Franchise agreement can be cancelled due to defective financial disclosure: Ontario Court of Appeal

Absence of signed and dated certificate in financial disclosure documents was fatal flaw

Franchise agreement can be cancelled due to defective financial disclosure: Ontario Court of Appeal

The Ontario Court of Appeal has affirmed an award of $475,909.26 to the franchisees of a Fit for Life restaurant because of defective financial disclosure documents.

The dispute in 2483038 Ontario Inc. v. 2082100 Ontario Inc., 2022 ONCA 453 stemmed from a franchise agreement to operate a Fit for Life restaurant in Oakville, ON. Samuel Davis is the sole director and officer of an Ontario-based corporation which provides franchises of Fit for Life restaurants. Baljeet Singh and Kulwinder Singh, as officers and directors of a corporation, applied for a Fit for Life franchise.

The franchisor provided financial disclosure documents to the potential franchisee. The documents contained Davis’ signature and promoted the franchise as worthy of investment. However, the documents did not contain a signed and dated certificate of accuracy and completeness as required by the regulation promulgated under the Arthur Wishart Act. 

The Wishart Act requires franchisors to provide prospective franchisees with a disclosure document containing specified information and documents, which must be accurate, clear and concise. A franchisee is permitted to rescind a franchise agreement without penalty or obligation “if the franchisor never provided the disclosure document.”

The Singhs demanded recission of the agreement and the trial judge ruled in their favour. The judge referred to jurisprudence stating that “a failure to provide the required disclosure may be established where the financial disclosure documents are so deficient as to effectively amount to a complete lack of disclosure.” Further, jurisprudence also laid down the rule that “the absence of a signed and dated certificate in the financial disclosure documents is a fatal flaw.”

Davis argued that jurisprudence requires the plaintiffs to first show that they were unable to make an informed investment decision due to the deficient disclosure before they can exercise their rescission rights. The judge rejected this argument and emphasized that the absence of a signed and dated certificate need not be accompanied by other defects to fail to satisfy the mandatory disclosure requirement.

The judge also found that Davis was a franchisor’s associate within the meaning of the Wishart Act and that he made representations to the Singhs for the purpose of granting the franchise, marketing the franchise, or otherwise offering to grant the franchise. The judge ruled that Davis was liable to pay the Singhs the amount of $475,909.26.

Act places personal liability on franchisor

The appellate court agreed with the trial judge’s analysis and conclusion. The court noted that jurisprudence does not require an inability to make an “informed investment” into the defective certificate analysis.

The court said, “requiring a franchisee to demonstrate they were unable to make an informed investment in a deficient certificate case would undermine one of the purposes of the Wishart Act.” The court highlighted that the act ensures that the contents of the disclosure documents are accurate by attaching personal liability to the signatories. The court further said that this personal liability to signatories is not tied to any impact on the recipient.

The court found that the financial disclosure documents did not contain the signed and dated disclosure certificate and that there was nothing to suggest that Davis’ signature on page four of the documents applied to anything beyond that page. The court concluded that the absence of the certificate was a fatal flaw in the disclosure, so the Singhs were entitled to rescind the franchise agreement without penalty under s.6(2) of the Wishart Act.

The court also agreed with the findings of the trial judge that Davis was a franchisor’s associate. Davis, as the sole director and shareholder, had control over the franchisor. The court found that he was directly involved in the granting of the franchise because he testified that he intended to be personally liable for his signature in the documents.

The court concluded that there was no error in the trial judge’s reasons or application of the law, so it dismissed the appeal.

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