Has the Law of Franchise Rescission Changed since Raibex? An Ontario Court Provides a Partial Answer

The recent decision in 2483038 Ontario Inc. v. 2082100 Ontario Inc.,[1] confirms a narrow point of franchise law, namely that an unsigned certificate in a Franchise Disclosure Document continues to constitute a “fatal flaw”, despite the Ontario Court of Appeal’s decision in Raibex Canada Ltd. v. ASWR Franchising Corp.[2] The decision also clarifies the liability of “franchisor’s associates”.

The plaintiff franchisee entered into an agreement with a franchisor for a restaurant in Oakville. The franchisee opened for business in December 2015, and ceased operations in August 2017 after delivering a notice of rescission under Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 (the “Wishart Act”). The notice of rescission alleged that there had been no disclosure at all. The main alleged deficiency was the failure to include the mandatory certificate signed by the sole officer and director (two signatures are required where a franchisor has more than one officer and director).

The case proceeded to trial.

The franchisor argued that the disclosure was not fatally deficient on the basis of the unsigned certificate alone. Contrary to prior appellate case law, which was crystal clear on this narrow point, the franchisor argued that Raibex changed the landscape and “shifted the focus of s. 6(2) rescission cases”. The post-Raibex test, the franchisor argued, is that the franchisee must show “actual impact of that non-disclosure”.[3]

The Court rejected the franchisor’s argument in the context of the signed certificate, which was the subject matter of clear prior appellate case law. The Court confirmed that “Raibex does not import the requirement of an inability to make an ‘informed investment’ in the context of the certificate.”[4]

While it remains arguable that Raibex changed the required analysis in many statutory disclosure cases, 2483038 Ontario Inc. makes clear that Raibex does not overrule prior decisions on narrower issues such as the importance of the certificate.  

2483038 Ontario Inc. also clarifies an important issue regarding the liability of “franchisor’s associates” under the Wishart Act.  In this case, the sole officer and director of the franchisor was found to be a “franchisor’s associate” because he “controlled” the franchisor and personally made representations to prospective franchisees by signing certain pages of the Franchise Disclosure Document (although he did not sign the certificate).

Importantly, the Court also found that franchisor’s associates, along with franchisors, are both liable for damages flowing from s. 6(6) of the Wishart Act.  In doing so, the Court rejected the arguments of the franchisor’s associate to the effect that he was only liable for amounts that he personally received.

 

[1] 2020 ONSC 475.

[2] 2018 ONCA 62; see our past blog post for a summary of the Decision: https://www.mccarthy.ca/en/insights/blogs/consumer-markets-perspectives/ontario-court-appeal-narrows-availability-franchise-rescission.

[3] 2483038 Ontario Inc. at para. 36.

[4] 2483038 Ontario Inc. at para. 38.

Franchise Legislation Arthur Wishart Act (Franchise Disclosure) 2000

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