Introduction
Rescission is the most powerful remedy available to a franchisee under Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the "AWA"). When a franchisor fails to deliver a compliant franchise disclosure document, the franchisee has the statutory right to unwind the entire transaction — to walk away from the franchise, recover its investment, and be compensated for its losses.
This article provides a detailed analysis of the rescission rights under section 6 of the AWA: the two distinct rescission windows, the procedure for exercising rescission, the franchisor’s obligations upon receiving a rescission notice, what constitutes "deficient" disclosure, the relationship between rescission and damages claims, and practical considerations for both franchisors and franchisees.
The Two Rescission Windows
Section 6 of the AWA establishes two distinct rescission rights, each with its own trigger, timeline, and scope.
Section 6(1): 60-Day Rescission for Deficient Disclosure
Under section 6(1), a franchisee may rescind the franchise agreement — without penalty or obligation — by delivering a notice of rescission to the franchisor within 60 days after receiving the franchise disclosure document, if the FDD contains a misrepresentation or fails to comply with the requirements of section 5 of the Act in a material respect.
The 60-day clock begins to run on the date the franchisee receives the FDD, not the date the franchise agreement is signed. This distinction is important because the FDD must be delivered at least 14 days before signing, which means the rescission window may close as early as 46 days after the franchise agreement takes effect (assuming the FDD was delivered exactly 14 days before signing).
The section 6(1) rescission right is triggered by material non-compliance with the Act’s disclosure requirements. This includes misrepresentations of material facts, omission of prescribed disclosure items, failure to include the certificate of the franchisor, delivery of stale financial statements, incomplete franchisee lists, and failure to include copies of all agreements the franchisee will be required to sign.
Section 6(2): Two-Year Rescission for No Disclosure
Under section 6(2), if the franchisor never provided a FDD to the franchisee, the franchisee may rescind the franchise agreement within two years after entering into it. This is the broader rescission right and creates the most significant exposure for franchisors.
The critical interpretive question under section 6(2) is what constitutes "no disclosure." Courts have held that the provision is not limited to situations where the franchisor delivered literally nothing. In Raibex Canada Ltd v ASWR Franchising Corp, the court found that a FDD so deficient that it was tantamount to no disclosure could trigger the two-year rescission window rather than the 60-day window. This means that the boundary between "deficient disclosure" and "no disclosure" is not always clear, and a severely deficient FDD may be treated as no FDD at all.
Similarly, in 6792341 Canada Inc v Dollar It Ltd, the court examined the adequacy of disclosure provided and considered whether the deficiencies were serious enough to amount to no disclosure. These cases establish that the quality of the FDD matters: merely handing over a document labelled "Franchise Disclosure Document" does not necessarily satisfy the franchisor’s obligations.
How to Exercise Rescission
A franchisee exercises the right of rescission by delivering a written notice of rescission to the franchisor within the applicable time period. The notice must be in writing and should clearly state that the franchisee is exercising its right of rescission under section 6 of the AWA.
While the Act does not prescribe a particular form for the notice, best practice is to identify the franchise agreement being rescinded, specify the statutory basis for the rescission (section 6(1) or 6(2)), describe the deficiency or non-compliance relied upon, and confirm the franchisee’s demand for the statutory remedies. The notice should be delivered by a method that provides proof of delivery and receipt, such as registered mail or courier with tracking and confirmation of delivery.
Franchisor’s Obligations Upon Rescission
Section 6(6) of the AWA prescribes the franchisor’s obligations following a valid rescission. Within 60 days of the effective date of rescission, the franchisor must:
1. Refund to the franchisee any money received from or on behalf of the franchisee, other than money for goods or services the franchisee has received and used prior to rescission.
2. Purchase from the franchisee any supplies, equipment, and inventory that the franchisee purchased pursuant to the franchise agreement, at a price equal to the acquisition cost paid by the franchisee.
3. Compensate the franchisee for any net losses that the franchisee incurred in acquiring, setting up, and operating the franchise.
These obligations are substantial. The refund obligation encompasses the initial franchise fee, all ongoing royalties, and other payments. The repurchase obligation covers supplies, equipment, and inventory at the franchisee’s acquisition cost — not depreciated value. And the compensation for net losses may include lease obligations, employee severance costs, and other expenses incurred in connection with the franchise.
The franchisor cannot offset the compensation for net losses against the franchisee’s profits. If the franchisee operated at a net loss, the franchisor must compensate for that loss in addition to refunding fees and repurchasing assets. If the franchisee operated at a net profit, the franchisor’s refund and repurchase obligations are not reduced.
What Constitutes ’Deficient’ Disclosure?
Determining whether a FDD is sufficiently deficient to trigger rescission requires a careful analysis of the specific deficiencies and their materiality. Not every minor error in a FDD will support rescission — the deficiency must be material.
The following types of deficiencies have been held or are likely to be held material:
• Complete omission of a prescribed disclosure item, such as the litigation history, financial statements, or franchisee list.
• Inclusion of financial statements that are stale or that do not comply with the requirement for audited statements.
• Failure to disclose material facts that would reasonably be expected to affect the franchisee’s decision, such as pending system changes, known competition, or financial difficulties.
• Misrepresentations of material facts, such as overstated earnings claims, understated costs, or false statements about the franchisor’s history.
• Failure to deliver the FDD as a single document at a single time.
• Absence of the certificate of the franchisor.
• Delivery of the FDD fewer than 14 days before signing or payment.
Conversely, minor typographical errors, immaterial inaccuracies, or trivial omissions are unlikely to support rescission. The test is whether the deficiency would reasonably be expected to have a significant effect on the franchisee’s decision.
Relationship with Section 7 Damages Claims
Rescission under section 6 and damages under section 7 are distinct remedies with different requirements and different consequences. A franchisee may pursue either remedy, but the choice between them involves strategic considerations.
Rescission unwinds the entire transaction: the franchisee gives up the franchise and receives a refund, repurchase, and compensation for net losses. Damages under section 7, by contrast, provide compensation for losses caused by misrepresentation without unwinding the franchise agreement. A franchisee that wants to continue operating the franchise but seeks compensation for losses caused by misrepresentation in the FDD would pursue damages under section 7 rather than rescission.
In some cases, the rescission window may have closed, leaving damages as the only available statutory remedy. In other cases, the franchisee may prefer to rescind because the franchise has been unprofitable or because the relationship with the franchisor has become untenable. The choice depends on the specific circumstances and requires careful legal analysis.
Practical Considerations
For Franchisees
Franchisees considering rescission should act promptly. The 60-day rescission window is strict and unforgiving. If you have concerns about the adequacy of your FDD, seek legal advice immediately — ideally before the 60-day window closes. Even if the 60-day window has passed, you may still have a two-year rescission right if the disclosure was so deficient as to constitute no disclosure, or a damages claim under section 7.
Before sending a rescission notice, document the deficiencies in the FDD carefully. Your legal counsel should identify each deficiency, assess its materiality, and ensure that the rescission notice is properly prepared and delivered. A poorly executed rescission attempt can weaken your position.
For Franchisors
Franchisors should treat the disclosure process as a risk management exercise. The cost of preparing a thorough, accurate, and timely FDD is negligible compared to the potential exposure from a successful rescission claim. Review your FDD annually, track material changes, and use experienced franchise counsel to prepare and update your disclosure.
When you receive a rescission notice, do not ignore it. Engage legal counsel immediately to assess the validity of the rescission claim and to develop a response strategy. In some cases, the claimed deficiency may not be material, and the rescission may not be valid. In other cases, negotiation or settlement may be the most commercially reasonable approach.
Frequently Asked Questions
Q: Can a franchisee rescind even if the franchise has been profitable?
A: Yes. The rescission right under section 6 is not contingent on the franchisee having suffered a loss. A franchisee whose FDD was deficient or non-existent may rescind the franchise agreement regardless of whether the franchise has been profitable. However, the practical value of rescission is typically greater for franchisees who have incurred net losses.
Q: Does the franchisor have to repurchase leasehold improvements?
A: The statute requires the franchisor to compensate the franchisee for net losses incurred in acquiring, setting up, and operating the franchise. This may include the cost of leasehold improvements, depending on the circumstances. The obligation to purchase supplies and equipment at acquisition cost applies to items purchased pursuant to the franchise agreement.
Q: What if the franchisor disputes the rescission?
A: A franchisor that believes the rescission is not valid may decline to comply with the franchisee’s demands. In that case, the franchisee would need to bring a court proceeding to enforce the rescission. The court will determine whether the FDD was deficient, whether the deficiency was material, and whether the rescission was properly and timely exercised. Alternatively, the parties may agree to mediate or arbitrate the dispute.
Q: Can the franchise agreement limit or modify the rescission rights under the AWA?
A: No. Section 11 of the AWA provides that any purported waiver or release of a right under the Act is void. The franchise agreement cannot shorten the rescission windows, impose procedural prerequisites beyond those in the Act, or otherwise limit the franchisee’s statutory rescission rights. Any such provision is unenforceable.
Contact Booni Law
If you are a franchisee considering rescission of your franchise agreement, or a franchisor who has received a rescission notice, Booni Law can provide the expert guidance you need. Rescission claims involve complex legal and factual issues, and the stakes are high for both parties. Our franchise law team has the experience to help you navigate the process effectively. Booni Law serves clients across Ontario, including the Greater Toronto Area, Southwestern Ontario, and communities throughout the province. Email us at admin@boonilaw.com or call +1 (226) 271-1751 to get started.
Disclaimer: This article is provided for general informational purposes only and does not constitute legal advice. Reading this article does not create a solicitor-client relationship between you and Booni Law. The information in this article may not reflect the most current legal developments and should not be relied upon as a substitute for professional legal advice tailored to your specific circumstances. If you require legal advice, please contact Booni Law.
