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
Events from this Firm
30 Oct 2019, Other, Toronto, Canada

The materials on the Blakes Business Class website are provided for informational purposes only. Accessing this information does not create a lawyer-client relationship.

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions