INTRODUCTION
Ontario has been privy to franchise specific legislation for well over 20 years now. The Arthur Wishart Act (Franchise Disclosure), 2000[1] imposes an obligation on a franchisor to deliver to a prospective franchisee a disclosure document (an “FDD”) which complies with the Wishart Act and the regulations[2] made thereunder. As consumer protection legislation, the Wishart Act, and franchise legislation in other provinces, is designed to afford prospective franchisees the information they need to make an informed investment decision.
As an incentive to franchisors to comply with their obligation to deliver an FDD, the Wishart Act allows a franchisee to rescind a franchise agreement: (a) within 60 days after receiving the FDD where a franchisor failed to provide an FDD or statement of material change within set timeframes, or where the contents of the FDD fail to meet the requirements set forth in the Wishart Act;[3] and (b) within two (2) years of the signing of the franchise agreement if the FDD was never delivered, or if the FDD was so incomplete that it was deemed to constitute non-delivery.[4]
Upon rescission, a franchisor, and a category of persons titled “franchisor’s associates,” are liable to pay a franchisee rescission damages.[5] The recent Ontario Court of Appeal decision, Royal Bank of Canada v Everest Group Inc.,[6] serves as a reminder to franchise lawyers that courts will still rely on the laws of contract in interpreting a franchisee’s right to rescind under the Wishart Act.
BACKGROUND
The Paramount decision concerns a franchise dispute between the franchisor, Paramount Franchise Group Inc. (“Paramount”) and the following three (3) franchisees: Versatile Holdings Inc. (“Versatile”), Everest Group Inc. (“Everest”), and Premium Host Inc. (“Premium Host,” and collectively with Versatile and Everest, the “Plaintiffs”).[7] Also relevant to this matter is Paramount’s employees, Holly Graham and Mohamad Fakih, and Paramount Franchise Inc. (“Paramount Leasing”), a related company to Paramount (collectively with Paramount, the “Defendants”).[8]
At trial, the Plaintiffs sought to rescind their franchise agreements under the Wishart Act, claiming that Paramount failed to provide an adequate FDD.[9] The main issue before the trial judge was whether the Plaintiffs properly exercised their recission rights and were thus entitled to statutory compensation under section 6(6) of the Wishart Act.[10]
To properly exercise their recission rights, the Plaintiffs sought to prove the FDD inadequate to the extent that it impaired their ability to make an informed decision.[11] The trial judge ruled that Paramount provided the Plaintiffs with an FDD.[12] Both parties exchanged large quantities of documents, though each had “drastically divergent versions” of what constituted the FDD.[13] In the end, the trial judge determined that, on a balance of probabilities, Paramount failed to provide Premium Host with an adequate FDD; Premium Host thus validly rescinded their franchise agreement and was entitled to statutory compensation.[14] Versatile and Everest’s recission actions were dismissed.[15]
The trial judge also considered which entities or individuals are deemed franchisor’s associates and are thus liable to pay Premium Host’s rescission damages.[16] The trial judge affirmed that, under subsection 1(1) of the Wishart Act, franchisor’s associates are entities or individuals a franchisor directly or indirectly controls, or that control the franchisor, and that (i) are directly involved in granting the franchise, or (ii) that exert significant operational control over the franchisee and are owed a “continuing financial obligation” by the franchisee.[17] If the control element is met, the franchisor’s associate is liable to pay damages.[18] Paramount Leasing, Holly Graham, and Mohamad Fakih were all found to be franchisor’s associates.[19]
On appeal,[20] the Paramount decision considered several main issues, including:
- when franchisors have disclosure exemptions;
- the extent franchisees can rescind their agreement for statutory compensation;
- what constitutes insufficient disclosure; and
- the requisite degree of involvement to classify individuals or entities as franchisor associates and thus jointly and severally liable to pay franchisees’ statutory compensation.
THE DECISION
(A). Entitlement to Recission and Statutory Compensation
i. Versatile and Everest Failed to Meet their Burden of Proof for Recission
On appeal, the Court affirms that franchisees have the burden to prove entitlement to recission and statutory compensation.[21] If franchisees rescind based on a deficient FDD, franchisees must prove the FDD deficient to the extent where the franchisor’s disclosure “effectively ‘never provided [a] disclosure document.’”[22]
The Court affirms the trial judge’s decision that Versatile and Everest failed to prove their entitlement to recission and statutory compensation; the trial judge’s findings were grounded in the evidence presented.[23] The Court gives further deference to the trial judge, stating that the franchisor’s relied upon documents were not the same documents received by the franchisees; the franchisor and franchisees all had questionable credibility regarding the relied upon FDD.[24]
ii. Premium Host Met their Burden of Proof for Recission
Further on appeal, the Court states the trial judge correctly determined that Paramount could not rely on disclosure exemptions under s. 5(7) of the Wishart Act.[25] Premium Host remains entitled to its rescission rights despite Paramount’s attempts to terminate the franchise agreement.[26]
Additionally, the Court agrees that Premium Host could proceed with their statutory compensation claim.[27] The trial judge’s decision was based on weighing the credibility of evidence before her at trial; the Court finds “no basis” to overturn the trial judge’s decision on materiality, determining that insufficient disclosure occurred based on financial information related to the Heartland location.[28]
Making recission rights under s. 6 of the Wishart Act conditional on non-termination would run contrary to the Wishart Act’s purpose as consumer protection legislation. The Court recalls the ruling in Pickering Square Inc. v Trillium College Inc., stating that contract termination prevents future obligations, but “does not render the contract void ab initio.”[29] The Court solidified that a franchisor’s failure to meet disclosure obligations gives franchisees the right to rescind the franchise agreement, and the franchisor cannot negate this right by “pre-emptively terminating the agreement.”[30]
(B). Determination of a Franchisor’s Associate
i. Paramount Wholesale and Fakih Group are Not Franchisor Associates
The Appeal Court affirmed that Paramount Wholesale and Fakih Group fell outside the definition of franchisor associates under the Wishart Act, thereby possessing no joint and several liability alongside the franchisor.[31] Neither Paramount Wholesale nor Fakih Group “exercis[ed] significant operational control” regarding franchise review or approval.[32]
ii. Holly Graham and Paramount Leasing are Franchisor Associates
On cross-appeal, the Court affirms that Holly Graham and Paramount Leasing are franchisor’s associates under the Wishart Act.[33]
Regarding Holly Graham, her responsibilities encompassed franchise review and approval.[34] Despite having no direct authority to approve franchises, Holly Graham possessed several responsibilities, including: (a) meeting and vetting prospective franchisees; (b) noting red flags and relevant experience; and (c) advising and briefing superiors of her findings.[35] Holly Graham’s role involved professional judgement and directly “advising the ultimate decision-makers.”[36] Provided a role goes beyond the “clerical or junior employee” level,[37] Paramount thus serves as an important lesson that an individual need not be a director or officer to be considered a franchisor’s associate.
Additionally, Paramount Leasing’s ability to “exercise significant operational control over the franchisees” and, at all times, exert “continuous financial obligations in respect of the franchise,” including the ability to end a franchisee’s lease if they breached the franchise agreement, was sufficient to deem this entity a franchisor’s associate.[38]
CONCLUSION
Paramount emphasizes that the Wishart Act fundamentally serves as consumer protection legislation, though franchisees face a high burden to prove no, or insufficient, disclosure. Additionally, Paramount cautions franchisors against relying on statutory exemptions to circumvent their disclosure obligations under the Wishart Act; instead, franchisors often assume less risk when they provide new franchisees with adequate FDDs.
Fundamentally, Paramount highlights that a franchisee’s recission rights depend on a franchise agreement providing legally enforceable rights to operate said franchise; otherwise, a franchisee may have limited recourse. Provided the franchisee possesses legally enforceable rights, franchisors should note that termination of the franchise agreement does not nullify a franchisee’s recission rights.
Finally, Paramount clarifies who is deemed a franchisor’s associate under the Wishart Act. Employees and related companies with key roles in granting a franchise to prospective franchisees should remain cognizant of being jointly and severally liable for franchisees’ recission rights. Moreover, Paramount serves as a reminder of ways to mitigate the chances of being deemed a franchisor’s associate; in particular, courts are less likely to deem persons as franchisor associates if a franchisee is not obligated to use said person’s services, and where the franchisee has alternatives available.
[1] SO 2000, c. 3 s 5(1) [“Wishart Act”].
[2] See O Reg 581/00.
[3] Franchisees must rescind the franchise agreement no later than sixty (60) days after receiving the FDD or within two (2) years if the franchisee never received an FDD [Wishart Act, supra note 1 s 6(1)–(2)]. Additionally, section 5 of the Wishart Act outlines disclosure document standards.
[4] Ibid s 6(1)–(2).
[5] Ibid ss 1(1), 7(1).
[6] 2024 ONCA 577 [“Paramount”].
[7] Premium Host Inc. v Paramount Franchise Group, 2023 ONSC 3808 at para 1.
[8] Ibid.
[9] Premium Host Inc. v Paramount Franchise Group, 2023 ONSC 1507 at para 1.
[10] Ibid.
[11] Ibid at para 52.
[12] Ibid at para 2.
[13] Ibid at paras 2–3.
[14] Ibid at para 6.
[15] Ibid.
[16] Ibid at paras 424–459.
[17] Ibid at para 424.
[18] Ibid at para 425.
[19] Ibid at paras 426–427.
[20] 2024 ONCA 577 [Paramount].
[21] Ibid at para 4.
[22] Ibid.
[23] Ibid at para 5.
[24] Ibid.
[25] Ibid at para 10.
[26] Ibid at para 11.
[27] Ibid at para 12.
[28] Ibid.
[29] Ibid para 11; Pickering Square Inc. v Trillium College Inc., 2016 ONCA 179 at paras 28–29.
[30] Paramount, supra note 20 at para 1.
[31] Ibid.
[32] Ibid at para 6.
[33] Ibid at para 13.
[34] Ibid.
[35] Ibid.
[36] Ibid.
[37] Ibid.
[38] Ibid.
