LEXPERT MAGAZINE
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JULY/AUGUST 2017 13
In Mendoza, the appellants had bought a
franchise from Active Tire & Auto Inc. in
June 2015. However, the individual appel-
lant, who was an experienced businessman,
was not able to operate the business suc-
cessfully and decided to rescind the agree-
ment three months aer purchase. e
appellants sought rescission under s. 6(2) of
the Act which provides that "[a] franchisee
may rescind the franchise agreement, with-
out penalty or obligation, no later than
two years aer entering into the franchise
agreement if the franchisor never provided
the disclosure document."
Before the motion judge, the appellants
focused on five deficiencies in the disclo-
sure document provided by Active Tire:
(1) the fact that the disclosure certificate
was signed by only one officer or director
and not two, as required by s. 7(2)(c) of On-
tario Regulation 581/00; (2) the failure to
provide audited
financial state-
ments as required
by s. 5(4)(b) of
the AWA and s.
3(1) of the regula-
tion; (3) the fail-
ure to provide the
disclosure docu-
ment at one time
as required by s. 5(3) of the Act; (4) the fact
that the letter of credit provided did not
conform with the disclosure document;
and (5) failure to disclose the required as-
sumptions and information as part of the
Ontario confirms test for rescission
Case turned on whether disclosure was materially deficient, not sophistication of franchisee BY ELIZABETH RAYMER
financial projections.
e franchisor called the appellant a
sophisticate who had more than enough
information to make an informed decision.
Yet one of the rea-
sons disclosure docu-
ments exist is because
of "the huge inequity
and bargaining po-
sition between the
franchisee and fran-
chisor," says Green-
bloom. "e franchi-
sor knows more." In
Mendoza, he adds,
the motion judge concluded that, as long as
there was sufficient information with which
the franchisee could make an informed deci-
sion, "that's all that really matters."
Ontario's appellate court did not agree.
"e scheme of the Act is to impose a num-
ber of requirements on franchisors to fully
disclose the type of financial and other in-
formation a prospective franchisee would
normally need in order to decide whether
to become a franchisee," Justice K. Feld-
man of the Court of Appeal for Ontario
wrote in her decision, in finding in the ap-
pellants' favour. "It then provides remedies
to the franchisee where the franchisor does
not meet the statutory obligations … "
Dolman says she impresses on US clients
thinking of expanding into Canada the
importance of providing a disclosure docu-
ment that is AWA-compliant; any mistakes
can be "fatal," she says, and the courts have
awarded "significant damages" to franchi-
sees who received disclosure documents
with material deficiencies and decided to
terminate the franchise agreement.
But in Mendoza, she adds, the court
made clear that proper disclosure docu-
mentation is essential. "e franchisee's
right should not be diminished by their so-
phistication or other subjective factors."
IN EARLY JUNE the Ontario Court of
Appeal overturned a lower court's decision
to forgive a franchisor's deficient disclosure
in the sale of a franchise and deny the fran-
chisee's motion to rescind the agreement.
e decision in Mendoza v. Active Tire
& Auto Inc. (2017 ONCA 471) confirmed
that the test for rescission under the prov-
ince's franchise legislation, the Arthur Wis-
hart Act (AWA), was whether the disclo-
sure made to the franchisee was "materially
deficient," not the actions or sophistication
of the franchisee.
"e Court of Appeal decision was con-
sistent with other decisions," says Todd
Greenbloom at Blaney McMurtry
LLP
in Toronto, who specializes in franchis-
ing and licensing. "e original [motion
judge's] decision was a detour from the way
things have been going."
e Ontario appellate court decision
confirmed that the AWA is intended to
protect franchisees by imposing require-
ments on franchisors: if a disclosure docu-
ment is materially deficient then no disclo-
sure has been made, and rescission is avail-
able to the franchisee.
"It's not a surprising result, but I think
it's important because it puts to rest any
notion that a franchisee could be found to
be sufficiently informed, having been pro-
vided with a materially deficient disclosure
document," says Jennifer Dolman at Os-
ler, Hoskin & Harcourt LLP in Toronto,
who works on the franchisor side. "at's
the end of the matter in terms of liability."
TODD GREENBLOOM
>
BLANEY MCMURTRY LLP
JENNIFER DOLMAN
>
OSLER, HOSKIN
& HARCOURT LLP
ON THE CASE
"IT'S NOT A SURPRISING RESULT, BUT I THINK
IT'S IMPORTANT BECAUSE IT PUTS TO REST ANY NOTION
THAT A FRANCHISEE COULD BE FOUND TO BE SUFFICIENTLY
INFORMED, HAVING BEEN PROVIDED WITH A MATERIALLY
DEFICIENT DISCLOSURE DOCUMENT."
>
JENNIFER DOLMAN, OSLER, HOSKIN & HARCOURT LLP
