Franchise

Case offers ‘good news’ for franchisor’s voluntary disclosure

By Kirsten McMahon, AdvocateDaily.com Managing Editor

Despite the common practice of Ontario franchisors providing voluntary disclosure to prospective franchisees, caution is required to ensure they are not unwittingly triggering the Arthur Wishart Act (AWA), says Toronto franchise lawyer Joseph Adler.

“Generally speaking, there’s a trend in the franchise bar to not rely on any exclusions from the AWA or exemptions from the disclosure obligations,” says Adler, partner with Hoffer Adler LLP. “There’s a certain reticence amongst franchise lawyers and franchisors to rely on any of the exclusions and exemptions in the Act because of the fairly significant risks involved.”

The risk is that a court may rule that the exemption or exclusion does not apply, thereby exposing the franchisor to an expensive rescission claim, he says.

As a result, franchisors would rather over-disclose than under-disclose, he tells AdvocateDaily.com.

Adler points to a recent decision by the Ontario Superior Court of Justice involving an application for leave to appeal from an arbitrator’s decision.

The franchisee purchased a hotel that operated under licence from the franchisor for $8.35 million. As part of the approval process, the franchisor provided the franchisees with a Franchise Disclosure Document (FDD).

The franchisee took over operation of the hotel in July 2016 and stopped paying the required monthly royalty fees to the franchisor a year later. The franchisee rescinded the licence agreement alleging deficient disclosure in the FDD, court documents state.

In September 2017, the franchisee commenced an arbitration against the franchisor concerning the arbitration clause in the licence agreement, seeking rescission and damages pursuant to s. 6 of the AWA and s. 7 damages for misrepresentation.

The arbitrator issued four awards that dismissed the franchisee’s claim for damages.

At the Superior Court, the franchisee argued that the arbitrator erred in interpreting the AWA and claimed that the right to damages applies to any misrepresentation found in any disclosure document provided by the franchisor to a franchisee.

The court dismissed the application for leave to appeal and granted the application to enforce the arbitral awards.

Adler, who was not involved in the matter and comments generally, says the franchisor was exempt from disclosure obligations under the AWA because the franchisee had invested more than $5 million in acquiring and operating the franchise in the first year.

“The public policy rationale behind the AWA is that it’s designed to create an even playing field between the larger franchisor and the smaller franchisee. It’s there to equal the bargaining power of the parties,” he says. “Arguably, a sophisticated franchisee who is investing more than $8 million will not need that kind of equality and bargaining power.”

There was no dispute over whether the exemption applied, says Adler, but providing a voluntary disclosure document raised the possibility that the AWA could be triggered.

“Based on this decision, I think there’s less risk when a franchisor provides a disclosure document on a voluntary basis,” he says. “This is good news for franchisors, but the rationale isn’t solid in my view.”

He says if an exemption is being relied upon, yet a franchisor provides voluntary disclosure, then he stresses it should not sign a certificate of disclosure, though the franchisor in this case apparently did sign the certificate.

“You could unwittingly invoke the Act, even where you think it shouldn’t apply and the persons signing the certificate could be exposing themselves to personal liability, where they would not have otherwise been subject to such liability,” Adler says.

“Perhaps the safest course of action is, if you’re relying on a clear-cut exemption, then it makes sense not to provide a disclosure document if one isn’t required,” he says, noting it could be detrimental to a franchisor.

Yet, Adler says, the failure to provide a disclosure document where relying on the exemption or exclusion is questionable, is also risky. “One needs to carefully examine the facts at hand and the risks involved,” he says.

To Read More Joseph Adler Posts Click Here