Franchisors' disclosure obligations may be triggered even
where a franchisee is assigning its interest in a franchise to a
third party. The Ontario Court of Appeal recently considered the
circumstances in which a franchisor will be exempt from the
disclosure obligations contained in the Arthur Wishart Act(Franchise Disclosure) (the Act). The case holds important
lessons to franchisors that facilitate the purchase of their
existing franchises by new prospective franchisees.
The Court's decision in 2189205 Ontario Inc. v.
Springdale Pizza Depot Ltd. (Springdale Pizza) makes
clear that the exemption from disclosure obligations contained in
section 5(7)(a)(iv) of the Act — which applies where the
"grant of the franchise is not effected by or through the
franchisor" — is now limited to situations
where the franchisor is nothing more than a "passive
participant" in the sale of a franchise.
In Springdale Pizza, a prospective franchisee
approached a franchisor with the intention of purchasing a Pizza
Depot franchise. The franchisor directed the purchaser to an
existing franchisee that was trying to sell its franchise. While
the transaction was essentially an assignment of the franchise
interest from the previous owner to the purchaser, the franchisor
also required the buyer to execute two additional documents: an
undertaking to car wrap all delivery vehicles with the Pizza Depot
brand, and an acknowledgment that the franchisor was not
substantiating or verifying the sales figures reported by the
The sale was completed but, several months later the purchaser
sought rescission of the agreement on the basis that they had not
received a disclosure document from the franchisor. The Act permits
rescission of a franchise agreement up to two years after its
execution, if the franchisor never provided a disclosure document,
unless one of the Act's exemptions from disclosure applied in
The franchisor maintained that it was not required to provide a
disclosure statement on the basis of the exemption in section
5(7)(a)(iv) of the Act. It was the franchisor's position that
this transaction was effected by or through the previous franchisee
and that the franchisor only exercised its right, pursuant to
section 5(8) of the Act, to act reasonably in approving (or
disapproving) the resale of the franchise.
The Court of Appeal disagreed. The Court held that given the
objective of the Act, which is to rectify power imbalances in
franchise relationships through disclosure obligations, this
exemption from disclosure should be interpreted narrowly to apply
only where the franchisor is merely a "passive
participant" in the sale of the franchise.
In this case, the franchisor's role in the sale of the
franchise exceeded that of a passive participant. In particular,
directed the prospective buyer to a specific franchisee that
was looking to sell its franchise;
was involved in the negotiations;
required the purchaser to actively seek its consent, as opposed
to merely exercising its right of refusal enshrined in section 5(8)
of the Act (even though the agreement stipulated that the
franchisors' consent could not be unreasonably withheld);
required the purchaser to execute two additional documents that
had not been executed by the previous franchisee.
Collectively, these steps constituted "active"
participation such that the "grant of the franchise" was
"effected by or through the franchisor." The disclosure
obligations in the Act therefore applied. The Court did pause to
say that each circumstance on its own may be insufficient to reach
this conclusion, but taken together, the circumstances support the
finding that the franchisor went beyond a passive role in the
Franchisors wishing to avoid the obligation to provide
disclosure statements to new franchisees in these kinds of buy/sell
transactions, must maintain a truly "passive" role in the
Parties to a franchise relationship should also consider what
effect this decision will have on the other exemptions from
disclosure obligations in section 5(7) of the Act. It is reasonable
to assume that they will also be interpreted in a very narrow
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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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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