April 15, 2020

Rescission in the time of COVID-19

Limitation periods and other deadlines have been suspended in Ontario as a result of COVID-19.  However, franchisors and franchisees want to know:  has the time period for a franchisee to deliver a notice of rescission also been suspended?  If not, what are the special considerations that arise, from both the franchisee and franchisor perspective, where a notice of rescission is delivered during the COVID-19 pandemic?

Ontario’s franchise legislation, the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3,[1] provides franchisees with a right of “rescission” in the event the franchisor fails to deliver a disclosure document, or provides a disclosure document that is so materially deficient that it is effectively no disclosure at all.  The purpose of the rescission remedy is to return the franchisee to the position it would have been in had it not entered into the franchise agreement.  In laymen’s terms, the delivery of a notice of rescission does two things:  it immediately “cancels” each and every “franchise agreement” the franchisee has entered into with a franchisor or a franchisor’s associate, and it entitles the franchisee to recover monies it has spent relating to its franchised business.

Most franchisees who seek to rescind rely on Section 6(2) of the Wishart Act.  Under Section 6(2), a franchisee may rescind the franchise agreement no later than two years after “entering into” the franchise agreement where no or materially defective disclosure was provided.  In most cases, this two-year period will start to run from the date the parties signed the franchise agreement.

On March 20, 2020, the Province of Ontario, by an Order in Council, suspended limitation periods, and “any period of time within which any step must be taken in any proceeding in Ontario, including any intended proceeding”.  The Order in Council was retroactive to March 16, 2020.

Does this Order in Council mean that the time to deliver a notice of rescission has also been suspended? Unfortunately, the answer to this question is not entirely clear.  However, a notice of rescission does not seem to fall under the two categories of deadlines that have been suspended by the Order in Council.

First, the time period to deliver a notice of rescission under Section 6(2) of the Wishart Act is arguably not a “limitation period”.  Limitation periods, under Section 2 of the Ontario Limitations Act, 2002, relate to the time in which a “claim” may be pursued in a court proceeding.  The Ontario Court of Appeal has confirmed that “[u]ntil the franchisor decides to not fulfil [its rescission obligations], the franchisee has no cause of action… at most, the franchisee has a latent or potential cause of action.”[2]  In addition, the Ontario Court of Appeal has recently confirmed that “[t]he purpose of the notice (of rescission) is to advise the franchisor that the franchisee is rescinding.  Its purpose is not as a precondition to litigation.”[3]

Second, a notice of rescission is not necessarily a “step…in any proceeding in Ontario” or in “any intended proceeding”.  Also as confirmed by the Ontario Court of Appeal, the rescission remedy “was intended to allow the parties to extricate themselves from the (franchise) agreement without litigation”.[4]  Furthermore, a franchisee’s “intent” to commence proceedings crystallizes only following the delivery of a notice of rescission, and then only in circumstances where a franchisor either rejects or ignores its obligations pursuant to the notice.

Given the uncertainty, what should parties to a franchise agreement do?

In the circumstances, franchisees who wish to rescind, and who are approaching the two-year anniversary of entering into any agreement with their franchisor, should immediately seek out the assistance of an experienced franchise lawyer to discuss whether they have a right to rescind.  If so, the franchisee should take steps to safely deliver a notice of rescission, well in advance of the deadline.  There are multiple ways to deliver a notice of rescission that limit or entirely eliminate the need for in-person contact, including delivery by prepaid courier, registered mail, and fax.

Franchisors who do not receive a notice of rescission on or before the two-year anniversary of entering into the franchise agreement may take some degree of comfort (subject to further clarification in the law) that they have passed the two-year “rescission window”, and will not need to respond to a notice of rescission from that franchisee, in future.

Franchisors who receive notices of rescission during the pandemic will be faced with special concerns relating to the current circumstances.  As the pandemic continues, franchisors may see notices of rescission based on more speculative grounds, as franchisees seek to aggressively limit their losses and/or become more motivated to exit the franchise system.  Franchisors will want to ensure that experienced franchise counsel rigorously evaluate the merits of the grounds stated in the notice.  Where a franchisee arguably has a right to rescind, a franchisor will need to consider the rescission in the context of the current circumstances.  For instance, a franchisor should find out whether the franchisee has made any special arrangements with respect to its lease or its contracts with suppliers, whether the franchisee is eligible for government assistance of any kind and, if so, whether it has applied for this relief, and, if the franchisee is currently operating, whether and how the unit can be safely transferred back to the franchisor.

Lastly, a franchisor will need to consider what impact receiving a notice of rescission has on its duty to provide statutory disclosure to a prospective franchisee or to deliver a statement of material change to any prospective franchisee who has already received a disclosure document but who has not yet entered into a franchise agreement. These issues should also be discussed with experienced franchise counsel.

Adrienne Boudreau, Sotos LLP

Adrienne is a partner in the litigation group at Sotos LLP, Canada’s largest franchise law firm.  She provides counsel to many franchisors in various sectors of the franchise industry and to franchised businesses. Adrienne can be reached directly at 416-572-7321 or aboudreau@sotosllp.com.

 


[1] The “Wishart Act”.

[2] 2130489 Ontario Inc. v. Philthy McNasty’s (Enterprises) Inc., 2012 ONCA 381 at para. 39 (CanLII).

[3] 2352392 Ontario Inc. v. Msi, 2020 ONCA 237 at para. 12 (CanLII) (“Msi”).

[4] Ibid.