Ontario Court of Appeal confirms disclosure exemptions should be narrowly construed

The Ontario Court of Appeal has confirmed that the disclosure exceptions in the Arthur Wishart Act¹ should be “narrowly construed”.

The appeal in 2147191 Ontario Inc. v. Springdale Pizza Depot Ltd.² arose as a result of a motion for summary judgement whereby the motions judge had held that the plaintiffs were entitled to rescind their franchise agreement for failure by the Franchisor to provide a disclosure document.³

The plaintiffs had taken an assignment of the franchised business from an existing franchisee. A disclosure document was provided to the plaintiffs, but the disclosure was materially deficient so  that it amounted to no disclosure at all, thus entitling the franchisee to rescind the franchise agreement pursuant to subsection 6(2) of the Act.

The franchisor appealed the decision arguing that the motions judge had erred in holding that the franchisor could not avail itself of the “resale” exemption from disclosure found in subsections 5(7)(a)(iv) and 5(8) of the Act, which read as follows:

(7) This section does not apply to,

                        (a) the grant of a franchise by a franchisee if,

                                    (iv) the grant of the franchise is not effected by or through the franchisor;

(8) For the purpose of subclause (7)(a)(iv), a grant is not effected by or through a franchisor merely because,

(a) the franchisor has a right, exercisable on reasonable grounds, to approve or disapprove the grant; or

(b) 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.

The motions judge had held that the franchisor had gone beyond the “mere passive role” that the Act allows by (i) being involved in 3 meetings with the plaintiffs in respect of the acquisition of the franchise, (ii) requiring the plaintiffs to provide payment of consideration beyond the transfer fee charged to the former franchisee, and (iii) requiring the plaintiffs to sign an acknowledgement, which provided certain protections to the franchisor. The motions judge had stated:

In my view, the remedial purpose of the statute requires the Court to err on the side of disclosure. Where the franchisor makes a business decision to do more than remain a passive approver of a “franchisee to franchisee” transaction, then the grant is “by or through the franchisor” and disclosure is required.⁴

The Court of Appeal affirmed the motion judge’s findings and stated that the decision was “consistent with the spirit of the case law from this court concerning the interpretation of the Arthur Wishart Act and recognizes both the overall purpose of the Act and the need to “narrowly construe” the disclosure exceptions in the Act.”⁵

The key take-away from this case is that a franchisor should use caution when considering whether to rely on a disclosure exemption. When in doubt, a franchisor should err on the side of caution and provide a franchise disclosure document notwithstanding the possible availability of an exemption from disclosure.