financial statement provided with the disclosure is not from the most recent fiscal year.
On the facts of the case, the disclosure document was provided to the prospective franchisee in early 2015 and included the financial statement for the 2013 fiscal year. This was because the franchisor’s 2014 financial statement was not yet complete. While the Regulation under the Act permits a franchisor to use the previous fiscal year’s financial statement where “180 days have not yet passed since the end of the most recently completed fiscal year and a financial statement has not been prepared and reported for that year”, the 180-day grace period had already passed when the disclosure was delivered.
The Court held that the franchisor could not deliver a valid disclosure document in such circumstances. Since the 180-day grace period under the Regulation had already passed, any disclosure document delivered by the franchisor would be fatally deficient until such time that the 2014 financial statement was finalized.
This is a caution to franchisors to ensure they provide up-to-date financial statements (unless they are within the grace period).
3. Third, the Court confirmed that statutory rescission under the Act is available to a franchisee whether or not it reviewed the disclosure document at the time it was delivered and whether or not the deficiency at issue is linked in any way to the franchisee’s ultimate financial performance.
According to the Court, a franchisor’s obligations under the Act “do not change depending on the actions or reactions of a particular franchisee. Nor are those obligations diminished when a franchisee does not study the contents of the disclosure document.” The Court also confirmed that statutory rescission “is not dependent on … [the] conduct of the franchisee”.
4. Fourth, the Court held that a disclosure document is fatally deficient where the certificate of the franchisor included with the document is only signed by one officer or director. According to the Court, where a franchisor has more than one officer or director, the omission of a second signature is fatal to the document.
While this decision remains consistent with other Ontario case law on franchise disclosure, it is another caution to franchisors to develop robust disclosure practices. The Court of Appeal’s reversal of the lower court ruling may also signal a reluctance to accept evidence that the franchisee had sufficient information to make an informed decision, despite the deficiencies in the disclosure document, as being relevant in evaluating franchisor liability.