A recent ruling out of the Superior Court of Justice and Court of Appeal in Ontario shows that franchisors in the area need to be very careful when it comes to disclosure obligations exemptions under the province's franchise laws.
In this particular case, a resale franchisee took a restaurant franchise brand to court to have their franchise agreement rescinded because the franchisor withheld the required disclosure. The resale franchisee had purchased the business from a previous owner, so the franchisor did not provide the disclosure because it felt this fell under the disclosure exemption in Ontario's franchise laws. Under those laws, known as the Arthur Wishart Act, franchisors do not have to provide a disclosure to a person who is receiving a franchise from another franchisee as long as the transfer isn't done through or affected by that franchisor. The law does clarify that neither the payment of a transfer fee nor the approval or disapproval of the transfer of ownership qualify as the franchiser affecting or actively engaging in the transfer.
However, in this specific case, the court found that the franchisor went beyond what would be considered a passive role, and this means they needed to provide the disclosure to the incoming resale franchisee. Because they failed to do so, the court ruled the franchisee was able to end the agreement. According to the court documents, the franchisor met with the transferring franchisee and the resale franchisee three different times about the transfer. The resale franchisee was also required to sign an acknowledgment that stated they didn't rely on sale figures representations from the franchisor about the business, and they were told by the franchisor that they would need to sign a new franchise agreement.
According to the ruling, once the franchisor required additional items from the franchisee that could potentially limit his or her rights and became actively engaged in the deal, they were no longer just exercising their rights to approve the transfer of ownership in a passive manner. Instead, the judge found the brand was negotiating for themselves over the allocation of responsibility and rights between themselves and the resale franchisee.
Moving forward, franchisors are likely to become more careful about when they exercise any disclosure exemptions found in Ontario's franchise laws. These disclosures help a franchisee make a more informed decision about their investment, so any exemptions used by a franchisor will always be looked at with extra scrutiny when challenged.
