Franchise Law Primer: Ontario’s Resale Exemption

With a consumer-protection focus, Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000[i] (the “AWA”) seeks to ensure that franchisees are able to make an informed investment decision when buying a franchise by requiring franchisors to provide a disclosure document to each potential franchisee before the franchisee candidate signs a franchise agreement or pays any fee[ii] – with some exceptions. One such exception is the topic of this article, known as the Resale Exemption.

After describing the Resale Exemption’s legislative underpinning, this article will discuss how Ontario’s courts have applied the Resale Exemption in three instructive cases, referenced here as Springdale, Dakin News, and Jayasena.

The Resale Exemption in the AWA

The Resale Exemption is intended to apply when an existing franchisee of a franchise system sells its franchise to a third party and the sale is not effected by or through the franchisor. The underlying policy rationale for the Resale Exemption is that in a situation where the franchisor is not making representations or promises to induce the candidate to purchase the franchise, then the franchisor should not be required to provide a disclosure document.

As shown below, Section 5(7)(a) of the AWA sets out four factors that must be met for the Resale Exemption to apply:

5(7) [The disclosure obligations set out above do] not apply to,

1. the grant of a franchise by a franchisee if,
   1. the franchisee is not the franchisor, an associate of the franchisor or a director, officer or employee of the franchisor or of the franchisor’s associate,
   2. the grant of the franchise is for the franchisee’s own account,
   3. in the case of a master franchise, the entire franchise is granted, and
   4. the grant of the franchise is not effected by or through the franchisor;

The final factor, set out in 5(7)(a)(iv), is the most contested one.  It is clarified somewhat by a so-called “safe-harbour” provision found in Section 5(8):

5(8) for the purpose of subclause (7)(a)(iv), a grant is not effected by or through a franchisor merely because,

1. the franchisor has a right, exercisable on reasonable grounds, to approve or disapprove the grant; or
2. a transfer 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 next section of this article will discuss how three Ontario cases have interpreted the Resale Exemption.