Franchising in Ontario

Posted on 28 Sep'14 Tags: , , , in Case Study, Employment Law, Working in Canada

Franchising in Ontario is regulated by the provincial Arthur Wishart Act (AWA). Anyone looking to start a franchise business should consult the provisions of this Act or preferably obtain legal advice to ensure all appropriate precautionary measures are in place.

The legislation was developed in the mid 90s, in an attempt to level out the potential imbalance of power in the franchisor-franchisee relationship. As stated in TA & K Enterprises Inc. v. Suncor Energy Products Inc., “the purpose of the Act is to protect franchisees and the provisions of the Act should be interpreted in that light.”[1] This was done by placing an obligation on franchisors to provide full disclosure, setting a duty of fair dealing on both franchisors and franchisees, and establishing the right of franchisees to associate. It allows for greater informed investing decisions and a better understanding of the franchise relationship.[2]

The duty of fair dealing applies to both the franchisor and franchisee. It imposes a duty to act in good faith and in accordance with reasonable commercial standards.[3] The right to associate allows franchisees to pool together or join organizations to advance franchisee interests. Franchisors are prohibited from interfering with franchisees that associate.[4]

The most important feature of the AWA is the requirement of franchisors to provide a disclosure document at least 14 days before singing any agreement or before the payment of any consideration relating to the franchise. The document provides information regarding the franchise business background, litigation history, bankruptcy or insolvency information and financial statements. It should also provide detailed information about the franchise offer including but not limited to costs and conditions.[5] The disclosure obligation is set out in Section 5 of the Act, which elaborates on methods of delivery, the contents of the disclosure document, material change, the need for accurate, clear and concise information and exemptions.

In the case of non-compliance, the franchisee obtains the right to rescind as well as the right of action for damages from failure of the franchisor to provide the necessary disclosure requirements. The rescission remedy is provided in Section 6 of the Act, which states that “the franchisee may rescind the franchise agreement, without penalty or obligation, no later than 60 days after receiving the disclosure document, if the franchisor failed to provide the disclosure document or a statement of material change within the time required by S5 or if the contents of the disclosure did not meet the requirements of S5.” If the disclosure document was not provided at all, the franchise agreement can be rescinded without penalty or obligation within two years of entering into the agreement or paying any consideration.[6] Additionally, a right to an action for damages is also established in S7 if there is a breach of the duty of fair dealing by the franchisor or if the franchisor restricts the franchisee’s right to associate. This includes a loss suffered by the franchisee due to a misrepresentation in the disclosure document.

It is important to note that there are exemptions to the disclosure requirements, which can be found in S5(7) of the Act.[7] Also, each province has its own franchise law and should be consulted depending on the location of the franchise.

Since it is up to the parties involved to make educated decisions, any disputes regarding the franchise are taken up through the courts and not the government. The government does not participate in reviewing disclosure documents or approving franchisors, which is why it is crucial to understand exactly what type of business is being sought after and its internal dynamics.

[1] TA & K Enterprises Inc. v. Suncor Energy Products Inc. [2010] O.J. No. 5532 at para 41, 2010 ONSC 7022.
[2] Richard D. Leblanc and Debi M. Sutin, “The Arthur Wishart Act (Franchise Disclosure), 2000 – An Overview” (Paper delivered at the Fairmont Royal York, Toronto, Ontario, Feb 9, 2012).
[3] Arthur Wishart Act (Franchise Disclosure) 2000, SO 2000, c 3, s3.
[4] Arthur Wishart Act (Franchise Disclosure) 2000, SO 2000, c 3, s4.
[5] http://www.sse.gov.on.ca/mcs/en/pages/business_franchising.aspx
[6] Arthur Wishart Act (Franchise Disclosure) 2000, SO 2000, c 3, s6.
[7] Arthur Wishart Act (Franchise Disclosure) 2000, SO 2000, c 3, s7.

Disclaimer: The above article is not a legal opinion as every case is different and is only for general awareness. Please contact us for specific questions and legal advise.