Good Record Keeping Is Paramount: Lessons For Franchisors And Franchisees From The Ontario Superior Court Of Justice

• Law Firm: Hoffer Adler LLP
• Subject Matter: Corporate/Commercial Law, Antitrust/Competition Law, Antitrust, EU Competition , Franchising
• Author: Mr Idan Erez
• Published date: 17 April 2023

The Ontario Superior Court of Justice's recent decision, Premium Host Inc. v. Paramount Franchise Group¹ ("Paramount"), confronts a number of legal issues that are of continuing importance to both franchisors and franchisees. But perhaps most importantly, it also serves as a stark reminder to franchisors and franchisees alike that any failure by them to document precisely what financial disclosure was provided, how it was delivered, by whom, to whom, and when, can prove to be a costly mistake for all parties.

Background

Paramount is a decision arising out of a factually complex dispute by which three related franchisees of the Paramount Fine Foods system of Middle Eastern restaurants sought to rescind their respective franchise agreements on the basis of the franchisor's alleged failure to have complied with its disclosure obligations under Ontario's franchise legislation, the Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3 (the "Act").

The three franchisees seeking rescission were related in the sense that their principals were acquaintances or spouses of one another. Nonetheless, each franchise concerned a separate franchise agreement involving a different location. The three franchisees were (i) Versatile Holdings Inc. ("Versatile"), which first entered into a "generic franchise agreement" that did not grant a license to operate within any particular territory or location, and then entered into a complete franchise agreement after a location was identified; (ii) Everest Group Inc. ("Everest"), which entered into its own franchise agreement concerning a different location; and (iii) Premium Host Inc. ("Premium Host"), which also entered into its own franchise agreement with the franchisor concerning a third location, which (and unlike Versatile's and Everest's locations) was a location that had previously been operated by another (unrelated) franchisee.

Each of the franchisees delivered notices of rescission concerning their respective franchise agreements, after encountering operational difficulties and being the subject of default notices issued by the franchisor (and in the case of Premium Host, a termination notice). The franchisees claimed they were entitled to rescind on the basis of a number of disclosure deficiencies including (i) failure to provide the franchisor's financial statements and provision of disclosure in a piecemeal fashion, instead of as "one document at one time", as required by the Act.

The Paramount decision is the court's judgment of the three rescission claims, which were tried together. In lengthy reasons, the court ultimately denied Versatile and Everest their rescission claims but granted Premium Host its rescission claim. The decision is currently under...