Photo of Sam KhajeeiBy Sam KhajeeiJune 26 2019
Business Law

Good Faith Disclosure: Some Relief for Franchisors

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The decision of the Ontario Superior Court of Justice in 2101516 Ontario Inc. et al. v. Radisson Hotels Canada Inc.(2019 ONSC 3302) is likely to be welcomed by franchisors across the country. In this decision, the Court ruled that a franchisee cannot claim for misrepresentation under section 7 of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, C.3 (the Act) if the misrepresentation is contained in a disclosure document that the franchisor was not obligated to deliver to the franchisee pursuant to the Act.

2101516 Ontario Inc. along with certain other guarantors (collectively, the Franchisees) purchased a "Country Inn & Suites" brand hotel (the Franchise) that operated under license from Radisson Hotels Canada Inc. (Radisson) for approximately $8.35 million. In connection with the acquisition of the Franchise, Radisson delivered a financial disclosure document (FDD) to the Franchisees.

Subsequent to the acquisition of the Franchise, the Franchisees stopped paying their required royalty fees to Radisson and sought to rescind their agreement with Radisson and claim for damages on the basis that the FDD contained deficiencies and misrepresentations.

The dispute was first referred to arbitration. The arbitrator determined that, under the Act, Radisson was exempt from providing a disclosure document to the Franchisees. Section 5(7)(h) of the Act exempts disclosure when the prospective franchisee invests at least $5 million or more in the acquisition and operation of the franchise over a one year period.

At trial, the Franchisees sought to persuade the Court that an action for misrepresentation in a disclosure document under the Act applies to all disclosure given to a franchisee and not just those which are required to be provided under the Act.

The Court disagreed and evaluated the underlying policy rationale for the exemptions to disclosure set forth in the Act. In particular, the Court found that one of the key rationales for requiring disclosure is to correct the inequality in bargaining power between franchisor and franchisee and that the exemptions related to instances where such inequality may not actually exist. Since section 5(7)(h) of the Act, for example, reflects complex multi-million dollar commercial transactions that involve commercially sophisticated franchisees, there is unlikely to be an inequality in bargaining power in these transactions. The Court found that the broad interpretation suggested by the Franchisees would be contrary to the purpose of the Act. By making the right to damages under the Act available to commercially sophisticated franchisees who neither require, nor are entitled to the assistance of section 5 of the Act, the Court would be undermining the policy rationale of the Act.

The Court further held that section 7 of the Act, which deals with damages for misrepresentation, only extends the right to compensation to a franchisee for losses suffered as a result of a misrepresentation contained in a disclosure document the franchisor is obliged to provide to the franchisee under section 5 of the Act.

In practice, this decision provides franchisors with greater comfort when providing disclosure documents to franchisees in good faith and in circumstances where the applicable franchise legislation does not require such disclosure. Disclosure documents customarily contain disclaimer language along the lines of the following:

"…If you reside in a Disclosure Province but are subject to an exemption or exclusion under the applicable Act from the entitlement to receive a Disclosure Document, then we have provided this Disclosure Document to you for informational purposes only, and on a voluntary basis, and on the understanding that you will not be relying in any way on the information and/or documents contained in this Disclosure Document that is regulated by one of the Acts and which otherwise does not apply to you when making a decision to proceed with the acquisition of a Franchise and to execute a Franchise Agreement (as defined herein)…"

The decision of the Court serves to reinforce the intent of the disclaimer language above.

Invitation for Discussion:

If you would like to discuss this article in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the Business Law group at Nerland Lindsey LLP.

Disclaimer:

Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.

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