Ontario Court Of Appeal Confirms Disclosure Exemptions Should Be Narrowly Construed

The Ontario Court of Appeal has confirmed that the disclosure exceptions in the Arthur Wishart Act1 should be "narrowly construed".

The appeal in 2147191 Ontario Inc. v. Springdale Pizza Depot Ltd.2 arose as a result of a motion for summary judgement whereby the motions judge had held that the plaintiffs were entitled to rescind their franchise agreement for failure by the Franchisor to provide a disclosure document.3

The plaintiffs had taken an assignment of the franchised business from an existing franchisee. A disclosure document was provided to the plaintiffs, but the disclosure was materially deficient so that it amounted to no disclosure at all, thus entitling the franchisee to rescind the franchise agreement pursuant to subsection 6(2) of the Act.

The franchisor appealed the decision arguing that the motions judge had erred in holding that the franchisor could not avail itself of the "resale" exemption from disclosure found in subsections 5(7)(a)(iv) and 5(8) of the Act, which read as follows:

(7) This section does not apply to,

(a) the grant of a franchise by a franchisee if,

(iv) the grant of the franchise is not effected by or through the franchisor;

(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.

The motions judge had held that the franchisor had gone beyond the "mere passive role" that the Act allows by (i) being involved in 3 meetings with the plaintiffs in respect of the acquisition of the franchise, (ii) requiring the plaintiffs to provide payment of consideration beyond the transfer fee charged to the former franchisee, and (iii) requiring the plaintiffs to sign an acknowledgement, which provided certain protections to the franchisor. The motions judge had stated:

In my...