Another Franchisor Freshly Squeezed By Material Deficiencies In Its Disclosure Document

• Published date: 23 June 2021
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Trials & Appeals & Compensation, Franchising
• Law Firm: McMillan LLP
• Author: Mr Andrae J. Marrocco, Adriana Rudensky and Mitch Koczerginski

The Ontario Superior Court's recent decision in 2611707 Ontario Inc., et al v. Freshly Squeezed Franchise Juice Corporation, et al., 2021 ONSC 2323 ('Freshly Squeezed') is another example of the Court applying the test promulgated in Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62 ('Raibex')¹ to determine whether one or more deficiencies in the franchisor's disclosure document entitles a franchisee to the two-year rescission remedy under Section 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c.3 (the 'AWA').

The Court in Freshly Squeezed relied heavily on the Court of Appeal's decision in Raibex in finding that failing to provide complete financial statements and failing to include an Agreement to Lease were material disclosure deficiencies. The Court also found that failing to highlight that the franchised business would be the first to be operated in a non-mall retail environment amounted to failing to disclose a 'material fact' (as defined in the AWA).

The Court held that these deficiencies effectively deprived the franchisee of the opportunity of making an informed investment decision and were tantamount to non-delivery of an effective disclosure document, thereby entitling the franchisee to relief under s. 6(2) of the AWA. The Court noted that key to its determination was the fact that the franchisor withheld information that was within its power to disclose.

The Court in Freshly Squeezed also confirmed that the test for determining whether the deficiencies in question reach the threshold for a s. 6(2) rescission claim is based on an objective standard, taking into account the facts of each case, including the terms of the franchise agreement. It is not necessary for the franchisee to lead evidence that the material deficiencies caused an actual impairment of their ability to make an informed investment decision.

The Rescission Claim

The franchisee entered into a franchise agreement with Freshly Squeezed Franchise Juice Corporation and began operating a unit located in the RioCan Food Hall of Mount Sinai Hospital in March 2018. Less than a year after opening, the franchisee delivered a notice of rescission under s. 6(2) of the AWA. The franchisee argued four 'fatal flaws' or 'material deficiencies' to validate its rescission under s. 6(2):

• the franchisor's certificate required under s. 5 of the AWA only had one director/officer signature (instead of two);
• the financial statement disclosure was incomplete;
• the...