In its recent decision in 2147191 Ontario Inc. v. Springdale Pizza Depot Ltd., 2015 ONCA 116, the Ontario Court of Appeal upheld a finding on summary judgment that a franchisor could not rely on the “resale exemption” from the disclosure requirements found in Ontario’s franchise legislation, the Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3. The court found that the franchisor’s role in the resale transaction went beyond that of a passive participant, thereby disentitling the franchisor from relying on the exemption.
The Arthur Wishart Act requires franchisors to provide a prospective franchisee with a proper disclosure document before the signing of a franchise agreement or the payment of any consideration by the franchisee. If the franchisor fails to do so, or the disclosure document is inadequate, the Act provides for various remedies, including rescission of the franchise agreement. Subsection 5(7) of the Act establishes various exemptions from the disclosure requirement, including where the grant of the franchise is not effected by or through the franchisor (the “resale exemption”; see s. 5(7)(a)(iv) and s. 5(8)). This particular exemption is designed to deal with transactions in which a new franchisor purchases an existing franchise from a pre-existing franchisee. Previous case law had established that the exemption is only available to franchisors if they remain “passive participants” in the purchase transaction (such as providing consent to the transaction).
The appeal in Springdale centred on whether the motion judge erred in finding that the franchisor could not avail itself of the resale exemption. The franchisor had met with the franchisee on three occasions in respect of the acquisition of the franchise. Although it was eventually determined that the transaction would proceed by way of assignment from the previous franchisee, these discussions included the possibility that the franchisee would acquire the franchise through a new franchise agreement. Further, the franchisor ultimately required the new franchisee to execute an acknowledgment that, among other things, provided certain additional protections to the franchisor that were not found in the original franchise agreement.
The Court of Appeal upheld the motion judge’s finding that:
…when a franchisor leads the parties to believe that it is starting down the path of requiring a new franchise agreement, meets the prospective franchisees multiple times, and requires extra consideration that limits the exercise of the prospective franchisees’ rights, I do not think it can be said to have been merely passive.
The Court of Appeal further noted that this finding was consistent with the spirit of the case law interpreting the Act, including the need to “narrowly construe” the disclosure exemptions in the Act.
Springdale provides another example of the courts in Ontario providing a very narrow reading of the resale exemption. For most franchisors, this exemption will rarely be available in a resale transaction. The case is also a helpful reminder to franchisors that the exemptions from the disclosure requirements of the Arthur Wishart Act are usually interpreted narrowly.