The recent Springdale Pizza decision of the Ontario Superior Court of Justice, released on June 6, 2014 (see 2147191 Ontario Inc. v. Springdale Pizza Depot Ltd., 2014 ONSC 3442), is yet another in a line of consistent cases addressing a franchisor’s active involvement in a resale between a former franchisee seller and new franchisee purchaser.
Consistent with earlier Ontario cases, the court ruled that based on the facts of the case, the franchisor was actively involved in the resale process. As a result, the franchisor was required to provide to the purchaser under the Arthur Wishart Act (Franchise Disclosure), 2000, an adequate disclosure document.
The key factors for ruling that the franchisor was actively involved in the resale were as follows:
- The purchaser, rather than the seller, had the burden of obtaining the franchisor’s approval to the resale (the resale was based on an agreement of purchase and sale between the plaintiff purchaser and former franchisee vendor. That agreement placed the onus of obtaining the franchisor’s approval on the purchaser.);
- The purchasers met with the franchisor’s representatives several times before signing the franchise assignment, and
- As a condition of the assignment, the franchisor required the purchaser to sign a formal acknowledgement regarding certain aspects of the purchase.
Given these factors, the franchisor was held to have actively engaged in the transaction beyond merely passively approving it.
Based on the requirements of section 5(7) of the Act, where the franchisor is engaged in such a way as to “effect” the resale, it is required to provide a purchaser with a franchise disclosure document.
The court wrote that franchisors who make a business decision to get actively involved in the franchise resale process, beyond merely approving the transaction, need to consider their legal obligation to comply with the disclosure obligations under the Act.
With respect to evidentiary and tactical issues, the franchisor raised a factual dispute about its degree of involvement in the resale negotiations. As well, the franchisor raised issues about the purchaser’s credibility and inconsistencies in the purchaser’s evidence; all presumably designed to challenge the appropriateness of the case for a summary judgment motion, i.e., final decision without a trial. Nevertheless, the court had no difficulties deciding the case on a motion for summary judgment based on other evidence which was undisputed.
Ontario jurisprudence provides franchisors and franchisees with a great deal of guidance for how to properly deal with franchise sale and resale transactions while complying with the strict franchise disclosure requirements of the Act. Franchisors who choose to circumvent these statutory franchise disclosure requirements in Ontario do so at their peril.
When in doubt, every franchise sale and resale transaction should be evaluated by a knowledgeable franchise lawyer to ensure compliance with Ontario franchise disclosure laws.