Is A Disclosure Document Required If A Franchise Is Being Assigned By The Franchisee?

Pursuant to subsection 5(1) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000 c. 3 (the "Act"), franchisors must provide prospective franchisees with a disclosure document. However, subsection 5(7) of the Act exempts the franchisor from this requirement in the event of a grant of a franchise by a franchisee if the grant "is not effected by or through the franchisor". Subsection 5(8) of the Act clarifies that a grant of a franchise "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 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." Before the franchisor decides to rely on this exemption and chooses not to provide a prospective franchisee with a disclosure document, the franchisor should consider the recent decision in the following case. In 2147191 Ontario Inc. v. Springdale Pizza Depot Ltd., 2014 ONSC 3442, the original franchisee assigned an existing franchise to the plaintiffs (the "Assignees"). The Assignees then sought to rescind the franchise agreement, claiming that they were entitled to receive a disclosure document from the franchisor under the Act in connection with the franchise assignment and that no disclosure was provided to them. The franchisor's position was that the Assignees were not entitled to receive disclosure, because the Assignees acquired the business from an existing franchisee and not from the franchisor itself.

Relying on subsection 5(8) of the Act, the court stated that a franchisor is not required to provide a disclosure document to franchise assignees where the franchisor is not involved in the transaction (aside from approving the transaction and receiving a transfer fee), and thus is merely a passive participant in the assignment.

However, the court found that the franchisor in this case went beyond a mere passive role. The court relied on the following facts in reaching its decision:

The franchisor met with both the original franchisee and the Assignees three times in connection with the assignment of the franchise. The franchisor required the Assignees to sign an...