The significance of franchising in the Canadian economy can hardly be underestimated. Close to 45% of all retail sales in Canada, particularly in the food services industry, are made through franchised businesses. As the largest provincial economy in the country, Ontario has greater franchise business activity than any other province. Since the early 80's, successive Ontario governments have contemplated the regulation of franchising in the province through a legislative scheme, thus putting in place, a code of business ethics to which both franchisors and franchisees should adhere. However, it was not until the year 2000 that Ontario in fact inaugurated its first comprehensive law dealing with franchising in the province. Ontario's franchise legislation, the Arthur Wishart Act, was given royal assent on June 8th, 2000. The purpose of this article is to offer an overview of the current Ontario franchise legislation.
Under Ontario's Act, in order for a business arrangement to fall within the definition of a "franchise", the franchisee must be required to make a single payment or continuing payments in the course of operating the business, or as a condition of obtaining the franchise or commencing operations as a franchisee. In particular, the business relationship is a franchise if the franchisor grants the franchisee the right to sell or distribute goods or services that are substantially associated with the franchisor's trade-mark, service mark, trade name, logo, advertising or other commercial symbol. Moreover, for a business arrangement to be considered a franchise, the franchisor must both retain significant control over, and offer assistance with respect to the franchisee's manner of operation. The franchisor must also offer the franchisee the representational or distribution rights to sell, offer for sale or distribute goods or services.
Section 2 of the Act restricts the application of the legislation to businesses operated either wholly or partly in Ontario. However, there is no requirement that the franchisee be a resident of Ontario. The application of the Act is also extended to the renewal of those franchise agreements which were originally entered into and consummated prior to the coming into force of the current Ontario legislation. This rather retroactive application of the Act is significant to the extent that it requires franchisors granting renewals of the franchise agreements entered into prior to 2000 to comply with the disclosure requirements of the Act (discussed below).
Section 3(1) of the Ontario Act provides that "Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement." For the purpose of this section of the Act, "fair dealing" includes the duty imposed on parties in a franchise agreement to "act in good faith and in accordance with reasonable commercial standards". The Courts in Canada have interpreted "good faith" to include commercial decency, fairness and reasonableness. More particularly, judicial interpretation of "acting in good faith" seems to suggest a manner of behavior that does not unreasonably, and without justification, nullify the objective or benefit of the agreement, thus causing harm to the other party. A contravention of the positive obligation that is placed upon parties to a franchise agreement to act in good faith and in accordance with reasonable commercial standards will give rise to a right of action for damages. Section 3(2) of the Act provides the legislative means for such actions. Actions for damages arising from a breach of the duty of good faith and fair play in franchise agreements are often tied into claims for general breach of contract. Section 9 of the Arthur Wishart Act does in fact make explicit that an aggrieved party to a franchise agreement, in addition to right of action for damages under the Act, can also claim for damages under other laws, an in particular, under the general laws of contract.
In light of the fact that most franchisees acting individually may not have the necessary economic resources to properly advance their commercial interests against a franchisor, particularly when serious issues arise, the Act explicitly allows franchisees to form an association or a collective body. Moreover, the Act prohibits a franchisor from interfering with, or restricting by contract or otherwise, a franchisee's decision to enter into an association with other franchisees.
Section 5 is perhaps among the most important provisions in the Act whereby an obligation is placed upon the franchisors to provide a prospective franchisee with a disclosure document. The disclosure document is to be delivered to a franchisee no later than 14 days prior to the signing by the perspective franchisee of a franchise agreement, "or any other agreement relating to the franchise". Under the current legal regime in Ontario, the disclosure document must be delivered to a prospective franchisee before any amount of money is advanced by the franchisee on account of the franchise agreement. There is of course no prohibition in law against the taking of deposits at the time of entering into a franchise agreement provided that the franchisor undertakes to deliver the disclosure statement within the 14 days proscribed by law. In the event that the franchisor fails to deliver the disclosure statement within that period, the good faith deposits taken must be returned without any deductions or penalty. Under the Act, the franchisor is obligated to include in the disclosure statement all "material facts" relating to the franchise. Material facts include any information about the business, operations, capital or control of the franchisor or about the franchise system that would have a significant effect on the value or price of the franchise to be granted or the decision of the prospective franchisee to acquire the franchise. The safest approach for a franchisor is to include all facts that could possibly be deemed "material" lest there be any claim for an incomplete disclosure statement. In addition to the requirement for providing a disclosure statement of all material facts, the Act also requires that a franchisor provide a prospective franchisee with statements of material changes "as soon as practicable". To be deemed a "material change", the change must "reasonably be expected to have a significant adverse effect on the value or the price of the franchise to be granted or on the decision to acquire the franchise".
There are certain limited exemptions from the disclosure requirements under the Ontario Act. One such exemption is reserved for circumstances where a franchisee is selling or transferring his interest in the franchise to a purchaser, and aside from the franchisor consenting to the sale or transfer, the franchisor is otherwise not involved in the transaction. In such circumstances, the Act does not require the franchisor to provide the new purchaser with a disclosure statement. A further exemption is extended to cases where the franchisor sells a franchise to its own officers and directors provided that they have held that position in the franchisor's business organization for at least six months and are purchasing it for their own account. It is assumed that the officers and directors of the franchisor are or ought to be already privy to all of the material facts relating to the franchise. Another exemption is reserved for circumstances where a franchisor sells an additional franchise to an existing franchisee. This exemption can only be used if there are no material changes since the original disclosure statement was delivered. In addition to the foregoing, exemptions are also allowed for when the franchisee's investment is less than $5,000.00 or where the franchise agreement is for a period less than one year and does not involve the payment of a non-refundable franchise fee. Finally, if the franchisee's investment in the franchise exceeds $5,000,000.00 over one year, the disclosure requirement does not apply.
Subsection 6(1) of the Ontario Act allows a franchisee to rescind the franchise agreement within 60 days after receiving the disclosure documents if the disclosure document or the statement of material change is not provided within the time required by the Act, or if the contents of the disclosure document are not complete. Furthermore, a franchisee has the right to rescind the franchise agreement no later than two years after entering into the franchise agreement if the franchisor did not provide the disclosure document.
Also, under the Act, the franchisor and every person who signs the disclosure document or statement of material change will be liable if a franchisee suffers a loss because of a misrepresentation contained in the disclosure statement or in the statement of material change. It is important to note that the Ontario Act makes the franchisor's agent and broker liable for such damages. Moreover, liability under the Act is joint and several.
Finally, section 11 of the Ontario Act prevents a franchisee from waiving its rights under the legislation. This provision is intended to protect the franchisee who is perceived as the weaker party in a franchise relationship.
Heydary, Javad
(416) 972-9001 Ext. 201
clientservices@heydary.com
Hosseini, Ruzbeh
(416) 972-9001, Ext. 207
clientservices@heydary.com
