The Ontario Court of Appeal has upheld a lower court decision finding that franchisors are not exempt from disclosure obligations where they are actively involved in the resale of an existing franchise.
The decision reaffirms that the “resale” disclosure exemption under the Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3 will be narrowly construed by Ontario courts. The “resale” exemption under ss.5(7)(a)(iv) and 5.8(a) and (b) of the Arthur Wishart Act provides that franchisors are exempt from providing disclosure where “the grant of the franchise is not effected by or through the franchisor,” including where the franchisor is just involved to: (i) exercise its right to consent to the transaction; and (ii) accept a transfer fee.
The Lower Court Decision
At first instance in 2147191 Ontario Inc. v. Springdale Pizza Depot Ltd.,1 the Ontario Superior Court of Justice allowed the purchaser of a Springdale Pizza franchise to rescind the assigned franchise agreement on the basis that the franchisor’s disclosure was materially deficient. For a more detailed review of the original decision, ourFranchise Group’s review of the case can be found here.
The franchisor, Springdale Pizza Depot Ltd., appealed the original decision that it could not avail itself of the resale disclosure exemption. In particular, the franchisor argued that the mere fact that it had meetings with the purchaser was not sufficient for the Court to find it more than a “passive” participant in the sale process and thus trigger the disclosure requirements under the Wishart Act.
In the appeal decision of Springdale,2 the Ontario Court of Appeal found that the lower court was justified in its finding, which was also consis=tent with the “spirit of the case law from this court concerning the interpretation of the Wishart Act and recognizes both the overall purpose of the Act and the need to ‘narrowly construe’ the disclosure exceptions in the Act.”
The Ontario Court of Appeal reaffirmed the lower court’s finding that where a franchisor leads the purchaser to believe that it is starting down the path of requiring a new franchise agreement, meets the prospective purchaser multiple times and requires extra consideration that limits the exercise of the purchaser’s rights, the franchisor cannot be said to be “merely passive” and thus cannot take advantage of the “resale” exception.
Key Take-Away Principles
Franchisors in Ontario seeking to rely on the “resale” disclosure exemption are reminded to exercise caution and can take away two key lessons from this decision:
- The disclosure exemption is available for franchisors whose participation is limited to: (i) exercising any contractual rights it has to approve the purchaser; and (ii) taking the franchise fee set out in the franchise agreement; and
- In cases where the franchisor has taken more than a passive role in the assignment process, franchisors are required to abide by the Wishart Act’s disclosure obligations.