Partial Summary Judgment Granted for Rescission of Franchise Agreement

Nick P. Poon, B.Sc. (Hons.), B.A., J.D.Civil Litigation, Commercial Litigation, Franchise Law, Summary Judgment0 Comments

In the recent Ontario Superior Court of Justice decision in 2147191 Ontario Inc. v. Springdale Pizza Depot Ltd., the plaintiffs brought a partial summary judgment motion seeking to rescind a franchise agreement under the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”).  After purchasing the business from an existing franchisee, the plaintiffs alleged that they were entitled to receive disclosure from the franchisor but the disclosure received was so materially deficient that it amounted to no disclosure at all.  As a result, the plaintiffs claimed that they were entitled to rescind the franchise agreement within two years of entering into the franchise agreement.  The defendant franchisor argued that it was not required to provide disclosure to the plaintiffs due to its minimal involvement in the sale transaction, or in the alternative, it provided satisfactory if imperfect disclosure which would only entitle the plaintiffs to rescind the franchise agreement within sixty days of receiving the disclosure documents (which had elapsed).

Under subsections 5(7) and 5(8) of the Act, the franchisor is not required to provide disclosure in connection with a resale of an existing business if the franchisor’s involvement is restricted to approving the transaction and receivng a transfer fee as set out in the franchise agreement.  The disclosure requirements are triggered, however, when the franchisor becomes more actively involved in the transaction.  In this case, the Court found that the defendant was sufficiently engaged in the resale transaction, including meeting with the plaintiffs multiple times and requiring consideration beyond the transfer fee, to trigger the disclosure requirements.

Next, the Court found that the disclosure documents provided by the defendants failed to include the proposed assignment of the franchise agreement, the proposed general security agreement, proposed sublease and head lease, reference to a prior decision about the defendant’s failure to make proper disclosure, facts relating to the location being purchased, and description of the franchisee’s exclusive territory.  The Court held that the disclosure documents were materially deficient so as to entitle the plaintiffs to rescind the franchise agreement within the longer period of two years.

If you require legal advice in respect to franchising, distribution or licensing, please contact us for an initial consultation.

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About the Author
Nick P. Poon, B.Sc. (Hons.), B.A., J.D.

Nick P. Poon, B.Sc. (Hons.), B.A., J.D.

Practitioner in Civil Litigation with a focus in insurance defence and commercial litigation. Bio | Contact

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