Franchising is a popular business model in which franchisors extend their brand name and expertise to franchisees who sell their products and services. However, because of the inherent inequality between a franchisor’s power and a franchisee’s vulnerability, Ontario law protects franchisees by dictating what information must be provided by the franchisor before money changes hands. This article will discuss how the Arthur Wishart Act (Franchise Disclosure), 2000 protects prospective franchisees who are considering signing a new agreement.
What is a franchise?
A franchise is a form of business in which two parties enter into an agreement where the franchisor contributes expertise and name recognition, allowing the franchisee to sell the franchisor’s products or services under the franchisor’s brand. Franchisees pay a fee to the franchisor for this privilege. In turn, they are required to follow the franchisor’s rules and procedures; buy supplies and services from them; pay licensing fees associated with using their brand; provide regular reports on their performance; and represent themselves as being part of an established successful system when advertising themselves or their business.
What laws govern franchise agreements?
Because franchisees are often individuals with little to no bargaining power, the Wishart Act protects franchisees by dictating what information must be disclosed by the franchisor before any money changes hands.
Franchise agreements are also governed by several different federal and provincial laws in addition to the Wishart Act. For instance, the Competition Act prohibits certain deceptive trade practices and false or misleading representations in connection with a franchise sale. The Criminal Code of Canada also prohibits fraud and misleading advertising activities related to franchise sales.
Disclosure by the franchisor is of utmost importance
The Wishart Act requires a franchisor to disclose all relevant information to prospective franchisees 14 days before either party signs any agreement or pays any money. Disclosure must be in writing and provided in a language that the franchisee can understand (if requested). It must also be provided in a format that is easy to read, such as on paper rather than an electronic document.
If a franchisor doesn’t give the franchisee this disclosure document at least two weeks in advance, they cannot require payment from the franchisee until 14 days after providing them with it. This gives both parties plenty of time to review the contract and make sure that they are comfortable making this type of investment and commitment.
The remedies available to wronged franchisees
If a franchisee is provided with inadequate disclosure, they may seek the remedy of recission under the Wishart Act. The franchisee is able to rescind the franchise agreement without penalty within 60 days of signing it if the franchisor fails to provide disclosure, fails to disclose a material change in business, or if disclosure is provided but does not meet the requirements set out in the legislation.
Once the franchisee rescinds the agreement, the franchisor has 60 days from the date of rescission to:
- refund to the franchisee any money received from or on behalf of the franchisee, other than money for inventory, supplies or equipment;
- 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;
- 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
- 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 (a) to (c).
Franchisees successful in franchisor’s appeal concerning disclosure
In a recent case before the Ontario Court of Appeal, the parties had entered into a franchise agreement for the operation of a “Fit for Life” restaurant in Oakville, Ontario. The franchisees operated for a brief period of time before wanting to rescind the agreement. The basis of their recission was a lack of financial disclosure as required under the Wishart Act.
Franchiser’s associate personally liable for lack of proper financial disclosure
At trial, the franchisor’s associate was found to be personally liable. The trial judge had noted that the financial disclosure documents were only signed on one page and that it was unclear if that signature applied to the pages after it. The franchisor’s associate argued that the signature was intended to apply to all financial disclosure documents, although there was little evidence that he had reviewed the remaining pages. He also argued that the franchisee needed to show that they were unable to make an informed investment decision by reason of inadequate disclosure. These arguments were rejected by the trial judge.
Franchise disclosure certificate attached personal liability to signatories
The Court of Appeal agreed with the trial judge’s conclusion. Requiring the franchisee to show that they were not able to make an informed investment undermines the purpose of the Wishart Act. A key purpose of franchise disclosure certificates is to attach personal liability to the signatories to incentivize compliance with their legal requirements. The appeal was ultimately dismissed in favour of the franchisees.
It is important to ensure disclosure is complete and accurate
To recap, franchisors must always provide a franchisee with all relevant information before they are required to pay anything, even if the contract has already been signed. If these rules are not followed, the franchisor’s business could face legal consequences and expensive fines. Disclosure documents must always be complete and accurate when given to potential franchisees. This will help build trust between parties while also protecting their rights under the law.
Contact the Business Litigation Lawyers at Campbells LLP for your Business Dispute
At Campbells LLP, our team of exceptional Oakville lawyers offers skillful and trusted advice on everything from commercial matters to complex litigation. We pride ourselves on being a firm our clients can turn to for a wide variety of their legal needs. To learn more about how we can help you, contact us online or at (905) 828-2247. We look forward to speaking with you and going through this process by your side.