A brief summary as to what this case means for you:

Despite the exemptions provided to franchisors under Ontario's Arthur Wishart Act (Franchise Disclosure), 2000 regarding the obligation to provide disclosure to prospective franchisees, franchisors would be well advised to read the following decision where notwithstanding the exemptions from disclosure afforded under the Act, courts still have ample room to interpret the wording of those exemptions and can still impose disclosure obligations on a franchisor despite wording in the Act that on its face might indicate certain scenarios are exempt.

1518628 Ontario Inc. v. Tutor Time Learning Centres, LLC

[2006] O.J. No. 3011, Ontario Superior Court of Justice
P.A. Cumming J.
July 21, 2006.

The plaintiff franchisee brought this motion for partial summary judgment on the basis that the defendant franchisor failed to provide disclosure pursuant to the Arthur Wishart Act (Franchise Disclosure), 2000 (the "Act"). The plaintiff franchisee acquired the franchise through a share purchase from an existing Tutor Time franchisee in November of 2003. The initial franchise agreement was dated September of 2000. The franchise agreement provided that franchisor consent to any transfer was required, as was payment of a transfer fee. During the course of the transfer process, the plaintiff franchisee had several discussions with the franchisor concerning the provision of a UFOC. The defendant (a US corporation) advised the plaintiff that it did not have a UFOC suitable for Canadian purposes, but would provide its US form of UFOC for informational purposes. The transaction closed in late November of 2003 and by the fall of 2004 the plaintiff had sold the business for $530,000 to a non-franchised purchaser. The plaintiff then delivered a notice of rescission to the franchisor under section 6(2) of the Act.

The defendant argued that it was not obligated to provide disclosure to the franchisee because the Act applies only to franchise agreements entered into after July 1, 2001. The court disagreed, interpreting the disclosure obligation to apply to any prospective franchisee – being any person who has indicated an interest in entering into a franchise agreement – and noting that the plaintiff indicated its interest in October of 2003.

Turning to the franchisee's claim for rescission, the defendant sought to rely on the argument that the grant of the franchise was not effected by or through the franchisor, and thus, exempt from the disclosure requirement (per section 5(7)(a)(iv)). Again, the court disagreed with the defendant's argument by finding that the word "grant" in section 1(1) of the Act includes "the sale or disposition of the franchise or of an interest in the franchise…[and interest] includes the ownership of shares in the corporation that owns the franchise". The court found the fact that the share purchase was directly between the plaintiff and predecessor franchisee irrelevant, ruling that the franchisor's obligation to disclose the franchisee arose because it was granting a franchise within the meaning of the Act, taking in to account the fact that the franchisor had to grant consent to the transfer, and was paid a transfer fee. The plaintiff was also required to sign, at the time of transfer, a personal guarantee, spousal personal guarantee, subordination agreement, non-disclosure, and other agreements. The court did note that section 5(8)(a) provides that a sale is not effected by or through a franchisor simply because the franchisor "has the right, exercisable on reasonable grounds, to approve or disapprove the grant". Drawing on section 12, the court noted that the onus of proof is upon the party claiming the exemption, which the franchisor failed to do. The franchisor's actions went beyond merely approving or disapproving of the new franchisee by requiring new agreements to be signed and imposing obligations on the spouse of the transferee. The court noted case law in Ontario whereby the addition of a franchisee's spouse to an agreement activated a franchisor's disclosure obligation, and found the same principles of law to apply in this instance.

Having determined the sale was effected by or through the franchisor, and that disclosure was required, the court then had to determine whether the UFOC provided was sufficient disclosure under Ontario law. Ontario law mandates that all material facts be disclosed to a prospective purchaser, and mandates that the disclosure be current to the date of providing the information to the prospective franchisee. The existing franchisee/transferor was in arrears of payments owing to the franchisor. The franchisor had sent a representative to inspect the transferor's business in the fall of 2003 and the representative noted several problems with the accounts, billings, and overall management. None of the foregoing information was disclosed to the purchaser/plaintiff by either the franchisor nor the transferor. In the court's view, these constituted material facts of which the prospective purchaser ought to have been made aware. The court found that compliance with the Act overruled any contractual arrangements or privity the franchisor may have had between itself and the transferor, and concluded that the disclosure requirements under the Act had not been met. The franchisor argued that in the event that certain material facts had been omitted, the plaintiff was still not entitled to rescission because greater than 60 days had passed since the date the franchisee received the UFOC (per section 6(1)) of the Act. The court, however, disagreed, finding that the plaintiff was entitled to the protection provided under section 6(2) of the Act, which provides for a rescission period of 2 years, by determining that the franchisee was never in fact provided with a disclosure document at all, based on the fact that the UFOC provided did not meet the disclosure requirements of the Act.

The final issue under consideration was whether a release that the plaintiff had delivered to the franchisor in May of 2004 was sufficient to release the franchisor from its disclosure/rescission obligations. Noting that the general principle governing releases is that general words are limited to those things which were in contemplation of the parties at the time the release was given, the court drew on evidence of the plaintiff's awareness of the disclosure obligations (and alleged deficiencies) at the time the release was being negotiated, and the plaintiff had received advice from counsel prior to signing the release. The release thus constituted a full release by the plaintiffs of any damages they may have for the franchisor's failure to provide disclosure. The plaintiff argued that the Act prohibits the waiver of a statutory right of rescission, however the court found this of no application to the facts under consideration because the dispute in question was concerning known breaches of the Act by the franchisor, and the court dismissed the plaintiff's motion.

Previous Featured Cases