Pursuant to the Arthur Wishart Act (Franchise Disclosure), 2000, all franchisors in the Province of Ontario must provide a disclosure document to a prospective franchisee 14 days before signing an agreement or receiving any payment to acquire the franchise.  The basic intent of a disclosure document is to provide the candidate with sufficient information in order to make an informed decision whether or not to invest into the franchise. Failure to provide a disclosure statement could result in the franchisee terminating the agreement and obtaining a full refund of the monies invested.

For the most part, the legislation in Ontario mirrors its counterpart in Alberta, and is close to the enacted franchise legislation in Prince Edward Island, New Brunswick and Manitoba. We will restrict our comments to the Ontario Act, although some of the principals expressed may apply to franchise legislation in other provinces.

The Wishart Act contains a very broad definition of “franchise.” As such, the definition captures not only the traditional “turn-key” retail franchise, but also some of the newer distribution networks involving, for example, soft drink dispenser machines, automated teller machines, and long distance phone cards.

The requirement to disclose before paying any monies to the franchisor also has a profound effect on the former process of having a candidate sign a confidentiality agreement or pay a deposit at the initial stages of the process. These practices are no longer permitted under the disclosure laws in Ontario unless the candidate has already received a disclosure document and 14 days have passed since its receipt.

The purpose of a disclosure document is to provide a potential franchisee with sufficient information in order to make an informed decision whether or not to invest in a franchise. The disclosure document must therefore contain all “material facts”, which is broadly defined as any information about the business, franchisor, or franchise system that would reasonably be expected to affect the price of the franchise or the decision to acquire it.  To assist franchisors, the regulations to the Wishart Act set out certain mandatory information that must be disclosed in the disclosure document:

Required Information

1. The business background of the franchisor.

2. The business background of the directors, general partners and officers of the franchisor.

3. Details of any charge or conviction against the franchisor or its associate, director, general partner or officer during the 10 years immediately preceding the date of disclosure of any offence regarding fraud, unfair or deceptive business practices, or a violation of law that regulates franchises or businesses.

4. Details of any administrative order or penalty against the franchisor or its associate, director, general partner or officer imposed under a law of any jurisdiction regulating franchises.

5. Details of any civil action against the franchisor or its associate for misrepresentation, unfair or deceptive business practices or violating a law that regulates franchises or businesses, including a failure to provide proper disclosure to a franchisee.

6. Details of any bankruptcy or insolvency proceedings during the six years immediately preceding disclosure against the franchisor or its associate, or against a director, general partner, or officer of the franchisor, whether in their personal capacity or associated with any other corporation or partnership of which they have an interest.

7. A list of all costs associated with the establishment and operation of the franchise including, any deposits or franchise fees, the estimated costs for inventory, leasehold improvements, equipment, leases, rentals and all other fees necessary to establish and operate the franchise. Any assumptions and information regarding these costs must also be disclosed and available to the franchisee for inspection.

8. If any earnings projections are provided, the basis and assumptions for the projections and a location where information is available for inspection by the franchisee.

9. Details of any financing arrangements offered directly or indirectly to franchisees.

10. A description of any training or other assistance offered to franchisees and the details as to who bears the costs if training is mandatory.

11. Particulars of any advertising fund, if one is maintained by the franchisor, including the amounts spent on national and local advertising in the last 2 years and the projected expenditure for the current year, and the percentage of the fund that was or will be retained by the franchisor.

12. A description of any restrictions or requirements with respect to the purchase of any goods and services to be sold by the franchise, and of any customers.

13. A description of the franchisor’s policy, if any, regarding volume rebates, and whether such rebates will be passed on to franchisees.

14. A description of the rights of the franchisor to the trade-mark, trade name, or logo associated with the franchise system.

15. A description of every licence, registration, authorization or other permission the franchisee is required to obtain, under any applicable federal or provincial law or municipal by-law, to operate the franchise.

16. Details of any exclusive territory granted to the franchisee and the circumstances under which such  rights depend upon achieving a specific level of sales, market penetration, or other condition, and under what circumstances they may be altered.

17. Details of the franchisors policy, if any, on the proximity between an existing franchise and another franchise, or any other distributor, whether or not under another trade-mark.

18. A list of former franchisees in Ontario whose franchises have been terminated, cancelled, not renewed, or reacquired by the franchisor within the last fiscal year.

19. With respect to each franchise closure within the previous 3 years, the reasons for such closure.

20. A list of all franchises in Ontario of the type being offered, including the names and addresses of each franchisee.

21. A description of all restrictions or conditions in the franchise agreement related to the termination or transfer of the franchise.

Financial Statements

Each disclosure document in Ontario must include a copy of the most recent financial statements for the franchisor prepared in accordance with generally accepted accounting principles on at least a review engagement basis. For franchisors not accustomed to this private corporate financial statements will now become public by virtue of their attachment to the disclosure document.

Alternative Dispute Resolution

Every disclosure statement must include a statement that any party may propose mediation or other dispute resolution mechanism with respect to a dispute under the franchise agreement. If any internal or external mediation or other alternative dispute resolution process is used by the franchisor, the disclosure document shall also include a description of such mediation or other alternative dispute resolution process.

Franchise Agreements

The disclosure document must also contain copies of all agreements to be signed by the franchisee, including the franchise agreement, sublease if applicable, and any construction or other license agreements.

Certificate of Disclosure

The disclosure document must be signed by the franchisor, or if the franchisor is a corporation, by at least two persons who are directors or officers of the franchisor, certifying that the disclosure document does not contain any untrue information, representations or statements, and includes every material fact, financial statement, statement and other information required by the Act and the regulations. Every person who signs the disclosure document is personally liable for any damages suffered by a franchisee from a misrepresentation or material omission in the document.

Material Changes

The obligation to disclose material facts to the prospective franchisee also extends to any material changes after a disclosure document is given but before the signing of a franchise agreement or any payment is made by the franchisee to acquire the franchise. The franchisor is required to provide the franchisee with a written statement of any material change to the initial disclosure document as soon as practicable after the change has occurred. All information in the statement of material change, and in the disclosure document for that matter, must be accurately, clearly and concisely set out.

Conclusion

With the franchise legislation in Ontario, disclosure is now a reality. Considering the consequences of non-disclosure or improper disclosure, including personal liability and the franchisee’s right to terminate the relationship, all franchisors would be wise to carefully prepare their disclosure documents to comply with the law in Ontario.

For more information on franchising, contact Derwin Wong or Hailey Kersey by phone at (416) 368-0600 or by email at dwong@businesslawyers.com or hkersey@businesslawyers.com.

Revised October 2015

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