Wild Wing Ruling Raises Red Flags for End-of-Year Resales

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As franchisors work to finalize year-end transfers and resales, a recent Ontario Court of Appeal decision serves as a timely warning of how easily the resale exemption under the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”) can be jeopardized.

In 2355305 Ontario Inc. v. Savannah Wells Holdings Inc. (“Savannah Wells Holdings”), the Ontario Court of Appeal once again narrowed the scope of the resale exemption under the Act. The case serves as a sharp reminder: when it comes to franchise resales, franchisors cannot take an active role without triggering disclosure obligations.

The Resale Exemption

Ordinarily, the Act requires franchisors to provide disclosure to prospective franchisees, with serious consequences for non-compliance. However, s. 5(7)(a)(iv) of the Act creates an exemption: where the franchisee is responsible for the grant of a franchise and the grant is “not effected by or through the franchisor,” then the franchisor is not obligated to provide disclosure. This typically applies when a franchisee sells its franchise to another party without franchisor involvement.

When ‘Helping Out’ Becomes ‘Effecting the Sale’

In Savannah Wells Holdings, the franchisees purchased a Wild Wing location through what they believed was a resale. However, a Wild Wing representative facilitated the sale, directing the buyers to the specific location and providing information. Once the deal was reached, Wild Wing required the new franchisees to sign a new franchise agreement.

When the business failed, the franchisees sought rescission of the franchise agreement, arguing that the franchisor had failed to provide the required disclosure.

The trial judge and the Court of Appeal agreed: by orchestrating the sale, steering the buyers and requiring a new franchise agreement, Wild Wing “effected” the transaction and could not rely on s. 5(7)(a)(iv) of the Act. Because disclosure was required but not given, the franchisees were entitled to rescission. The Court of Appeal emphasized that the resale exemption is available only where a franchisor is entirely passive, essentially reduced to consenting and collecting a transfer fee.

A Narrowing Trend

The decision aligns with prior cases, including Tutor Time, Springdale Pizza and Dakin News Systems. Together, these decisions make clear that requiring the execution of a new franchise agreement, imposing additional conditions or agreements or otherwise increasing the franchisor’s involvement in the transaction will trigger disclosure obligations.

Lessons for Franchisors

Key takeaways from this case include:

1. Be Passive or Be Prepared to Disclose: Any conduct beyond passive consent or fee collection, such as imposing new agreements, makes the resale exemption unavailable.
   
2. Avoid Dual Roles: Brokers or representatives connected to the franchisor must act cautiously, as their actions may be attributed to the franchisor.
   
3. When in Doubt, Disclose: The Act’s purpose is franchisee protection. Franchisors who err on the side of transparency can avoid costly rescission claims and litigation.

The Bigger Picture

Savannah Wells Holdings reinforces that franchisors must remain completely passive to rely on the resale exemption under s. 5(7)(a)(iv) of the Act. In a regime grounded in disclosure and fairness, disciplined compliance and robust disclosure remain a franchisor’s best defence. In Ontario franchise law, what you don’t disclose can ultimately harm you.

The Franchising Group at Aird & Berlis LLP advises franchisors on regulatory compliance, disclosure obligations and resale transactions. For guidance on managing year-end franchise transfers and mitigating legal and reputational risk, please contact the authors or a member of the group.