Canada: Disclosure Requirements Of Ontario’s Franchise Legislation And The Rescission Remedy

Last Updated: March 28 2012
Article by David Shaw, Megan Roberts and Megan Shaw

Introduction to Ontario's Franchise Legislation

Franchising is not as heavily regulated in Canada as it is in a number of other jurisdictions, including the U.S. In Canada, franchise regulation is purely a provincial matter. Currently, only five Canadian provinces have franchise legislation in place: Ontario, Alberta, Prince Edward Island, New Brunswick and Manitoba (which has received Royal Assent but is not yet in force pending the finalization of the regulations thereunder). While there are certain differences in the legislation and regulatory requirements of each province, they are all derived ultimately from the U.S. model of mandated disclosure by a franchisor to prospective franchisees, coupled with a duty of good faith and fair dealing owed by each party to a franchise agreement to the other, and a right of franchisees to associate freely amongst themselves.

Unlike the U.S., no Canadian province requires either the registration of franchisors or the public filing of their disclosure documents. The legislative requirements are all enforceable only by private rights of action and the right of the franchisee to rescind its franchise agreement in the absence of proper disclosure by the franchisor (as described in further detail below).

Ontario's Arthur Wishart Act (Franchise Disclosure), 2000 (the Act) strives to address the imbalance of power and asymmetry of information typically found in the relationship between franchisors — often large, sophisticated corporations, and franchisees — often less sophisticated individuals. The Act applies to a franchise agreement entered into, or to a renewal or extension of a franchise agreement, on or after July 1, 2000 with respect to franchise locations operated partly or wholly in Ontario. The Act is designed primarily to protect franchisees by giving them the information they need to make an informed decision about whether to invest in a given franchise, as well as a commercial framework that assures they will be treated fairly.

The Act contains three primary elements:

1. disclosure by the franchisor to its prospective franchisees;

2. a duty of good faith and fair dealing on all parties to the franchise agreement; and

3. a right of association on the part of franchisees.

This article provides background information regarding the first of these elements and the remedies available to a franchisee for a franchisor's failure to comply with its disclosure obligations under the Act.

The Ontario Court of Appeal described the purpose of the Act this way in Personal Coffee Cup Corp. v. Beer (c.o.b. Elite Coffee Newcastle): "... the focus of the Act is on protecting the interests of franchisees. The mechanism for doing so is the imposition of rigorous disclosure requirements and strict penalties for non-compliance."

Disclosure Requirements under the Act

Under the Act, a franchisor is required to deliver to each prospective franchisee a disclosure document which contains all material facts about the franchise and the franchisor, and copies of all agreements relating to the franchise to be signed by the prospective franchisee, and which meets the detailed requirements set out in the regulations made under the Act (the Regulations). The information provided in the disclosure document must be accurate, clear and concise. The disclosure document must be delivered not later than 14 days prior to the earlier of the franchisee's signing of the relevant franchise agreement and its paying any consideration to the franchisor in relation to the franchise. The disclosure must be in a single document, delivered as such at one time, and must be certified as true and complete by two officers or directors of the franchisor. In addition, should any "material change" occur, which renders inaccurate the information provided in the original disclosure document, the Act requires the franchisor to provide the prospective franchisee with a clear and concise written statement detailing such material change as soon as possible after it occurs, and, in any event, no later than the earlier of the franchisee's signing of the franchise agreement and its paying any consideration to the franchisor in relation to the franchise.

There is a long list of information included in the Regulations which must be set out in the disclosure document, including details regarding the business background of the franchisor, its finances, its bankruptcy and insolvency history, the franchisee's expected costs associated with establishing the franchise and contact particulars for both current and former franchisees. The overarching requirement is that the document contain all "material facts" related to the franchise, which includes any information about the business, operations, capital or control of the franchisor, or about the franchise system, that would reasonably be expected to have a significant effect on the value or price of the franchise to be granted or the decision to acquire it.

Remedies

If the franchisee suffers a loss because of a misrepresentation contained in the disclosure document, the franchisee has a right of action for damages against the franchisor and against every person who signed the disclosure document. It should be noted that franchisees are deemed to have relied on any misrepresentation contained in a disclosure document and that a "misrepresentation" is defined to include an untrue statement of a material fact, or an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in light of the circumstances in which it was made. More significantly, if the franchisor delivers the disclosure document late or the disclosure fails to meet the requirements of the Act, the franchisee has the right to rescind the franchise agreement, without penalty or obligation, within 60 days after its receipt of the disclosure document. If the disclosure document is never delivered at all, the rescission remedy is available for two years after the date the franchisee entered into the franchise agreement. Of particular interest to franchisors is the fact that, in the event of rescission, the franchisor must compensate the franchisee for any losses it incurred in acquiring, setting up and operating the franchise.

In particular, the Act provides that within 60 days of the effective date of the rescission, the franchisor must:

1. refund to the franchisee any money received from or on behalf of the franchisee, other than money for inventory, supplies or equipment;

2. purchase from the franchisee any inventory that the franchisee had purchased pursuant to the franchise agreement and remaining at the effective date of rescission at a price equal to the purchase price paid by the franchisee;

3. purchase from the franchisee any supplies and equipment that the franchisee had purchased pursuant to the franchise agreement, at a price equal to the purchase price paid by the franchisee; and

4. compensate the franchisee for any losses that the franchisee incurred in acquiring, setting up and operating the franchise, less the amounts set out in clauses (1) to (3) above.

Disclosure Exemptions under the Act

The disclosure obligations under the Act are not applicable in all cases. Section 5(7) of the Act provides a number of exemptions from mandatory disclosure, even where the relationship is found to be a "franchise" and the Act applies generally (with similar exemptions from disclosure typically available in other Canadian jurisdictions with franchise legislation). Salient disclosure exemptions which may be available to a franchisor in certain cases include the following:

  • One year, no payment exemption (Section 5(7)(g)(ii) of the Act): Where the franchise agreement to be entered into between the parties is not valid for longer than one year, and does not involve the payment of a non-refundable franchise fee, an exemption to disclosure is available in Ontario. An analogous exemption is not available under the Alberta Franchises Act. The New Brunswick Franchises Act, Prince Edward Island Franchises Act and Manitoba Franchises Act allow for a similar exemption; however, in addition to the limited term (not more than one year) and no payment of a non-refundable franchise fee requirements, the franchise legislation of each of New Brunswick, Prince Edward Island and Manitoba also requires that the franchisor or franchisor's associate provide location assistance to the franchisee for this exemption to be available.
  • Large investor exemption (Section 5(7)(h) of the Act):An exemption exists under the Act for instances where the franchisee will invest more than C$5-million in one year in the acquisition and operation of the franchise. This exemption is not available in any of the other provinces with franchise legislation in effect.
  • Exemption upon renewal or extension of the franchise (Section 5(7)(f) of the Act): In cases of renewal or extension of a franchise agreement where there has been (1) no interruption in the operation of the business operated by the franchisee under the franchise agreement and (2) no material change since the franchise agreement or latest renewal or extension of the franchise agreement was entered into, an exemption from disclosure is available under the franchise legislation of each of Ontario, Alberta, Prince Edward Island, New Brunswick and Manitoba. It should be noted that the Alberta legislation does not condition the availability of this exemption on there not being any material change. "Material change" is defined in subsection 1(1) of the Act as "... a change in the business, operations, capital or control of the franchisor or franchisor's associate, a change in the franchise system or a prescribed change, that would reasonably be expected to have a significant adverse effect on the value or price of the franchise to be granted or on the decision to acquire the franchise and includes a decision to implement such a change made by the board of directors of the franchisor or franchisor's associate or by senior management of the franchisor or franchisor's associate who believe that confirmation of the decision by the board of directors is probable."
  • Exemption where the grant of the franchise is not effected by or through the franchisor (Section 5(7)(a)(iv) of the Act): An exemption also exists for grants of a franchise by a franchisee, for the franchisee's own account, where the grant is not effected by or through the franchisor. Section 5(8) of the Act clarifies that 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. This exemption may be available in cases where a franchisee sells its business to a new franchisee. This exemption is available for franchises in each of Ontario, Alberta, Prince Edward Island, New Brunswick and Manitoba.
  • Exemption upon the grant of an additional franchise to an existing franchisee (Section 5(7)(c) of the Act): An exemption from the Act's disclosure requirements is available in the case of a grant of an additional franchise to an existing franchisee if that additional franchise is substantially the same as the existing franchise that the franchisee is operating and if there has been no material change since the existing franchise agreement or latest renewal or extension of the existing franchise agreement was entered into.
  • Fractional franchise exemption (Section 5(7)(e) of the Act): An exemption from the Act's disclosure requirements is available in the following circumstance: The granting of a franchise to a person to sell goods or services within a business in which that person has an interest if the sales arising from those goods or services, as anticipated by the parties or that should be anticipated by the parties at the time the franchise agreement is entered into do not exceed, in relation to the total sales of the business, a prescribed percentage. Each Canadian jurisdiction with franchise legislation in effect has a comparable exemption available and the "prescribed percentage" is 20%. Thus, if sales from a particular franchisor's products are anticipated by the parties, at the time the agreement is made, to account for less than 20% of the overall sales of a franchisee's business, the franchisor can avail itself of the fractional franchise disclosure exemption.

It is important to note that the Act places no express obligation on a franchisor to advise a prospective franchisee that it is relying on a specific disclosure exemption as the reason for not delivering a disclosure document to the prospective franchisee. However, if the franchisee challenges the applicability of an exemption, the onus will be on the franchisor to demonstrate that such disclosure exemption applied.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
David Shaw
 
In association with
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Law Practice Management
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.