In a significant recent Ontario decision, 2101516 Ontario Inc. et al v. Radisson Hotels Canada Inc., the court considered whether a franchisor can be liable for a misrepresentation claim under the Arthur Wishart Act (Franchise Disclosure) (the “Wishart Act”) in circumstances when the alleged misrepresentations were contained in a franchise disclosure document that the franchisor was not required to have provided, but that was provided voluntarily nonetheless.
Under the Wishart Act, franchisors are normally required to provide extensive financial disclosure to prospective franchisees before executing any franchise agreement; however, the Wishart Act exempts franchisors from providing such disclosure under certain narrow circumstances. One such exemption is when the prospective franchisee will be investing over $5 million in the acquisition and operation of the franchise over a period of 1 year.
This so-called “sophisticated franchisee” exemption, as it is sometimes called, seems to exist out of a recognition that there is no need for a franchisor to spend the time and money associated with preparing formal disclosure when the prospective franchisee is presumptively sophisticated enough to conduct its own due diligence before making such a substantial investment.
In the Radisson case, the franchisee was proposing to purchase a franchised hotel from the franchisor in the amount of $8.35m. As a result, the franchisor was exempt from the Wishart Act’s disclosure obligation. The franchisor nonetheless provided the franchisee with a disclosure document, and the franchisee subsequently signed the franchise agreement and purchased the hotel. The franchisee was evidently not successful in operating the hotel and delivered a notice of rescission.
The parties proceeded to arbitration, and the arbitrator dismissed the franchisee’s claim for rescission and for damages under the Wishart Act from misrepresentations contained in the disclosure document. As to the statutory misrepresentation claim, the arbitrator found that a claim under the Wishart Act for misrepresentation in a disclosure document is not available when the disclosure document was delivered voluntarily and without obligation.
The franchisee sought permission from the court to appeal the arbitrator’s decision.
The court held that the arbitrator’s decision was not appealable in the particular circumstances of the case; however, the court nonetheless went on to consider whether the arbitrator’s decision was reasonable. The court found that the arbitrator was reasonable in holding that a claim under the Wishart Act for misrepresentation in a disclosure document is not available when the disclosure document was voluntarily delivered. The court stated that holding otherwise would be contrary to the purpose of the Wishart Act by making a statutory claim for misrepresentation available to commercially sophisticated franchisees who are not subject to the imbalance of bargaining power more typically present between prospective franchisees and franchisors.
This case lends support to the common practice on the part of franchisors to provide disclosure in circumstances when they may not be required to do so because of one of the Wishart Act’s exemptions. Franchisors may wish to voluntarily disclose in those circumstances because of the risk that the relevant exemption may subsequently be found by a court or arbitrator not to have applied in the circumstances; without having disclosed, the franchisor would then be exposed to an expensive rescission claim.
There remains risk for the franchisor in making voluntary disclosure, notwithstanding the Raddison decision. Franchisors who voluntarily disclose may still be exposed to claims for misrepresentation outside of the Wishart Act, which are harder to prove than those made pursuant to the Wishart Act, but could still represent a significant litigation risk.
For more information about the Radiss on decision and its implication for franchisors and franchisees, see Joseph Adler’s comments in this recent publication.