COURT OF APPEAL FOR ONTARIO

CITATION: 2611707 Ontario Inc. v. Freshly Squeezed Franchise Juice Corporation, 2022 ONCA 437

DATE: 20220603

DOCKET: C69366

Gillese, Trotter and Harvison Young JJ.A.

BETWEEN

2611707 Ontario Inc. and Bernard Yeboah

Applicants (Respondents)

and

Freshly Squeezed Franchise Juice Corporation and Talal Samadi

Respondents (Appellants)

Jonathan Kulathungam and Nipuni Panamaldeniya, for the appellants

Adrienne Boudreau and Daniel Hamson, for the respondents

Heard: May 26, 2022

On appeal from the judgment of Justice Susan Vella of the Superior Court of Justice, dated March 26, 2021, with reasons at 2021 ONSC 2323.

REASONS FOR DECISION

[1] The respondent franchisees successfully applied to rescind a franchise agreement with the appellant franchisors. The application judge concluded that the appellants provided a materially deficient franchise disclosure document (“FDD”). Accordingly, the respondents could validly rescind the franchise agreement under section 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3, because they had entered into the agreement without the ability to make a properly informed investment decision.

[2] The appellants submit that the application judge erred in reaching each finding of material deficiency. More generally, they argue that she erred in finding that the test for assessing material deficiencies pursuant to s. 6(2) is to be assessed objectively rather than subjectively.

[3] For the following reasons, the appeal is dismissed.

Facts

[4] Mr. Yeboah, the sole officer and director of the franchisee 2611707 Ontario Inc., met with the sole officer and director of the franchisor, Freshly Squeezed, after seeing an advertisement for the sale of a Freshly Squeezed franchise in a hospital food court. Mr. Yeboah visited the location in December 2017 and the parties entered into a franchise agreement in January 2018. The appellants delivered the FDD at issue in this appeal on December 18, 2017.

[5] On September 10, 2018, after just over three months of operation, the respondents served a notice of rescission on the appellants, alleging material non-disclosure in the franchise agreement under s. 6(2) of the Act. They followed with an updated notice in January 2020.

[6] The application judge agreed with the respondents and declared the agreement validly rescinded. She found that the respondents’ FDD was deficient to the point of non-disclosure in three areas. First, the financial statements did not include explanatory notes. Second, the appellant failed to disclose that they had not yet entered into a head lease or whether the respondents would have the benefit of an escape clause should the terms of the head lease be unacceptable. Third, the appellants failed to advise the respondents that the franchise was their first non-mall location.

[7] The application judge concluded that, viewing the disclosure objectively within the case’s factual matrix, the appellants failed to provide the information necessary to allow the respondents to make an informed investment decision. The disclosure was thus tantamount to the non-delivery of an effective FDD within the meaning of s. 6(2) of the Act.

[8] Further, the application judge awarded the respondents $306,581 in statutory compensation under s. 6(6) for the return of money paid to the franchisor and the purchase of supplies and equipment. She directed that a Master hear a reference for the quantum of Mr. Yeboah’s unpaid labour.

Analysis

[9] The central question in this appeal is whether the franchise agreement was validly rescinded. To justify a rescission under s. 6(2) of the Act, the franchisor’s FDD must be “so deficient as to effectively amount to a complete lack of disclosure”: Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62, 419 D.L.R. (4th) 53, at para. 47 (emphasis in original).

[10] Not every franchisee receiving imperfect disclosure will be able to validly rescind its agreement. Section 6(2) is engaged only where the deficient disclosure prevents the franchisee from making an informed decision about whether or not to invest in the franchise. Such materially deficient disclosure is treated as non-disclosure pursuant to s. 6(2) of the Act as interpreted by the case law: Raibex, at para. 49.

[11] 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.

[12] The appellants say that the application judge correctly noted that the franchisee must show that the disclosure was so deficient that it was tantamount to non-disclosure. However, having recognized this onus, she erroneously determined that the respondents did not need to submit evidence of actual impairment of its ability to make informed decisions. They urge this court to set aside all three of the application judge’s findings of material non-disclosure.

[13] We disagree. In Mendoza v. Active Tire & Auto Inc., 2017 ONCA 471, 414 D.L.R. (4th) 676, leave to appeal refused, [2017] S.C.C.A. No. 405, this court affirmed the objective nature of the test for a valid rescission. There, Feldman J.A. wrote, at para. 26, that a franchisor’s “obligations do not change depending on the actions or reactions of a particular franchisee.” The s. 6(2) test 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.

[14] Accordingly, the application judge did not err in determining that the respondents had met the test for a valid rescission without evidence of actual impairment.

[15] Moreover, we do not agree with the submission of the appellants that the application judge erred by finding that the disclosure deficiencies justified rescission in this case. Having applied the correct test, her determination that the deficiencies were material is entitled to deference absent palpable and overriding error.

[16] First, the application judge determined that the appellants’ failure to include the notes to the financial statement was a material deficiency. These notes were necessary to allow the respondents to assess the financial health of the franchise system. For example, the financial statement referenced notes concerning accounts receivables and customer’s deposits. The former represents about 73% of the appellants’ assets while the latter amounted to 60% of their liabilities. We see no error in the application judge’s conclusion on this point.

[17] Nor can we identify an error in the application judge’s finding that the appellants’ failure to disclose a negotiated agreement to lease and the absence of a head lease prevented the respondents from making an informed investment. In particular, the respondents were not advised that the landlord could terminate the head lease without compensation if the decision was made to demolish or redevelop the franchise’s location.

[18] Further, the franchise agreement did not permit the respondents to back out of the lease should its terms be unacceptable. We see no error in the application judge’s finding that the appellants’ failure to disclose their negotiated agreement to lease and the absence of a headlease obscured the respondents’ degree of risk and, therefore, prevented an informed investment.

[19] Finally, the application judge concluded that the appellants failed to disclose that the franchise was the first to be located outside of a mall, and that this failure rendered the FDD essentially worthless.

[20] The respondents could arguably have determined that the franchise was the first in a non-mall setting based on the information they had received. However, the Act imposes an obligation on the franchisor, not the franchisee. The appellants were duty-bound to inform the respondents that they were essentially test-driving the franchise in a non-mall setting. Their failure to do so caused the respondents to unknowingly invest in a business model with no track record of success. We see no error on the part of the application judge on this point.

[21] Consequently, we see no basis to interfere with the application judge’s analysis. Even in light of the high threshold for rescission under s. 6(2) of the Act, the application judge made the necessary findings of fact, applied the correct test, and reached a determination amply available on this record.

Disposition

[22] The appeal is dismissed. Costs are awarded to the respondents at $20,000 inclusive of disbursement and HST.

“E.E. Gillese J.A.”

“Gary Trotter J.A.”

“A. Harvison Young J.A.”