June 27, 2011
Since franchisors are in a position to dictate the terms of franchise agreements, the franchise disclosure document is legally required in order to provide a prospective franchisee with sufficient and readily accessible information to assist them to make informed decisions as to whether to invest in the franchise system or not.
However, franchise legislation does exempt franchisors in a limited number of circumstances from having to provide a disclosure document to a new franchisee, and, recently, an Ontario court decision helped to clarify the application of one of those exemptions.
According to Ontario franchise legislation, a franchisor does not have to disclose a franchisee on the resale of a franchise between an existing franchisee and a new one where “the grant of the franchise is not effected by or through the franchisor”. In the Ontario Court of Appeal decision in 2189205 Ontario Inc. v. Springdale Pizza Depot Ltd., the court clarified and reinforced the meaning of this exemption by pointing out a number of circumstances (as had occurred between the parties) which, taken together, supported the conclusion that a resale was brought about or caused to happen by or through the franchisor:
As a result, franchisors who wish to take advantage of this exemption should take special care, on the resale of a franchise, to stay as uninvolved in the transaction as possible. It is permissible to approve or reject the sale without triggering disclosure obligations, but any more activity than that (including approving the purchase price) may limit the availability of the disclosure exemption.