Recent Case Significantly Changes Disclosure Standards for Franchisors

The recent case of Raibex Canada Ltd. v ASWR Franchising Corp. significantly increases the standard of disclosure required of certain franchisors.  This case dealt with the All-Star Wings franchised system and is a cause for concern for any franchisor, whose site selection process takes place after the issuance of a disclosure document and the execution of a franchise agreement—which is not uncommon in the franchise industry.

In this case, the plaintiffs successfully argued that the franchisor failed in its disclosure obligations by not disclosing the head lease as part of the disclosure package, even though the head lease was not available and a site had not been selected at the time disclosure was issued. 

The effect of this case is that Ontario courts have expanded the scope of disclosure to include information which may not be known or available to the franchisor at the time of disclosure, thereby bringing into question the admittedly common practice of selecting sites for franchises after franchise agreements are signed. Further, some of the contemplated work-arounds to this issue are either not available or not advisable, given the language of the decision.  The court put forth the position that franchisors must wait to issue disclosure until all material facts (including, specifically, head leases) are known.  This will significantly impact the ability of franchisors to sell franchises without specific locations having already been secured.

The greater effect of this case is that franchisees may now potentially claim that a “material fact”, entirely unknown or unavailable to the franchisor at the time of disclosure or at the time that the franchise agreement was signed, may give rise to a successful rescission claim in certain instances.

Practically, franchisors who time their site-selection process after franchise agreements are signed must view this case as a dire warning against this practice.  While the decision is most likely to face appeal and reconsideration in a higher court, this case is presently persuasive precedent and franchisors in this position should revisit their site-selection process immediately in order to avoid rescission claims on this basis.

The full text of the decision can be found here.

If your system currently engages in site-selection after franchise agreements are executed, or if you would like to discuss how this case impacts your disclosure, sale or site-selection procedures, please contact us.

DANIEL F. SO