Ontario Court of Appeal narrows franchisor obligation to disclose litigation in Caffé Demetre case

A recent decision by the Ontario Court of Appeal¹ has narrowed the circumstances under which litigation involving a franchisor may constitute a “material fact” for the purposes of disclosure obligations under the Arthur Wishart Act.²

The appeal arose from a summary judgment motion³ in which the defendant franchisee’s counterclaim for rescission of a franchise agreement was denied on the basis that three of four alleged disclosure omissions were not actual disclosure deficiencies.⁴ The fourth alleged deficiency — the failure of the franchisor to disclose the existence of litigation by the franchisor against a competitor — was found by the motions judge to constitute a disclosure omission, but one that did not rise to the level of a deficiency entitling the franchisee to rescission for failure to provide a disclosure document.⁵ 

The motion decision was notable at the time, in part because it was an instance in which the court’s newly expanded ability to grant summary judgment (following the Supreme Court of Canada’s ruling in Hryniak v Mauldin⁶) was applied in a franchise case, and in part because it suggested that failure to disclose the existence of litigation commenced by the franchisor against a competitor to protect the brand could give rise to a claim for rescission by the franchisee.

The general Regulation under the Act requires that the franchisor’s disclosure document must include:

A statement, including a description of details, indicating whether the franchisor...has been found liable in a civil action of misrepresentation, unfair or deceptive business practices or violating a law that regulates franchises or businesses, including a failure to provide proper disclosure to a franchisee, or if a civil action involving such allegations is pending against the person.⁷

The Regulation focuses on litigation commenced against the franchisor, not by the franchisor. 

The franchisee argued that failure to disclose the existence of such litigation amounted to a failure to disclose a “material fact” within the meaning of the Act (which includes information that “that would reasonably be expected to have a significant effect on the value or price of the franchise to be granted or the decision to acquire the franchise”)⁸ and entitled the franchisee to exercise its right of rescission under s.6(2) of the Act.

The motions judge found, as summarized by the Court of Appeal, “any litigation involving a franchisor amounts to a material fact – no matter what the nature and circumstances of the litigation might be.”⁹ However, the motion judge disagreed that the disclosure omission was sufficient to allow rescission under s.6(2) of the Act.

The Court of Appeal’s decision retreats from this position and confirms that not just “any litigation involving a franchisor” will amount to a “material fact,” but leaves open the possibility that litigation other than the type defined in Regulation s.2(5) may constitute a material fact under the right circumstances:

Ongoing or prospective litigation involving the franchisor is not, by definition, a material fact. Of course, the litigation must be disclosed if it falls within the description contained in s. 2(5) of the regulations. But if the litigation in issue does not fall within that description, then whether it is a material fact, as contemplated by the Act, will be a question of fact determined on a case-by-case basis. Because the analysis is highly fact-specific, no bright-line rule can be articulated.¹⁰

In sum, the Court’s decision removes the presumption that failure to disclose litigation commenced by a franchisor will entitle a franchisee to rescind the franchise agreement, but franchisors should still weigh carefully a decision not to disclose information about cases they have commenced.  As always, they should ask themselves whether the information, if shared, might reasonably make franchisees think twice about investing or affect their view of the price.