When it comes to starting or operating a franchise in Ontario, the Arthur Wishart Act (Franchise) plays a key role in ensuring fairness and transparency in franchise relationships. One of the most important protections for franchisees under this remedial legislation is the rescission remedy. 

This Cloudhaus blog breaks down what rescission is, how it affects both prospective franchisees and franchisors, and offers real-world situational examples that parties often encounter in the complexities of franchise agreements.

What is Rescission Under the Arthur Wishart Act?

Rescission is a legal term that means canceling or voiding a contract. Under the Arthur Wishart Act, franchisees have the right to rescind the franchise agreement if the franchisor fails to meet disclosure obligations or provides misleading information. This statutory right allows franchisees to exit an agreement if they were not given adequate disclosure to make an informed investment decision.

In simple terms, if a franchisee feels they were not provided with proper disclosure or the franchisor violated key rules, they can cancel the agreement by delivering a notice of rescission.

Why is Rescission Important for Franchisees?

The rescission remedy is crucial for franchisees because it protects them from being locked into unfair or misleading franchise agreements. It gives prospective franchisees the ability to back out if they were misled or if the franchisor failed to comply with disclosure requirements, helping them avoid significant financial losses, such as the initial franchise fee or operating expenses.

For example, if a franchisor exaggerates earnings potential without evidence, the franchisee can seek rescission to recover their investment and avoid further financial obligation.

How Does Rescission Affect Franchisors?

Franchisors must be diligent, as failure to comply with the Arthur Wishart Act’s disclosure obligations can lead to rescission claims. If a franchisee rescinds the agreement, the franchisor must refund payments, such as the franchise fee, and may lose investments in training, supplies, or other costs associated with establishing the franchised business. Non-compliance can also harm the franchisor’s reputation in the franchise industry.

Franchisors can avoid rescission claims by ensuring proper disclosure and providing accurate, transparent information before the franchise agreement is signed.

What Are the Grounds for Rescission?

Under the Arthur Wishart Act, franchisees can rescind the agreement if specific conditions are met. Common grounds include:

• Failure to Provide Disclosure Documents: If the franchisor does not provide the required franchise disclosure document, detailing the business, financial statements, and other key information, before signing the agreement, the franchisee can rescind.

Example: A franchisor fails to provide a disclosure document outlining costs like commercial leases or operational expenses. This inadequate disclosure can lead to rescission.

• Misleading Information: If the franchisor provides false or misleading information about earnings potential or the franchise business, the franchisee can cancel the contract.

Example: A franchisor claims a franchise restaurant will generate high profits without supporting data, prompting the franchisee to seek rescission.

• Failure to Update Information: If the franchisor does not provide a statement of material change (e.g., updates to fees or earnings), the franchisee has grounds to rescind.

• Incorrect Financial Statements: If financial statements are inaccurate or do not meet required standards, this can justify rescission.

What is the Process of Rescinding a Franchise Agreement?

To rescind a franchise agreement, the franchisee must deliver a notice of rescission in writing, explaining the reasons for cancellation. The Arthur Wishart Act allows franchisees up to two years from signing the agreement to issue this valid notice, though the time limit may vary based on circumstances. Once the notice of rescission is delivered, the franchisor must refund payments, such as the initial franchise fee, though certain expenses like inventory or salaries may not be refundable.

What Are the Consequences of Rescission for the Franchisee?

When a franchisee rescinds the agreement, they can typically recover their initial investment, such as the franchise fee or deposits, but operating expenses, like equipment or advertising costs, may not be refunded. The rescission remedy protects franchisees from being trapped in a bad deal, allowing them to recover as much of their investment as possible and make informed decisions about future franchise opportunities.

What Are the Consequences of Rescission for the Franchisor?

For franchisors, rescission claims can result in significant financial and reputational consequences. They must refund the franchisee’s payments, which can be a substantial loss, especially for an entire franchise or master franchise. Frequent rescissions can also damage the franchisor’s reputation, making it harder to attract new franchisees in the franchise industry.

Hypothetical Situation 1: Rescission Due to Misleading Information

Imagine a franchisee who invests in a franchise restaurant based on the franchisor’s promise of high profits. After opening, the franchisee discovers the sales figures were exaggerated and not supported by evidence. Since the franchisor misrepresented the financial outlook, the franchisee can deliver a notice of rescission to cancel the agreement and recover their initial franchise fee.

Hypothetical Situation 2: Failure to Provide Disclosure Document

Consider a franchisee who joins a gym franchise after the franchisor promises success but fails to provide the required franchise disclosure document before signing. Due to this insufficient disclosure, the franchisee can rescind the contract, as the franchisor did not meet the statutory requirements for proper disclosure.

Can a Franchisor Prevent Rescission?

Yes, franchisors can minimize the risk of rescission by adhering to the Arthur Wishart Act’s disclosure obligations, including:

• Providing a comprehensive franchise disclosure document with all mandatory statements and details.
• Being transparent about potential earnings, costs, and financial obligations.
• Issuing a statement of material change for significant updates.
• Ensuring financial statements are accurate and compliant with standards.

By prioritizing proper disclosure, franchisors can reduce the likelihood of rescission claims.

How Can Franchisors Protect Themselves?

Franchisors can safeguard against rescission by:

• Complying fully with the Arthur Wishart Act’s statutory requirements.
• Providing accurate and honest disclosure documents to prospective franchisees.
• Regularly updating franchise agreements and disclosure documents to reflect changes.
• Consulting legal professionals to ensure compliance with franchise legislation.

Transparency and fair dealing foster trust, reducing the risk of rescission and strengthening the franchise relationship.

Conclusion

Rescission under the Arthur Wishart Act is a vital protection for franchisees, allowing them to cancel unfair or non-compliant franchise agreements. If a franchisor fails to meet disclosure obligations or provides misleading information, franchisees can deliver a valid notice of rescission to recover their investment. For franchisors, rescission claims can lead to financial losses and reputational damage in the franchise industry.

By ensuring proper disclosure and transparency, franchisors can avoid rescission claims and build successful, long-term partnerships with franchisees. Understanding the rights of franchisees and the importance of compliance with the Arthur Wishart Act is essential for maintaining a fair and thriving franchise system in Ontario. For more insights, check out Ontario Franchise Deposits: What You Must Know Legally.