The numbers stopped working around the second year. Sales at your Brampton location are well below what the franchisor’s representative suggested. The royalty comes out every month whether you profit or not, and you are paying a required supplier more than you could pay elsewhere. Then, while talking to another franchisee, you learn that the disclosure document you received may have been missing something important. You start wondering whether you can walk away and get your money back.
Sometimes you can. Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 gives franchisees one of the strongest remedies in Canadian commercial law, namely the right to rescind and be made whole. It also has strict deadlines and a high threshold, and using it incorrectly can leave you in default under your franchise agreement and your lease. A disappointing business, on its own, gives you no statutory right to cancel.
This article is general information, not legal advice. Franchise disputes turn on the details of your documents and your dates, so if you think any deadline may be approaching, get advice specific to your situation right away.
What Rescission Actually Means
Rescission under the Act is different from simply ending a contract. It unwinds the deal. Under section 6, within 60 days of the effective date of rescission, the franchisor or its associate must compensate the franchisee by:
- Refunding money received from or on behalf of the franchisee, other than for inventory, supplies, or equipment
- Buying back inventory the franchisee had under the franchise agreement, at the price paid
- Buying back supplies and equipment, at the price paid
- Compensating the franchisee for any losses incurred in acquiring, setting up, and operating the franchised business, after deducting the amounts above
That last item is what makes the remedy so powerful, because it can include operating losses, leasehold improvements, and financing costs. It also gives franchisees with a failing business a route that an ordinary damages claim might not offer. The franchisee generally does not need to prove the disclosure failure caused those losses. Whether a particular expense is recoverable can still be fought over, and it depends on the evidence. Keep all of your records.
Two Deadlines, Two Very Different Tests
Section 6 creates two separate rights.
Sixty days. A franchisee may rescind no later than 60 days after receiving the disclosure document, if the franchisor provided it late, or if the document’s contents did not meet the requirements of section 5. Section 5 generally requires the document to arrive at least 14 days before you sign any franchise-related agreement or pay anything, as one document delivered at one time. This short window often closes before an operator has even opened their doors, which is why getting legal advice soon after signing can be valuable.
Two years. A franchisee may rescind no later than two years after entering into the franchise agreement, if the franchisor never provided the disclosure document. Most litigated cases fall under this branch, often because a franchisee who received some document argues that it was so deficient that it amounts to no disclosure at all.
When Defective Disclosure Counts as No Disclosure
The Court of Appeal for Ontario addressed this in Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62. The court held that rescission under the two-year branch is available only where the deficiencies are so serious that the franchisor has effectively provided no disclosure. An imperfect document does not automatically qualify. Calling something a disclosure document does not make it one, either.
The question is contextual. Courts ask whether the franchisee was effectively deprived of the opportunity to make an informed decision about whether to invest. They look at all of the relevant circumstances, including the terms of the franchise agreement, and the safeguards it may contain. In Raibex, the fact that a lease had not yet been finalized did not amount to no disclosure, given the circumstances of that case.
In practice, issues raised in these cases include missing financial statements, a missing or improperly signed certificate, failure to disclose head lease terms, or incomplete information about significant costs. Results vary. Do not assume that one flaw you have found will carry you over the line, and do not assume the reverse either. A careful comparison of the document against section 5 and the disclosure regulation, O. Reg. 581/00, is the proper first step.
Check also whether you are buying from an existing franchisee. A resale from an existing owner may be exempt from disclosure, depending on how much the franchisor was involved. The Court of Appeal has read that exemption narrowly when the grant was effected by or through the franchisor, so it is worth looking at closely.
Giving Notice the Right Way
A notice of rescission must be in writing and delivered to the franchisor, personally, by registered mail, by fax, or by any other prescribed method, at the franchisor’s address for service or to any other person designated for that purpose in the franchise agreement. It should clearly state that you are rescinding under the Act and give the reason. Check the address and the method carefully, because mistakes here can hurt you.
Think hard before you send it. Questions to work through with a lawyer before you act include:
- Which branch are you relying on, and is it still in time?
- Have you stopped operating, or do you need to? Continuing to run the store after rescinding can undercut your position, and closing without planning can put you in breach of the lease.
- Who else is exposed: your landlord, your bank, and any guarantors, including your spouse?
- How will staff, suppliers, and customers be told?
- Do you have copies of everything before the franchisor cuts system access?
Many operators are tempted to stop paying royalties while they consider the matter. That might provide the franchisor with a default to rely on, and it can complicate things if rescission later fails. Decide on a position only after you know your options.
If the Franchisor Does Not Pay
Rescission notices are frequently ignored or refused. In that case, the franchisee usually sues, either by action or sometimes by an application or summary judgment motion, depending on how contested the facts are. In Peel, Superior Court proceedings are handled at the courthouse at 7755 Hurontario St. in Brampton. Claims within $50,000 may go to Small Claims Court, although most rescission claims exceed that amount, and Simplified Procedure covers claims up to $200,000.
Who is on the other side matters. Section 7 gives a right of action for damages against the franchisor, its broker, its associates, and every person who signed the disclosure document, in the case of a misrepresentation in the document or a failure to comply with the disclosure obligations. Liability is joint and several for these claims. That can be meaningful when the franchising company itself is a thin subsidiary with few assets. Associates can also be responsible for rescission compensation in certain cases, so a careful corporate search can pay off.
Section 10 makes a clause void if it restricts the application of Ontario law or restricts the venue to a jurisdiction outside Ontario for a claim otherwise enforceable under the Act. Section 11 voids any waiver or release of a right under the Act. There is an important qualification, though: a settlement of a real, known dispute may stand on different ground from a release buried in the initial paperwork. Do not sign a renewal, transfer, or settlement release without reading it closely, because you may be asked to give something up.
Remedies When Rescission Is Off the Table
Most franchise disputes do not lead to rescission. Other routes include these.
Damages for misrepresentation. Section 7 allows a claim where a franchisee suffers loss because of a misrepresentation in the disclosure document or a statement of material change. A franchisee is deemed to have relied on the misrepresentation. Earnings claims, undisclosed costs, and a concealed plan to open a competing unit often form the basis. Common-law claims for negligent or fraudulent misrepresentation may also be available, although agreements often contain language trying to limit reliance on statements outside the contract.
Fair dealing. Under section 3, every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement, including acting in good faith and according to reasonable commercial standards. It runs both ways. Allegations commonly involve opening a competing outlet in a way that undermines the franchisee, using advertising funds improperly, refusing renewal or transfer for an improper purpose, imposing sudden changes that make the unit unprofitable, or manipulating supplier rebates. A court generally will not rewrite a hard bargain, however, so a franchisor exercising a clear contract right reasonably is not in breach merely because the outcome hurts you.
Breach of contract. Sometimes the plain terms have been broken. The franchisor might have failed to provide the training, territory protection, or support promised. Compare what was promised against what you got.
Right to associate. Section 4 protects franchisees’ right to associate with each other and bars the franchisor from interfering, or penalizing anyone for doing so. Talking to other operators is often where evidence is found, and joint action can spread costs.
Injunctions. A franchisee who is about to lose the business through a disputed termination, or who faces a lockout, may ask a court for urgent interim relief. A franchisor may likewise seek one to enforce a non-compete or to recover trademarks after termination. These motions move quickly, and they depend on showing a serious issue, irreparable harm, and that the balance of convenience favours relief.
Dispute Resolution Clauses and Practical Pressure
Read your agreement’s dispute clause before you take any step. Many require notice and a period of negotiation or mediation before a lawsuit, or even send disputes to arbitration. A valid arbitration clause within Ontario may be enforced, although some claims or parties may raise further questions. Time limits for notice of default and cure rights also need attention. Missing a 10-day cure period over a small unpaid amount could give the franchisor a reason to terminate.
Practical pressure points exist on both sides. A franchisor may control the head lease, the point-of-sale data, and the supply chain. A franchisee may hold the local customer relationships and the ability to make a rescission claim that is costly to defend. Many disputes settle, often through a negotiated exit in which a location is sold or transferred. If settlement is in view, deal with guarantees, lease release, inventory, the non-compete, and a mutual release all at once.
What to Gather Now
Whatever your situation, build the file now, and do it before relationships worsen:
- The disclosure document, with the envelope, courier slip, or email showing when it arrived
- The franchise agreement, lease or sublease, guarantees, and all related agreements
- Dates of signing and of every payment, including any deposit
- Written sales claims, pro formas, emails, and notes of conversations
- Your financial statements, royalty records, and setup costs
- Records showing supplier pricing and any rebate information
- Default notices and all correspondence
- Contact information for current and former franchisees
Mark the two-year date on your calendar. The general limitation period for other claims is also usually two years from discovery, and these periods may run separately.
If any of this sounds familiar, a prompt review through our franchises practice can tell you which of these remedies is realistic. When a dispute has already escalated, our business litigation page describes the wider process, and you can contact the firm to arrange a time to go through your documents. No lawyer can promise a result in these cases, but knowing your deadlines leaves you free to make the decision on your own terms.