Section 5(4) of the AWA requires that the disclosure document include “material facts,” defined as any information about the business, operations, capital, or control of the franchisor or franchisor’s associate, or about the franchise system, that would reasonably be expected to have a significant effect on the value or price of the franchise to be granted or the decision to acquire the franchise.
Improper disclosure allows franchisees to exercise rescission within two years of signing. This places an obligation on the franchisor to refund all money received (e.g., fees), repurchase inventory, equipment, and supplies at original cost, and compensate for pre-rescission setup and operating losses.
Guiding principles
It is imperative that franchisors ensure their franchise systems are supported by complete, accurate, and timely disclosure documents so they do not expose themselves to the severe rescission remedies available to franchisees under the AWA. While Ontario Regulation 581/00 under the AWA does not provide a single closed definition of material facts, there are approximately 30 categories of prescribed material information. These include biographies of all directors and officers of the franchisor, information on all judgments, litigation, bankruptcy, and criminal convictions, a list of all current and former franchisees, required licenses and permits, and exclusive territories and policies.
Precedent examples
Ontario courts have analyzed material facts, or the lack thereof, on a system-by-system basis. In Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62, inadequate disclosure warranted rescission by undermining decision-making. Dollar It Ltd. (2009 ONCA 385) and Country Style (2012 ONSC 881) stressed the importance of head lease disclosures. Meanwhile, Caffe Demetre (2015 ONCA 285) clarified that litigation materiality is fact-specific; the Court held that ongoing franchisor-initiated litigation was not inherently a material fact where its protective nature and lack of potential liability to the franchise system were not relevant to the franchisee’s investment decision.
Freshly Squeezed deep dive
In 2611707 Ontario Inc. v. Freshly Squeezed Franchise Juice Corporation, 2022 ONCA 437, the Court of Appeal upheld rescission for an inadequate FDD relating to a first non-mall site. The application judge awarded $306,581, finding three independent material deficiencies.
The financial statements referenced critical notes without attachments, obscuring financial health. The head lease, partially executed, lacked attachment or summary despite landlord termination risks without compensation. The FDD also omitted that this would be the franchisor’s first non-mall location.
The Court found that the franchisee was aware the site was a non-mall location based on site visits and the list of franchise locations included in the FDD. However, this was not sufficient. The AWA requires uniform, documentary disclosure of all material facts in a single disclosure document. In particular, there was no track record for a location of this type, posing a risk to the franchisee and making this a material fact.
Practical takeaways
Franchisors must attach all referenced documents, fully detail leases, and clearly flag novel operations to meet objective disclosure standards. A franchisor’s obligations do not vary based on a specific franchisee’s actions or reactions. The focus is on the adequacy of the disclosure itself, not its impact on a particular franchisee.
Because the courts’ analysis is conducted on a case-by-case basis, it is critical that franchisors understand the nuances within their own franchise systems and ensure their disclosure documents are drafted with precision and care.
The author also acknowledge the valuable support of Harneet Gill in the preparation of this piece.
