April 15, 2015

Ontario Court of Appeal says no need to disclose all forms of litigation against the franchisor in the disclosure document

The Ontario Court of Appeal recently dismissed a franchisee’s claim for rescission damages. The franchisee claimed damages for rescission, arguing it had a valid right to rescind and to claim damages because it had not been provided with details about prospective litigation involving the franchisor.

The original judge’s decision suggested there was a requirement to disclose all forms of litigation involving the franchisor. The Ontario Court of Appeal disagreed. The Court of Appeal concluded the franchisor was not required to disclose the outstanding litigation because it involved a former franchisee who was operating a competing business in a different market from the prospective franchisee’s market, which would have no economic impact on the prospective franchisee’s operations. The facts of the case were not “material facts” requiring disclosure. The litigation was not relevant to the prospective franchisee, and did not involve allegations of unfair or deceptive business practices and did not involve the alleged breach of franchise laws.

The Court of Appeal clarified that determining whether litigation must be disclosed is a “question of fact determined on a case-by-case basis.” No bright-line rule can be articulated. Franchisors should periodically review with their franchise counsel whether disclosure documents should be updated to list outstanding litigation, or whether references to litigation that is not material can be omitted.

A copy of the Court of Appeal’s decision, called Caffé Demetre Franchising Corp. v. 2249027 Ontario Inc., can be found here.