To find the right franchisee and safeguard your brand, it’s critical that, as a franchisor, you have a strategy that you can put into practice to help you identify your future franchisee partners.  This article will help you identify the right franchisees for your specific system, and provides practical advice about how to assess if a prospective franchisee has what it takes to succeed in your system.

1. Business experience. Franchisees are essentially small business owners.  Prior experience operating a business, even if it’s a business type different than the franchise business they may operate, will help to set a franchisee up for success.  Remember, your new franchisee is going to have a lot of learning to do when they are onboarded to the system:  learning your system standards, understanding your brand values and how those are expressed in your daily operations, and any specific or special skills that may be necessary to operate their franchise business.  A franchisee with an understanding of small business fundamentals, such as basic accounting, budgeting, cash flow management, reporting, sales, marketing and hiring and management of employees is already one step ahead.  Franchisees with no business experience may be completely overwhelmed if, at the same time they are completing their system training, and also have to learn everything about operating a business.

2. Alignment with brand values, mission, and culture. “Fit” is going to mean something different to every franchise system, but it’s one of the most important things that franchisors need to consider in evaluating potential franchisees.  A prospective franchisee who otherwise “ticks all the boxes” but has a fundamentally different view of your brand, or of the system and its overall goals and direction is, at best, unlikely to succeed and, at worst, may create significant problems for you and the system, in general.  What’s the best way to identify the elusive “right fit?”  Here are some practical tips:

• Your initial screening and application processes should include at least some questions that directly address your brand’s values and mission. For example, ask some questions about why they are interested in your brand, in particular, and why they think they are right for the system.
• In interviewing a franchisee candidate, ask historical, behaviour-based questions that will help to reveal their personal characteristics and qualities. For instance, if one of your brand values is customer satisfaction, ask them to give you a specific example of a time in their past when a customer satisfaction issue arose, what it was, how they handled the situation, and what the result was.  These types of questions and answers will likely be very helpful to you in assessing whether the franchisee candidate is the person you’re looking for.  Past experience is often the best indicator of future performance.
• You may want to hold a discovery day or other workshop where the prospective franchisee can learn about your brand and also interact with existing franchisees. Not only will the franchisee learn about whether your system is right for them, but you can observe the candidate and assess whether you think they are right for the brand.  For instance, do they seem excited about your brand?  Do they seem engaged?  Do they get along with existing franchisees?  Are they asking good questions?  Your existing franchisees may also be able to provide you with insight on whether the candidate is compatible with your brand.
• You may wish to conduct reference checks. You might speak to previous employers, business partners or colleagues to gain insights into the candidate’s abilities and alignment with your brand values.  Another good idea is to check publicly available sources (a “Google” search, social media feeds, etc.) to see whether the franchisee candidate has a public presence and, if so, whether it reveals anything about them that is in conflict with your brand.
• You may wish to employ good profiling technology and related services. There are services available that will identify the qualities and characteristics of the most successful franchisees currently in your system, and then analyze franchisee candidates to determine whether or not they possess these same qualities.

3. Sufficient financial resources. No matter how much business experience a candidate may have, or how much they seem to fit into your brand’s culture, that franchisee is virtually certain to fail if the franchisee doesn’t have sufficient financial resources to operate.  A new unit that opens and then rapidly closes may harm the reputation of the brand, as may a unit that opens and then has to cut hours or reduce staff to stay afloat.  Franchisors should set clear financial criteria for prospective franchisees.  In particular, franchisors should ensure that prospective franchisees have a sufficient amount of unencumbered liquid assets to meet initial capital expenses, and sufficient initial operating capital to sustain the business until it is able to generate adequate profit.  The creditworthiness of the franchisee’s principal should also be explored.

4. Ambition and dedication. What are the franchisee’s expectations around business ownership and operation?  Do they intend to personally devote their full time and attention to the franchise business?  Do they understand that opening a new business, even a franchise business with excellent franchisor support, can be hard work?  Or do they think that, because the business is a franchise business, it will essentially “run itself”?  Do they believe they can just “hire a manager” to perform all business functions?  It’s important to assess a candidate’s expectations around these important issues.  Most franchise systems require franchisees to devote their full time and attention to the franchise business.  Individuals who understand this from the outset, and are keen to work hard to build a great business, are best placed to achieve success.

5. Understanding of the franchise relationship. While many franchisees are ambitious, want to be “their own boss”, and often have an entrepreneurial spirit, it’s very important for a prospective franchisee to understand the role of a franchisee within a franchise system.  A franchisor should assess whether a candidate understands that a franchisee will need to carefully follow the franchisor’s standards, methods of operation, management techniques, and business practices.  Success as a franchisee depends on the successful execution of these existing practices and standards.  The reputation of the system also depends, in part, on franchisee compliance with system standards.  For example, while it may be that restaurant franchisees can source individual items for prices lower than those offered by a franchisor’s approved suppliers, buying supplies only from approved suppliers is important to ensure consistency across the brand, manage health risks from food-borne illnesses, and achieve overall lower supply costs that are the result of volume discounts and product bundling.  Those candidates looking to “innovate” or “improve” upon the system need to understand, from the beginning, that their aspirations may not be compatible with the role of a franchisee.  It’s important for franchisors to explain to franchisee candidates the role of the franchisor, the role of the franchisee, and how their different functions work together to create the conditions for system success.

6. The right attitude and realistic expectations. It’s critical that the franchisee candidate has the right mindset.  Misalignments between expectations and reality is a recipe for unhappy franchisees and negative brand publicity.  A candidate should have genuine enthusiasm and passion for being a franchisee in your system, and understand what they can achieve with a franchise business.  It’s important that the franchisee candidate have a realistic understanding of the potential profitability of the franchise business.  In particular, it may be a red flag if a franchisee seems interested only in how much money they can make.  Franchisors who elect to directly provide financial information to franchisees must be very careful to do so in accordance with relevant franchise legislation.  Providing earnings claims or historical financial information in the wrong way may lead to significant claims against franchisors in future.

At Sotos LLP, we assist restaurateurs in determining whether to franchise their systems and guide them through the various stages of development and maturity. We also assist franchisors in every aspect of their sales processes. The author can be reached at aboudreau@sotos.ca.

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The facts are straightforward.

270[2] entered into agreements with Lightbox for the operation of two retail cannabis stores under the “Dutch Love” brand.  Under the agreements, Lightbox was required to operate both stores on a day-to-day basis. 270 was never involved in the operation or direct management of the stores.

In December 2021, 270 delivered two notices of rescission to Lightbox pursuant to the Wishart Act.[3]  270 took the position that it was a franchisee of the “Dutch Love” franchise system, and it did not receive the required disclosure.  Lightbox disputed that the businesses were franchises.[4]

Upon delivering the notices of rescission, 270 jointly rebranded both stores.  It stopped using the “Dutch Love” marks, and began operations under its own brand, “Roll N Rock Cannabis.”

Lightbox commenced an action against 270 and brought a motion for an injunction.  It sought to prevent 270 from “owning and/or operating a ‘Roll N Rock Cannabis’ retail store or any other cannabis retail store, other than a ‘Dutch Love’ branded store.”  Lightbox also sought to restrain 270 from using the marks and “operating methods” associated with the Dutch Love brand.  This included a long list of prohibitions, including requiring 270 to no longer use the services of certain third-party suppliers (such as the global HR software company ADP) and not displaying certain items in-store, including “potted plants”.

The Court dismissed Lightbox’s motion after a preliminary assessment of the evidentiary record, and did not need to consider the three-part test that is standard on injunction motions.

First, the Court found no right capable of enforcement.  There was “no evidence whatsoever of any agreement between the parties that 270 would refrain from the ownership or operation of another cannabis retail brand at either of the store locations in question or at all.”  In fact, the Court noted that the order Lightbox wanted it to make would be contrary to certain express terms of the agreements, which allowed 270 to transition its operations to another cannabis brand.

Second, the Court found Lightbox had failed to lead any evidence to support its claim that 270 had misused any confidential information or operating methods.  In fact, one of Lightbox’s affiants bluntly admitted that many of the resources needed to understand the cannabis business can be found publicly online.

The following lessons can be learned from this case:

1. An injunction remains an extraordinary remedy that must be grounded in pre-existing contractual rights. The Court will not enforce rights for which the parties never bargained. The Court will not find that a restrictive covenant is an implied term in the parties’ agreements, particularly where that implied term would contradict the express terms of the contract.
2. Allegations must be supported by adequate evidence. Evidence in support of injunctive relief must be clear, cogent, and detailed. Any proprietary information or methods must be clearly identified, and the existence of such interests and methods must be established by the evidentiary record.  Vague allegations will not be sufficient to support a claim for injunctive relief.
3. Whether the injunction is mandatory or prohibitive may be determined by evaluating the result of the proposed order. Lightbox argued on the motion that the injunction sought was prohibitive. 270 agreed that while the order was phrased as a prohibition, its practical effect was that 270 had no choice but to perform its positive obligations under the agreements.  Essentially, that 270 would have to operate as a “Dutch Love” or cease operations entirely.   The Court agreed with 270.  It concluded that because the result of the order would be to restore the status quo, the relief sought was mandatory in nature.  Had the Court been required to consider the three-part test for an injunction, Lightbox would have had to meet the more demanding strong prima face case standard.
4. An “ill-conceived” motion is not sufficient grounds for an elevated costs award. Although the Court agreed with 270 that Lightbox’s motion was “ill-conceived and as well unsupported by a proper evidentiary record relating to the relief sought” it found this was not a sufficient basis to increase the costs awarded to 270 on the motion. 270 was awarded partial indemnity costs, payable within 30 days.[5]

Adrienne Boudreau, Sotos LLP

Adrienne is a partner at Sotos LLP.  Her practice focuses on all areas of commercial litigation with an emphasis on franchise litigation.  Adrienne can be reached directly at 416-572-7321 or aboudreau@sotos.ca.

[1] 2022 ONSC 1873 (CanLII).
[2] Sotos LLP was counsel to 270 on this motion.
[3] Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3.
[4] The parties agreed that the Court did not need to determine whether they were in a franchise relationship in order to fully adjudicate the issues on the motion.
[5] 2022 ONSC 2999 (CanLII).

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It is well-known that franchisors must disclose all material information (“materials facts”) relating to the grant of a new franchise, or the renewal of an existing franchise.  Material information will, of course, include information that is prescribed by the Wishart Act[2] and the associated Regulation.[3] However, it will also include any information that would reasonably be expected to have a significant effect on the decision to acquire the franchise, or information that will have a significant effect on the value or price of the franchise, whether or not that information is expressly prescribed.  Failure to disclose all material facts creates a risk that a franchisee can later rescind its franchise agreements and look to the franchisor for significant compensation.

Facts

In the Freshly Squeezed case, Freshly Squeezed Franchise Juice Corporation (the “Franchisor”) took the position that it had provided a “disclosure document” to the principal of the franchisee, 2611707 Ontario Inc. (the “Franchisee”), prior to the Franchisee entering into any franchise agreements.

The Franchisee’s franchise business was to be located in the “RioCan Food Hall” of Mount Sinai hospital in Toronto.  This was going to be the first time that a “Freshly Squeezed” franchise would be located outside of a shopping mall setting.

The Franchisee entered into a franchise agreement in January 2018, and began operating its “Freshly Squeezed” franchise business in March 2018.  In the fall of 2018, the Franchisee delivered a notice of rescission pursuant to Section 6(2) of the Wishart Act, on the basis that it had not received a disclosure document.  The Franchisor took the position that disclosure had been provided.  The Franchisee later commenced an application seeking rescission and compensation.

The Court ultimately found that the Franchisor had failed to disclose certain material facts to the Franchisee, including facts that were “material” but not specifically prescribed by the Wishart Act and the Regulation.  The Court granted the Franchisee’s rescission application, and ordered the Franchisor and its principal to pay over $300,000 in statutory compensation.

Comments on rescission, generally

In reaching her decision, the application judge relied on the Ontario Court of Appeal’s decision in Raibex.[4]

At the application hearing, the Franchisor had argued that Raibex “changed the law”, and that now franchisees seeking rescission must prove the alleged non-disclosure actually impacted their ability to make an informed investment decision. The application judge rejected this submission.

After carefully reviewing Raibex, and earlier Ontario Court of Appeal decisions, the application judge found the test for determining whether an alleged disclosure deficiency entitled a franchisee to rescind remained objective.  Accordingly, she confirmed that rescinding franchisees need not lead evidence that, in their own specific case, their ability to make an informed investment decision was actually impaired by the alleged non-disclosure.

However, the application judge found that, per Raibex, this objective analysis does not occur in a vacuum.  Rather, the Court will consider the particular facts and circumstances of the underlying grant of franchise.  In so finding, she confirmed that the key question on a rescission is whether the subject deficiency is so serious that it deprived the franchisee of an opportunity to make an informed investment decision (about whether or not to purchase the franchise business) in the particular circumstances of the case.

Findings in the case[5]

Financial Statements.  The alleged disclosure document in issue in this case included financial statements, which were prepared to a “review engagement” standard.  However, certain line items in the financial statements referred to the notes of the financial statements, and these notes were not included in the disclosure document.

The application judge recognized previous Ontario Court of Appeal case law confirming that disclosure of a franchisor’s financial statements is a “foundational part of disclosure”, and that failure to provide compliant financial statements will generally result in a finding of non-disclosure.  She found the Franchisor’s failure to include the notes to the financial statements meant that the Franchisor had failed to comply with the Regulation, and to fully disclose the required financial information.  Incomplete financial statements deprived the Franchisee of information that was necessary for it to assess the Franchisor’s financial status and provided the basis for the Court’s first finding of material non-disclosure.

Site-specific disclosure.  At the time the disclosure document was provided, the head lease had not been entered into, and so could not be included with the disclosure document.  The disclosure document did not disclose that no head lease was in place.  However, the Court found this non-disclosure was mitigated by the fact that the Franchisee was aware of this fact.

Also at the time of disclosure, the Franchisor had signed, and delivered to the landlord, a negotiated agreement to lease.  This agreement to lease had not been countersigned by the landlord or returned to the Franchisor at the time of disclosure.

The agreement to lease contained a provision that, in certain circumstances, the landlord could terminate the lease at any time on three months’ notice, without compensation.  This termination provision was included in the final head lease.  Pursuant to the franchise agreement, the Franchisee was bound by the terms of the head lease.

The disclosure document did not reveal that an agreement to lease had been negotiated.  The disclosure document also did not contain a summary of the material terms of the agreement to lease, including the termination provision, and did not append a copy of the agreement to lease.

The Franchisee took the position that the termination clause was material because, if exercised, it could adversely affect its expected return on investment in the franchise business.

The Franchisee was not involved in any lease negotiations and had no ability to cancel either the franchise agreement or sublease, as did the franchisee in the Raibex case.

In all the circumstances, the Court found that the failure to disclose the agreement to lease, or to at least provide a summary of its material terms, was a material fact that ought to have been disclosed pursuance to Section 5(4)(a) of the Wishart Act.  This combined with the lack of any “contractual comfort” to the Franchisee that would permit it to exit the franchise relationship if the lease terms were not to its satisfaction, resulted in the Court’s second finding of material non-disclosure.

Entry into a new market.  As noted above, the Franchisee’s franchise business was to be the first “Freshly Squeezed” franchise in a “non-mall” retail location.  This fact was not disclosed to the Franchisee in the disclosure document, or otherwise.

Prior to entering into the franchise agreement, the Franchisee had visited several operating “Freshly Squeezed” franchise businesses.  The disclosure document contained a list of all currently operating “Freshly Squeezed” locations, which the Franchisee had telephoned.  At the application hearing, the Franchisor argued that this list provided the raw data from which the Franchisee could have “extrapolated” the fact that its unit was to be the first in a non-mall location.

The Court rejected this argument.  It found that the fact that this was to be the first non-mall location was a material fact that ought to have been explicitly disclosed pursuant to Section 5(4)(a) of the Wishart Act.  The Court noted that there was “no track record for the success of this franchise business in non-mall settings and that, in and of itself, could pose a risk to the financial viability of this particular venture.”  This was the basis for the Court’s third finding of material non-disclosure.

Important lessons for franchisors

The Freshly Squeezed case serves as an important reminder to franchisors that disclosure should not be approached as a rote or mechanical exercise.  There is no standard disclosure “template”.  The unique qualities of the specific unit to be granted, and the features and characteristics of the franchise system, need to be considered in determining what information must be disclosed relating to each franchise opportunity.  What facts are “material”, and therefore required to be disclosed, may vary with each grant of franchise.  A disclosure document that is adequate for one franchise opportunity may be materially deficient in respect to another.

In addition, the Court will look to all the circumstances of the underlying grant of franchise in assessing whether or not the disclosure standard has been met.

Failing to properly disclose a prospective franchisee can be a costly mistake.  Franchisors are well-advised to seek the advice of experienced franchise counsel to assist with the disclosure process.  Competent counsel should carefully review information provided by the franchisor, question information that appears to be inaccurate, and identify any apparent information gaps to assist in ensuring that all material facts are included in each disclosure document.

Sotos LLP acted as counsel to the applicants in this matter. The decision is currently under appeal.

Adrienne Boudreau is a partner with Sotos LLP in Toronto, home to Canada’s largest group of franchise lawyers.  She provides counsel to many franchised businesses, for both franchisors and franchisees, and has extensive experience litigating franchise rescission cases.

[1] 2611707 Ontario Inc., et al v. Freshly Squeezed Franchise Juice Corporation, et al., 2021 ONSC 2323.
[2] Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3.
[3] O. Reg. 581/00.
[4] Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62.
[5] Certain of the application judge’s findings were the product of a unique, evidentiary agreement, to which the parties agreed at the beginning of the application hearing, in order to determine the matters at issue by way of application (as opposed to by way of trial).  This bulletin will therefore consider only those findings made that were not impacted by this unique agreement.

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On March 15, 2020, Chief Justice Geoffrey B. Morawetz issued a Notice to the Profession, the Public and the Media Regarding Civil and Family Proceedings in response to the COVID-19 situation. The Notice, which applies to all Superior Court of Justice proceedings in Ontario, states that regular court operations have been suspended. As a result of the suspension, only certain, urgent matters are being heard by the court at this time.

The Notice stipulates that the following types of matters will continue to be heard during the suspension:

1. Certain matters related to public health and safety;
2. Certain family and child protection matters;
3. Certain civil and commercial list matters that may result in “immediate and significant financial repercussions” if the matter is not heard; and
4. “Any other matter that the Court deems necessary and appropriate to hear on an urgent basis.”

What matters are being heard?

We provide some examples of cases that the Court has determined to fall within the above types, such that they should be heard during the suspension.

• Matters with health and safety considerations: York Condominium Corporation No. 419 v Black, 2020 ONSC 2066 (dispute between a condo corporation and condo resident over continuing renovations to a condo unit, which required multiple tradespeople and third parties to attend at a building that housed a high number of senior citizens); Almeida v Morgan, 2020 ONSC 2192 (motion under the Health Care Consent Act, 1996 to allow a medical professional to administer treatment to Mr. Almeida pending Mr. Almeida’s appeal of a decision from the Consent and Capacity Board);
• Matters related to national politics: Karahalios v Conservative Party of Canada, 2020 ONSC 1820 (disqualification of candidacy for the Conservative Party of Canada);
• Matters related to privacy rights of minors: Rogerson v Havergal College, 2020 ONSC 2022 (public material filed with the Court contained private information about a minor, which was contrary to an order that had previously been made in the proceeding to protect the privacy of the children involved);
• Certain matters involving commercial or residential tenancy rights: Morguard Corporation v Corredor, 2020 ONSC 2166 (enforcement of a residential eviction order that was made prior to the suspension of court operations where the tenant was being evicted as a result of alleged criminal behaviour towards other residents); Slimmon-Weber v Racco, 2020 ONSC 2169 (ongoing commercial tenancy dispute that began in 2019; the hearing and Chambers appointment were adjourned as a result of the Notice to the Profession; respondent landlord took the position that the adjournments did not require him to stay any eviction proceedings);
• Matters involving property disputes: Saine v Niagara Escarpment Commission, 2020 ONSC 2151 (applicant seeking to appeal a finding that there is no jurisdiction to vary conditions of a development permit; the appeal process must be commenced prior to the expiry date of the permit, which was April 13, 2020; if the permit expires before the appeal process is commenced, the applicant would be forced to begin the entire process again, after having already dedicated over a decade and significant money to the process); Wang v 2426483 Ontario Limited, 2020 ONSC 2040 (dispute related to the upcoming closing of a pending real estate transaction); and
• Compliance with existing court orders: Hrvoic v Hrvoic, 2020 ONSC 1711 (party not complying with an order to repay money to a line of credit in the context of contentious civil and family proceedings); Morris v Onca, 2020 ONSC 1690 (judgment debtors ignoring court orders to repay funds to the judgment creditor).

Since the March 15 Notice, the Ontario Superior Court of Justice has released various Notices and Orders related to the ongoing COVID-19 situation and court operations. A full list of the Notices and Orders issued by the Ontario Superior Court of Justice, including ongoing updates and regional notices, can be found here.

Adrienne Boudreau, Sotos LLP

Adrienne is a partner at Sotos LLP.  Her practice focuses on all areas of commercial litigation with an emphasis on franchise litigation.  Adrienne can be reached directly at 416-572-7321 or aboudreau@sotosllp.com.

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COVID-19-related scams, in particular, have surged.  The Washington Post reports that, according to IBM’s X-Force research division, coronavirus email scams have increased by 14,000 percent in just the past two weeks.  Such emails often try to get the recipient to divulge sensitive information, such as usernames and passwords.  Phony websites claiming to sell PPE and COVID-19 “cures” have proliferated.   “Zoombombing” – interrupting zoom calls to spread racist, pornographic, or vulgar content – is becoming commonplace.  Fake texts, asking people to click on harmful links, have increased.

Franchise systems may be particularly vulnerable to these kind of cyber-attacks.  By their very nature, franchise systems are decentralized.  Often, many different people have access to a franchise system’s computers and electronic information, including franchisors, franchisees, their respective employees, suppliers, and other third parties.  In the wake of the global pandemic, many more people may now have access to these online systems.  This decentralization and increased access poses certain challenges at the best of times.  During a crisis, it is even more difficult to ensure compliance with cybersecurity best practices.

What can you do to keep your franchise systems safe online?  Education is your first line of defence.  Here are some basic tips that you can circulate to everyone who has access to your online systems:

• Exercise caution in opening attachments/clicking on links – be especially on guard if the link/attachment relates to COVID-19. Be cautious of messages with a sense of urgency to them, or those that include deadlines.  If the link or attachment is available from a reputable and recognized website (for instance, the Government of Canada), you may wish to access the article/link directly from the website, rather than through the attachment or link.
• For emails, double check the sender’s information – if an email address looks suspicious, don’t respond and delete it. In particular, scrutinize emails inviting you to join a videoconference or chat.  Look for spelling errors in names and websites – these can be a red flag that the invitation is not legitimate. When in doubt, contact the sender via another means, such as by phone or text, to confirm the invitation is actually from them.
• Be wary of texts – particularly those relating to coronavirus or COVID-19, or relating to “your” subscriptions/accounts. We’ve seen suspicious texts claiming to be from the government, major banks, and “Netflix”, among others.  Many of these texts are actually phishing scams, trying to get you to click on a harmful link.
• Videoconference best practices – change your videoconference settings so that only the meeting host can share their screen, make calls private, and consider requiring participants to enter a password to join the meeting.
• Family/household members – if you’re sharing a device with anyone, including children, take the time to educate them about good online practices. Device security is only as strong as the weakest link.

Adrienne is a partner with Sotos LLP in Toronto, Canada’s largest franchise law firm.  She provides counsel to many franchised businesses.  Adrienne can be reached directly at 416-572-7321 or aboudreau@sotosllp.com.

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Fit for Life confirms that the “informed investment decision” approach to the evaluation of disclosure, as discussed by the Ontario Court of Appeal in Raibex[3], should not be used in “deficient certificate” cases.

In addition, the Court has also found that written statements contained in a franchise disclosure document may constitute “representations to the prospective franchisee on behalf of the franchisor for the purpose of granting the franchise, marketing the franchise or otherwise offering to grant the franchise” sufficient to make a person a “franchisor’s associate” within the meaning of the Wishart Act.

Facts

The two individual plaintiffs in Fit for Life were interested in purchasing a “Fit for Life” franchise.  The franchisor provided each of them with a substantively identical franchise disclosure document (collectively, the “FDD”).

The first four pages of the FDD contained some prescribed information about the “Fit for Life” franchise system, such as its corporate name, affiliates, business experience, etc.  Following this information, there was an unusual signature block on page 4 of the FDD.  The signature block was signed by Samuel Davis, the sole director and officer of the franchisor, 2082100 Ontario Inc. (the “Franchisor”).  Mr. Davis testified at trial that what appeared in the first four pages of the FDD prior to his signature were his “aspirations” for the franchise system.  He testified that, by signing on page 4, his intent was to endorse the FDD in its entirety, and to be personally liable for its contents.

On page 27 of the FDD there was a heading entitled “Fit for Life Franchise Certificate of Disclosure” and various statements about the truthfulness and completeness of the disclosure document.  This page did not contain a signature block or line, and there was no signature on this page.

The corporate franchisee (the “Franchisee”) and its officers and directors subsequently entered into a franchise agreement and related agreements for the operation of a “Fit for Life” franchise.

After approximately 20 months of operation, the Franchisee delivered a notice of rescission pursuant to Section 6(2) of the Wishart Act, on the basis that the FDD did not contain a properly signed certificate.  The Franchisee sought statutory compensation pursuant to Section 6(6) of the Wishart Act in the amount of $624,821.06.

The Franchisor failed to pay any amount pursuant to the notice of rescission, and the Franchisee commenced an action.  It named the Franchisor and Samuel Davis as defendants.  The plaintiffs sought a declaration that all “franchise agreements” had been rescinded by the Franchisee’s notice of rescission, and the payment of statutory compensation.  They also sought a declaration that Mr. Davis was a “franchisor’s associate” within the meaning of the Wishart Act, and was therefore personally responsible with the Franchisor for the payment of statutory compensation.

The plaintiffs were ultimately successful.  The Court found that the franchisor did not provide proper disclosure because the FDD did not include a certificate that met the requirements of Section 7 of the Regulation to the Wishart Act.  It further found that the Franchisee had rescinded all “franchise agreements” pursuant to Section 6(2) of the Wishart Act, and that Mr. Davis was a “franchisor’s associate”.

Two approaches to the evaluation of disclosure

Fit for Life is notable in that the trial judge, Justice Kimmel, rejected the defendants’ argument that Raibex “shifted the focus” of Section 6(2) rescission cases relating to deficient certificates and that, post-Raibex, franchisees have to demonstrate how a deficient certificate deprived them of the ability to make an informed investment decision about whether to purchase the franchise.  In refusing to reach this conclusion, the Court drew a distinction between rescission cases concerning non-disclosure of “material facts” and those concerning deficient certificates.  The Court found that it is not appropriate in deficient certificate cases to apply an “informed investment decision” approach to the evaluation of disclosure.

The Court reviewed the Section 6(2) rescission case law.  It noted that two different policy objectives underlie these decisions:  1) informed investment decision-making, which recognizes the rights of franchisees; and 2) impressing upon those who sign disclosure documents the importance of complete and accurate disclosure, which recognizes a specific obligation on the franchisor.

The issue in Raibex related to the alleged non-disclosure of a material fact.  In considering this issue, the Court of Appeal endorsed a purposive analysis.  It considered whether the non-disclosure of a material fact negated a prospective franchisee’s ability to make a “properly informed decision about whether or not to invest in the franchise”.  The Court in Fit for Life identified that this inquiry was informed by the first policy objective:  full disclosure to franchisees.

By contrast, the Court in Fit for Life found that a defective certificate case is not informed by the policy objective of full disclosure to franchisees.  Rather, the requirement for a properly signed certificate serves the second policy objective of impressing upon franchisors the importance of complete and accurate disclosure.

In light of the existence of these two distinct policy objectives it makes no sense to require a franchisee, in a deficient certificate case, to explain how the absence of a compliant certificate impacted its ability to make an informed investment decision.  The purpose of the signed certificate is to remind the franchisor of the importance of the certification.  The requirement for a signed certificate does not exist to better inform the franchisee.  Accordingly, the Franchisee in Fit for Life was not required to show that the absence of a compliant certificate negatively impacted its ability to make an informed investment decision.

Justice Kimmel rejected the defendants’ argument that a deficient certificate must be accompanied by additional disclosure deficiencies in order to give rise to a Section 6(2) rescission.  In so doing, she confirmed a long-standing line of case law that a non-compliant certificate, on its own, is a fatal defect amounting to non-disclosure under the Wishart Act.  This finding also suggests that each of the two policy objectives identified by the Court are important, and one cannot be ignored at the expense of the other.

In the result, the trial judge found that Mr. Davis’ signature on page 4 of the FDD did not serve the policy objective of impressing upon him the importance of ensuring the FDD was complete and accurate.  She found the evidence before the court did not support the defendants’ position that Mr. Davis intended to certify the entire FDD, but signed on the wrong page, in error.  Justice Kimmel found the absence of a compliant certificate to be a fatal flaw, sufficient, on its own, to give rise to a right of rescission under Section 6(2) of the Wishart Act.  She further found that the franchisee had properly exercised its right of rescission, and was entitled to statutory compensation pursuant to Section 6(6) of the Wishart Act.

Fit for Life has provided important guidance in deficient certificate cases.  However, Raibex’ application to cases where the alleged deficiency is the non-disclosure of a material fact will need to be clarified and developed in future cases.

A person can be a “franchisor’s associate” on the basis of written representations in an FDD that does not contain a signed certificate

The Court also considered whether Mr. Davis, the sole officer and director of the franchisor, was a “franchisor’s associate” within the meaning of the Wishart Act.

The plaintiffs first argued that Mr. Davis exercised “significant operational control” over the plaintiffs’ franchise because the Franchisor sublet the premises from which the franchise was operated to the Franchisee.  The Court refused to find that Mr. Davis, personally, exercised significant operational control based on the existence of the sublease.  The sublease was between Franchisor and Franchisee, and Mr. Davis was not a party to the sublease in his personal capacity.  The court refused to infer any level of personal involvement by Mr. Davis based on the existence of the sublease, alone.

The plaintiffs then argued that the statements on page 1-4 of the FDD, which promoted the “Fit for Life” concept, should be considered “representations” made by Mr. Davis on behalf of the Franchisor for the purpose of granting the franchise, marketing the franchise, or otherwise offering to grant the franchise.   The Court agreed and, on the basis of the “representations” on pages 1-4 of the FDD, found Mr. Davis to be a “franchisor’s associate” and therefore personally liable to compensate the Franchisee for the Franchisor’s failure to provide adequate disclosure.

The presence of Mr. Davis’ signature on page 4 of the FDD was important to the Court’s conclusion that the contents of the preceding pages were “representations” made by him.  However, the placement of his signature in the FDD was unusual.  Deficient certificate cases typically concern disclosure documents containing no signatures, at all, or the incorrect number of signatures on the certificate.  It will be interesting to see whether and how the findings in Fit for Life will be applied in future rescission cases to the question of whether a person is a “franchisor’s associate”.

The plaintiffs also made an alternative submission that, even if Mr. Davis wasn’t personally involved in the review or approval of the grant of franchise, he should be found to be a franchisor’s associate on the theory that Mr. Davis delegated his control over the franchisor to others, and these persons acted as Mr. Davis’ agents.  The plaintiffs argued that in carrying out these delegated responsibilities, Mr. Davis should be imputed with all of his agents’ actions and knowledge.

The plaintiffs pointed to the fact that Mr. Davis was the sole director and officer of the Franchisor and that the FDD, which he signed, represented that no affiliates of the Franchisor would have any dealings with the Franchisee.  They also argued that the other individuals with whom they dealt were not employed by the Franchisor.  Accordingly, the only capacity in which these persons could be dealing with the Franchisee for the purposes of the grant of franchise was as the agent of Mr. Davis.  In addition, the plaintiffs noted that Mr. Davis established the process for reviewing and approving the grant, ensured this process was followed, and was kept informed on the approval process in relation to the grant, in which he had the sole financial interest.

While employing the theory of implied agency is an interesting argument, the Court ultimately rejected it, although it left open the possibility that such an agency relationship could be present in another case.  The trial judge found in Fit for Life that it was more plausible that the persons with whom the Franchisee interacted were agents of the Franchisor, rather than agents of Mr. Davis, personally.  The trial judge noted that no authority was presented to her that Mr. Davis could not delegate his responsibilities as a director, officer, or employee of the corporate franchisor to other people, for them to exercise on behalf of the corporation.  The Court noted that the idea that Mr. Davis could only delegate his responsibilities to someone to carry out for him personally “seems antithetical to the corporate veil and recognized distinction in which officers and directors act.”

Sotos LLP acted as counsel to the plaintiffs at trial.

Adrienne Boudreau is a partner with Sotos LLP in Toronto, Canada’s largest franchise law firm.  She provides counsel to many franchised businesses, for both franchisors and franchisees, and has extensive experience litigating franchise rescission cases.

[1] Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3.

[2] 2483038 Ontario Inc. v. 2082100 Ontario Inc., 2020 ONSC 475.

[3] Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62.

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