Focus On

FRANCHISING - Franchisor disclosure - Disclosure requirements - Remedies - Rescission

Tuesday, July 25, 2017 @ 8:26 AM  

Lexis Advance® Quicklaw®
Appeal by Mendoza and his company from the dismissal of their summary judgment application to rescind a franchise agreement. Mendoza purchased an Active Tire franchise in June 2015, after months of negotiations. He was not an experienced purchaser. In the months leading up to the purchase, Mendoza received from Active Tire documents and information relating to the purchase, as well as its assistance in retaining an accounting firm to prepare a financial plan with positive projections, upon which the appellants relied in making the decision to purchase the franchise. The appellants also retained a financial and legal firm at the request of the bank from which they borrowed funds for the purchase and obtained a line of credit. Mendoza did not operate the franchise successfully in the months following the purchase. He also experienced physical and mental health problems during that time. He decided to rescind the purchase agreement in August 2015, taking the position that Active Tire never provided the required disclosure document. Before the motion judge, the appellants focused on the following deficiencies in the disclosure document: 1) the fact that it was signed by only one officer or director of Active Tire, as opposed to two, as required by the Regulations; 2) Active Tire’s failure to provide audited financial statements; 3) Active Tire’s failure to provide the disclosure document at one time; 4) the fact that the letter of credit did not conform with the disclosure document; and 5)Active Tire’s failure to disclose the required assumptions and information as part of the financial projections. The judge accepted that the disclosure document was deficient, but found that overall, Active Tire provided sufficient documentation to permit Mendoza to make an informed decision about whether or not to enter into the franchise agreement, and that the deficiencies were neither significant nor misleading.

HELD: Appeal allowed. The deficiencies in Active Tire’s disclosure, particularly the absence of the required second signature and the lack of compliant financial statements, were significant and misleading, and were fatal to the ability of the purported disclosure document to be a disclosure document within the meaning of the Arthur Wishart Act (Act). The motion judge inappropriately discounted Active Tire’s failure to provide two signatures on the basis that Mendoza had met most of the directors and had information about their backgrounds in the disclosure document. This reasoning missed the point of s. 7(1)(e) of the Act, which gave the franchisee substantive rights in damages against the directors and officers who signed the document. Those who signed the disclosure document were personally responsible for the accuracy and sufficiency of the contents of the disclosure document, and that responsibility was backed up by personal liability to the franchisee. Mendoza was never provided with financials for the most recent fiscal year, and had to rely on 2013 statements in deciding whether or not to purchase the franchise. The motion judge erred in finding that Mendoza was precluded from relying on the deficiencies in the disclosure document because he acknowledged he had not read the entire document. Active Tire had statutory duties with respect to disclosure that were not conditional on what Mendoza did with the disclosure. What was provided to the appellants did not meet the definition of a disclosure document within the meaning of the Act. Mendoza’s entitlement to rescind the franchise agreement arose from Active Tire’s failure to fulfill its disclosure obligations, therefore it did not matter that his motivation was the less-than satisfactory performance of the franchise.

Mendoza v. Active Tire & Auto Centre Inc., [2017] O.J. No. 2964, Ontario Court of Appeal, K.N. Feldman, E.A. Cronk and B. Miller JJ.A., June 8, 2017. Digest No. TLD-July242017005