Court warns franchisors to carefully interpret disclosure exemptions

The Ontario Superior Court of Justice and Court of Appeal have found in favour of a Brampton, Ont., Pizza Depot franchisee seeking to rescind their franchise agreement after the franchisor withheld disclosure.

The assigned franchisee (assignee) claimed they were entitled to receive a disclosure document from the franchisor under the Arthur Wishart (Franchise Disclosure, 2000) Act. The franchisor claimed the assignee was not entitled to disclosure because they acquired the business from an existing franchisee, not from the franchisor.

Subsection 5(1) of the act states a franchisor must provide disclosure documents to prospective franchisees. Subsection 5(7) exempts the franchisor from this requirement in the event of a grant of a franchise by the franchisee, but only if the grant “is not affected by or through the franchisor.” Subsection 5(8) clarifies a franchisor is not affecting a grant of a franchise when they approve or disapprove the grant or when a transfer fee is paid to the franchisor in the amount set out in the franchise agreement.

Lawyer Marina Abrosimov of Ottawa-based Merovitz Potechin LLP says the court found the franchisor in this case went beyond a passive role. They met with both the original franchisee and the assignee three times in connection with the assignment. The franchisor also required the assignee to sign an acknowledgement including a statement saying they did not rely on the representations by the franchisor about sales figures for the business. The franchisor told the original franchisee they would require a new franchise agreement from them as well.

The judge said once the franchisor became engaged in the transaction and required additional consideration limiting the rights of the prospective franchisee under the statute, they were no longer passively exercising their approval rights. The judge found the franchisor was negotiating for themselves concerning the allocation of statutory and common law rights and responsibilities between them and the franchisee.

The franchisor went to the Court of Appeal, which affirmed the decision stating it recognized the overall purpose of the act, while redressing the imbalance of power between franchisor and franchisee. The court also said disclosure exemptions must be “narrowly construed.”