If you’ve thought about setting up a franchise, you aren’t alone-franchising is the 12th largest industry in Canada and has grown to represent $120 billion of Canada’ GDP! But, if you’re planning to purchase a franchise in Ontario, you’ll need to ensure you’re intimately familiar with Ontario’s Franchise Act – known formally as the Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3.
In this blog post, we’ll outline the key pieces of Ontario’s franchise act that you’ll want to be aware of if you’re considering buying a franchise.
What is a Franchise?
You’re likely familiar with franchises if you’ve ever set foot in a McDonald’s or Boston Pizza.
A franchise is a type of business model where a franchisee pays a franchisor for the right to use its brand, products, and services. The franchisor also provides the franchisee with training, support, and assistance with their business. In return, franchisees must operate their business following guidelines and systems set out by the franchisor.
What is NOT a Franchise?
While it’s important to understand what a franchise is, it’s equally important to understand what a franchise is not. Indeed, with so many different types of commercial relationships available in Ontario, it can be difficult to determine what a franchise looks like. For additional context, the following types of relationships are not covered by Ontario’s Franchise Act:
- Employer-employee relationships;
- Partnerships;
- Memberships in cooperative associations;
- Agreements to use trademarks, trade names, logos, advertising, or other commercial symbols;
- A lease agreement between a franchisee and a landlord; and
- Service contracts or “franchise-like arrangements” with the Crown or any of its agents.
To that end, if you are considering entering into a business arrangement, it’s important to speak with a skilled business lawyer to confirm the nature of your business arrangement and identify the applicable laws and regulations.
The Ontario Franchise Act: What You Need to Know
Ontario’s Franchise Act is a provincial law governing the relationship between franchisors and franchisees. So, what do you need to know about this act? Below, we’ll summarize some of the most important aspects of this legislation.
The Purpose of Ontario’s Franchise Act
The primary purpose of Ontario’s Franchise Act is to ensure that franchise owners provide potential franchisees with detailed information about the franchise before the buyer commits to purchase and outlines certain rights that potential franchisees have when entering into a franchise agreement.
Disclosure Requirements in Franchise Agreements
One of the key provisions of Ontario’s Franchise Act is the requirement that franchisors provide potential franchisees with a “disclosure document” at least 14 days before signing a franchise agreement.
The disclosure document must provide “all material facts,” including information about the franchise and agreement, financial statements, copies of the proposed franchise agreement, and other statements that may help the potential franchisee make informed investment decisions.
If the franchisor fails to provide a disclosure document – or provides an incomplete or misleading disclosure document – they may face fines or legal action.
Material Changes Since Disclosure
Providing the disclosure document is only one piece of the puzzle. After a franchisor provides a disclosure document to a potential franchisee, they are also required to inform the potential franchisee of any “material changes” since they provided the disclosure document before allowing the potential franchisee to sign a franchise agreement.
A material change is typically an event that would harm the franchise’s value or the potential franchisee’s decision to purchase the franchise.
Delays in Receiving Disclosure Documents or Notification of Material Change
What happens if you don’t receive a disclosure document (or notification of a material change) within the specified time? In this case, a potential franchisee can cancel the agreement without penalty up to 60 days after receiving the disclosure document.
And, if the potential franchisee doesn’t receive a disclosure document, the franchisee can cancel their franchise agreement without penalty for up to two years after entering a franchise agreement.
Damages for Misrepresentation or Failure to Disclose
If a franchisor fails to comply with the disclosure requirements in Ontario’s Franchise Act (including disclosure of material changes), and a franchisee suffers a loss because of that failure to comply, the franchisee may bring legal action. The Act specifies that a franchisee may bring action against the franchisor, agent, broker, associate, and any other person who signed the disclosure document or statement of material change.
After the Franchise Agreement: Good Faith, Fair Dealing, and the Right to Cancel a Franchise Agreement
If a franchise agreement is already in place, the Franchise Act of Ontario provides additional protection for franchisees.
Good Faith and Fair Dealing in Franchise Agreements
Under Ontario’s Franchise Act, franchisors and franchisees must deal with each other in good faith and in a fair manner. Essentially, parties must act honestly and fairly towards each other. Failing to act in good faith may result in a franchisee taking legal action against a franchisor or vice versa.
The Right to Associate in Franchise Agreements
Franchisees have the right to associate with other franchisees, regardless of what the franchise agreement says. For example, franchisees are entitled to join associates or participate in activities with other franchisees, and the franchisor cannot prevent them from doing so. A franchisor’s failure to permit a franchisee to associate with other franchisees (for instance, if the franchisor attempts to enforce a contract term prohibiting association) can result in legal action against the franchisor.
Final Thoughts on Ontario’s Franchise Act
Prospective franchisees can rest assured that they are well-protected under the Franchise Act in Ontario. The disclosure requirements help ensure that franchisees have the information they need to make an informed decision about purchasing a franchise before entering a franchise agreement, and their rights upon entering an agreement concerning fair dealing and association are also protected.
Nevertheless, franchise agreements can be complicated, and it’s important for anyone looking at purchasing a franchise to consult with an experienced business law lawyer before signing on the dotted line. Taking this step will help ensure you are aware of the applicable laws and regulations and how they impact your business rights.
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