The Ontario Court of Appeal has upheld a lower court decision
finding that franchisors are not exempt from disclosure obligations
where they are actively involved in the resale of an existing
The decision reaffirms that the "resale" disclosure
exemption under the Wishart Act (Franchise Disclosure),
2000, SO 2000, c 3 will be narrowly construed by Ontario courts.
The "resale" exemption under ss.5(7)(a)(iv) and 5.8(a)
and (b) of the Arthur Wishart Act provides that
franchisors are exempt from providing disclosure where "the
grant of the franchise is not effected by or through the
franchisor," including where the franchisor is just involved
to: (i) exercise its right to consent to the transaction; and (ii)
accept a transfer fee.
The Lower Court Decision
At first instance in 2147191 Ontario Inc. v. Springdale
Pizza Depot Ltd.,1 the Ontario Superior Court of
Justice allowed the purchaser of a Springdale Pizza franchise to
rescind the assigned franchise agreement on the basis that the
franchisor's disclosure was materially deficient. For a more
detailed review of the original decision, our
Franchise Group's review of the case can be found here.
The franchisor, Springdale Pizza Depot Ltd., appealed the
original decision that it could not avail itself of the resale
disclosure exemption. In particular, the franchisor argued that the
mere fact that it had meetings with the purchaser was not
sufficient for the Court to find it more than a "passive"
participant in the sale process and thus trigger the disclosure
requirements under the Wishart Act.
In the appeal decision of Springdale,2 the
Ontario Court of Appeal found that the lower court was justified in
its finding, which was also consistent with the "spirit of the
case law from this court concerning the interpretation of the
Wishart Act and recognizes both the overall purpose of the
Act and the need to 'narrowly construe' the disclosure
exceptions in the Act."
The Ontario Court of Appeal reaffirmed the lower court's
finding that where a franchisor leads the purchaser to believe that
it is starting down the path of requiring a new franchise
agreement, meets the prospective purchaser multiple times and
requires extra consideration that limits the exercise of the
purchaser's rights, the franchisor cannot be said to be
"merely passive" and thus cannot take advantage of the
Key Take-Away Principles
Franchisors in Ontario seeking to rely on the "resale"
disclosure exemption are reminded to exercise caution and can take
away two key lessons from this decision:
The disclosure exemption is available for franchisors whose
participation is limited to: (i) exercising any contractual rights
it has to approve the purchaser; and (ii) taking the franchise fee
set out in the franchise agreement; and
In cases where the franchisor has taken more than a passive
role in the assignment process, franchisors are required to abide
by the Wishart Act's disclosure obligations.
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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