6792341 Canada Inc. et al. v. Dollar It Limited et al.

[Indexed as: 6792341 Canada Inc. v. Dollar It Ltd.]

95 O.R. (3d) 291

Court of Appeal for Ontario,

Gillese, MacFarland and LaForme JJ.A.

May 8, 2009

Contracts -- Franchise agreement -- Rescission -- Disclosure -- Franchisor providing incomplete disclosure statement to franchisee -- Disclosure statement not enabling franchisee to make informed decision to enter into franchise agreement -- Franchisor Certificate in disclosure document not signed or dated -- Inadequate disclosure amounting to no disclosure --Franchisee having two years to rescind agreement under s. 6(2) of Arthur Wishart Act (Franchise Disclosure) -- Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3, s. 6.

The applicants entered into various agreements with the respondents for the purpose of obtaining a franchise. The business was not successful and the applicants served the franchisor with a notice of rescission pursuant to s. 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000. Taking the position that the respondents had not made the disclosure mandated by the Act, the applicants applied for declaratory relief acknowledging their right to rescind the franchise agreement and related agreements and for the refund of invested moneys. The application judge accepted that disclosure was incomplete, but found that the disclosure document was not "void ab initio". He concluded that, as it could not be said that the franchisor had "never provided the disclosure document", the applicants did not have the right to rescind the agreement within two years under s. 6(2) of the Act, that they were restricted to the 60-day window for rescission under s. 6(1) of the Act and that the purported rescission was out of time. The applicants appealed.

Held, the appeal should be allowed.

The application judge's interpretation of s. 6 of the Act would defeat the entire purpose of the Act, which is to protect the interests of franchisees. The applicants were not provided with a document that enabled them to make an informed decision to enter into the franchise agreement. While the disclosure document contained what purported to be a "Franchisor Certificate", that document was neither dated nor signed. The absence of a signed and dated Certificate was enough, in itself, to support a conclusion that the disclosure mandated by the Act was not provided and that the applicants had two years to rescind the agreement under s. 6(2) of the Act. Furthermore, the respondents made no financial disclosure as required by the Act. The applicants were required to enter a sub-lease with an affiliate of the franchisor. In the circumstances, the head lease was a material document and should have been disclosed. The sub-landlord met the definition of franchisor's associate and the franchisor had an obligation to disclose information about the sub-landlord. There was no description in the disclosure document of the actual territory to be granted, contrary to s. 6(12) and (13) of O. Reg. 581/00. No description of the franchisor's policy on proximity between franchisees was provided. A document does not become a disclosure document for the purposes of the Act just because it is called a disclosure document. Given the many material deficiencies in this case, the franchisor never provided the disclosure document within the meaning of s. 6(2). The applicants had the right to rescind the franchise and related agreements when they did. [page292]

APPEAL from the judgment of McLean J. of the Superior Court of Justice dated June 18, 2008 dismissing an application for a declaration that the applicants had the right to rescind the franchise agreement and related relief.

Cases referred to Hi Hotel Ltd. Partnership v. Holiday Hospitality Franchising Inc., [2008] A.J. No. 892, 2008 ABCA 276, [2009] 3 W.W.R. 219, 99 Alta. L.R. (4th) 1, 296 D.L.R. (4th) 335, 437 A.R. 225, 168 A.C.W.S. (3d) 304, affg [2007] A.J. No. 1465, 2007 ABQB 686, 85 Alta. L.R. (4th) 93, 436 A.R. 185, [2008] 4 W.W.R. 316, 165 A.C.W.S. (3d) 70, apld Other cases referred to 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd., 2005 CanLII 25181 (ON CA), [2005] O.J. No. 3040, 256 D.L.R. (4th) 451, 201 O.A.C. 95, 7 B.L.R. (4th) 1, 141 A.C.W.S. (3d) 741 (C.A.); 1518628 Ontario Inc. v. Tutor Time Learning Centres LLC, [2006] O.J. No. 3011, 2006 CanLII 25276, 150 A.C.W.S. (3d) 93 (S.C.J.); 6862829 Canada Ltd. v. Dollar It Ltd., 2008 CanLII 60699 (ON SC), [2008] O.J. No. 4687 (S.C.J.); Personal Service Coffee Corp. v. Beer (c.o.b. Elite Coffee Newcastle), 2005 CanLII 25180 (ON CA), [2005] O.J. No. 3043, 256 D.L.R. (4th) 466, 200 O.A.C. 282, 141 A.C.W.S. (3d) 410 (C.A.)

Statutes referred to Franchises Act, R.S.A. 2000, c. F-23, ss. 4, 9, (1)(b), 13 Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3, ss. 1, 5, (2), (4), 6, (1), (2), 7, (1)(e)

Rules and regulations referred to Franchises Regulation, Alta. Reg. 240/1995, s. 2, (4) General Regulation, O. Reg. 581/00, Parts II, III, ss. 2 [as am.], 3, 6, (6), (8), (12), (13), 7

Julie Audet, for appellants. Allan R. O'Brien, for respondents.

The judgment of the court was delivered by

[1] MACFARLAND J.A.: -- This is an appeal from the order of McLean J. dated June 18, 2008, wherein he dismissed the appellants' application for certain relief under the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the "Act"). This appeal raises for consideration the interpretation of ss. 6(1) and 6(2) of the Act.

Overview

[2] On June 24, 2007, the appellants entered into various agreements with the defendants for the purpose of obtaining a franchise agreement to operate a Dollar It store in the City of Ottawa.

[3] From the outset, the business was not successful and on February 6, 2008, the appellants served the franchisor with a notice of rescission pursuant to s. 6(2) of the Act. The appellants took the position that the respondents had not made the [page293] disclosure mandated by the Act. They brought an application for certain declaratory relief acknowledging their right to rescind the franchise and related agreements and for the refund of invested moneys.

[4] The application judge in brief reasons, concluded that the disclosure document given when considered "as a whole it is in compliance with the requirements under section 5 of the Act" and dismissed their application.

[5] In my view, the application judge erred in concluding that the respondents had met the disclosure obligation required of them under the Act. For the reasons that follow, I would allow the appeal, set aside the order and direct that an order issue in accordance with these reasons.

Facts

[6] The appellants entered into a franchise agreement and various ancillary and related agreements with the respondents on June 24, 2007. Prior to entering these agreements, the respondents provided the appellants with a disclosure document in purported compliance with s. 5 of the Act. The disclosure document was delivered May 31, 2007. In addition to the disclosure document, the respondents provided "generic" copies of the Dollar It Franchise Agreement, the Indemnity Agreement, the General Security Agreement and the sub-lease.

[7] There is little dispute that the disclosure document was missing required information and did not meet specific requirements of either s. 5 of the Act or the regulations.

[8] The dispute between the parties centres on the interpretation to be given to s. 6 of the Act.

[9] The appellants take the position that the disclosure provided was so deficient as to amount to no disclosure, thus permitting them to avail themselves of the two-year window provided in s. 6(2) of the Act in which to rescind the franchise and related agreements.

[10] The respondents, on the other hand, take the position that having provided a disclosure document, albeit one that was missing some required information, they have complied with s. 5 of the Act. Accordingly, if the appellants wished to rescind the franchise and related agreements, the only opportunity to have done so was within the 60-day window provided by s. 6(1) of the Act. On this view, the purported rescission was out of time as it was served some eight months after the disclosure documents had been provided. [page294]

Analysis

[11] The application judge concluded, in para. 3 of his reasons:

. . . the only way the Applicants' claim could succeed is if the Court found that the disclosure document was void ab initio. For otherwise s. 6(1) would apply and the request for rescission would be barred under the Act 60 days after the delivery of the document.

and further, at paras. 5 and 6:

Here, however, there was one disclosure document given. It seems that when we consider the matter as a whole it is in compliance with the requirements under s. 5 of the Act. However, even if that were not the case, the court does not find that the want of compliance would in any way void this document ab initio. It may well give a right to damages because of its incompleteness and any misrepresentations. However, with regard to s. 6(2) it would have to be void ab initio for that limitation period to have effect.

Clearly, it was the legislature's view that if the franchise transaction was completed without a disclosure document, then there is a 2-year limitation period within which rescission could be requested. However, the argument to consider that this disclosure being void ab initio as requested is simply not consistent with the Act. The only reason it is argued by the Applicants that the disclosure should be considered a cause of avoidance is simply put as being its want of compliance with s. 5 of the Act. However, this very situation is contemplated in s. 6(1) of the Act wherein there is a 60-day rescission period after the delivery of a non-compliant document.

[12] In my view, if the application judge's interpretation is permitted to stand, it would defeat the entire purpose of the Act which is to protect the interests of franchisees.

[13] The analysis must begin with a consideration of the purpose of the legislation. As this court noted in Personal Service Coffee Corp. v. Beer (c.o.b. Elite Coffee Newcastle), 2005 CanLII 25180 (ON CA), [2005] O.J. No. 3043, 256 D.L.R. (4th) 466 (C.A.), at para. 28:

It is clear, therefore, that the focus of the Act is on protecting the interests of franchisees. The mechanism for doing so is the imposition of rigorous disclosure requirements and strict penalties for non-compliance. For that reason, any suggestion that these disclosure requirements or the penalties imposed for non-disclosure should be narrowly construed, must be met with skepticism.

[14] Paragraph 3 of the appellants' factum lists the information and documentation missing from the disclosure document as follows:

(a) a completed and duly signed certificate certifying that the disclosure document was complete and accurate;

(b) financial statements or a balance sheet; [page295]

(c) details of, or a copy of, any offer to lease or lease between the respondent Shikar Properties Inc. (the franchisee's sub-landlord) and the owner (Head Landlord);

(d) information on the respondent Shikar Properties Inc. (which is a company related to the franchisor);

(e) prescribed statements pertaining to the advertisement fund and contributions thereto;

(f) description of the actual territory to be granted;

(g) prescribed description of the franchisor's policy on proximity between franchisees etc.;

(h) description of license, registration, authorization or other permission required to be obtained to operate the franchise; and

(i) description regarding volume rebates etc.

[15] The respondents do not dispute that some of this information and documentation was not part of the disclosure document. They concede some pieces were missing, but say that others were not required to be disclosed and yet others were substantially -- if not entirely -- disclosed. Paragraph 4 of the respondents' factum contains their response to the deficiencies complained of by the appellants and outlined above. Their explanations are as follows:

(a) The respondents provided this certificate but did not sign it.

(b) Dollar It was still in its first year of business when it entered into the franchise agreements. Therefore it was only obligated to provide its opening balance sheet. The disclosure document did not provide the opening balance sheet.

(c) The regulations do not require the disclosure of this lease and it was not a material fact. In any event the terms of the so-called "Head Lease" are identical to those in the sublease executed by the appellants.

(d) The Appellants submit that Shikar Properties Inc. is a "franchisor's associate" under the Act. Even if that is true, the Regulations do not require disclosure of information about franchisor's associate, but instead only require that the particular information disclosed be about the franchisor and any associates (for example, whether the franchisor and associates have applied for bankruptcy within the last six years).

(e) The Disclosure document contained statements on the advertising fund. The Disclosure document did not contain information about the percentage of the fund that would be spent nationally because Dollar It only operates in Ontario and therefore there is no national advertising. The Disclosure document states that franchisees are required to contribute 1% of gross sales for advertising.

(f) The respondents concede that this information is missing from the Disclosure document and was instead contained in the Franchise Agreement. Instead, the Disclosure document stated that the exclusive territory would "generally" be a 1 km radius. [page296]

(g) Dollar It has no such policy.

(h) The respondents admit that this information was missing.

(i) Dollar It does not have any rebates for volume purchases, and the Disclosure document specifically states that "we generally do not provide material benefits ... to franchisees based on use of designated or approved suppliers".

[16] Disclosure under the Act is not optional. A franchisor is mandated to provide a prospective franchisee with a disclosure document -- one document -- delivered as required by s. 5(2) -- as one document at one time. The content of the disclosure document is mandated by s. 5(4) of the Act and Part II of the regulations passed pursuant to the Act, O. Reg. 581/ 00. As this court noted in 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd., 2005 CanLII 25181 (ON CA), [2005] O.J. No. 3040, 256 D.L.R. (4th) 451 (C.A.), at para. 16:

One of the prime purposes of the Act is to obligate a franchisor to make full and accurate disclosure to a potential franchisee so that the latter can make a properly informed decision about whether or not to invest in a franchise.

[17] When key information is missing, a properly informed decision is not possible. Section 5(4) provides:

5(4) The disclosure document shall contain: (a) all material facts, including material facts prescribed; (b) financial statements as prescribed; (c) copies of all proposed franchise agreements and other agreements relating to the franchise to be signed by the franchisee; (d) statements as prescribed for the purposes of assisting the prospective franchisee in making informed investment decisions; and (e) other information and copies of documents as prescribed.

[18] In addition to s. 5, Parts II and III of O. Reg. 581/00 detail the disclosure requirements set out in s. 5.

[19] The rescission remedy is set out in s. 6 of the Act.

6(1) A franchisee may rescind the franchise agreement, without penalty or obligation, no later than 60 days after receiving the disclosure document, if the franchisor failed to provide the disclosure document or a statement of material change within the time required by section 5 or if the contents of the disclosure document did not meet the requirements of section 5.

(2) A franchisee may rescind the franchise agreement, without penalty or obligation, no later than two years after entering into the franchise agreement if the franchisor never provided the disclosure document.

[20] The application judge considered s. 6(1) to be a complete answer to the problem here raised. He accepted that the disclosure document did not comply with s. 5 and because that situation [page297] was specifically contemplated by the language of s. 6(1) of the Act, any rescission must be within 60 days of receipt of the disclosure document. Therefore, although applicant's purported rescission was well within the two years of s. 6(2), it was well beyond the 60 days contemplated by subsection (1) and according to the trial judge, ineligible for rescission under the Act. I disgree. Upon a closer examination of the missing and incomplete information in question, it becomes clear that the appellants were not provided with a document that enabled them to make an informed decision to enter into the franchise agreement.

Missing Documents/Information

(a) The certificate

[21] While s. 18 of the disclosure document purported to be a "Franchisor Certificate", that document was neither dated nor signed.

[22] The importance of the Certificate has been considered in a recent decision of the Alberta Court of Queen's Bench, Hi Hotel Ltd. Partnership v. Holiday Hospitality Franchising Inc., 2007 ABQB 686, [2007] A.J. No. 1465, 436 A.R. 185 (Q.B.), [^1] at para. 133:

Again an important reason for the statutory requirement that the Certificate of Franchisor be signed by at least 2 officers or directors of the franchisor is that if the disclosure document contains any material inaccuracies, the franchisee has two individuals to sue.

and, at para. 143:

I conclude that an unsigned and undated document does not meet the requirement that it must be signed and dated. In my view the Certificates of Franchisor are a nullity and as such an essential element and requirement of the disclosure document was not provided. The production of signed and dated Certificate of Franchisor was a substantive requirement of the disclosure document. The disclosure document provided was not substantially complete.

[23] The court concluded in that case that the statutory right of rescission had been properly exercised. In Hi Hotel, the franchise agreement had been entered into in June 2004 and the notice of rescission served May 2005.

[24] Section 13 of the Alberta legislation [^2] is different from s. 6 of the Ontario Statute. It provides: [page298]

13. If a franchisor fails to give a prospective franchisee the disclosure document by the time referred to in s. 4, the prospective franchisee may rescind all the franchise agreements by giving notice of cancellation to the franchisor or its associate, as the case may be, (a) no later than 60 days after receiving the disclosure document, or (b) no later than 2 years after the franchisee is granted the franchise,

whichever occurs first.

[25] While the language differs from s. 6 of the Act, it is not entirely dissimilar. There was no question in Hi Hotel that a disclosure document was provided within the s. 4 [^3] time parameters.

[26] The Alberta legislation differs from that of Ontario in that it appears to authorize "substantial compliance" in relation to a franchisor's obligation of disclosure. Section 2(4) of the Alberta Regulation, Alta. Reg. 240/995 provides:

2(4) A disclosure document is properly given for the purposes of s. 13 of the Act if the document is substantially complete.

[27] There is no similar provision in Ontario -- either in the legislation or in the regulations. In Hi Hotel, the issue boiled down to whether the inclusion of an undated, unsigned certificate included in the disclosure document amounted to substantial compliance with the disclosure obligations mandated by the Act.

[28] Section 2 of the Alta. Reg. 240/1995 is not unlike s. 7 of the O. Reg. 581/00 in that each section requires a signed and dated certificate to be included in the disclosure document. The Alberta court noted in Hi Hotel that one of the reasons for requiring the certificate to be included in the terms mandated by the legislation was to enable a franchisee to take advantage of s. 9 of the Alberta Act, which provides:

9(1) If a franchisee suffers a loss because of a misrepresentation contained in a disclosure document, the franchisee has a right of action for damages against any or all of the following: (a) the franchisor; (b) every person who signed the disclosure document.

[29] A similar provision is found in s. 7 of the Ontario Act. In Ontario, the provision reads:

7(1) If a franchisee suffers a loss because of a misrepresentation contained in the disclosure document or in a statement of material change or as a result of the franchisor's failure to comply in any way with s. 5, the franchisee has a right of action for damages against, [page299] (a) the franchisor; (b) the franchisor's agent; (c) the franchisor's broker, being a person other than the franchisor, franchisor's associate, franchisor's agent or franchisee, who grants, markets or otherwise offers to grant a franchise, or who arranges for the grant of a franchise; (d) the franchisor's associate; and (e) every person who signed the disclosure document or statement of material change.

[30] It is argued that the fact that this section provides a right of action in damages to a franchisee where a franchisor has, in the language of the statute, "failed to comply in any way with s. 5" reinforces the argument that where the disclosure document does not meet the requirements of s. 5, rescission is not an option once 60 days from the signing of the agreement has passed.

[31] In my view, s. 7 merely provides additional remedies to a franchisee, rights in addition to the rescission rights contained in s. 6.

[32] The addition of this provision in s. 7 -- which is not part of the Alberta legislation -- does not, in my view, in any way diminish or render less persuasive the conclusion of the Alberta court's decision in Hi Hotel. In that case, the mere absence of a signed and dated certificate was enough to permit the franchisee to rescind the franchise agreement. I agree with that decision and would find in the circumstances here, that the failure to include the mandated certificate alone would be enough to conclude that there was not disclosure as required by the Act. That being the case, the franchisee, in my view, was entitled to rescind the franchise and related agreements as it did in February 2008.

(b) Financial statements

[33] The certificate, however, was not the only required document not included in the disclosure document. Exhibit E of the disclosure document is entitled "Dollar It Limited Financial Statements" and it is a blank page. The importance of financial disclosure is underscored by the fact that specific reference is made to financial statements in s. 5 of the Act in addition to the detailed requirements set out in s. 3 of the O. Reg. 581/00.

[34] The respondents concede that no financial disclosure was made. They point out that because the franchisor was in its first year of operation, when the franchise agreement was signed it [page300] was only obliged to provide its opening balance sheet, and while that is true, no opening balance sheet was provided.

[35] When one considers that the purpose of disclosure is to enable a prospective franchisee to make an informed decision about whether or not to invest in a franchise, [^4] financial disclosure is of the utmost importance. In relation to this disclosure obligation, the respondents' actions in no way resembled "substantial" compliance. There was a complete failure on their part to make disclosure as required by the Act.

(c) The lease

[36] The respondents argue that there was no obligation to produce the head lease; neither the regulations nor the Act require its production and it is not a material fact. I disagree. The appellants were required to enter a sub-lease, not with the franchisor, Dollar It Limited, but with Shikar Properties Inc., described in the lease as the sub-landlord. In the sub-lease, Dollar It Limited is described as "an affiliate of the Sub-Landlord". As one reads through the sub-lease, from time to time reference is made to Shikar Properties Inc. as the franchisor [^5] and/or a party to the franchise agreement.

[37] In my view, it would be important that the franchisee be able to satisfy itself that Shikar Properties Inc. had the right to enter into the sub-lease. It could only do that by examining the terms of the head lease.

[38] In addition, para. 10 of the sub-lease provides:

ASSUMPTION OF OBLIGATIONS UNDER LEASE BY SUB-TENANT

The sub-tenant hereby accepts all the terms, covenants, conditions and obligations in the Head Lease, as agreed and negotiated by the Sub-Landlord with the Landlord and assumes and agrees to perform, abide by and be bound by all of the terms, covenants, conditions and obligations of the Sub- Landlord as Tenant contained in the Head Lease including the obligation to pay the Minimum Basic Rent to the Landlord in accordance with Section 3 above. The Sub-Tenant shall execute such additional documents as may be required by the Sub-Landlord, the Franchisor or the Landlord to give effect to the terms hereof. Notwithstanding the foregoing, in the event of the bankruptcy or insolvency of the Sub-Tenant, the Sub-Landlord agrees to assume all the terms, covenants, conditions and obligations of the Tenant under the Head Lease. [page301]

And para. 11 provides:

SUB-TENANT ACKNOWLEDGEMENT

The Sub-Tenant acknowledges that it has received and has had ample time to read, and has read this Sublease. The Sub- Tenant further acknowledges that it has had an opportunity to be advised by advisors of it's [sic] own choosing regarding all pertinent aspects of this Sublease and the Offer/Head Lease. The Sub-Tenant further acknowledges that it has received a) a copy of the Offer/Head Lease and is familiar with the terms, covenants and conditions contained therein.

[39] How, I ask rhetorically, could the franchisee, who is the sub-tenant under the sub-lease, ever comply with its acknowledgement obligation without receiving a copy of the head lease? It is expected to accept all of the terms and obligations of the head lease and to be bound by them. In my view, to suggest, in these circumstances, that the head lease is not material and that there is no obligation to disclose it under the Act is absurd. It is obviously material and required to be disclosed.

(d) Information on the respondent Shikar Properties Inc.

[40] The respondents agree that even if Shikar Properties Inc. is a franchisor's associate (as that term is defined in the Act), the regulations do not require disclosure of information about franchisors' associates, but instead only require that the particular information disclosed be about the franchisor and any associates. [^6] As noted above, Shikar Properties Inc. is the franchisee's landlord. It is the tenant under a head lease with the owner of the property which it sub-leases to the franchisee and is the location from which the franchisee will operate its franchise.

[41] Section 1 of the Act defines "franchisor's associate" in the following terms:

"franchisor's associate" means a person (a) who, directly or indirectly, (i) controls or is controlled by the franchisor, or (ii) is controlled by another person who also controls, directly or indirectly, the franchisor, and (b) who, (i) is directly involved in the grant of the franchise, [page302] (A) by being involved in reviewing or approving the grant of the franchise, or (B) by making 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, or (ii) exercises significant operational control over the franchisee and to whom the franchisee has a continuing financial obligation in respect of the franchise [.];

[42] In my view, Shikar Properties Inc. as sub-landlord meets the definition of franchisor's associate. It is controlled by Shane Merali, as is the franchisor, Dollar It Limited. Mr. Merali signed documents on behalf of both the franchisor, the franchise agreement, the purchase and sale agreement and also signed the sub-lease on behalf of Shikar Properties Inc. Clearly as sub-landlord, in my view, Shikar as the franchisee's landlord exercises significant operational control over the franchisee and the franchisee has a continuing financial obligation to it for rental payments for the property from where the franchise is run.

[43] It seems to me, in the circumstances here, where Shikar is referenced in the sub-lease as the franchisor as well as the sub-landlord, the obligation to disclose arises. The Act mandates disclosure of all material facts, including those prescribed. The definition of material fact is a broad one:

"material fact" includes any information about the business, operations, capital or control of the franchisor or franchisor's associate, or about the franchise system, that would reasonably be expected to have significant effect on the value or price of the franchise to be granted or the decision to acquire the franchise; . . .

[44] By having no information about Shikar Properties Inc., the franchisee cannot make an informed decision in relation to the franchise. It knows nothing about the party with which it is expected to sign a sub-lease and the obligations of whom it is required to assume under a head lease that it has never seen.

[45] The bold statements contained in s. 2 of the disclosure document do not begin to address what is required under Part II, s. 2 of O. Reg. 581/00.

(e) Statements pertaining to the advertisement fund and contributions thereto

[46] The information contained in the disclosure document is sparse. A table entitled "Fees and Other Costs" found at p. 7 of the disclosure document contains an entry for "Advertising [page303] Contribution" and the amount stated is one per cent of gross sales. At p. 11 of the document, under the title "Training and Other Assistance", there is a section entitled "Advertising", which reads as follows:

We have an advertising fund, and you have to participate in a local regional advertising co-operative. We have an advertising Council. We may periodically place advertising on behalf of our entire system including franchisees. When we do so, we ordinarily use an independent advertising agency and place the advertising locally, regionally or nationally depending on the nature of the advertising. (Emphasis added)

[47] While the respondents argue that the disclosure document did not contain information about the percentage of the fund that would be spent nationally because Dollar It only operates in Ontario and therefore there is no national advertising, the general statement set out above clearly contemplates advertising at the national level in addition to local and regional advertising.

[48] The requirements set out in s. 6(6) of O. Reg. 581/00 are detailed and specific and are nowhere close to being met in the respondents' document.

[49] There is no information about the percentage of the fund spent on national or local advertising campaigns preceding the date of the disclosure document. [^7] Similarly, there is no information on the percentage of the fund retained by the franchisor. Nor is there anywhere another statement stating the projected amount of the contribution, a projection of the percentage of the fund to be spent on national or local advertising campaigns for the current fiscal year, nor any projection of the percentage of the fund to be retained by the franchisor. There is no indication of whether reports on advertising activities financed by the fund will be made available to the franchisees. All of this information is required under s. 6(6) of O. Reg. 581/00 as part of the disclosure document.

(f) Description of the actual territory to be granted

[50] The respondents concede this information is not contained in the disclosure document. They say it was contained in the franchise agreement which, I note, was not part of the disclosure document, but rather was sent along with it to the appellants. [page304]

[51] Section 10 of the disclosure document provides:

TERRITORIAL RIGHTS

You will receive a territory that will be specifically described in the Franchise Agreement. Typically, the territory is designated by specifying boundary streets, highways, community boundaries, or county lines, generally or in a 1km radius.

As long as you achieve stated annual levels as described in the Franchise Agreement and Schedule A to the Franchise Agreement, DI will not operate, or grant any other person the right to operate a Dollar It business within your territory.

Except as described above, you do not need to achieve a certain sales volume, market penetration or other contingency. Your territory may only be modified by written agreement between you and us.

[52] Obviously this statement does not meet the requirements of subsections 12 and 13 of s. 6 of O. Reg. 581/00, which provide:

6(12) A description of any exclusive territory granted to the franchisee; (13) If the franchise agreement grants the franchisee rights to exclusive territory, a description of the franchisor's policy, if any, as to whether the continuation of the franchisee's rights to exclusive territory depends on the franchisee achieving a specific level of sales, market penetration or other condition and under what circumstances these rights may be altered.

[53] The description of the territory is required to be in the disclosure document and the obligation is not met by putting it in the franchise agreement where that document is not part of the disclosure document. The opening language of s. 6 of the Regulation is important. It provides:

6. For the purposes of clause 5(4)(a) of the Act, every disclosure shall include the following presented together in one part of the document. . .

[54] There follows the list which include items 12 and 13 quoted above. The Act requires that the disclosure be contained in one document delivered at one time. As this court noted in Dig This Garden, at para. 18:

The requirement that disclosure occur in the form of a single document is not an empty formal requirement. The legislature clearly envisioned that the purpose of the legislation -- i.e., ensuring that a decision to enter into a franchise agreement is an informed one -- would best be fulfilled by giving prospective franchisees the opportunity to review a single document or documents so that all the information is before them at the same time. It is simple common sense that people have more difficulty processing and assessing information given at different times, some of it orally, than they do information provided in a single, written document.

[55] It is not enough to meet this requirement to simply send with the disclosure document, the franchise or other related [page305] agreements where the required information is found and reference those agreements.

[56] The legislation requires that the information be "presented together in one part of the document". Again, I say, the purpose is obvious. The important financial and other key information should be located together in one part of one document to enable a reader to clearly grasp what is required and to avoid the confusion and difficulty that may arise where reference must be had to numerous other documents where the information may be located.

[57] The object of the disclosure exercise is to enable potential franchisees to make informed decisions by having available for review in accurate, clear and concise form all of the material information about the franchise and those involved in its operation.

[58] To say that required information is found elsewhere in other documents does not, in my view, meet the obligation to include required information in the disclosure document.

(g) The failure to provide a description of the franchisor's policy on proximity between franchisees

[59] The respondents in response to this alleged failure say Dollar It has no such policy.

[60] Yet the disclosure documents states that the franchisee will be given a territory ". . . generally in a 1km radius . . ." and that as long as stated annual levels are maintained, Dollar It will not operate or grant any other person the right to operate a Dollar It business within the franchisee's territory.

[61] Schedule B to the franchise agreement describes "territory" as follows:

The "Territory" shall be the following territory: The area within three (3) kilometer [sic] of the St. Joseph Market Plaza municipally known as 1887 St. Joseph Blvd., in the City of Ottawa, in the province of Ontario.

[62] If there were no policy on the proximity between franchisees, there would be no reason to grant any exclusive territory. Furthermore, if there were no such policy then the disclosure document should say so and it does not. Again the disclosure requirements were not met.

(h) Description of licence, registration authorization or other permission required to be obtained to operate the franchise

[63] The respondents concede this information is missing from the disclosed document. [page306]

(i) Description regarding volume rebates

[64] The respondents argue that Dollar It does not have any rebates for volume purchases and that the disclosure document specifically states that "[w]e generally do not provide material benefits . . . to franchisees based on use of designated or approved suppliers".

[65] Section 6(8) of O. Reg. 581/00 requires:

6(8) A description of the franchisor's policy, if any, regarding volume rebates, and whether or not the franchisor or the franchisor's associate receives a rebate, commission, payment or other benefit as result of purchases of goods and services by a franchisee and, if so, whether rebates, commissions, payments or other benefits are shared with franchisees, either directly or indirectly.

[66] Section 6 of the disclosure document, entitled "Restrictions on Sources and Sales of Products and Services", contains the sub-heading "A. Restrictions on Sources of Products and Services" that provides:

We may offer to sell you miscellaneous supplies that you may be required to purchase.

We generally do not provide material benefits (eg. renewal or additional franchises) to franchisees based on use of designated or approved suppliers.

[67] It seems to me, on a reading of the whole paragraph, that the reference to "material benefits" did not relate to volume rebates. Again, the disclosure document does not meet the requirements of the Act.

[68] In my view, the foregoing review of the deficiencies of this disclosure document makes it crystal clear that there was not disclosure as required by the Act. There is simply no way anyone reviewing this disclosure document could make an informed decision about whether or not to invest in this franchise.

[69] That being the case, it is necessary to consider the language of the statute to determine whether or not rescission is available to the appellants in all the circumstances.

[70] The application judge concluded that because a disclosure document had been delivered, albeit one that was not in compliance with s. 5 of the Act, the appellants could only look to s. 6(1) for relief. The 60 days since their receipt of the disclosure document long having passed, the application judge dismissed the application for a declaration that the appellants were entitled to rescind the franchise and related agreements.

[71] The section bears repeating:

6(1) A franchisee may rescind the franchise agreement, without penalty or obligation, no later than 60 days after receiving the disclosure document, if the franchisor failed to provide the disclosure document or a statement of [page307] material change within the time required by s. 5 of if the contents of the disclosure document did not meet the requirements of s. 5.

(2) A franchisee may rescind that franchise agreement, without penalty or obligation, no later than two years after entering into the franchise agreement if the franchisor never provided the disclosure document.

[72] The purpose of the legislation is to protect franchisees and the mechanism for so doing is the imposition of rigorous disclosure requirements and strict penalties for non- compliance. The legislation must be considered and interpreted in light of this purpose.

[73] In 1518628 Ontario Inc. v. Tutor Time Learning Centres LLC, [2006] O.J. No. 3011, 2006 CanLII 25276 (S.C.J.), Cumming J. considered s. 6(1) and (2). In that case, a U.S. franchisor provided the United States version of a uniform franchise offering circular ("UFOC") for information purposes to a prospective Canadian franchisee. The arguments of the franchisor in Tutor Time were similar to those offered here. Beginning at para. 67, the court noted [at paras. 67-73]:

TTLC submits the delivery of the U.S. UFOC activates the rescission provisions of s. 6(1), but not s. 6(2). Section 6(1) provides that when a disclosure document is provided late or is incomplete in terms of contents then rescission can be involved within a 60 day period (i.e. by January 26, 2004 in the instant situation). The notice of rescission was not delivered until October 23, 2004.

Section 6(2) of the Act provides:

(2) A franchisee may rescind the franchise agreement, without penalty or obligation, no later than two years after entering into the franchise agreement if the franchisor never provided the disclosure document.

When a franchisor "never provided the disclosure document", s. 6(2) applies, with the right to rescind being within two years after entering the franchise agreement. 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd., [2004] O.J. No. 3008 (S.C.J.) at para. 19, aff'd 2005 CanLII 25181 (ON CA), [2005] O.J. No. 3040 (C.A.).

Did TTLC provide a disclosure document within the meaning of s. 5 which was simply incomplete and therefore, s. 6(1) rather than s. 6(2) is operative?

The U.S. UFOC does provide much of the information required of an Ontario UFOC. However, the U.S. UFOC was expressly not provided for disclosure purposes by TTLC, but rather simply for "informational" purposes and was provided only a few days before the transaction was completed, being December 1, 2003. The US UFOC did not provide the material facts pertinent to the Burlington franchise (set forth in the two Site Visit reports of Ms. Soper to TTLC). In my view, this non- disclosure of material facts in itself meant there was not compliance with the Act as to the required disclosure.

In my view, for the reasons given, the U.S. UFOC did not meet the disclosure requirements mandated by the Act and the Regulations. [page308]

Even though the U.S. UFOC would provide some of the information required by an Ontario UFOC, in my view, given the circumstances of this case, TTLC "never provided the disclosure document" within the meaning of s. 6(2).

[74] Similarly, in this case the stark and material deficiencies in the disclosure document in this case do not meet the requirements of the Act. A document does not become a disclosure document for the purposes of the Act just because it is called a disclosure document. Put another way, calling something a disclosure document doesn't make it one.

[75] On the application judge's reasoning, the provision of any document purporting to be a disclosure document would meet the s. 6(2) requirement. No matter how deficient that document was, a franchisee would only have the right to rescind for 60 days after receipt of that document. This cannot be the intent of the legislation. Such an interpretation would lead to absurdity.

[76] Here the deficiencies were material and they were many. In such circumstances, the only reasonable conclusion is that the franchisor never provided the disclosure document within the meaning of s. 6(2). Accordingly, the franchisees in the instant case had the right to rescind the franchise and related agreements when they did.

[77] A similar result was reached in a recent decision by Linhares De Sousa J. in 6862829 Canada Ltd. v. Dollar It Ltd., 2008 CanLII 60699 (ON SC), [2008] O.J. No. 4687 (S.C.J.), which decision considered the same disclosure document that is the subject of the instant case. At paras. 64 and 65 of the judgment, the trial judge noted:

A disclosure document may be given in one document, at one time and on time. If such a disclosure document substantially provides all of the material information but may have a deficiency in a minor non-material detail then it would be an absurd result to conclude that such a disclosure document should be considered as no disclosure ever having been given. . . .

On the other hand, it would not be "an absurd result", given the purpose of the Act, to conclude that a disclosure document, although given in one document, at one time and on time but which lacks material information to the franchise agreement, can be considered as no disclosure ever having been given.

[78] I agree with and endorse these observations, acknowledging of course that each case will fall to be considered on its own particular facts.

[79] For the foregoing reasons, I would allow the appeal and the order of the application judge is set aside. In its place, I [page309] would make an order as sought by the appellants declaring that the appellants had the right to rescind the franchise agreement without penalty or obligation when they did.

[80] If the parties are unable to agree on the related and incidental relief sought by the appellants, those matters should be returned to the Superior Court.

[81] The appellants are entitled to their costs of the appeal fixed in the sum of $8,000 and their costs below fixed in the sum of $10,000, both sums inclusive of disbursements and GST.

Appeal allowed.

Notes

[^1]: Since affirmed by the Alberta Court of Appeal, 2008 ABCA 276, [2008] A.J. No. 892, 437 A.R. 225 (C.A.).

[^2]: See s. 7(1)(e) of the Ontario legislation and s. 9(1)(b) of the Alberta Franchises Act, R.S.A. 2000, c. F-23.

[^3]: Of the Alberta Franchises Act.

[^4]: See Dig This Garden, at para. 16.

[^5]: See para. 2, paras. 5.3, 7.4.1.

[^6]: For example, whether the franchisor and associates have applied for bankruptcy within the last six years.

[^7]: I note that the undated, unsigned certificate makes it impossible to know the date of the disclosure document.