Even in the absence of an executed franchise agreement, your
business relationship could be characterized as one of franchise
and, as a result, subject to disclosure obligations contained in
the Arthur Wishart Act (Franchise Disclosure) (the Act).
In a recent Ontario decision, Justice Corbett in 1706228
Ontario Ltd. v. Grill It Up Holdings Inc. confirmed that:
A franchise relationship can exist in
the absence of an express franchise agreement so long as the
substance of the relationship is one of franchise; and
Disclosure obligations of a
franchisor under the Act begin at the outset of the business
relationship, when money is exchanged between the parties and
before the final franchise agreement is executed.
In 2007, Grill It Up, a nascent fast food franchise operation,
entered into a licence agreement and an asset purchase agreement
with the plaintiff, allowing the plaintiff to use its trademarks
and promotional materials. The plaintiff invested $130,000 to open
However, before the parties could execute the franchise
agreement, the plaintiff backed out of the transaction. According
to the plaintiff, Grill It Up had failed to deliver a disclosure
document as required by the Act, and had also previously
misrepresented the prospective franchisee's financial
obligations under the agreement. The plaintiff sought a return of
its investment, as well as lost income relating to the aborted
Despite the absence of a franchise agreement, the court held
that the relationship between the plaintiff and defendant was a
franchise relationship within the meaning of the Act. According to
the Court, the parties had agreed through the executed license and
asset purchase agreement that:
The plaintiff would pay a royalty to Grill It Up;
Grill It Up, in the licence agreement, granted the plaintiff
the right to sell goods that were "substantially
associated" with Grill It Up's trademark;
Grill It Up provided "significant assistance" in the
franchisee's method of operation: start-up construction
costs were borne by the defendant, the store was designed by Grill
It Up, the menu was provided by Grill It Up, employees were trained
by Grill It Up and Grill It Up provided promotional materials.
Additionally, the location of the restaurant was found by Grill It
Up, who entered into a head lease with the shopping mall and
subleased the space to the plaintiff for its restaurant.
In the circumstances, it was clear to the court that the
parties' conduct amounted to a "franchise"
relationship under the Act. As a result, the disclosure
requirements in the Act applied to the parties.
The court then considered whether Grill It Up had breached its
disclosure obligations. Under section 5, a franchisor is required
to provide a prospective franchisee with a disclosure document at
least 14 days prior to the signing of a franchise agreement, or any
other agreement "relating to" the franchise, and payment
of any consideration by the prospective franchisee to the
In this case, the plaintiff paid deposits to Grill It Up and
executed agreements "relating to" the franchise, such as
the licence agreement and asset purchase agreement, even though the
plaintiff refused to execute the final franchise agreement itself.
As a result, the court held Grill It Up was in breach of its
disclosure obligation to deliver a disclosure document to the
plaintiff. The plaintiff was entitled to rescission and
consequently a return of the lost investment, as well as damages
for lost income, due to the fact that the franchisee's
principal resigned from his previous job to pursue the franchise
opportunity with Grill It Up.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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