Pursuant to subsection 5(1) of the Arthur Wishart Act
(Franchise Disclosure), 2000, S.O. 2000 c. 3 (the
"Act"), franchisors must provide prospective franchisees
with a disclosure document. However, subsection 5(7) of the Act
exempts the franchisor from this requirement in the event of a
grant of a franchise by a franchisee if the grant "is not
effected by or through the franchisor". Subsection 5(8) of the
Act clarifies that a grant of a franchise "is not effected by
or through a franchisor merely because,
the franchisor has a right,
exercisable on reasonable grounds, to approve or disapprove the
a transfer fee must be paid to the
franchisor in an amount set out in the franchise agreement or in an
amount that does not exceed the reasonable actual costs incurred by
the franchisor to process the grant."
Before the franchisor decides to rely on this exemption and
chooses not to provide a prospective franchisee with a disclosure
document, the franchisor should consider the recent decision in the
following case. In 2147191 Ontario Inc. v. Springdale Pizza
Depot Ltd., 2014 ONSC 3442, the original franchisee assigned
an existing franchise to the plaintiffs (the
"Assignees"). The Assignees then sought to rescind the
franchise agreement, claiming that they were entitled to receive a
disclosure document from the franchisor under the Act in connection
with the franchise assignment and that no disclosure was provided
to them. The franchisor's position was that the Assignees were
not entitled to receive disclosure, because the Assignees acquired
the business from an existing franchisee and not from the
Relying on subsection 5(8) of the Act, the court stated that a
franchisor is not required to provide a disclosure document to
franchise assignees where the franchisor is not involved in the
transaction (aside from approving the transaction and receiving a
transfer fee), and thus is merely a passive participant in the
However, the court found that the franchisor in this case went
beyond a mere passive role. The court relied on the following facts
in reaching its decision:
The franchisor met with both the
original franchisee and the Assignees three times in connection
with the assignment of the franchise.
The franchisor required the Assignees
to sign an acknowledgement, which included a statement by the
Assignees that they did not rely on the representations by the
franchisor about the sales figures of the business.
The franchisor initially told the
original franchisee that the franchisor would require a new
franchise agreement, as opposed to an assignment document. It was
later decided that the transaction would proceed as an assignment
from the original franchisee.
The judge held at paragraph 15 that "[o]nce the franchisor
became engaged in the transaction and required additional
consideration that limited the rights of the prospective franchisee
under the statute, it was no longer passively exercising its
approval rights. Rather, it was negotiating for itself concerning
the allocation of statutory and common law rights and
responsibilities as between franchisor and franchisee." The
judge then went on to say at paragraph 17 that "[w]hen a
franchisor leads the parties to believe that it is starting down
the path or requiring a new franchise agreement, meets the
prospective franchisees multiple times, and requires extra
consideration that limits the exercise of the prospective
franchisee's rights, I do not think it can be said to have been
merely passive." Accordingly, the court found that the
Assignees were entitled to disclosure from the franchisor.
The franchisor appealed the decision of the Superior Court of
Justice. The Court of Appeal in 2147191 Ontario Inc. v.
Springdale Pizza Depot Ltd., 2015 ONCA 116, affirmed the lower
court's decision, stating that the decision recognized the
overall purpose of the Act – redressing the imbalance of
power as between the franchisor and franchisee. Importantly, the
Court of Appeal held that the disclosure exemptions in the Act,
including the exemption set out in subsection 5(7) of the Act, must
be narrowly construed.
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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