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Disclosures in Disputes: An Evolving Area of Canadian Franchise Laws
Franchise law in Ontario has been steadily evolving, but one area that remains relatively unchanged is how cases involving pre-sale disclosure are handled. Most cases are based on rescission - notice of intent to terminate the franchise agreement - but there is another area of law that has the potential to shape a franchisor's pre-sale disclosures and that is a failure to comply or misrepresentation when it comes to disclosure obligations.
However, this is unlikely to remain true for long as it can be a helpful legal tool for franchisees and even franchisors. This can benefit franchisees if rescission alone is not a viable solution. For franchisors, it can act as potential defense against a franchisee's rescission claim.
As franchise law in Ontario and other provinces with similar legislation evolves, it's highly possible there will be decisions in court that rely on the misrepresentation/failure to comply disclosure obligation to handle franchise disputes. Currently, all provincial franchise laws allow for a misrepresentation action, and all except Alberta allow for a cause of action for failing to meet disclosure obligations. This cause of action, known as a "Section 7 claim" in Ontario, allows for damages for misrepresentation by a franchisor of a material fact or for the failure of the franchisor to fully comply with disclosure obligations as set out under the province's franchise laws.
Unlike a rescission claim, this action doesn't end the relationship between franchisee and franchisor. It also doesn't carry an automatic entitlement to damages, instead requiring a franchisee prove that damages occurred from the franchisor's failure to comply with disclosure obligations or misrepresentation in those disclosures. Naturally, this lack of automatic damages and the proof requirement may make a Section 7 claim less appealing to franchisees than a rescission claim. It is also important to keep in mind that this claim can support damages for both past and future losses, unlike a rescission claim. In addition, a claim under Section 7 allows for liability to be imposed against parties other than the franchisor or franchisee, such as a franchisor's broker or agent.
The most important feature of a Section 7 claim may be that it could serve as the middle ground between no claim at all and a rescission claim, allowing a franchisee to receive damages without terminating the franchise relationship and potentially losing his or her business.
While Section 7 claims have yet to be seen much in Canadian franchise disputes, they could prove a valuable avenue in the future. Only time will tell what sort of impact these legal provisions will have going forward.