Underneath the Golden Boy - Robson Hall Faculty of Law

Canadian Franchise Disclosure Laws 429
exemption is that there is no utility in requiring the transferring franchisee to
disclose information that he does not know in the first place and can determine
only at great expense. 8
Sections 5(7)(a)(i) to (iii) of the Ontario Act exemption are simple "stop
loss" provisions, designed to prevent a franchisor from directly or indirectly
granting a franchise without providing a disclosure document. 9
Section 5(7)(a)(iv) of the Ontario Act permits a franchisor to 'interfere' to a
degree in the franchise transfer without 'tainting' the exemption. The interesting
issue is the level of interference that will result in the franchise transfer being
"effected by or through the franchisor." Section 5(8) of the Ontario Act purports
to answer this question:
• 5(8) For the purposes 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 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 other three Acts have similar sections. 10
Because of the word "merely", sections 5(8)(a) and (b) evidently do not
exhaust the ways in which a franchisor may become involved in a franchisee
transfer without tainting the exemption. 11 But where does one draw the line To
date the only reported Canadian case on this issue is 1518628 Ontario Inc.,
Nancy van Dorp and Dean McCoy v. Tutor Time Learning Centers, LLC et. al. 12
In that case, plaintiff 1518628 acquired the shares of a corporate franchisee of
8
Most of the information that must be in the disclosure document would not be known by the
transferring franchisee, who would have to collect it from the "real" franchisor. The franchisee
would have to spend a lot of time and money independently verifying the accuracy and
completeness of this information, since he would be strictly liable if the buying franchisee
suffered a loss because of a misrepresentation in the disclosure document: Alberta Act, s. 9;
New Brunswick, Ontario and PEI Acts, s. 7.
9
For example, if subclause (iii) was not there a franchisor could grant a master franchise to its
affiliate (without disclosure, since the affiliate won't complain), and the affiliate could then
grant disclosure-free sub-franchises using the exemption. See the definitions of 'master
franchise', 'subfranchisor' and 'subfranchisee' in the four Acts.
10
Alberta Act, s. 5(2); New Brunswick Act, s. 5(10); PEI Act, s. 5(8).
11
For example, the grant will not be "effected by or through the franchisor" merely because the
franchisor provides material information to a prospective buyer, or refers prospective buyers to
the franchisee: Fox v. Ehrmantraut, 28 Cal.3d 127; 615 P.2d 1383.
12
[2006] O.J. 3011 (Sup.Ct.J.).