Law Times

Page 4 February 5, 2018 • Law Times www.lawtimesnews.com NEWS NEWS NEWS OCA overturns 'problematic' franchise ruling BY ALEX ROBINSON Law Times T he Court of Appeal has overturned a lower court decision that law- yers say would have cre- ated an expansion of disclosure obligations for franchisors. In Raibex Canada Ltd. v. ASWR Franchising Corp., a franchisee sought to rescind an agreement with a franchisor af- ter the disclosure document they provided lacked information about the location of the fran- chise and how much it would cost to convert an old restaurant into the new one. The Court of Appeal sided with the franchisor, reversing a 2016 ruling in the Ontario Superior Court of Justice that suggested it was premature for a franchisor to enter an agreement before locating a site for a new franchise. Lawyers say the Court of Ap- peal's decision is a big win for franchisors and the franchise industry in general. "Franchisors and their law- yers have been operating in a period of great uncertainty in the last year and a bit because the lower court's decision real- ly called into question what is a very common industry practice — signing the franchise agree- ment and then the parties going out and looking for the site," says Andraya Frith, chairwoman of the franchise and distribution practice group at Osler Hoskin & Harcourt LLP, who was not involved in the case. At issue in the appeal was whether the franchise disclosure document provided by the fran- chisor was so inadequate that it allowed the franchisee to rescind their franchise agreement under the Arthur Wishart Act, which regulates franchise disclosure in Ontario. Franchise disclosure docu- ments must include "all materi- al facts," which the act defines as specific information about the franchisor that would "rea- sonably be expected to have a significant effect on the value or price" of the franchise. The act requires franchisors to disclose this information so that potential franchisees "can make a properly informed deci- sion" about whether they should invest in a franchise. Franchisees can rescind the agreement without penalty within two years if the docu- ment is not provided. The franchise agreement in this case gave the franchis- ee, Raibex Canada, the right to operate an AllStar Wings and Ribs franchise in Mississauga, Ont. The dispute revolved around the fact that the franchise disclo- sure document did not specify a location for the franchise and did not include cost estimates to convert a pre-existing restaurant into the new franchise, despite including an estimated range of how much it would cost to build the franchise from a shell. After the parties agreed on a site that included an existing res- taurant that would be converted, costs were higher than the fran- chisee expected. The franchisee then rescinded the agreement on the basis of material non-disclosure. The franchisor then sought damages for costs it incurred after taking over the restaurant following the notice of recession. On summary judgment, a motion judge held that the fran- chise agreement had been valid- ly rescinded and dismissed the franchisor's claim for damages. The motion judge found the disclosure document did not include all material facts as re- quired by the act, as it did not contain the terms of the head lease that would bind the fran- chisee; nor did it include the costs to transform an existing restaurant building into the franchise. The judge determined that the fact that this information was unknown to the franchisor at the time of the agreement did not excuse their obligation to disclose it. She found that the lack of dis- closure was "egregious" and that the differences between what was in the document and the re- ality of the costs and lease were so stark that they amounted to "no disclosure." The Court of Appeal found the franchisee was not entitled to rescind the franchise agree- ment, as the absence of the information in the disclosure document "had little impact on the franchisee's ability to make an informed investment deci- sion." In its decision, the court said that a clause in the franchise agreement that required both parties to exercise "reasonable best efforts" in selecting the franchise's location provided protections in addition to an opt-out clause in the agreement. "Had the franchisee found the prepaid rent requirement to be too onerous or the lo- cation otherwise unsuitable, rather than urge the franchisor (as it did) to accept the deposit term and sign the lease, it could have rejected the location and either searched for another site or elected to receive its money back," Justice Gloria Epstein wrote in the decision, on behalf of a three-judge panel. Geoffrey Shaw, one of the lawyers who represented the franchisor in the case, says the decision shows that each case will be looked at in a case-by- case basis to determine if the alleged deficiency is so bad that it prevents the prospective franchisee from making an in- formed decision. "The court seems to be mov- ing away from what I might call a dogmatic application of exist- ing case law," he says. David Altshuller, one of the lawyers representing the fran- chisee, did not respond to re- quests for comment. LT Andraya Frith says franchisors and their lawyers have been operating in a period of uncertainty since a 2016 decision. Celebrate Excellence at the 11 th Annual Canadian Dealmakers Awards Gala C-Suite executives, deal teams and advisors come together to recognize Winners who have impacted their industries by strategically positioning companies for innovation, growth, globalization and diversification. Join us for an unforgettable evening on March 8, 2018, at the Fairmont Royal York Hotel, Toronto. 5:30 pm | Cocktail Reception 7:00 pm | Gala Dinner & Awards Presentation 9:30 pm | After Party Hosted by: Amber Kanwar; Financial Journalist, BNN To purchase a table, please contact us at MediaSolutions.Sales@thomsonreuters.com or call 416-649-8841. Learn more at www.canadiandealmakers.ca R E C O G N I Z I N G THE BEST IN CANADIAN DEAL-MAKING Founding Partners A Member of JA Worldwide JA Canada Net proceeds go to support Bronze Sponsor Silver Sponsor Cocktail Sponsor Après Award Sponsor Untitled-6 1 2018-02-01 2:56 PM

• Cover