Rescission under 6(2) of Wishart Act granted for wholly deficient disclosure document on summary judgment

…yet another reminder to franchisors to ensure their disclosure documents are in order and fully comply with the Arthur Wishart Act (Franchise Disclosure), 2000 (“Wishart Act”) and its regulations.

http://www.goldmanhine.com
November 23, 2010

Rescission under 6(2) of Wishart Act granted for wholly deficient disclosure document on summary judgment
(MBCO Summerhill v. MBCO Associates, 2010 ONSC 5432)
Jonathan Mesiano-Crookston

The September 28, 2010 summary judgment decision by Chapnik, J. of the Ontario Superior Court of Justice in MBCO Summerhill Inc. v. MBCO Associates Ontario Inc., MBCO Rosedale Inc. and George Elian, 2010 ONSC 5432, is yet another reminder to franchisors to ensure their disclosure documents are in order and fully comply with the Arthur Wishart Act (Franchise Disclosure), 2000 (“Wishart Act”) and its regulations.

In this case, Chapnik, J. granted summary judgment in favour of the MBCO franchisee:

  1. rescinding its franchisee agreement with the franchisor MBCO Associates Ontario Inc.;
  2. rescinding the sub-lease and related sub-lease agreements with the sub-landlord MBCO Rosedale Inc., found to be a “franchisor’s associate” within the meaning of the Wishart Act;
  3. holding George Elian, a 50% shareholder in both the franchisor and sub-landlord corporation, as being a “franchisor’s associate” within the meaning of sub-section 1(1) of the Wishart Act;
  4. ordering the Franchisor and George Elian, jointly and severally, to pay to the franchisee the sum of $146,642.42 minus $18,415.73 due to the franchisee under sub-section 6(6) of the Wishart Act;
  5. ordering payment of costs to the franchisee of $24,000.00.

The facts of this case are pretty straightforward. In September, 2007 the franchisee entered into a franchise agreement with the franchisor MBCO Associates Ontario Inc., and a sub-lease and related sub-lease documents with MBCO Rosedale Inc. The franchisee was given a document described as a disclosure document by the franchisor. However, six months after signing the franchise agreement and sub-lease, and before the restaurant was ever opened for business, the franchisee elected to rescind the franchise agreement and sub-lease on the grounds that it was never provided with a disclosure document in accordance with section 5 of the Wishart Act.

Under sub-section 6(1) of the Wishart Act, a franchisee has the right to rescind its franchise agreement within two months of having received a disclosure document if that document did not meet the requirements of the Wishart Act. Under sub-section 6(2) of the Wishart Act, a franchisee can rescind within two years if it was not given a disclosure document at all.

The franchisee argued it was entitled to rescind its agreement under sub-section 6(2) of the Wishart Act because the disclosure document it had been given was so deficient that it was deemed at law to not be a disclosure document within the meaning of the Wishart Act. This follows from a line of earlier franchise decisions including the Ontario Court of Appeal decision in Dollar It (cited below) and Dig This Garden (also cited below).

Unsurprisingly, the defendants disagreed. They argued that while the disclosure document might not have been perfect, the franchisee had, in fact, received one and therefore the franchisee had on two months within which to rescind under sub-section 6(1) of the Wishart Act which it had not done.

The Court agreed with the franchisee. It was clearly unimpressed with the disclosure document, which it described in the following words:

[12] The disclosure document given to the plaintiff can be described as a flyer of four and one-half pages, containing two pages of photographs; one page setting out general information concerning the neighbourhood as well as a four-item investment summary and projected financial information based on three possible scenarios.

The Court pointed out that the disclosure document “contain[ed] numerous deficiencies” (para. 14), including:

  • no proper financial statements or balance sheets;
  • no head lease; and,
  • no signed certificate, which the Court called “an important deficiency”.

(The defendants even appeared to agree. They admitted in their factum that the disclosure document “neither complies nor even comes in any way close to comply with the required contents for the Disclosure Document called for by s.5 and the Regulation” (para. 13). )

In the end, the Court granted rescission of the franchise agreement against the franchisor, rescission of the sub-lease and related sub-lease documents against the sub-landlord, and ordered the franchisor and its 50% shareholder to pay the amounts due to the franchisee under sub-section 6 (6) of the Wishart Act which totalled $128,226.69 (para. 32, 33).

The Court also made two other noteworthy findings relating to “franchisor’s associates”, a term that is defined in section 1(1) of the Wishart Act:

1. A 50% shareholder, and one directly involved in the grant of the franchise, can be a franchisor’s associate
The Court held that Elian was a “franchisor’s associate” of the corporate franchisor, MBCO Ontario Associates Inc. (see paras. 18-22). This meant Elian was jointly and severally liable with the franchisor to pay the franchisee the amounts due under sub-section 6(6) of the Wishart Act which included the monies paid by the franchisee to acquire the franchise as well as the franchisee’s losses. The Court arrived at this conclusion for two reasons:

  • First, because Elian was a 50% shareholder of MBCO Associates Ontario Inc., even though he was not an officer or director. The Court held that a 50% shareholding is sufficient “control” to make that shareholder a “franchisor’s associate”, and cited the earlier case of 1490664 Ontario Ltd. v. Dig this Garden Retailers Ltd., 256 D.L.R. (4th) 451 (Ont. C.A.) which had held that a “franchisor’s associate” does not require a majority (51%) shareholding (para. 20 of the MBCO case).
  • Second, because Elian was directly involved in the grant of the franchise (para. 21).

2. A sub-landlord can be a franchisor’s associate
The Court also held that MBCO Rosedale Inc., the franchisee’s sub-landlord, was also a franchisor’s associate, because of the close relationship between it and Elian (para. 26), because it “exercise[ed] significant operational control over the plaintiff franchisee” (para. 27) and because the “plaintiff would have a continuing financial obligation to MBCO Rosedale in respect of the franchise” (para. 27). Accordingly, the court ordered rescission of the sub-lease and related sub-lease agreements. Interestingly, there was no damages award made against the sub-landlord, perhaps because none was requested.

While the Court was probably motivated to arrive at this conclusion because of the close relationship between the franchisor, Elian and the landlord (“Elian [was] the president and sole shareholder of MBCO Rosedale” (para. 23)) and by a desire to allow the franchisee to rescind the sub-lease as well as the franchise agreement (see para. 23), this finding by the court continues to expand the traditional notion of “franchisor’s associate” to include landlords or sub-landlords that are closely related to the franchisor. (Although sub-landlords have previously been found to be franchisor’s associates, such as in 6792341 Canada Inc. v. Dollar It Ltd., 2009 ONCA 385).

In light of this decision, franchisors should be aware that related companies that act as landlords or sub-landlords to their franchisees may be held to be, in appropriate cases, “franchisor’s associates” under the Wishart Act. If so, franchisees will be entitled to rescind leases, sub-leases and other agreements concluded with these “associates”.

Franchisees, on the other hand, should be aware that they may be able to obtain judgment against landlords or sub-landlords that are closely related to the franchisor and which may be deemed to be a “franchisor’s associate” as defined by the Wishart Act. In these cases, damages for rent paid under sub-section 6(6)(a) of the Wishart Act, or other payments made to the franchisor’s associate, may be ordered, in addition to an order for rescission.

November 23, 2010

By Jonathan Mesiano-Crookston and Steven Goldman, franchise lawyers
Goldman Hine LLP
Toronto, Ontario

Franchise Law

www.goldmanhine.com

http://www.goldmanhine.com/2010/11/23/rescission-under-62-of-wishart-act-granted-for-wholly-deficient-disclosure-document-on-summary-judgment-mbco-summerhill-v-mbco-associates-2010-onsc-5432/


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