In an earlier post, we discussed the Brister v. 2145128 Ontario Inc. case of the Ontario Superior Court of Justice  (the “Brister Post”), which discussed the exemptions under the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”).  In 2256306 Ontario Inc. v. Dakin News Systems Inc. (“Dakin”) the Ontario Superior Court of Justice (the “Court”) had the opportunity to further confirm the limited application of section 5(7) of the Act.

In Dakin, the Court considered an application by a franchisee (the “Plaintiff”) to rescind a franchise agreement on the basis that the franchisor (the “Defendant”) had not provided the Plaintiff with a disclosure document pursuant to the Act.

The Plaintiff purchased the franchise from an existing franchisee (the “Prior Franchisee”) whose franchise agreement with the Defendant had expired. As a result, the franchise was being run on a month to month basis.

In May 2012, the Defendant, realizing that a new franchisee was operating the franchise, required that the Plaintiff sign a new franchise agreement for the continued operation of the franchise (the “Franchise Agreement”). The Defendant did not provide the Plaintiff with a disclosure document at any time.

In February 2013, the landlord of the premises of the franchise opted not to renew the franchise’s lease. The Plaintiff was advised by the Defendant that it would incur costs of approximately $95,000 to relocate and to purchase “fresh inventory” for the new location. The Plaintiff then sought to rescind the Franchise Agreement on the basis that no disclosure document had been provided to it.

The Defendant argued that they were exempt from providing the Plaintiff with a disclosure document pursuant to sections 5(7)(a)(iv), 5(7)(f) and 5(7)(g)(ii) of the Act. The Court rejected each of the Defendant’s arguments in the following manner:

  1. Further to the Brister Post, Section 5(7)(a)(iv) applies where the Franchisor is not an active participant in the grant of the franchise. This was not the case in Dakin because the Prior Franchisee was operating the franchise under an expired franchise agreement and the Defendant required that a new franchise agreement be signed by the Defendant for the continued operation of the franchise;
  2. Section 5(7)(f) applies where there is a renewal or extension of a franchise agreement in circumstances where there has been no interruption in the operation of the franchise and there has been no material change since the date of the franchise agreement or its latest renewal or extension. This exemption did not apply because the Franchise Agreement was a new agreement and not just a “renewal or extension of a franchise agreement” and the change in ownership constituted a material change; and
  3. Section 5(7)(g)(ii) applies where the franchise agreement is not valid for longer than one year and does not involve the payment of a non-refundable franchise fee. This exemption did not apply because the Franchise Agreement required that the Plaintiff pay a franchise fee to the Defendant notwithstanding that such franchise fee was never actually paid by the Plaintiff to the Defendant. We note that the Court did not comment on whether an express reference to a “refundable franchisee fee” in the Franchise Agreement would have entitled the Defendant to rely on the Section 5(7)(g)(ii) exemption.

As evidenced in Dakin, the courts continue to give a very narrow reading to the disclosure exemptions under the Act. Further, this case demonstrates the difficulties that franchisors face when attempting to rely on these exemptions as an after-thought upon realization that a disclosure document ought to have been provided to a franchisee. As such, these exemptions should only be relied upon by franchisors in very specific circumstances and only as expressly set forth in the Act and further refined by the jurisprudence.