Canada: Just Not Ready? Raibex Decision Makes Post-Agreement Location Selection A Fatal Error

We recently wrote about the Ontario Superior Court's decision in Raibex v ASWR Franchising Corp., a summary judgment decision in a rescission case where the franchisor's failure to include a copy of the head lease and development costs specific to the location was found to be a fatal deficiency in the disclosure document, despite the fact that the location was expressly to be determined after the franchise agreement was signed.

The decision introduces unheard of new disclosure obligations, including the concept that disclosure may be "premature" if a franchisor does not yet know all potentially material facts about the franchise to be granted or those facts do not exist. In Raibex, the Court suggested that a franchisor in such a situation is "not yet ready" to disclose and "must wait" before delivering a disclosure document. This decision has potentially drastic impact for franchisors in Ontario, many of whom follow the longstanding and common practice, long thought to be Wishart Act¹ compliant, of selecting a location after the franchise agreement is signed following a location selection process set out in the agreement. The decision does not distinguish between situations where the franchisor sub-leases the location and where franchisees enter into leases directly, nor does it account for the impact of this new principle on multi-unit or area development arrangements, causing further confusion. The decision appears to stand squarely at odds with other cases, including the recently released Active Tire case summarized in this edition of our newsletter.

As we reported in our previous piece, the franchisor has commenced an appeal of the decision. All franchisors should stay closely tuned to this space for updates on the appeal, given the potential impact on their business. In the meantime, franchisors are cautioned to consider the impact of the Raibex case when disclosing to prospective new franchisees.

Read our full summary of the Raibex decision here.  

Footnote

^{1. (Franchise Disclosure), 2000, S.O. 2000, c.3.}

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