The Ontario Court of Appeal has recently released a decision that serves as a reminder to franchisors of their potential disclosure obligations under the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”) in cases where a franchise is being resold. Specifically, in cases where a franchisor goes beyond merely exercising their right to approve a resale and instead:
- becomes involved in the sale process; and
- requires the new franchisee to execute documents that are not specified in the Franchise Agreement as a condition of the franchisor’s consent to the resale,
a franchisor may be required to provide franchise disclosure to the franchisee under the Act.
In the case, 2189205 Ontario Inc. v. Springdale Pizza Depot Ltd.1, the plaintiff franchisee 2189205 Ontario Inc. (the “Franchisee”.) contacted the franchisor, Springdale, concerning the potential purchase of a franchise. Springdale directed the Franchisee to an existing franchisee looking to sell its franchise. The Franchisee purchased the assets of the existing franchisee after Springdale provided some assistance in the negotiation of the transaction. In exchange for its consent to the resale, Springdale required the Franchisee to execute various documents, including an undertaking requiring certain branding identification on the Franchisee’s pizza delivery vehicles and an acknowledgement that the franchisor was not confirming, substantiating or reporting the sales figures provided by the selling franchisee to the Franchisee. After operating the franchise for several months, the Franchisee issued a notice of rescission under the Act due to the fact that it had not received franchise disclosure documentation as required by the Act.
Springdale defended itself by relying on the resale exemption under the Act, which provides that a franchisor is not obligated to provide disclosure to a franchisee under certain circumstances, including some resales. Specifically, section 5(7)(a)(iv) of the Act provides that a franchisor is exempted from disclosure obligations where the grant of the franchise is not effected by or through the franchisor. Section 5(8) of the Act provides that the grant of a franchise is not considered to be effected by or through a franchisor simply because there is a right of approval over that grant or if there is a transfer fee payable to the franchisor as part of that grant.
In this case, the court found that the exemption under section 5(7)(a)(iv) of the Act did not apply to the factual circumstances of this case. The court found that the franchisor’s involvement in directing the Franchisee to the selling franchisee, in conjunction with the franchisor’s involvement in negotiations between the transaction’s parties and the Franchisee’s direct dealings with the franchisor on the issue of obtaining consent to the resale, amounted to Springdale effecting the grant of the franchise. Furthermore, Springdale’s requirement that the Franchisee execute new documents concerning the delivery vehicles and the acknowledgement also meant that the Springdale was not taking a passive role in the resale, and thus caused the disclosure obligations of the Act to apply to the franchisor. In making this finding, the Court of Appeal upheld a lower court’s decision granting summary judgment against Springdale for failing to meet its disclosure obligations under the Act.
The lesson from this case is that franchisors have to be very careful when getting involved in the resale of franchises. Franchisors should exercise an abundance of caution and abide by the Act’s disclosure obligations if there is a possibility that their involvement in a resale transaction could be seen as more than simple passive approval or disapproval of the transaction. If there is any doubt, franchisors should provide disclosure as the risk of not doing so is too great under current statutory disclosure regimes. Although this is an Ontario case, it will apply equally to franchisors who operate in other provinces where there are statutory franchise disclosure obligations.