Ontario’s franchise disclosure law levels the playing field
Ontario law provides legal protections to franchisees.
Ontarians who want to start small businesses often consider the franchise model as an option. Only six provinces have comprehensive franchise legislation and Ontario is one of them. The Arthur Wishart Act (AWA or the Act) helps equalize power between franchisors and franchisees in large part through comprehensive franchisor disclosure requirements.
The Act also requires both parties to deal fairly, which includes acting in good faith and complying with “reasonable commercial standards.”
A franchise involves a franchisor with an established business model and proprietary branding that signs a detailed franchise agreement with a franchisee – a party who will own and run the day-to-day operations of a local business entity under the franchise’s brand.
Think of strong franchise brands like McDonald’s, Tim Hortons, The Keg, Pet Valu, The Body Shop, Expedia CruiseShipCenters, Shell Canada, Pizzaiolo, and hundreds of others.
The franchisor retains control over parts of the franchisee’s operations, the goods and services offered, business location or territory and the appearance of business premises. It provides franchisee support like training, real estate assistance, branding and marketing, supply chains, research and development, and more.
In exchange, the franchisee usually pays a fee upfront plus periodic royalties. The franchise model can be effective for a franchisee who gets to use the brand recognition and customer goodwill the franchisor already built.
Ontario franchise law
A major provision of the Ontario Act is protection of the franchisee’s right to associate with other franchisees without franchisor retaliation or restriction. Any franchise agreement term does this is void.
Another AWA plank is to require a franchisor to provide a potential franchisee with a “disclosure document” at least 14 days before the earlier of signing the franchise agreement or paying money to the franchisor (unless it is the amount or less than the amount prescribed, fully refundable and nonbinding).
The law has specific exceptions to these disclosure requirements.
The Act also mandates a disclosure document when a franchise agreement does not allow the franchisee to disclose information to other franchisees in the same franchise, to any franchisee organization or to the franchisee’s “professional advisors.”
Disclosure document content
The disclosure must contain:
- All material facts
- Financial statements
- Copies of proposed agreements
- Statements supporting “informed investment decisions”
- Other prescribed information and document copies
The franchisor must provide the prospective franchisee with a “written statement of any material change” from the disclosure document within certain time parameters.
The Act lays out detailed requirements for how, why and when a franchisee may rescind a franchise agreement and related franchisor responsibilities.
The AWA provides these legal remedies:
- Either party has a right of action for money damages against the other for breaching the “duty of fair dealing in the performance or enforcement of the franchise agreement.”
- A franchisee may sue for damages a franchisor who violates the right of association with other franchisees.
- The franchisee has a right of action for damages for losses from franchisor misrepresentations.
The Act does not restrict any other legal remedies available to the parties outside the AWA.
A franchisee cannot waive rights under the AWA and any attempt to do so is void. This article provides an overview, only scratching the surface of this complex law.
From a legal standpoint
A new Ontario franchisee should consult a business lawyer during initial negotiations, to review franchise and disclosure agreements and other contracts, for guidance throughout the course of business, to support and represent the franchisee in disputes with the franchisor that may arise, and for re-sale of the franchise.
With offices in Toronto and Hamilton, O’Connor Richardson Professional Corporation assists franchisees in the Greater Toronto Area and throughout the Golden Horseshoe to establish their businesses as well as represent them in disputes, including, when necessary, litigation under Ontario’s franchise laws.