Ruling strict about document disclosure

Lawyers say a recent Court of Appeal decision clarifies that courts are going to use a strict approach when considering whether a franchise disclosure document complies with provincial legislation.

In Mendoza v. Active Tires & Auto Inc., a franchisee sought to rescind the agreement it had with a franchisor on the basis that the disclosure document it had provided did not comply with the Arthur Wishart Act.

The act regulates franchise disclosure in Ontario and holds that franchisees can rescind a franchise agreement without penalty within two years if the franchisor never provided the disclosure document.

The Court of Appeal overturned a lower court decision, which ruled in favour of the franchisor and said the franchisee could not rescind the agreement, as the disclosure was sufficient.

Lawyers say the lower court’s decision in the case was an outlier that would have benefited franchisors, as it would have meant courts would take a less stringent approach to disclosure obligations.

Jennifer Dolman, a partner with Osler Hoskin & Harcourt LLP, who was not involved in the case, says the lower court’s decision was welcome from the perspective of a lawyer who represents franchisors, but it was inconsistent with past court decisions.

“The Court of Appeal has now corrected the record as it were, as to the fact that no, it’s not going to be a subjective consideration,” she says.

The case turned on whether two deficiencies in the disclosure document that was provided to the franchisee were material. The disclosure certificate lacked the required signatures of two directors and the franchisors also failed to provide financial statements in compliance with the act.

The motion judge, Ontario Superior Court Justice Grant Dow, found that these two deficiencies were insignificant.

The Court of Appeal disagreed.

“In my review, they represent material deficiencies that are fatal to the ability of the purported disclosure document to be a disclosure document within the meaning of the act,” wrote Justice Kathryn Feldman.

The motion judge also accepted the franchisor’s argument that the franchisee could not say the contents of the disclosure document were of importance to him, as he did not read the entire document.

The Court of Appeal, however, determined that it did not matter if the franchisee had not properly reviewed the documents, as the material itself was deficient.

The franchisor’s obligations are not diminished when a franchisee does not closely study the contents of the disclosure document, Feldman said.

Feldman said that the act imposes significant disclosure obligations on franchisors for the benefit of franchisees.

Milton Davis, the lawyer representing the franchisor, says he does not intend to seek leave from the Supreme Court of Canada to appeal the decision, as the matter is not of national importance because it concerns Ontario-specific legislation.

He says the Court of Appeal applied a strict approach to the interpretation to the act.  

“It doesn’t matter whether or not the franchisee even reads the disclosure document, which means it doesn’t matter if the franchisee is not misled in any way, shape or form,” says Davis, a partner with Fogler Rubinoff LLP.

Ben Hanuka, the lawyer representing the plaintiffs, says the Court of Appeal decision is helpful to the franchise law bar to clarify what the test is for such matters.

“Whether you advise a franchisor or whether you advise a franchisee, you’ve got to make an assessment about the nature of the deficiency and what’s not compliant and whether those deficiencies are important and material. That you do on an objective basis,” says Hanuka, of Law Works PC. He says an important takeaway for franchise lawyers is that technicalities matter in this area of law.

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