No Franchise Disclosure Document Required: Ontario Court Of Appeal Considers The One-Year Term/No Franchise Fee Exemption

The Ontario Court of Appeal recently confirmed that franchisors do not need to provide a disclosure document to prospective franchisees where the franchise term is one year or less and franchisees do not pay a non-refundable franchise fee. The court's decision in TA & K Enterprises Inc. v. Suncor Energy Products,1 the first to consider the "one-year term/no franchise fee" disclosure exemption contained in Ontario's franchise legislation2, represents a significant victory for franchisors.

If you are in the franchising business in Ontario, the TA&K decision should be required reading. We explain the case, and the significance of the Court of Appeal's ruling, below.

The legislative context

As those of you in the franchise business know, the disclosure obligations under the Act are onerous. Subject to certain exemptions, the Act requires a franchisor to provide prospective franchisees with a disclosure document (containing all material facts about the franchisor and the franchise business) two weeks before the franchisee signs any agreements or makes any payments to the franchisor. Failure to do so can result in rescission of the franchise agreement and expose the franchisor to damages.

One of the statutory exemptions from having to provide a disclosure document arises where:

The franchise agreement is not valid for longer than one year; and does not involve the payment of a non-refundable franchise fee (notably, the Act does not define the term "franchise fee"). TA & K required the court to consider whether this exemption applies where a franchise agreement for a one-year term was subsequently renewed on a month-to-month basis and the franchisee was required to make periodic royalty payments to the franchisor.

The facts in TA & K Enterprises Inc. v. Suncor Energy Products

The plaintiff franchisee operated a gas station under a franchise agreement with Suncor. The franchise agreement was signed on November 11, 2008 and expressly provided that the term of the franchise was one year, commencing on November 15, 2008 and ending on November 14, 2009. The franchise agreement contained no renewal options, and did not require the franchisee to pay a non-refundable franchise fee for the right to become a franchisee (although it did require the franchisee to pay royalties over the course of the agreement). Relying on the above-noted statutory exemption, Suncor did not provide a disclosure document to the plaintiff.

About a month before the one-year term...