Lexpert Magazine

28 LEXPERT MAGAZINE | JUNE 2018 BIG SUITS franchisor, which is common in the industry, was not found to be offside of the Act's dis- closure regime. Background to the Case In 2012, the plaintiff franchisee, Raibex Canada Ltd. ("Raibex"), entered into a fran- chise agreement with ASWR Franchising Corp. ("AllStar") for the operation of a new AllStar Wings & Ribs franchise. Prior to en- tering into the agreement, Raibex received a franchise disclosure document ("FDD") as required by the Wishart Act. e franchise agreement provided for the location of the franchise to be determined aer the franchise agreement was signed, at which point the franchisor would enter into a head lease and sublease the chosen location to the franchisee. If a suitable location was not found within 120 days, the franchise agreement also provided an opt-out clause allowing the franchisee to terminate the franchise agreement and receive a refund of its initial fee. Aer touring several locations with the franchisor's real estate agent, Raibex de- cided to pursue a location that had been home to another restaurant, which it would convert to an AllStar franchise. e FDD described this construction strategy as a "conversion," noting that certain savings on the costs of a "shell" (new build) may be achieved by pursuing a conversion, but were not guaranteed. At the time this location was selected, the opt-out clause was avail- able to Raibex but not exercised. Aer a few months of operating the franchise, AllStar served a notice of default advising that the franchise agreement may be terminated due to non-payment of over $200,000 owing for rent and amounts owed to contractors. e franchisee then served a notice of rescission in response, citing among other things, the failure to disclose a copy of the head lease or sufficiently tailored con- struction cost estimates in the FDD. All- Star denied the effectiveness of the Notice of Rescission, terminated the franchise and assumed operations. Litigation commenced shortly thereaer and both parties sought summary judgment. Decision on Summary Judgment On the summary judgment motions, the court granted the franchisee's claim for re- scission since the FDD did not include a copy of the head lease and, in the motion judge's view, it would be "absurd" to suggest the lease terms were not material. e motion judge also found that AllStar failed to disclose suf- ficient construction cost estimates relevant to the "conversion" strategy. In doing so, the motion judge suggested that, if "material matters" (such as the loca- tion) are not yet known, the franchisor is "not yet ready" to disclose and "must wait" to disclose and enter into a franchise agreement. is decision caused confusion for franchi- sors in Ontario, many of whom follow the common practice of selecting a location aer the franchise agreement is signed following a process set out in the franchise agreement. Decision on Appeal In granting AllStar's appeal and dismissing Raibex's cross-appeal, the Court of Appeal has restored clarity and commercial sense to the interpretation of the disclosure require- ments and rescission remedies set out in the Wishart Act. It is anticipated that this clarity will assist franchisors and franchisees alike in understanding what properly needs to be included in a disclosure document and how decisions to rescind or not ought to be made. In its reasons on appeal, the Court clari- fied the crucial distinction between rescis- sion for "deficient disclosure" under section 6(1) of the Wishart Act, which must be exer- cised within 60 days of receiving a disclosure document, and rescission under section 6(2), which is available within two years of signing a franchise agreement and where the franchi- sor "never" provided a disclosure document. Much of the jurisprudence on the rescis- sion remedy has focused on whether and to what extent a deficient disclosure docu- ment can be sufficiently non-compliant as to render it tantamount to no disclosure at all and ground a claim for rescission under section 6(2). e Court clarified in Raibex that, in or- der for a disclosure document to amount to no disclosure at all, the franchisee must be ef- fectively deprived of the opportunity to make an informed investment decision to acquire the franchise. e Court of Appeal added that this determination must be made with reference to the terms of the franchise agree- ment and all relevant surrounding circum- stances of the grant of the franchise. With respect to the motion judge's find- ings regarding the non-disclosure of the head lease, the Court found that the mo- tion judge's failure to consider the location selection and opt-out clauses in the franchise agreement was an error of law. e Court noted that all parties involved knew that the proposed location had not yet been selected at the time the agreement was signed and that the franchisor and franchisee would work collaboratively to find a site. e presence of contractual safeguards, requiring the parties to use "reasonable best efforts" to find a suitable location and pro- viding an opt-out to the franchisee if a suit- able location was not found within 120 days, were a complete answer to the franchisee's claim regarding the non-disclosure of the head lease. With respect to the disclosure of develop- ment costs, the Court of Appeal found that the detailed "shell" cost estimates provided in the FDD provided a reasonably accurate projection of the franchisee's actual costs and were sufficient to put Raibex on notice of the risks associated with a "conversion." e Court highlighted the strong warning in the FDD that conversion costs may vary greatly depending on the location. Where the selection of a location is le to be decided aer the execution of a franchise agreement, it is sufficient to disclose, as All- Star did, the details of the location selection process along with a reasonable estimate of the leasing and development costs associated with establishing a franchise. Such an inter- pretation accords with common sense and commercial realities, and does not interfere with common arrangements employed by franchisors in Ontario. e plaintiffs/respondents, Raibex Can- ada Ltd., Ramy Bastaros, Ashraf Habashy, and Ihab Lawandi, were represented in this matter by David Altshuller and Lara Di Genova of Teplitsky, Colson LLP. e defendants/appellants, ASWR Fran- chising Corp., ASWR Developments Inc., Leontian Holdings Inc., Hellenic Interna- tional Holdings Inc., Tom Anastopoulos and J. Perry Maisonneuve, were represented by Geoffrey B. Shaw and Christopher Hor- kins of Cassels Brock & Blackwell LLP.

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