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Franchise - Disclosure - Non-Application [AWAFD s.5(7)]. 2189205 Ontario Inc. v. Springdale Pizza Depot Ltd. [resale of a franchise AWAFD 5(7)(a)]
In 2189205 Ontario Inc. v. Springdale Pizza Depot Ltd. (Ont CA, 2011) the Ontario Court of Appeal dismissed an appeal, here brought against orders "granting partial summary judgment, declaring that the Franchise Agreement documents were validly rescinded and that the franchisor is liable to pay damages required by s. 6(6) of the Act".
Here the court considers a 'resale' (assignment) of a franchise [under AWAFD s.5(7)(a)], and the non-application of the disclosure duties that that may justify:[1] At issue in this appeal are ss. 5(7)(a)(iv) [SS: "the grant of the franchise is not effected by or through the franchisor"] and (8)(a) [SS: n/a where "the franchisor has a right, exercisable on reasonable grounds, to approve or disapprove the grant"] of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the Act), exempting a franchisor from the disclosure obligations on a resale of the franchise by a franchisee.
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II. The resale exemption
i. The decision
[17] The motion judge, at para. 10, considered whether there was a genuine issue requiring trial as to whether disclosure was exempted by ss. 5(7)(a)(iv) and 5(8) of the Act:In my view, in order to determine if the statutory requirements have been met, the facts of each case must be examined. I do not accept the submission of counsel for the franchisor that the disclosure provisions do not apply because this case falls into an exemption set out in section 5 of the Act, specifically that this was a resale of a franchise. It was argued that the franchisor was not involved in the sale of the franchise, apart from providing its consent to the transaction. This argument, however, is not supported by the evidence, in particular the various documents that the Plaintiffs were required to sign involving Springdale or one of its affiliates. This was not a case of the sale of a franchise being effected from the existing franchisee only to the new purchaser. That view is also inconsistent with the affidavit evidence filed by the Defendants. [18] I do not accept the franchisor’s characterization of the motion judge’s decision as a finding that the mere signing of franchise documents was sufficient to defeat the resale exemption. Nor do I accept that she failed to consider the nature or the content of the franchise documents signed. While her reasons on this particular issue were relatively brief, in rejecting the franchisor’s position that it was not involved in the sale, the motion judge relied upon the evidence filed and the various documents that were required by the franchisor.
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[25] Section 5 of the Act sets out the specific disclosure obligations for franchisors and s. 6 provides the consequences for failure to strictly comply with those requirements, including rights of rescission and compensation. Exemptions from the disclosure requirements are set out in ss. 5(7) and 5(8).
[26] The disclosure exemptions in s. 5(7) exempt a franchisor from the disclosure obligations where:. the grant of the franchise is not from the franchisor or on behalf of the franchisor (ss. 5(7)(a) and (d));
. the grant is to an individual associated with the franchisor (s. 5(7)(b));
. the grant is an expansion, renewal or extension of an existing franchise and there has been no material change (ss. 5(7)(c) and (f)); and
. the grant does not meet threshold values as determined by regulation (ss. 5(7)(e), (g) and (h)). [27] The provisions of the Act relating to the resale exemption provide:5(7) This section does not apply to,
(a) the grant of a franchise by a franchisee if,
(i) the franchisee is not the franchisor, an associate of the franchisor or a director, officer or employee of the franchisor or of the franchisor’s associate,
(ii) the grant of the franchise is for the franchisee’s own account,
(iii) in the case of a master franchise, the entire franchise is granted, and
(iv) the grant of the franchise is not effected by or through the franchisor;
...
5(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. [28] Pursuant to s. 6(2), the failure to provide any disclosure permits a franchisee to rescind the Franchise Agreement without penalty within two years of the Franchise Agreement. As a result of s. 12, the onus is on the franchisor to prove that an exemption applies.
[29] The franchisor submits that in the context of a primary franchise sale, the franchisee must place heavy reliance on the disclosure document provided by the franchisor to assess the potential financial viability of the franchise. On the other hand, the prospective franchisee in a franchise resale market is better positioned to make an informed decision concerning whether to invest in a franchise. The prospective franchisee in this second scenario has the opportunity to observe the franchisee as a business, discuss the business with the incumbent franchisee and review business records.
[30] However, the disclosure exemption in s. 5(7)(a) does not simply focus upon whether there has been a pre-existing franchise. If the disclosure exemption was only concerned with a pre-existing franchise, there would be no need to qualify the exemption relating to a grant from a franchisee.
[31] While s. 5(7)(a) exempts a franchisor from the disclosure obligations when the grant of the franchise is directly from a franchisee, the provisions limit the role that the franchisor may play in such a grant without triggering the disclosure obligation. The focus of ss. 5(7)(a)(iv) and 5(8) is on the role of the franchisor in the resale. The disclosure exemption is not available where the grant of the franchise is from the franchisee but is “effected by or through the franchisor”. Subsection 8 provides that “a grant is not effected by or through a franchisor merely because … the franchisor has a right, exercisable on reasonable grounds, to approve or disapprove the grant” or because the franchisor may charge a reasonable fee for its approval.
[32] Given the purpose and context of the Act, the exemptions to disclosure set out in ss. 5(7)(a)(iv) and 5(8) must be narrowly construed.
[33] The Concise Oxford English Dictionary defines the verb “effect” as “cause to happen, bring about”: Concise Oxford English Dictionary, 11th ed., sub verbo “effect”. Taken together, the language of ss. 5(7)(a)(iv) and (8) exempt a franchisor from its disclosure obligations only when the franchisor is not an active participant in bringing about the grant and does nothing more than “merely” exercise its rights to consent to the transfer. In such circumstances, the power imbalance does not bear upon the decision to become a franchisee and plays no role in effecting the grant.
[34] A number of cases have considered the conduct of a franchisor that has resulted in the transfer of the grant to be “effected by or through the franchisor”.
[35] In MAA Diners Inc. v. 3 for 1 Pizza & Wings (Canada) Inc., 2003 CanLII 10615 (Ont. S.C.), aff’d 2004 CanLII 19240, Speigel J. found that the vendor franchisee and the franchisor were the same. She further found at para 29:The respondents have also failed to satisfy me that the grant of the franchise as “not effected by or through the franchisor”. [The franchisor’s operation manager] took an active role in the franchise arrangements with the applicants. All of the meetings between the parties took place at the offices of [the franchisor]. [He] prepared the contractual documents. He also provided the bill of sale and the sublease ... [He] testified during cross-examination that he was asked to “facilitate or manage the transaction” with the applicants. [36] In 1518628 Ontario Inc. v. Tutor Time Learning Centres, LCC, 2006 CanLII 25276 (Ont. S.C.), Cumming J. considered when a franchisor’s requirements for providing its consent to the assignment goes beyond the mere “right, exercisable on reasonable grounds, to approve or disapprove the grant”, within the meaning of s. 5(8)(a), to become a grant “effected by or through the franchisor” within the meaning of s. 5(7)(a)(iv).
[37] In Tutor Time, the franchisor required the execution of certain documents as a condition of consenting to the assignment of the franchise. The franchisor argued (as does the franchisor in this case) that it was not an active participant in finding the purchaser and in the sale process and that it merely exercised its right, on reasonable grounds, to consent to the assignment. The Franchise Agreement provided conditions for the franchisor’s consent to transfer, “including” enumerated requirements. As in the agreement in this case, the franchisor had the power to impose further requirements for its consent to an assignment of the Franchise Agreement. In that case, the franchisor did not participate in the sale, but required the purchaser’s spouse to sign the Personal Guaranty before it would consent to the assignment of the franchise.
[38] Justice Cumming found that by imposing conditions beyond the specific requirements of the Franchise Agreement, the grant of the franchise to the new purchaser (through the resale of the existing franchise) was “effected by or through the franchisor” within the meaning of the Act: para. 35.
[39] Justice Cumming held that if the proposed purchaser had refused to sign a document specifically required by the transfer provisions of the Franchise Agreement, the franchisor could reasonably have withheld its approval. He noted, “[t]his would arguably be a right of the franchisor exercisable on reasonable grounds, to approve or disapprove the grant”: para. 30. He distinguished, at para. 44, between the franchisor’s right to impose such conditions specifically required by the Franchise Agreement and the franchisor’s power to impose additional conditions:A “right” is different from simply being in a position of “power”. In my view, a “right” means a condition in the franchise agreement, that is, an express contractual right between franchisor and franchisee. TTLC had the “power” to refuse to consent to the transfer on any basis it wished unless a condition imposed by it was met. TTLC might exercise such “power” on reasonable grounds. However, in such instance, the franchisor could not be said to have a “right” to impose the condition within the meaning of the exempting provision, being s. 5(8)(a) of the Act. [40] He concluded at para. 49:The exemption in s. 5(8)(a) stipulates that “a grant is not effected by or through a franchisor merely because the franchisor has a right, exercisable on reasonable grounds, to approve or disapprove the grant” (my emphasis). In my view, a franchisor who exercises the power, albeit on reasonable grounds and pursuant to its usual practice, to require a non-officer, non-shareholder spouse ... to in effect become a co-franchisee is not merely engaging in the relatively passive act of approval of the transfer of the franchise as between the parties contemplated in the agreement between the transferor franchisee ... and intended transferee franchisee ... Rather, the grant is being effected by or through the franchisor. [41] Clearly, the level of the franchisor’s involvement in the present case does not approach the level of that in MAA Diners Inc., where the court found that the franchisor was also the vendor. Section 5(7)(a)(i) makes the exemption unavailable in such circumstances. However, s. 5(7)(a)(iv) captures the indirect involvement of a franchisor. In this case, there was uncontradicted evidence before the motion judge that the franchisor did not simply play a passive role in the resale of this franchised business, limited to the specific requirements required for its consent under the Franchise Agreement.
[42] In this case, the franchisor directed the prospective vendor to this particular business. The franchisor had detailed financial information about all franchises and the right of first refusal. Further, the franchisor had some involvement in the negotiations for the agreement of purchase and sale of the assets of the business. As noted above, all of the parties of this action negotiated together to bring about the sale of the vendor’s business to the respondents and for the respondents to become a franchisee of Springdale as a result. Furthermore, the agreement of purchase and sale required the respondents to obtain the consent of the franchisor, and thus deal directly with the franchisor. In conclusion, the franchisor was directly involved with the respondents in the purchase of this business. The franchisor was not merely a passive participant in this resale.
[43] In addition, the franchisor did not merely demand execution of the Franchise Agreement and related documents that had been signed by the vendor as required in clause 18.4(3) of the Franchise Agreement. Although they may not have been as significant as the guarantee required in Tutor Time, the franchisor required two additional documents that had not been signed by the vendor, the Undertaking for car wrapping and the Acknowledgement in order to consent to the assignment.
[44] The franchisor submits that the undertaking to use the specified car wrapping was required to bring the franchise into conformity with Pizza Depot’s then current Retail Marketing Plan. However, the vendor had not signed a similar undertaking with the franchisor. There was no evidence before the motion judge that this was required to conform to the current Retail Marketing Plan. Further, the undertaking signed by the respondents provides that a breach of the undertaking regarding the car wrap was considered a breach of the Franchise Agreement.
[45] The Acknowledgement included a signed statement by the respondents that they did not rely in any way on the representations by the franchisor about the sales figures of the business. I cannot agree with the appellants that this additional protection against recourse for the misrepresentation of financial figures was insignificant to the consent.
[46] The franchisor submits that, in any event, the Undertaking for car wrapping and the Acknowledgement would not have been a prerequisite for the consent to the assignment and that the franchisor could not have reasonably refused to consent if the respondents had refused to sign them. However, that position is entirely speculative as the evidence was that the franchisor required the five documents in order to consent. The franchisor had the power to impose additional conditions under the Franchise Agreement and chose to do so. As in Tutor Time, it does not matter if these additional conditions were reasonable.
[47] It may be that any of these individual circumstances would not have been enough to support a finding that the grant was “effected by or through the franchisor.” However, there are a number of circumstances that, taken together, support the motion judge’s conclusion that the resale was brought about or caused to happen by or through the franchisor:. the franchisor directed the respondents to this particular purchaser;
. the franchisor negotiated together with the vendor and the respondents to bring about the sale of the business and the assignment of the franchise;
. under the agreement the onus was on the respondents to obtain the consent of the franchisor; and
. the franchisor required execution of documents that the vendor had not been required to sign, the Undertaking for car wrapping and the specific acknowledgement that there was no reliance by the respondents on any financial representations by the franchisors. [48] The motion judge considered the applicability of the resale exemption. She adverted to the role of the franchisor in the transaction and the documents it required from the respondents. In this case the franchisor went beyond the passive role of merely exercising its right, on reasonable grounds, to approve the resale of the franchise business within the meaning of s. 5(8)(a). The franchisor was involved in the sale and sale process and required the respondents to execute documents which were not specified in the Franchise Agreement, as a condition of its consent. For these reasons, the motion judge did not err in concluding that the grant from the franchisee was effected by or through the franchisor and did not fall within the disclosure exemption in s. 5(7)(a)(iv). On this record, there was no genuine issue requiring a trial. . 2355305 Ontario Inc. v. Savannah Wells Holdings Inc. [disclosure exemptions s.5(7)(a)]
In 2355305 Ontario Inc. v. Savannah Wells Holdings Inc. (Ont CA, 2025) the Ontario Court of Appeal dismissed a franchisor's appeal, here from a successful "franchisee’s action brought under the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c.3 (the “Act”) for damages".
Here the court considers the AWAFD s.5(7)(a) disclosure exemption:[5] The Act provides for exemptions to a franchisor’s disclosure obligation. In this case, the appellants sought to rely on s. 5(7)(a), which applies to a resale of a franchise if the grant of the franchise is not effected by or through the franchisor. This and other exceptions provided under s. 5(7) are to be narrowly construed: Springdale Pizza, at para. 32. Accordingly, in general, where a franchisor requires a new franchise agreement to be signed, they can no longer rely on the s. 5(7)(a) exemption: 2256306 Ontario Inc. v. Dakin News Systems Inc., 2016 ONCA 74, at para. 8. If, on the other hand, the franchisor merely passively consented to the transfer of the franchise, the exemption can apply: Springdale Pizza, at paras. 31-33; see also s. 5(8)(a) of the Act.
[6] A party relying on this exemption from disclosure must satisfy the four criteria set out at s. 5(7)(a): “(i) the franchisee is not the franchisor, an associate of the franchisor or a director, officer or employee of the franchisor or of the franchisor’s associate, (ii) the grant of the franchise is for the franchisee’s own account, (iii) in the case of a master franchise, the entire franchise is granted, and (iv) the grant of the franchise is not effected by or through the franchisor” (emphasis added).
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