Every franchise rescission case is a lesson

1. insider
There is more to this story than meets the eye. Global Diaper had 7 franchises in 2007. Today they have 1 - under protest. You should investigate the business practices of Pederson and his wife, Kate. This story is more about how a franchisee can lose everything to an unethical, untruthful, franchisor. They know how to push the limits of the law for their own gain.
There is a juicy, Canada-wide story here! Someone has to tell it!

The Financial Post
May 27, 2013

Every franchise rescission case is a lesson
Jennifer Dolman

Jennifer%20Dolman.jpg

This is the first case in which a court has found that including only one signature on a certificate when there ought to have been two makes the certificate deficient. Fotolia

Rescission damages can be significant, particularly when the franchisee involved incurred losses in acquiring, setting up and operating the franchise. So, I am always on the look-out for the latest rescission case under the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Wishart Act”). I’ve written frequently about this “draconian” remedy.

If a franchisor was required under the Wishart Act to deliver a disclosure document to a prospective franchisee before entering into a franchise agreement with or taking money from the prospective franchisee, and failed to do so, or the disclosure document was deficient in a material respect, then the franchisee has two years from the date of the franchise agreement to rescind it under s. 6(2) of the Wishart Act. The franchisor shall pay within 60 days of the franchisee’s notice of rescission the monies required under s. 6(6) of the Wishart Act.

Ablouin Imports Ltd. v. Global Diaper Services Inc., 2013 ONSC 2592 at canlii.ca/t/fx8k0 is the latest rescission decision and was released by the Ontario Superior Court of Justice on April 30, 2013. The franchisee had brought a motion for partial summary judgment seeking a declaration that it had validly rescinded its franchise agreement, and that it was entitled to damages of more than $200,000 under s. 6(6) of the Wishart Act.

Justice Stinson found that the franchisee had validly rescinded the franchisee agreement (as well as two ancillary agreements). The franchisor had delivered a disclosure document but it had several significant deficiencies, including no audited financial statement, not properly identifying the franchisor, not disclosing a location where information was available for inspection that could substantiate financial projections, and only including one signed signature on the certificate when the franchisor had two officers and directors at the time it made disclosure, with the result that the “disclosure did not qualify as a ‘disclosure document’ for the purposes of the Wishart Act.”

This is the first case in which a court has found that including only one signature on a certificate when there ought to have been two makes the certificate deficient. Earlier cases have established that a missing signature on a certificate is enough for a court to find that the franchisor’s disclosure counts as no disclosure at all. (See my earlier blog, Why a signature matters in franchise disclosures)

There was also an issue as to whether the franchisor had delivered the disclosure document as “one document at one time” within the meaning of s. 5(3) of the Wishart Act, but given the factual controversy concerning exactly what had been turned over and in what format, the court could not decide the motion on this basis.

Justice Stinson was also not prepared to grant summary judgment on the issue of how much money the franchisor owed to the plaintiff under s. 6(6) of the Wishart Act. There wasn’t enough time on the motion to address the extensive documentation filed by the franchisee, and the franchisor had taken issue with some of the claims. Justice Stinson therefore directed a reference to the Master at Toronto.

Justice Stinson was also unwilling to grant summary judgment on the issue of whether the wife of the franchisor’s principal, Mr. Pederson, was a franchisor’s associate within the meaning of s. 1(1) of the a Wishart Act. Mr. Pederson, who did not have counsel on the motion and was representing himself as well as the franchisor, had conceded that he fell within the definition of “franchisor’s associate” under the Wishart Act. While he and his wife held 50% of the shares, the evidence didn’t persuade Justice Stinson that the wife was heavily involved in running “all aspects of the company”.

What I find particularly interesting is Justice Stinson’s reaction to the franchisor’s attempt to minimize its exposure under the Wishart Act by reason of the franchisee’s sophistication. Several of my franchisor clients have questioned how a sophisticated franchisee can possibly be entitled to complain about deficient disclosure. My answer is always, when it comes to rescission claims under the Wishart Act, there do not appear to be any equitable defences available to franchisors.

In the latest case, the franchisor argued that because the franchisee’s principal was a sophisticated businessman who had considerable experience with franchises and with the Wishart Act, and had pointed out several errors in the disclosure materials during their initial discussions, the franchisee should “not be heard to complain of deficiencies in the disclosure.”

Justice Stinson held that while this proposition “is superficially attractive”, it is not a suitable approach to the issue as, “the result would be to vary the form and level of disclosure required to be made by a franchisor, depending on the so-called sophistication of the prospect of a franchisee.

“On this theory, a very great deal of detail would be necessary when dealing with a franchisee with little business experience; by contrast, much sparser disclosure would be sufficient when dealing with a franchisee with extensive business experience. Not only would this inject some sort of subjective assessment into the exercise, but it effectively incorporates some case-by-case assessment that is nowhere mentioned in the Wishart Act or the regulations. Had the legislature intended to provide for, in effect, varying levels of disclosure, it could have done so. It did not,” the justice said in rejecting Mr. Pederson submission.

The rescission remedy under the Wishart Act is not to be taken lightly. When defending a rescission claim, a franchisor should seek the advice of experienced franchise counsel, and to reduce its cost exposure, avoid disputing liability where the disclosure document was clearly deficient and no meritorious defences are available. On facts such as the ones in the Global Diaper Services case, a franchisor should focus its defence on and try to settle the amount of rescission damages owing to the franchisee.

Comments

1. insider
There is more to this story than meets the eye. Global Diaper had 7 franchises in 2007. Today they have 1 - under protest. You should investigate the business practices of Pederson and his wife, Kate. This story is more about how a franchisee can lose everything to an unethical, untruthful, franchisor. They know how to push the limits of the law for their own gain.
There is a juicy, Canada-wide story here! Someone has to tell it!

http://business.financialpost.com/2013/05/27/every-franchise-rescission-case-is-a-lesson/


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