The Ontario Court of Appeal ("ONCA") recently affirmed the trial level decision in Jayasena Management Corp et al. v Savannah Wells Holding Inc. et al1("Savannah") – which held that the sale of an existing franchise was "effected by or through" the franchisor, making the resale disclosure exemption found in ss. 5(7)(a)(iv) and 5(8) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the "AWA") inapplicable. In doing so, the ONCA has once again confirmed that the courts will interpret franchise disclosure exemptions very narrowly.
Background
We discussed the trial court decision in Savannah in a prior bulletin. In short, however, the plaintiffs wanted to become Wild Wing franchisees (a brand of restaurants owned by the franchisor defendant). They met with a representative of the franchisor who encouraged them to acquire a franchise from an existing franchisee, took them on a tour of that location and provided them with some financial information from the vendor franchisee (but no franchise disclosure document under the AWA). The plaintiffs thereafter acquired the franchise and signed a new franchise agreement relating to same with the franchisor.
After unsuccessfully operating the franchise for 18 months, the plaintiffs served a notice of rescission and brought a claim for damages against the defendants (being the franchisor and franchisor's associates). The defendants took the position that they were entitled to rely on the statutory exemption from providing a franchise disclosure document under ss. 5(7)(a)(iv) and 5(8) of the AWA and that rescission was not available to the plaintiffs as a result.
Section 5(7)(a)(iv) of the AWA exempts franchisors from the obligation to provide a franchise disclosure document if the grant of the franchise by a franchisee is "not effected by or through the franchisor". Section 5(8) goes on to provide that a grant is "not effected by or through a franchisor" merely because the franchisor has a right to approve or disapprove of the grant or a reasonable transfer fee must be paid to the franchisor.
The trial court held that the defendants could not rely on the resale disclosure exemption in ss. 5(7)(a)(iv) and 5(8) of the AWA because they were actively involved in "effecting" the transfer of the franchise. The trial court declared that the franchise agreement was validly rescinded due to the defendants' failure to provide a franchise disclosure document and awarded the plaintiffs approximately $700,000 in damages together with costs on a substantial indemnity basis in the amount of $250,000.
The ONCA Decision
The defendants appealed, asserting that the trial judge erred in concluding they were not entitled to rely on the resale disclosure exemption (they also challenged the damages and costs awarded by the trial judge). The ONCA made short work of dismissing the appeal.
Noting that the AWA is remedial legislation designed to redress the power imbalance between franchisors and franchisees, the ONCA cited its earlier decision in 2189205 Ontario Inc. v. Springdale Pizza Depot Ltd.2 for the proposition that the statutory exemptions from the franchisor's disclosure obligation are to be narrowly construed. The ONCA also noted that, pursuant to s. 12 of the AWA, the onus is on franchisors to prove that an exemption applies.
The ONCA went on to find that the trial court had ample evidence to conclude that the grant of the franchise was "effected through" the franchisor on two separate bases, making the resale disclosure exemption inapplicable.
First, the ONCA confirmed (as it previously held in 2256306 Ontario Inc. v Dakin News Systems Inc.3) that requiring the purchaser to sign a new franchise agreement alone (as opposed to simply granting consent to an assignment of the agreement to the purchaser) is sufficient to make the resale exemption inapplicable.4 While the defendants disputed the legitimacy of the franchise agreement (the plaintiffs produced the only copy of same, signed by them alone), the ONCA held that there was sufficient evidence for the trial judge to prefer the plaintiffs' evidence on the point (which was that the defendants kept a copy of the fully executed franchise agreement and only gave the plaintiffs a version that had been signed by them).
Second, the ONCA found that the trial judge had ample evidence to conclude that the franchisor, like in Springdale, played more than merely a passive role in the grant of the franchise. The franchisor's representative steered the plaintiffs to the specific franchise that was for sale and provided them with financial information about it.5
Accordingly, the ONCA agreed with the trial court that the plaintiffs validly rescinded the franchise agreement and were entitled to statutory compensation under s. 6(6) of the AWA. The ONCA went on to find no errors in the amount of damages and costs awarded to the plaintiffs, and consequently dismissed the appeal with costs.
Key Takeaways
As we noted in our prior bulletin, the resale disclosure exemption in s. 5(7)(a)(iv) will be of limited utility in most cases. Courts will continue to construe the disclosure exemptions narrowly and the onus to demonstrate that one applies is on the franchisor.
There are two circumstances where a court may find that a franchisor has "effected" the transfer: 1) where it requires the purchaser to sign a new franchise agreement or other related documents (or agree to additional conditions not contemplated in the original agreement with the seller); or 2) where it actively participates or is involved in some way in the transaction. This latter circumstance can be demonstrated where the franchisor directs a purchaser to an existing franchisee looking to sell and has some involvement in bringing the parties together, providing the purchaser with information about the seller's business or being involved in their negotiations.
As a result, the safer course for franchisors when dealing with a sale of an existing franchise is to provide the purchaser with a compliant franchise disclosure document – rather than hope for the ability to rely upon the resale disclosure exemption found in ss. 5(7)(a)(iv) and 5(8) of the AWA.
Footnotes
1 2355305 Ontario Inc. v Savannah Wells Holdings Inc., 2025 ONCA 505; 2023 ONSC 1008.
2 2011 ONCA 467 ("Springdale"), at para. 32.
3 2016 ONCA 74, at para. 8.
4 Savannah, at paras. 9 – 10.
5 Savannah, at para. 11.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2025
