CANADA Trends and Developments Contributed by: Melissa Cattini and Ahmed Malik, MLT Aikins
Depot Ltd., 2011 ONCA 467, 336 D.L.R. (4th) 234, leave to appeal refused [2014] S.C.C.A No. 35648 (“Springfield Pizza”) and 2256306 Ontario Inc. v Dakin News Systems Inc., 2016 ONCA 74 (“Dakin”): • the AWA is remedial, intended to redress the imbal - ance of power between franchisor and franchisee; • disclosure exemptions are to be “narrowly con - strued”; • if a franchisor requires a new franchise agreement to be signed, the re-sale disclosure exemption under Section 5 (7)(a) of the AWA no longer applies (Dakin); • where the franchisor merely passively consents to a transfer of a franchise, the exemption can still apply (Springdale Pizza); and • the onus rests on the franchisor to prove that a disclosure exemption applies. A critical issue in Jayasena was whether the franchise was granted “by or through” the franchisor, or whether the franchisor merely consented to the transfer of the franchise. Under the AWA, such granting is not “by or through” a franchisor merely because it has an approval right or collects a transfer fee; “something more” is required. The ONCA found there was ample evidence for the trial judge to conclude that the transfer and grant of the franchise was effected through the franchisor. Among other things, the trial judge found that Mr Chandiok effectively acted as the “Franchisor’s rep - resentative” and played more than a passive role, including: (i) steering the franchisees to a specific franchise for sale, (ii) providing a tour, including of non-public areas; (iii) printing sales summaries from the restaurant’s computer system; and (iv) explain - ing Wild Wing’s systems and how to operate them, among other things. The franchisees believed, rightly or wrongly, that he was associated with the franchisor. This level of involvement supported the finding at trial that the franchisor could not rely on the re-sale dis - closure exemption. The ONCA upheld the trial judge’s reasoning and held that the exemption was unavailable to the franchisor because:
• the franchisor required a new franchise agreement to be signed (as in Dakin); and • the franchisor’s representative took an active role in the transfer, going beyond the passive consent of the franchisor (Springdale Pizza). The ONCA confirmed that either basis would be suf - ficient, and that both align with its prior jurisprudence. The Jayasena case underscores that a franchisor’s representative’s active involvement in the franchise sales and development processes can trigger char - acterisation as a “franchisor’s associate” under the AWA, carrying personal liability along with the fran - chisor for disclosure deficiencies. This risk was high - lighted in Royal Bank of Canada v Everest Group Inc., 2024 ONCA 577 (the “Paramount”), where the ONAC upheld that a franchisor cannot avoid liability by dis - tancing itself from the franchise sales process, as the law looks to the substance of involvement by the fran - chisor and its associates (not just those in name only). Once the actions of a representative are in progress and resemble the granting of a new franchise approv - al, the exemption for passive transfers evaporates, and full disclosure obligations are imposed, notwith - standing that the franchisor itself may not have got itself involved. This not only exposes the individual representative(s) to liability but also draws the fran - chisor into potential rescission claims and damages. This decision is a caution to Canadian franchisors as follows. • Active participation in resales or transfers risks converting a simplified transfer into a compliance- heavy transaction. • The franchisor cannot shield itself through internal separate from sales or development as liability attaches to the actions taken (or seen to be taken) in its name. • System-wide compliance oversight is critical; fran - chisors must monitor and govern representatives’ conduct to ensure it remains within the law. Jayasena reinforces that Ontario courts will construe disclosure exemptions narrowly, and that franchisors bear the burden of proving their applicability. Ulti -
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