Technical Requirements of Franchise Disclosure Legislation

Originally published in the Canadian Business Franchise magazine on February 5, 2013

Q: How strict are Canada’s courts in interpreting and enforcing the technical requirements of franchise disclosure legislation?

A: When it comes to the actual requirements for the content of disclosure documents, the courts have been very strict. Franchise legislation in the five provinces that have enacted such legislation—Alberta, Manitoba, Ontario, New Brunswick and Prince Edward Island—mandates that certain information and documents must be included and the disclosure document must be provided to a franchisee in a certain manner and by a certain time.

If a franchisor delivers a disclosure document that is deficient or lacks certain information or supporting documents, the franchisee generally has a period of 60 days from delivery of the document to rescind the franchise. If the franchisor does not deliver a disclosure document at all, the time permitted for rescission is two years from (a) the date on which the franchisee first paid any money to the franchisor or (b) the date on which the franchisee entered the franchise agreement, whichever is earlier.

In some cases where a disclosure document has been delivered, but is so deficient in terms of its content or is missing key documents—such as financial statements, copies of agreements the franchisee is required to sign or a signed certificate of disclosure—the courts have stated the franchisor, in essence, did not deliver a disclosure document at all. So, they have allowed the franchisee the full two-year period to exercise the right of rescission.

Technical details
In a leading case decided by the Alberta Court of Appeal involving a hotel franchise, the court held a franchisee was entitled to rescind a franchise agreement for a two-year period after entering it, in circumstances where a disclosure document was delivered with a certificate of disclosure in required form, but the certificate of disclosure was not signed by the two officers whose names appeared on it. The court stated the legislation in Alberta required the certificate to be signed and, without the signatures, the franchisee would have been deprived of the right to sue the officers directly. The court held it did not have any discretion under the legislation to allow a disclosure document that did not have a signed certificate of disclosure to satisfy the required form, even though the franchisee did receive the actual form of disclosure document and had the benefit of its contents.

When it comes to some of the technical details regarding the delivery of a disclosure document, most franchise lawyers have generally assumed the courts will be equally vigilant in enforcing the mandatory requirements of franchise legislation. All Canadian franchise legislation—except the most recently passed legislation in Manitoba—requires a disclosure document to be one document, delivered as one document at one time. While the provinces differ somewhat as to how a disclosure document is to be delivered, they all specify their methods of permitted delivery.

Document delivery
So, what happens if a franchisor delivers a disclosure document that is compliant with the content requirements of the legislation, but is not delivered as required under that same legislation? This has become not just a technical problem for franchisors, but also a practical problem, because franchise disclosure documents are large, running into hundreds of pages once all of the agreements required to be signed and the financial statements are included. Personal delivery and registered mail are the two most common methods permitted in each province.

While delivery by registered mail is allowed, it is for the most part impossible, because Canada Post will not accept a registered mail package for delivery if the contents weigh more than 500 g (16 oz).

While Manitoba, Prince Edward Island and New Brunswick will allow disclosure documents to be delivered by e-mail, their requirements in this regard are somewhat complex. Simply e-mailing the document will not be satisfactory.

Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 states a disclosure document must be delivered personally, by registered mail or by any other prescribed means. To date, however, no other means have been prescribed. Since registered mail is not really an option, this means personal delivery is, in effect, the only permitted means.

Even though personal delivery can be difficult and costly, particularly to reach franchisees based in remote areas, most franchisors will not risk a claim of rescission by delivering the disclosure document through some other means.

A recent case in Ontario, however, has considered the issue and, to the surprise of most franchisors and franchise lawyers, determined otherwise. While it is a good, practical result, this decision has left the franchise community wondering how far the courts will go in bending the mandatory requirements of franchise legislation.

Electronic, but not late
In Vijh v. Mediterranean Franchise Inc., the Ontario Superior Court of Justice determined, based on the facts of the case, that section 5(2) of the Arthur Wishart Act relates to the question of what happens if the franchisor delivers a disclosure document by e-mail with the franchisee’s consent. Could the franchisee, after waiting almost two years, rescind the agreement under section 6(2) of the Arthur Wishart Act and recover costs and damages, simply because of the improper delivery method—or would the franchisee be restricted to the damages remedy provided under section 7(1)?

In every other respect, both sides agreed the franchisor had fully complied with the disclosure requirements set out in that legislation. The only deficiency was the method of delivery.

With the franchisee’s consent, the franchisor had delivered the disclosure document by e-mail, rather than via registered mail or personal delivery as prescribed in the legislation. The franchisee, having operated the franchise for almost two years, now wanted rescission and damages. The court concluded that rescission under section 6(2) of the Arthur Wishart Act, simply because the disclosure document was delivered by e-mail, was not available to the franchisee.

The franchisee submitted that any breach of the Act that relates in any way to a disclosure document—including a breach regarding the method of delivery, however minor—should allow rescission under section 6(2), even if almost two years have gone by.

The court did not agree with this submission, stating this interpretation of section 6(2) did not make sense, given the plain language and the other sections of the Act dealing with disclosure and the obvious legislative intent to provide two routes for rescission:

● A 60-day right of rescission if a disclosure document was provided late (i.e. after the 14-day requirement) or lacked some of the required content; and

● A two-year right of rescission if no disclosure document was ever provided.

(The Act also provided a damages remedy under section 7(1) for breach of any of the disclosure document requirements.)

“If the franchisee’s interpretation of section 6(2) is right (i.e. the franchisee may rescind for up to two years for any breach of the Act, however minor) then why have section 6(1)?” the court asked, referring to the 60-day period. “Why differentiate between the 60-day rescission right for late or incomplete delivery of the disclosure document and the two-year rescission right for no delivery? The reason, surely, is to make clear the two-year rescission right is reserved for the much more serious situation where no disclosure document is provided.”

The court relied on earlier decisions, which held the two-year right of rescission is only available where there is “a complete failure to provide a disclosure document” or where the disclosure document provided was “materially deficient,” but not where it was “merely late.”

By the same reasoning, the two-year right of rescission is not available where a complete disclosure document was provided, as in this instance, but by e-mail, rather than registered mail. If a breach of the timing or content requirements allows only a 60-day right of rescission under section 6(1), then a breach of the method of delivery requirement, which by any measure is much less significant, cannot sensibly justify a two-year right of rescission under section 6(2).

The court therefore limited the franchisee to the damages remedy in section 7(1). Counsel for the franchisor suggested the only damage sustained by the franchisee was the cost of printing the e-mailed disclosure document. The court stated, “He may well be right.”

The court dismissed the franchisee’s case and awarded costs in favour of the franchisor.

What to take from this case
This court decision does not yield any general principle suggesting delivery of a disclosure document by e-mail is an acceptable practice in Ontario. Rather, two clear factors influenced the court.

First, the parties agreed, for the purposes of this case, the contents of the disclosure document were fully compliant with the legislation. The case was only about the method of delivery.

Second, the franchisee had agreed to have the document delivered by e-mail. The court looked rather skeptically at the result that would have occurred had the franchisee been entitled to rescind the franchise it had already operated for two years, just because the document had been delivered by a method not specifically permitted in the legislation, when the franchisee had consented to this method.

However, to keep within the framework of the Act, the court essentially said that proper remedy should have been rescission within 60 days, as opposed to two years. So, franchisors should not take comfort in delivering disclosure documents in Ontario by e-mail, because they will likely still be exposed to a 60-day rescission claim by a franchisee, assuming the contents of the document are not materially deficient.

This will certainly lead to further confusion.