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Can a Franchisee Rescind an Agreement if a Disclousre Statement is Deficient?

 

February 16, 2018

 

The Short Answer:

 

Under the Arthur Wishart Act (the “Act”), franchisors have an obligation to provide a prospective franchisee a complete disclosure statement prior to the execution of any agreements.  Failure to provide a disclosure statement or where a deficient disclosure statement is provided would allow the franchisee to rescind the franchise agreement and recover money paid to the franchisor.  Mendoza v. Active Tire & Auto Inc. (“Mendoza”) is just the most recent Court of Appeal decision upholding these principles.

 

The Case:

 

In Mendoza, the franchisor delivered a disclosure statement which had a number of alleged deficiencies, including:  an absence of signatures of two directors or officers in the certificate and the provision of financial statements that were not of the most recent financial year.  With respect to financial statements, under the Act, the franchisor is allowed to deliver an old financial statement as long as the date of delivery is within 180 days of the franchisor’s financial year end.  The franchisor in this case delivered the old financial statements two weeks after the expiry of the 180 day grace period.

 

The Court’s Analysis:

 

Both of these deficiencies were found to be significant.  Since those who sign the certificate are personally liable for the accuracy and sufficiency of the disclosure statement, the missing signature was found to be clearly material.  Although the franchisor delivered old financial statements that were only two weeks overdue the statutory grace period, this was still a breach of its obligations that could not be condoned.  Accordingly, the Court allowed rescission of the franchise agreement.

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