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What Constitutes Adequate Notice of Rescission by a Franchisee?

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August 15, 2019

Under Ontario’s franchise legislation, the Arthur Wishart Act (Franchise Disclosure) (the “Wishart Act”), a franchisee is entitled to “rescind”, or unwind, its franchise agreement if the franchisor failed to provide adequate disclosure to the franchisee before the execution of the franchise agreement.

To make a claim for rescission, the franchisee must first deliver to the franchisor notice of rescission. The absolute latest time by which the notice of rescission must be delivered in order to be effective is 2 years after the franchisee’s entering into the franchise agreement, if the deficiency is found to be so deficient as to constitute no disclosure at all within the meaning of the Wishart Act. Within 60 days from delivery of the notice of rescission, the franchisor must essentially pay back what the franchisee paid to become a franchisee.

Given how potentially far-reaching the consequences are that result from delivery of the notice of rescission, it is perhaps surprising that the Wishart Act does not specify what form the notice of rescission must take (other than that it must be in writing) or what its contents must include.

Fortunately, there have been a number of judicial decisions that have shed some light on what a notice of rescission must look like, and what it must contain.

Most recently, the court considered notices of rescission in the 2019 decision, 2352392 Ontario v. MSI. In that case, the franchisor had terminated the franchisee’s restaurant. The franchisee’s lender sued the franchisee’s principal to recover the loan it had advanced to the franchisee. The franchisee defended against the lender’s claim, and in turn sued the franchisor; in the document setting out the franchisee’s claim against the franchisor (the “pleading”), the franchisee claimed for the first time that it was seeking to rescind the franchise agreement. The franchisee had not delivered any written notice of rescission prior to service of its pleading against the franchisor.

In defending against the franchisee’s rescission claim, the franchisor took the position that a claim for rescission made for the first time only in a pleading did not constitute written notice of rescission under the Wishart Act, and that the franchisee’s failure to have delivered a written notice of rescission prior to service of the pleading meant that the franchisee was outside of the 2-year limitation period to do so.

The court accepted the franchisor’s position and held that a claim for rescission made for the first time in a pleading does not constitute notice of rescission under the Wishart Act. In arriving at this conclusion, the court noted that the purpose of a pleading was very different from the purpose of notice under the Wishart Act: the latter is intended to notify the franchisor that the franchisee is rescinding its franchise agreement and gives the franchisor 60 days to compensate the franchisee, whereas the former is meant to define the litigation and set out the franchisee’s claim when and after the franchisor fails to compensate the franchisee within those 60 days.

The court in the MSI decision made reference to a 2009 decision of the court in 779975 Ontario Limited v. Mmmuffins Canada Corporation. Like the 2019 MSI case, the Mmmuffins case considered whether a rescission claimed within a pleading could constitute proper notice of rescission under the Wishart Act. In the Mmmuffins case, the franchisee had likewise not delivered a written notice of rescission prior to commencing litigation by serving a pleading. Unlike the pleading in MSI, the pleading in Mmmuffins made no reference to the Wishart Act or the rescission remedy available under the Wishart Act; rather, the pleading made reference only to a more generally available claim for rescission known as “common law rescission”.

The court in Mmmuffins held that the failure of the franchisee in the pleading expressly to claim statutory rescission under the Wishart Act meant that the pleading in that case did not constitute notice of rescission under the Wishart Act. In arriving at that conclusion, the court offered helpful guidance about the minimum contents that must be included in a notice of rescission for it to be effective under the Wishart Act: “the notice must at least be sufficient to bring home to the franchisor that the franchisee is exercising its statutory right of rescission under the [Wishart Act] and to inform the franchisor that the clock has begun to run on the 60-day period… The notice does not have to be in specific language, but it must at least make it clear that the franchisee is exercising its statutory right to rescind the franchise agreement and demanding the compensation to which it is entitled.”

Takeaways: in order for it to be effective, a notice of rescission must be in writing and must announce explicitly that the franchisee is rescinding the franchise agreement pursuant to the Wishart Act. It is not enough for that notice of rescission to be included for the first time in a pleading that initiates a lawsuit.

It is good practice for the notice of rescission to specify, with some detail, the deficiencies in the franchisor’s disclosure that are alleged to give rise to the franchisee’s entitlement to rescind, and to refer to the specific disclosure provisions in the Wishart Act and its regulation that the franchisor is alleged to have breached.