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A brief summary as to what this case means for you:
The exemptions from disclosure contained within the Act are narrowly construed by the courts. Franchisors would be prudent to ensure that disclosure is provided in nearly all situations where there may be any ambiguity, and should ensure that if they are relying on an exemption that they comply with the letter of the law and the provisions of the franchise and not overstep their powers.
The plaintiff franchisee, a prospective franchisee at the time it contacted the franchisor, sought to purchase a franchise and inquired of the franchisor whether it had any franchises for sale. The prospective franchisee was directed to an existing franchised restaurant and it purchased the assets of that restaurant from the existing franchisee. The franchisor required various standard documents (franchise agreement, guarantee, sublease) to be executed in order to effect the transfer and did not provide a disclosure document. The Franchisor relied on the exemption for disclosure contained within section 7(5)(a)(iv) of the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”) exempting disclosure in situations where there is a transfer between two franchisees. After operating for a short period of time, the plaintiff franchisee submitted its Notice of Rescission and commenced proceedings against the franchisor. The franchisee was successful at trial and the trial judge found that the exemption under the Act did not apply so as to excuse the franchisor from its disclosure obligations because the franchisor required the plaintiff franchisee to sign two additional documents that had not been required of the original vending franchisee (an undertaking regarding car wrapping and an acknowledgment) and the franchisor was an active participant in the negotiation of the purchase agreement.
The franchisor appealed the trial judge’s ruling, and was denied relief by the Court of Appeal which upheld the trial judge’s finding. The Court of Appeal stated that in order to qualify for the exemption a sale may not “be effected by or through a franchisor”. The franchisor’s conduct in the sale and its requirement of additional documents as a condition of its consent triggered the disclosure obligation. The Court noted that given the purpose of the Act, the exemptions to disclosure must be narrowly construed, and with regards to this specific ground of exemption should only be enforced where a franchisor plays a passive role and acts in a manner that is consistent with, and limited by, the specific requirements governing consents to transfers in the franchise agreement.
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