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Ask the Experts: Franchisees’ rescission rights
http://www.azfranchising.com/ask-the-experts-franchisees-rescission-rights/
By Steven H. Goldman
Q: What are franchisees’ statutory rights
to rescission (i.e. termination of the franchise agreement) across Canada?
Steven says:
The five provinces that currently have franchise legislation in force (Alberta, Manitoba, Ontario, New Brunswick and Prince Edward Island) and British Columbia, which recently passed its own legislation that will come into force sometime this year, require franchisors to provide extensive disclosure to prospective franchisees of material facts relating to themselves, their franchise systems, their associates and the specific franchise being purchased. If the franchisor fails to comply with its disclosure obligations, there are powerful legal remedies, including rescission.
A rescission claim enables the franchisee to (a) terminate the franchise agreement—broadly defined to include related agreements between franchisor and franchisee, such as a lease, sub-lease or guarantee—and (b) return to the same financial position he/she was in before entering the franchise agreement, by way of compensation.
Generally, any disclosure document that does not meet the statutory requirement—i.e. to provide the details necessary for the prospective franchisee to make a fully informed decision with respect to purchasing the franchise—allows the franchisee in turn to exercise a statutory right of rescission within 30 to 60 days (depending on the province) of receiving that document from the franchisor. And if the franchisor fails to deliver any disclosure document at all, the right of rescission is granted for two years after entering the franchise agreement. (It is worth noting Canadian courts have increasingly defined a disclosure document with material deficiencies as no disclosure at all, thereby broadening the availability of the two-year rescission remedy.)
Along with the franchisor, the franchisor’s associates—i.e. parties involved in the granting of the franchise—may be held jointly and severally liable for damages related to a rescission claim. Associates could include companies related to the franchisor, anyone involved in the review or granting of the franchise, anyone who made representations on behalf of the franchisor and/or anyone who otherwise offered the grant to the franchisee.
Q: What can franchisees recover in financial compensation when exercising their right to rescission?
Steven says:
As mentioned, the rescission remedy aims to restore the franchisee to his/her previous financial position, which may involve recovering significant financial compensation from the franchisor and its associates.
In Alberta, for example, the franchisor must compensate the franchisee for ‘net’ losses incurred in acquiring, setting up and operating the franchise within 30 days of the effective date of rescission. In other provinces with franchise legislation, the franchisor has 60 days to make specific payments refunding the franchisee for ‘any’ losses incurred in acquiring, setting up and operating the franchise, including money paid to the franchisor and all costs associated with purchasing inventory, supplies and equipment specified in the franchise agreement.
Q: Why would franchisees exercise the right to rescission?
Steven says:
After purchasing a franchise, the franchisee may encounter problems in operating the business. Examples could include: discovering the business is not as profitable or successful as originally believed or represented by the franchisor or its associates; suffering ongoing financial losses; learning financial obligations were not properly disclosed; and discovering the franchisor did not disclose material information that would have dissuaded the franchisee from purchasing the franchise at all. In these circumstances, it is understandable why the franchisee may wish to exercise the right of rescission.
Any franchisee who experiences such problems should seek legal advice as soon as possible from a lawyer with experience in franchise legislation, to avoid losing any potential right of rescission due to the strict time limits and to benefit from technical expertise with regard to the availability, quantification and enforceability of rescission rights.
Steven H. Goldman is a partner and franchise litigation lawyer with Goldman Hine LLP in Toronto. For more information, contact him at (416) 867-9100 or via e-mail at s.goldman@goldmanhine.com.
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