By Stephanie Sugar, McCarthy Tétrault LLP

The Court of Appeal’s analysis in its 2018 decision in Raibex Canada Ltd. v. ASWR Franchising Corp[1] subsequently sparked a debate as to whether the legal tests and onus had shifted in undertaking an evaluation of adequacy of disclosure. The Court of Appeal’s conclusions suggested that consideration of the franchisee’s subjective knowledge and ability to make an informed investment decision was the new locus of the analysis. This issue has been litigated in a number of cases since 2018, and recently the Court of Appeal has weighed in on this debate in the recent decisions of 2483038 Ontario Inc. v. 2082100 Ontario Inc.,[2] and 2611707 Ontario Inc. v. Freshly Squeezed Franchise.[3]

The first instance decision in Raibex was released in 2016 and caused a significant rift in the interpretation and application of franchise legislation. The issue in the case was whether there had been materially deficient disclosure. Among other sub-issues advanced, the franchise agreement was signed without a determined location, and, therefore, without a head lease. The franchisor and franchisee identified a mutually acceptable location, the franchisee had the ability to walk away from the deal, and the franchisee had decided to sign the lease and proceed.  The motions judge held that disclosure was materially deficient because the head lease was not included, and held that if all of the material facts are not known (such as the location or specifics about costs), “the franchisor must wait”.[4] The decision was quite at odds with the practical realities of many practices in setting up franchises, and the franchise community was left in a certain state of purgatory waiting to determine whether the decision would stand.

The Court of Appeal unanimously reversed the decision, holding that the motions judge had made a legal error by concluding that the absence of a certain type of document automatically meant that the disclosure was inadequate and rescission was justified without considering the factual circumstances. The Court of Appeal held that the determination of whether disclosure was adequate must be undertaken “with a view to all relevant circumstancesbearing on whether the franchisee can make a properly informed decision about whether or not to invest.”[5] The Court concluded on the facts of the specific case, that the franchisee had sufficient information and was provided with sufficient contractual safeguards that were a “complete answer” to the failure to disclose the head lease, and that “[t]he absence of that information had little impact on the Franchisee’s ability to make an informed investment decision.”[6] The question then arose as to whether the standard for determining the adequacy of disclosure has shifted, and if the franchisee had an obligation to prove that it was not able to make an informed decision.

Two cases that directly debated the question of whether Raibex changed the law were Freshly Squeezed and 2483038 Ontario Inc. v. 2082100 Ontario Inc. (“Fit for Life”).  In Freshly Squeezed the franchise business was juice retail outlets. The franchisee’s location was in a hospital in Toronto, and was the first location in the franchise that was a “non-mall” location. Disclosure was provided in December 2017, and the franchise agreement was signed in January of 2018, with operations commencing in March of that year. The franchisee ceased operating just a few months later in September 2018, and delivered a notice of rescission. In its application, the franchisee claimed the disclosure had four fatal flaws: (1) the certificate was not signed by two officers; (2) the financial disclosure was incomplete; (3) there was no disclosure of the fact the franchisor had not entered into a head lease; and (4) disclosure was piecemeal. Noted in the Superior Court’s judgment was the fact that both parties “rely heavily” on Raibex. The franchisee argued Raibex maintained the status quo, and the franchisor argued that the determination of whether the franchisee was able to make an informed investment decision had shifted and required the franchisee “to put forth evidence demonstrating that his ability to make an informed investment decision was actually impaired.”[7] The Court rejected the franchisor’s argument, and found that imposing such an obligation and standard would “be inconsistent with the objective of this consumer protection-oriented legislation”.[8]

The Court went on to consider the four alleged deficiencies, and found that the disclosure was materially deficient in failing to provide complete financial statements,[9] the failures to provide disclosure about the head lease,[10] and that there was a failure to disclose what the Court held was a material fact that this was the first non-mall location.[11]

The Court of Appeal agreed with the Application Judge’s analysis and unanimously dismissed the franchisor’s appeal.[12] The Court of Appeal identified the issue of principle that was the subject of the appeal as being whether the standard against which sufficiency of disclosure is measured ought to be subjective or objective:

Before this court, the appellants argue that the application judge erred in her conclusion on all three instances of non-disclosure. The heart of their appeal, however, is their submission that the application judge erred in law by failing to apply a subjective test to the question of whether the information provided impaired the franchisee’s ability to make an informed decision. They submit that the test for a valid rescission requires evidence that the material deficiencies genuinely impaired the particular franchisee’s ability to make an informed investment.[13]

The Court of Appeal rejected the argument that the test should be subjective and that the franchisee has an onus to demonstrate actual impairment. Citing back to the Court’s prior decision in Mendoza v. Active Tire & Auto Inc.,[14] the Court held that the test for whether there has been adequate disclosure, “focuses on the disclosure itself, not its recipient, because the Act seeks to ensure that the franchisor provides the same disclosure to every potential franchisee.”[15] Of particular practical importance, the Court of Appeal agreed that the fact this was the first non-mall setting was a “material fact” within the scope of the legislative definition. The Court held that the franchisor was “duty-bound to inform the respondents that they were essentially test-driving the franchise in a non-mall setting.”[16] The failure to disclose this fact amounted to having the franchisee “unknowingly invest in a business model with no track record of success.”[17]

Less than a week later, the Court of Appeal released its decision in 2483038 Ontario Inc. v. 2082100 Ontario Inc.[18] which dealt with the franchised business of Fit for Life restaurants. The only issue of non-disclosure in this case was the failure of the franchisor to include a signed certificate in the disclosure document.[19] The franchisor’s officer and principal had signed the disclosure document at the beginning, but had not executed on a signature line on the actual certificate. The franchisor argued that this deficiency did not prevent the plaintiffs from making an informed investment decision and was a “purely technical argument”.

Again, the case directly debated whether the decision in Raibex imported a requirement on a franchisee to demonstrate they were unable to make an informed investment decision.[20] The trial judge held there was no such requirement, and that to impose that standard on the franchisee would undermine the objectives of the legislation. The trial judge concluded that there is “nothing in the Raibex decision that explicitly or implicitly overrules the decisions in earlier cases in which the Court of Appeal and this court have said that a deficient disclosure certificate can, on its own, be a fatal defect amounting to effective non-disclosure”.[21]

The Court of Appeal unanimously agreed:

The main issue in this appeal is whether the failure to certify the financial disclosure documents is enough for a court to find that there was substantially no disclosure such that rescission is possible within two years.

The short answer is yes. The trial judge was correct in both her analysis and conclusion.[22]

The Court of Appeal affirmed the trial judge’s analysis that imposing a requirement on the franchisee to prove at inability to make an informed investment decision would undermine the purpose of the legislation:

An important purpose of franchise disclosure certificates is that they attach personal liability to the signatories, which is intended to incentivize the signatories to ensure the contents of the disclosure documents are accurate. In this case, the trial judge found that this attachment of personal liability to signatories is a free-standing objective and is not tied to any impact on the recipient. I agree with this finding.[23]

The decisions provide important context and clarity on the Courts’ analysis and interpretation of the issues raised by Raibex. The standards of disclosure remain high, and it remains the obligation of the franchisor to satisfy them. However, Raibex remains a part of the analytical landscape, and the specific factual circumstances in any individual case must be examined and continue to be important (and perhaps ultimately determinative) in considering the sufficiency of disclosure.

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[1] Raibex Canada Ltd. v. ASWR Franchising Corp, 2016 ONSC 5575, rev’d 2018 ONCA 62.

[2] 2483038 Ontario Inc. v. 2082100 Ontario Inc., 2022 ONCA 453, aff’g 2020 ONSC 475

[3] 2611707 Ontario Inc. v. Freshly Squeezed Franchise, 2022 ONCA 437 aff’g 2021 ONSC 2323.

[4] Raibex Canada Ltd. v. ASWR Franchising Corp, 2016 ONSC 5575 at ¶75-78.

[5] Raibex Canada Ltd. v. ASWR Franchising Corp, 2018 ONCA 62 at ¶52.

[6] Raibex Canada Ltd. v. ASWR Franchising Corp, 2018 ONCA 62 at ¶53

[7] 2611707 Ontario Inc. v. Freshly Squeezed Franchise, 2021 ONSC 2323 at ¶41.

[8] 2611707 Ontario Inc. v. Freshly Squeezed Franchise, 2021 ONSC 2323 at ¶41.

[9] 2611707 Ontario Inc. v. Freshly Squeezed Franchise, 2021 ONSC 2323 at ¶55-65.

[10] 2611707 Ontario Inc. v. Freshly Squeezed Franchise, 2021 ONSC 2323 at ¶66-82

[11] 2611707 Ontario Inc. v. Freshly Squeezed Franchise, 2021 ONSC 2323at ¶89

[12] 2611707 Ontario Inc. v. Freshly Squeezed Franchise, 2022 ONCA 437.

[13] 2611707 Ontario Inc. v. Freshly Squeezed Franchise, 2022 ONCA 437 at ¶11.

[14] Mendoza v. Active Tire & Auto Inc., 2017 ONCA 471

[15] 2611707 Ontario Inc. v. Freshly Squeezed Franchise, 2022 ONCA 437 at ¶13.

[16] 2611707 Ontario Inc. v. Freshly Squeezed Franchise, 2022 ONCA 437 ¶ 20.

[17] Ibid.

[18] 2483038 Ontario Inc. v. 2082100 Ontario Inc., 2022 ONCA 453, aff’g 2020 ONSC 475

[19] 2483038 Ontario Inc. v. 2082100 Ontario Inc., 2020 ONSC 475at ¶16.

[20] 2483038 Ontario Inc. v. 2082100 Ontario Inc., 2020 ONSC 475at ¶34-37.

[21] 2483038 Ontario Inc. v. 2082100 Ontario Inc., 2020 ONSC 475at ¶40.

[22] 2483038 Ontario Inc. v. 2082100 Ontario Inc., 2022 ONCA 453 at ¶18-19.

[23] 2483038 Ontario Inc. v. 2082100 Ontario Inc., 2022 ONCA 453 at ¶21.