On January 25, 2018, the Ontario Court of Appeal released its decision in Raibex Canada Ltd. v ASWR Franchising Corp., providing clarity on the pre-contractual disclosure obligations imposed on franchisors under the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Wishart Act”).
In late 2016, the Ontario Superior Court granted the franchisee’s rescission claim concluding that it would be “premature” for a franchisor to provide disclosure and enter into a franchise agreement if potentially material facts about the franchise, such as the location, had yet to be determined.
The Court of Appeal granted the franchisor’s appeal and set aside the rescission of the franchise agreement. In its decision, the Court clarifies that the disclosure obligations under the Wishart Act must be interpreted practically and with reference to the terms of the franchise agreement. The post-agreement location selection process employed by the franchisor, which is common in the industry, was not found to be offside of the Act’s disclosure regime.
Background to the Case
In 2012, the plaintiff franchisee, Raibex Canada Ltd. (“Raibex”), entered into a franchise agreement with ASWR Franchising Corp. (“AllStar”) for the operation of a new AllStar Wings & Ribs franchise. Prior to entering into the agreement, Raibex received a franchise disclosure document (“FDD”) as required by the Wishart Act.
The franchise agreement provided for the location of the franchise to be determined after 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.
After touring several locations with the franchisor’s real estate agent, Raibex decided to pursue a location that had been home to another restaurant, which it would convert to an AllStar franchise. The 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 available to Raibex but not exercised.
After 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. The 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 construction cost estimates in the FDD. AllStar denied the effectiveness of the Notice of Rescission, terminated the franchise and assumed operations. Litigation commenced shortly thereafter and both parties sought summary judgment.
Decision on Summary Judgment
On the summary judgment motions, the court granted the franchisee’s claim for rescission 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. The motion judge also found that AllStar failed to disclose sufficient construction cost estimates relevant to the “conversion” strategy.
In doing so, the motion judge suggested that, if “material matters” (such as the location) are not yet known, the franchisor is “not yet ready” to disclose and “must wait” to disclose and enter into a franchise agreement. This decision caused confusion for franchisors in Ontario, many of whom follow the common practice of selecting a location after 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 requirements 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 clarified the crucial distinction between rescission for “deficient disclosure” under section 6(1) of the Wishart Act, which must be exercised 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 franchisor “never” provided a disclosure document.
Much of the jurisprudence on the rescission remedy has focused on whether and to what extent a deficient disclosure document 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).
The Court clarified in Raibex that, in order for a disclosure document to amount to no disclosure at all, the franchisee must be effectively deprived of the opportunity to make an informed investment decision to acquire the franchise. The Court of Appeal added that this determination must be made with reference to the terms of the franchise agreement and all relevant surrounding circumstances of the grant of the franchise.
With respect to the motion judge’s findings regarding the non-disclosure of the head lease, the Court found that the motion judge’s failure to consider the location selection and opt-out clauses in the franchise agreement was an error of law. The 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.
The presence of contractual safeguards, requiring the parties to use “reasonable best efforts” to find a suitable location and providing an opt-out to the franchisee if a suitable 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 development 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.” The 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 left to be decided after the execution of a franchise agreement, it is sufficient to disclose, as AllStar 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 interpretation accords with common sense and commercial realities, and does not interfere with common arrangements employed by franchisors in Ontario.
The plaintiffs/respondents, Raibex Canada Ltd., Ramy Bastaros, Ashraf Habashy, and Ihab Lawandi, were represented in this matter by David Altshuller and Lara Di Genova of Teplitsky, Colson LLP.
The defendants/appellants, ASWR Franchising Corp., ASWR Developments Inc., Leontian Holdings Inc., Hellenic International Holdings Inc., Tom Anastopoulos and J. Perry Maisonneuve, were represented by Geoffrey B. Shaw and Christopher Horkins of Cassels Brock & Blackwell LLP.