WHEN IS A DISCLOSURE DOCUMENT NOT A DISCLOSURE DOCUMENT ?
CO-SUMMER 2009
In its recent unanimous decision pertaining to the Dollar It franchise system (6792341 Canada Inc. v. Dollar It Limited, 2009 ON CA 385 (Ont. C.A.), the Ontario Court of Appeal has sent another clear message to franchisors in Ontario that they MUST comply with the Arthur Wishart Act (the "Act”) when disclosing to potential franchisees or face the very real possibility that their non-compliant disclosure document may be deemed by the Courts to be tantamount to no disclosure.
In this case, the franchisee had entered into a franchise agreement and ancillary documents with the franchisor. Prior to entering into the franchise agreement, the franchisor provided the franchisee with a disclosure document which was purported to be in compliance with section 5 of the Act. In addition to the disclosure document, the franchisee was given "generic” copies of the Dollar It Franchise Agreement, the Indemnity Agreement, the General Security Agreement and the Sublease.
Shortly after beginning operations, it became clear to the franchisee that the franchise operations were not going to be profitable. Within a few months, it served a notice of rescission on the franchisor. While there was no dispute that the disclosure document was missing required information and did not comply with the requirements of section 5 of the Act, the issue related to the interpretation to be given to section 6 of the Act.
The franchisee contended that the disclosure document it received was so deficient as to amount to no disclosure thereby allowing it a two-year window in which to rescind the franchise agreement, as such remedy is provided for subsection 6(2) of the Act. The franchisor contended that although it was missing some required information, the franchisor did provide a disclosure document, at one time and in one document, therefore complying with section 5 of the Act and if the franchisee wished to rescind its franchise agreement and ancillary documents, it should have done so within the sixty-day window provided by subsection 6(1).
The Court of Appeal continues to hold that the focus of the Act "is on protecting the interests of the franchisees. The mechanism for doing so is the imposition of rigorous disclosure requirements and strict penalties for non-compliance” and that any suggestion "that these disclosure requirements or the penalties imposed for non-disclosure should be narrowly construed, must be met with skepticism”.
The content of the disclosure document is mandated by subsection 5(4) of the Act and Part II and III of the Regulations and that the franchisors are required to fully and accurately disclose to a potential franchisee so that it can make a properly informed decision on whether or not to invest in the franchise. When material information is missing from such disclosure, the potential franchisee is unable to make an informed decision.
The application judge narrowly viewed subsection 6(1) as applicable in any context where a disclosure document does not comply with subsection 5(4) of the Act, since it was specifically contemplated therein that rescission had to occur within sixty days of the franchisee having received the "deficient” disclosure document.
However, when the Court of Appeal reviewed the information that was missing from the disclosure document, it found that clearly, "the franchisee had not been provided with a document that enabled it to make an informed decision to enter into the franchise agreement”.
THE FOLLOWING IS A SUMMARY THAT WAS MISSING FROM THE DISCLOSURE DOCUMENT :
1. A completed and duly signed certificate. Financial statements or an opening balance sheet
2. Offer to Lease or Head Lease
3. Information on Shikar Properties Inc. (the sub-landlord)
4. Prescribed statements pertaining to the advertisement fund and contributions
5. Description of the actual territory to be granted
6. Prescribed description of franchisor’s policy on proximity between franchisees
7. Description of license, registration, authorization or other permission required to be obtained to operate the franchise
8. Description regarding volume rebates, etc.
Having reviewed all of the deficiencies, the Court of Appeal concluded that it was "crystal clear that there was not disclosure as required by the Act. There is simply no way anyone reviewing this disclosure document could make an informed decision about whether or not to invest in this franchise”.
Further, it reasoned that simply because you call a document a "disclosure document” does not make it so. In fact, based on the application judge’s reasoning that because a document called a "disclosure document” had been given to the franchisee, the franchisee would only have sixty days in which to rescind, pursuant to subsection 6(1) of the Act. The Court of Appeal indicated that "such an interpretation would lead to absurdity”. Based on the many material deficiencies of the disclosure document before it, the Court of Appeal unanimously held that "the only reasonable conclusion is that the franchisor never provided the disclosure document”, thereby entitling the franchisee to rescind within the period of two years, pursuant to subsection 6(2) of the Act.
In this case, the franchisee was represented by Sylvie Patenaude – Partner, Sicotte Guilbault, LLP (Ottawa).
In this case, the franchisee had entered into a franchise agreement and ancillary documents with the franchisor. Prior to entering into the franchise agreement, the franchisor provided the franchisee with a disclosure document which was purported to be in compliance with section 5 of the Act. In addition to the disclosure document, the franchisee was given "generic” copies of the Dollar It Franchise Agreement, the Indemnity Agreement, the General Security Agreement and the Sublease.
Shortly after beginning operations, it became clear to the franchisee that the franchise operations were not going to be profitable. Within a few months, it served a notice of rescission on the franchisor. While there was no dispute that the disclosure document was missing required information and did not comply with the requirements of section 5 of the Act, the issue related to the interpretation to be given to section 6 of the Act.
The franchisee contended that the disclosure document it received was so deficient as to amount to no disclosure thereby allowing it a two-year window in which to rescind the franchise agreement, as such remedy is provided for subsection 6(2) of the Act. The franchisor contended that although it was missing some required information, the franchisor did provide a disclosure document, at one time and in one document, therefore complying with section 5 of the Act and if the franchisee wished to rescind its franchise agreement and ancillary documents, it should have done so within the sixty-day window provided by subsection 6(1).
The Court of Appeal continues to hold that the focus of the Act "is on protecting the interests of the franchisees. The mechanism for doing so is the imposition of rigorous disclosure requirements and strict penalties for non-compliance” and that any suggestion "that these disclosure requirements or the penalties imposed for non-disclosure should be narrowly construed, must be met with skepticism”.
The content of the disclosure document is mandated by subsection 5(4) of the Act and Part II and III of the Regulations and that the franchisors are required to fully and accurately disclose to a potential franchisee so that it can make a properly informed decision on whether or not to invest in the franchise. When material information is missing from such disclosure, the potential franchisee is unable to make an informed decision.
The application judge narrowly viewed subsection 6(1) as applicable in any context where a disclosure document does not comply with subsection 5(4) of the Act, since it was specifically contemplated therein that rescission had to occur within sixty days of the franchisee having received the "deficient” disclosure document.
However, when the Court of Appeal reviewed the information that was missing from the disclosure document, it found that clearly, "the franchisee had not been provided with a document that enabled it to make an informed decision to enter into the franchise agreement”.
THE FOLLOWING IS A SUMMARY THAT WAS MISSING FROM THE DISCLOSURE DOCUMENT :
1. A completed and duly signed certificate. Financial statements or an opening balance sheet
2. Offer to Lease or Head Lease
3. Information on Shikar Properties Inc. (the sub-landlord)
4. Prescribed statements pertaining to the advertisement fund and contributions
5. Description of the actual territory to be granted
6. Prescribed description of franchisor’s policy on proximity between franchisees
7. Description of license, registration, authorization or other permission required to be obtained to operate the franchise
8. Description regarding volume rebates, etc.
Having reviewed all of the deficiencies, the Court of Appeal concluded that it was "crystal clear that there was not disclosure as required by the Act. There is simply no way anyone reviewing this disclosure document could make an informed decision about whether or not to invest in this franchise”.
Further, it reasoned that simply because you call a document a "disclosure document” does not make it so. In fact, based on the application judge’s reasoning that because a document called a "disclosure document” had been given to the franchisee, the franchisee would only have sixty days in which to rescind, pursuant to subsection 6(1) of the Act. The Court of Appeal indicated that "such an interpretation would lead to absurdity”. Based on the many material deficiencies of the disclosure document before it, the Court of Appeal unanimously held that "the only reasonable conclusion is that the franchisor never provided the disclosure document”, thereby entitling the franchisee to rescind within the period of two years, pursuant to subsection 6(2) of the Act.
In this case, the franchisee was represented by Sylvie Patenaude – Partner, Sicotte Guilbault, LLP (Ottawa).