In Cassels Brock’s February 2011 Franchise Law e-communiqué, we mentioned a decision of the Ontario Superior Court of Justice in which a franchisor ("Suncor") was able to obtain summary judgment in respect of a proposed class action brought on behalf of 241 franchisees alleging the franchisor’s failure to deliver franchise disclosure documents. The case, TA & K Enterprises Inc. v. Suncor Energy Products Inc.,  O.J. No. 5532 (S.C.J.), was a helpful interpretation and reminder of the limits and exemptions to the franchise disclosure requirements of the Arthur Wishart Act (Franchise Disclosure),2000 (the “Act”) in the province of Ontario. This case was recently appealed to the Ontario Court of Appeal, which upheld the Ontario Superior Court of Justice decision.
In this case, the franchisees operated retail stores selling gas and other products under the Sunoco brand name. Suncor and the proposed class member franchisees entered into franchise agreements for one-year terms. No franchise disclosure documents were given to the franchisees, because Suncor relied on two disclosure exemptions under the Act: section 5(7)(g)(ii) of the Act, which provided that disclosure was not required if the franchise agreement was not valid for longer than one year and did not involve the payment of a non-refundable franchise fee, and section 5(7)(f), which provided that no disclosure was required where there was a renewal or extension of a franchise agreement and there had been no material change since the last renewal or extension.
The Ontario Superior Court of Justice rejected the franchisees’ contention that the new agreements entered into by the franchisees were entirely new agreements rather than renewals or extensions. Further, the court declined to characterize royalty fees and other amounts paid by the franchisees to Suncor as “non-refundable franchise fees,” concluding that Suncor could rely on the legislative exemption concerning disclosure.
The franchisees also argued that since they had signed franchise agreements a few days before the one-year term of the agreements, the effective date of the agreement was the date of signing and thus the franchise agreements were for longer than one year, thereby depriving Suncor of its disclosure exemption. The court rejected this argument as well, stating that if an agreement is signed before it becomes operational, this does not preclude the availability of the s. 5(7)(g)(ii) exception under the Act.
On appeal, the Ontario Court of Appeal dismissed the franchisees’ appeal, once again rejecting the franchisees’ arguments that the franchise agreements were for longer than one year and that royalties could be characterized as “non-refundable franchisees fees” under the Act. Now that this case has withstood the scrutiny of an appellate court, franchisors should take comfort in this decision as evidence that courts will uphold carefully-crafted franchise agreements that are deliberately structured to take advantage of the disclosure exemptions available under the Act.