Decision clarifies rescission notice under AWA

A recent decision provides both franchisees and franchisors with some clarity on what constitutes notice of rescission under the Arthur Wishart Act (Franchise Disclosure), 2000 (AWA), says Toronto civil litigator Stephany Mandin, who acted for the successful plaintiffs in the case.

Mandin, principal of Mandin Law, and co-counsel Steven H. Goldman, a partner at Goldman Hine LLP, successfully convinced the judge that a claim in a pleading that was drafted by their clients’ previous counsel did not meet the threshold for statutory notice under the AWA.

“I think the decision was sound because it properly delineates the common law right of rescission from the much more sweeping and onerous statutory right of rescission,” she tells while noting that the ruling has been appealed.

“A claim of rescission in a pleading puts a franchisor defendant on notice that there is litigation, and it defines the causes of action, whereas a statutory notice of rescission is arguably intended to prevent litigation by putting the franchisor on formal notice that it has 60 days to compensate the franchisee in accordance with s. 6 of the AWA,” Mandin says. “Only after that 60-day period has elapsed does the legal cause of action crystallize.”

She explains that the AWA, like franchise legislation in other provinces, requires franchisors to deliver a disclosure document to potential franchisees at least 14 days before signing any binding agreement or payment of money.

Late or incomplete disclosure entitles franchisees to rescission within 60 days after receiving disclosure under s. 6(1) of the Act, but if the disclosure is “materially deficient,” as is alleged in this case, existing jurisprudence dictates that it will be treated as if no disclosure was made at all, giving franchisees a full two years from the date of the franchise agreement to seek rescission under s. 6(2) of the AWA, Mandin says.

Once notice of rescission is delivered, the clock begins ticking on the 60-day deadline under s. 6(2) of the AWA for franchisors to comply with their financial obligations under s. 6(6), which effectively put franchisees back in the position they were in before an agreement was signed.

“Franchisees are essentially fully compensated for any money paid to the franchisor and for all losses acquired in setting up and operating the franchise,” Mandin says.

Because of the extraordinary nature of the statutory right of rescission, fairness dictates that franchisors are given adequate time to respond and adhere to their statutory obligations, she adds.

The judge in the case agreed, using the “absurd result,” as he put it, of allowing a pleading to act as notice of statutory rescission, to illustrate the reason for his decision.

“A franchisee could sue the franchisor in a claim for rescission without the franchisor being given anytime to comply with what the legislature says it must do,” the judge wrote. “This would not be fair to the franchisor. This would also undermine the legislative framework set up under section 6 of the Wishart Act.”

The case has its roots in a burger restaurant franchise bought by the franchisee in late 2012. The franchise failed within months, and the franchisee was faced with a claim from the bank over a loan default.

As part of the franchisee’s defence to the bank’s claim, its previous counsel advanced a third-party claim against the franchisor, claiming a statutory right of rescission for inadequate disclosure — the only rescission notice ever delivered in the case, she says.

Mandin and Goldman were ultimately retained to pursue a solicitor’s negligence claim against the franchisee’s former lawyer, but she explains that each strand of the litigation was jammed up by the unresolved question of whether notice of rescission was ever provided pursuant to s. 6 of the AWA.

That resulted in the odd sight of the franchisee and franchisor taking the same position before a motion judge in opposition to the franchisee’s former counsel, who argued that the pleadings in his third-party claim met the notice requirements of the AWA, she says.

“Typically, franchisees and franchisors are on opposite sides, but in this motion, our interests were aligned,” Mandin says.

Ruling that the third-party claim did not constitute a proper notice of rescission under the AWA, the judge concluded that the franchisee’s former lawyer had tried to “repurpose” the pleadings he drafted into something they were never intended to be, “in a rather transparent attempt to avoid liability.”