Cancelling Your Franchise Agreement: Rescission Rights for Deficient Franchise Disclosure Documents (FDD)
Franchisors are held to be in a position of significant power over franchisees. The courts, and the Arthur Wishart Act (“AWA”) aim to address this imbalance and provide franchisees with protection. One example of such protection includes the obligation of franchisors to provide full disclosure of all material facts relevant to the franchise, and the ability of franchisees to rescind their franchise agreements if this disclosure is deficient. The Ontario courts have recently commented on this rescission right, and on how deficient franchise disclosure documents (“FDD”) must be in order to permit a franchisee to rescind their agreement.
What is Rescission?
Rescission of a contract permits parties to treat the contract as if it had never been entered into. This includes returning all amounts paid when entering into the contract. Essentially, a franchisee may be permitted to end the contract and recover their investment if they rescind their franchise agreement.
The Two Rescission Timelines: 60 Days vs 2 Years
The AWA is the law that governs franchise disclosure, and its primary purpose is to protect the rights of franchisees. For this reason, it imposes a duty of fair dealing into every franchise agreement.[i]
The AWA permits franchisees to rescind their franchise agreement in two instances. First, franchisors are required to provide disclosure at least 14 days before signing the franchise agreement.[ii] If no disclosure is provided, the franchisee has 60 days to rescind their agreement.[iii] Second, a franchisee can rescind within two years of entering into a franchise agreement if the franchisor “never provided a disclosure document.”[iv]
While these timelines may seem similar, they are used for different purposes. The first timeline permits franchisees to rescind if a franchisor does not meet the statutory obligations imposed by the AWA. On the other hand, in order for a disclosure document to justify rescission under the second timeline, it must be “so deficient as to effectively amount to a complete lack of disclosure,”[v] even if the franchisee physically received a copy of disclosure documents.
How Deficient is Deficient Enough?
If a franchisee wishes to rescind their agreement in the two-year time period, they must be able to prove that the FDD is so deficient that it amounts to a lack of disclosure. This is a highly fact-specific standard to meet. Ultimately, however, a franchisee must show that the lack of disclosure “deprived [them] of the ability to make an informed investment decision”[vi] The Ontario Court of Appeal has recently discussed deficient disclosure in the following two cases.
Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62
In this case, the parties entered into the franchise agreement without knowing the precise site for the franchise, and without exact cost estimates for establishing the franchise. Instead, they agreed to select a suitable location together to then renovate. The FDDs thus did not provide exact information about the location of the franchise.[vii] They provided an estimate for costs of establishing a new franchise from scratch, but no exact amount was given for their specific renovation project. Before completion of the project, the franchisee was informed that the costs had exceeded the contemplated scope, and thus the franchisee rescinded the agreement for lack of disclosure.
The Court sided with the franchisor, and held that while the FDDs had not exactly specified the cost of establishing the franchise, they were not so deficient as to amount to a lack of disclosure. Because the franchisee was actively involved in selecting the franchise premises, and because the agreement allowed the franchisee to reject potential locations, the Court held that the franchisee was not deprived of the ability to make an informed investment decision.[viii]
2611707 Ontario Inc. v. Freshly Squeezed Franchise, 2022 ONCA 437
In this case, the franchisor did not provide notes along with their financial statements, did not disclose that they did not yet enter into a lease for the premises, did not permit the franchisee to back out of the lease should its terms be unacceptable, and did not advise the franchisee that this was their first non-mall location.[ix] After just three months of operations, the franchisee rescinded the agreement.
Here, the Court sided with the franchisee. They held that the notes to the financial statements would have been necessary to assess the financial health of the business.[x] This was a material deficiency that prevented the franchisee from making an informed investment decision. Moreover, the franchisee had no information about the lease, and would not have been able to back out of it even if they wanted to.[xi]
These cases show that whether or not FDDs are deficient depends on the circumstances of each case. They also show that if franchisee’s are given the opportunity to contribute to, approve or reject major franchising decisions (such as the lease or the franchise location), the Court may side with the franchisor and find that FDDs are not deficient.
Key Takeaways
- Franchisees can rescind their franchise agreement within 60 days or within two years of entering into it, but the requirement for rescinding is different in each case.
- In order to rescind within two years, the franchisee must prove that the disclosure was so deficient that they were not able to make an informed investment decision.
- Proving disclosure is so deficient that it amounts to no disclosure at all is a highly fact-specific inquiry.
- You may not be able to establish this if you were involved in making major decisions related to the franchise or if you were given the option to back out of them.
How Our Team Can Assist You
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[i] Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3, s 3(1).
[ii] Ibid, s 5(1).
[iii] Ibid, s 6(1).
[iv] Ibid, s 6(2).
[v] Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62 (CanLII) at para 47 [“Raibex”].
[vi] Raibex at para 49.
[vii] Raibex at para 13.
[viii] Raibex at para 53.
[ix] 2611707 Ontario Inc. v. Freshly Squeezed Franchise, 2022 ONCA 437 (CanLII) at para 6 [“Freshly Squeezed”].
[x] Freshly Squeezed at para 16.
[xi] Freshly Squeezed at para 18.