• Ontario Court Rules there is No “Material Change” Where the Franchisee Had Knowledge of Changes
  • October 17, 2013 | Author: Stefanie Holland
  • Law Firm: Cassels Brock & Blackwell LLP - Toronto Office
  • In 1201059 Ontario Inc. and Pizza Pizza Limited, the Ontario Superior Court of Justice addressed the disclosure obligations of a franchisor in the context of the renewal of a franchise agreement when the franchisee is required to incur substantial renovation costs to its business premises. In this case, the court held that the franchisor was not required to disclose the renewal obligation in writing.

    In this case, the crux of the franchisee’s claim was that, at the time of renewal, the defendant franchisor failed to adequately disclose in writing (as required under the Arthur Wishart Act [“the Act”], Ontario’s franchise legislation) the franchisor’s requirement for proposed renovations when he renewed his franchise agreement for a further term of 5 years. The Plaintiff franchisee did not want to incur the costs for any renovations and alleged that it suffered damages when the franchisor attempted to proceed with renovations and allegedly terminated the agreement before its date of completion.

    One of the main issues considered by the Court was whether the Defendant franchisor was exempt from the written disclosure requirements as prescribed by the Act. More specifically, the Court considered whether the proposed renovations to the franchisee’s business constituted a material change.

    Section 5(7) of the Act provides that the requirement to give written disclosure does not apply to the renewal of a franchise agreement where there has been no interruption in the operation of the business operated by the franchisee under the franchise agreement and there has been no material change since the franchise agreement was entered into. The Act defines “material change” as a change in the business or operations of the franchisor that would reasonably be expected to have a significant adverse affect on the value or price of the franchise to be granted or on the decision to acquire the franchise. A review of both the original and the renewal agreements led the Court to find that there were no material changes in the renewal agreement that could be considered as fundamental to the Plaintiff’s business operations.

    The Court applied the common-law test for materiality as provided in Trillium Motor World Ltd. and General Motors of Canada Ltd., and considered whether there was a substantial likelihood that the proposed renovations, which had been known to all franchisees since the original franchise agreement, would have assumed actual significance in a reasonable investor’s deliberations to renew. Its analysis led to the conclusion that a reasonable investor in the situation of the Plaintiff at renewal would not have attached significance in what had already been known to him prior to signing the original franchise agreement. In other words, there were no material changes in the renewal agreement, as the intention to proceed with the renovations and costs were already disclosed to the Plaintiff and included in the original franchise agreement.

    The Court’s position that the Plaintiff franchisee had been fully informed prior to entering into the original franchise agreement was also supported by the fact that the Plaintiff franchisee knew that other Pizza Pizza franchise owners had renovations completed at their operations, he attended conferences where the renovations were discussed, and he had discussions with the Defendant franchisor regarding such renovations. Lastly, at no time prior to the renewal did the Plaintiff franchisee ever object to or voice his concerns about the extent of the renovations or the costs that he would incur.

    This case sheds some light on an area of the Act which has been the focus of limited jurisprudence. While courts continue to assess materiality on a case-by-case basis, one thing is certain: it is important for franchisors and their counsel to closely consider all of the circumstances of the franchise relationship when deciding what information to disclose in advance of the renewal of a franchise agreement. Both franchisors and counsel must be mindful that a failure to disclose material information could result in an award of damages or rescission of the franchise agreement under the Act.