In part 1 of this series, we explored 4 “fatal flaws” of a franchise disclosure document that would allow a Franchisee to terminate a franchise agreement.

In this blog, we examine the “informed decision” analysis.[1] Under this test, the Court focuses on:

Whether the deficient disclosure from the Franchisor prevents the Franchisee from making an informed decision about whether or not to invest in the Franchise.[2]

The “informed decision” analysis is a fact-specific and objective test that seeks to determine whether the material deficiencies in the disclosure will make it impossible for anyone to make an informed investment decision.[3]

If the answer to that question is a yes, then the disclosure could be treated as no disclosure being delivered, and the Franchisee can terminate a franchise agreement within 2 years of signing that agreement.

Unlike the “fatal flaws”, the analysis here is fact-specific. The following are examples of the Court finding the Franchisor’s deficient disclosure was serious enough to allow a Franchisee to exit the franchise.

Numerous Material Deficiencies

In 6792341 Canada Inc. v. Dollar It Limited, 2009 ONCA 385 (“Dollar It”), the Ontario Court of Appeal ruled that the Franchisee was allowed to terminate a franchise agreement because the Franchisor’s disclosure document was missing numerous required information, including a lack of: [4]

  • prescribed advertisement statements;
  • the franchisor’s policy on proximity between franchises;
  • a description of the territory to be granted;
  • a description of license, registration, authorization to register a franchise; and
  • a description regarding volume rebates.

The Court held that the disclosure deficiencies were significant and numerous enough to be deemed as “no disclosure” at all.

Dollar It illustrates that even if no single deficiency amounts to a “fatal flaw”, numerous deficiencies can make the disclosure document so deficient that rescission remains the only just outcome.

Undisclosed Risks

In 2611707 Ontario Inc. v. Freshly Squeezed Franchise, 2022 ONCA 437, the Ontario Court of Appeal upheld a decision that found the following deficiencies, when considered together, are sufficient to justify a rescission of the franchise agreement:

  1. Failure to Disclose a Complete Version of Financial Statements: In the Franchisor’s disclosure document, certain notes to the financial statements were missing, including a note that relates to the accounts receivables owed to the Franchisor. The first instance judge noted the incomplete financial statements “did not provide the franchisee with the full information to which it was entitled so that it could assess the financial health of the franchise system in which it was about to invest.”[5]
  2. Failure to Disclose an Agreement to Lease: While this is different from a non-disclosure of a head lease – a fatal flaw, the Court found that the Franchisor should have disclosed the signed agreement to lease (which is typically followed by a full lease). Further, the Franchisor did not disclose a term in the agreement to lease that allows the Landlord to not construct the leased premises and unilaterally terminate the lease for no compensation.

Conclusion

Certain disclosure deficiencies may only amount to imperfect disclosure, which does not warrant rescission. However, numerous minor deficiencies taken together could render a disclosure document so deficient it effectively amounts to no disclosure.

[1] 2611707 Ontario Inc. v. Freshly Squeezed Franchise, 2022 ONCA 437 at para 10.

[2] 2611707 Ontario Inc. v. Freshly Squeezed Franchise, 2022 ONCA 437 at para 12.

[3] 2364562 Ontario Ltd. v. Yogurtworld Enterprises Inc., 2021 ONSC 5112 at para 38.

[4] 6792341 Canada Inc. v. Dollar It Limited, 2009 ONCA 385 (CanLII), at para 14.

[5] 2611707 Ontario Inc. et al v. Freshly Squeezed Franchise Juice Corporation, 2021 ONSC 2323 at para 63.



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