Franchisors looking to avoid the onerous costs of preparing
disclosure statements can look to a recent Ontario Court of Appeal
case for guidance. The decision clarifies the disclosure exemption
for franchise agreements of one year or less that do not require
the payment of an up-front franchise fee.
The Ontario Court of Appeal's decision in TA & K Enterprises v. Suncor
Energy clarifies the scope of the exemption from
disclosure found in section 5(7)(g)(ii) of the Arthur Wishart Act (Franchise
Disclosure), 2000 (Act). Under this provision, a
franchisor does not have to deliver a disclosure statement to a new
franchisee 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 decision provides three
important lessons to franchisors wishing to take the benefit of
First: the term of a
proposed franchise agreement should be expressly limited to 12
months or less.
Second: to assess
the length of an agreement's term, the courts will look to the
period during which the parties are legally bound by their
rights and obligations under the agreement. Other factors
— such as when the agreement is actually executed or a
subsequent offer to extend the agreement — will not
extend the term of the agreement for the purposes of exemption.
Based on the court's analysis, it could be risky to insert a
renewal term into the agreement that is automatically
triggered at the end of the term, as this could be construed
by the courts as contemplating a longer term than one year.
Third: to be exempt
from disclosure under the provision, the franchise agreement cannot
require any form of fee to be paid for the right to become
a franchisee. Such fees are considered risky for the franchisee,
therefore taking the relationship outside the exemption. By
contrast, ongoing "royalties or payments for goods and
services" are permitted under the exemption, as these are
not considered to be a "non-refundable franchise
The issue in TA & K Enterprises was whether Suncor,
the franchisor, was exempt from the statutory obligation to provide
a disclosure document to one of its franchisees, TA & K
Enterprises Inc. (TAK). The two companies signed a franchise
agreement on November 11, 2008. Suncor did not provide a disclosure
statement to TAK.
The term of the agreement was one year, commencing on November
15, 2008 and ending on November 14, 2009, with no option to renew.
During the term of the agreement, Suncor went through a merger with
Petro Canada that required it to divest some of its franchises. In
October 2009, 11 months after the agreement was signed, Suncor
wrote to TAK informing it that, after the agreement expired, there
would be a month-to-month extension on identical terms and
conditions. Shortly after receiving the second letter from Suncor,
TAK purported to exercise the right of rescission under section 6
of the Act and sought refunds of monies paid to Suncor under the
The Superior Court of Justice granted Suncor's motion for
summary judgment on the basis that it satisfied both requirements
under section 5(7)(g)(ii) and was therefore exempt from the
disclosure obligation. TAK appealed the decision and argued that
neither requirement was met.
The Court of Appeal affirmed the lower court decision. According
to the Court, the duration of the agreement was twelve months,
despite the fact that it was executed before its term began. What
mattered was the length of the enforceable grant of a franchise,
not when the agreement was signed. The fact that confidentiality
and other provisions remained binding was also not relevant, as
this was not the franchise grant. Moreover, an agreed-to extension
on a month-to-month basis after expiry did not trigger the
disclosure requirement. The disclosure obligation needs to be
assessable when the agreement is first signed.
TAK also argued that its obligation to pay royalties constituted
a "franchise fee" under the provision. This was rejected
by the Court of Appeal. A "franchise fee" was a "fee
paid for the right to become a franchisee," and this did not
include "royalties or payments for good or services."
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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The recent decision of the Ontario Court of Appeal in BMW Financial Services Canada, a Division of BMW Canada Inc. v. McLean provides some useful insight into the relationship between automobile dealers and the financing arms of the manufacturers for whom those dealers are franchisees.
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