In 225603 Ontario Inc. and Ali Reda v. Dakin News Systems Inc. et.al., the Ontario Court of Appeal affirmed the Ontario Superior Court’s summary judgment decision, declaring an International News franchisee’s right to rescind its franchise agreement, and that none of the exceptions to disclosure pursuant to the Arthur Wishart Act (Franchise Disclosure), 2000 (the AWA) applied.

Background

The plaintiff franchisee operated an International News kiosk under the Dakin News Systems Inc. (Dakin) franchise system. The franchisee purchased the franchise from a former owner in 2011. The original franchise agreement for the business had expired in 2010, but the franchise had been operating on a month-to-month basis since that time. Prior to the closing of the franchisee’s 2011 purchase, the franchisee’s lawyer wrote to Dakin to inquire about the status of the franchise agreement. Dakin responded with information on transfer procedures including the necessity for Dakin to approve the purchaser and for the payment of a $10,000 transfer fee. The franchisee closed the sale without conforming to the transfer procedures and continued operating under the terms of the expired franchise agreement. In May of 2012, the franchisee executed a new Dakin franchise agreement. At no time did Dakin provide a disclosure document. In August 2013, the franchisee advised Dakin that it was rescinding the franchise agreement on the basis that disclosure had not been provided, and brought an action against Dakin with respect to the enforcement of its rescission rights.

At the Superior Court

Dakin brought a motion for summary judgment for a declaration that it was entitled to rely on the AWA’s exemptions to its disclosure obligations. Dakin’s claim on applicable exemptions was that: (1) the grant of the franchise was not effected by or through the franchisor (s.5(7)(a)(iv)); (2) the grant was a renewal or extension of an existing franchise agreement without interruption in operations and without a material change (s. 5(7)(f)); and/or (3) the grant was for less than one year and did not involve the payment of a non-refundable franchise fee (s.5(7)(g)(ii)). The franchisee brought a competing summary judgment motion in respect of its right to rescind the agreement pursuant to the AWA.

Justice Parayeski granted summary judgment in favour of the franchisees on the basis that there had been no disclosure and that the rescission claim had been brought within the two-year timeframe required by the AWA. In doing so, and without a separate hearing of Dakin’s motion, the Court also held that none of the exemptions to disclosure applied in this instance. The Court found that the grant was effected through Dakin, and that the agreement executed by the franchisee in May of 2012 was a new agreement with material change in respect of the ownership of the franchise. The Court further held that the franchisor had required the payment of a non-refundable franchise fee even though that fee had not been paid (a fact which the Court found to be immaterial).

The Court of Appeal

Dakin appealed the summary judgment decision on the grounds that it had been denied a fair hearing of its motion as Justice Parayeski had not allowed them to be heard on their cross-motion with respect to exemptions from disclosure. In denying the appeal, Justices Weiler, LaForme and Huscroft found that Justice Parayeski’s decision to deal with the motion and the cross-motion together caused no prejudice to the appellants as the findings of fact were supported by the record, and in this case “those findings rendered summary judgement in favour of the respondents inevitable.”

Implications and practical considerations

This case confirms that franchisors need to be extremely wary of relying on exemptions from disclosure. The Court of Appeal here confirms that all exemptions will continue to be interpreted very narrowly. Franchisors need to be aware of changes of ownership in their systems and to follow up, as franchisees will not always see the need to do so themselves. As many other cases have shown, the area of franchise transfers is fraught with risk and franchisors are best served to provide carefully prepared, customized disclosure to transferee franchisees.