Franchise law won’t be retroactive

So even though it’s a big business, it’s surprising that the province’s franchising industry itself is effectively unregulated.

The Record
April 26, 2000

Franchise law won’t be retroactive
David Petras

According to the Canadian Franchise Association, the franchise industry accounts for almost 50 per cent of Ontario’s retail economy with annual revenues in Canada approaching $100 billion.

So even though it’s a big business, it’s surprising that the province’s franchising industry itself is effectively unregulated.

That could soon change, however, with the introduction in the Ontario legislature last December of the Franchise Disclosure Act, 1999. This bill, now receiving committee study at Queen’s Park, is similar to legislation Alberta has had in place for many years.

The full name of the proposed legislation – “an act to require fair dealing between parties to franchise agreements, to ensure that franchisees have the right to associate and to impose disclosure obligations on franchisors” – really says it all.

The legislation does not deal with existing franchises, but will apply only to franchise agreements entered into after the act comes into force. Exempt as well are “continuing commercial relationships or arrangements” such as employer/employee relationships, partnerships, membership in co-operative associations and certain leases.

A franchise is defined in the legislation as a right to engage in a business for which:

1) The franchisee is required to make a payment or continuing payments to the franchisor.
2) The franchisor must grant the franchisee the right to sell goods or services substantially associated with the franchisor’s trade mark.
3) The franchisor must exercise significant control over the franchisee’s method of operation.

Both the franchisor and the franchisee will have a duty of “fair dealing,” although this term is not defined and the legislation limits the duty to the performance and enforcement of the franchise agreement specifically.

Franchisees will have the right to associate with other franchisees and to form or join an organization of franchisees.

In addition, a franchisor may not interfere with, prohibit, or restrict, by contract or otherwise, a franchisee associating with other franchisees.

Any franchise agreements with provisions that do interfere with the franchisee’s right to associate are void, and a franchisee will have a right of action for damages where a contravention of such right occurs.

Most important of all, the legislation requires franchisors to provide prospective franchisees with specific disclosure not less than 14 days before the earlier of the signing of a franchise agreement or the making of the purchase payment by the new franchisee.

The disclosure document must contain all material facts, financial statements, and copies of certain other documents and information required by the legislation.

A franchisor must also provide the franchisee with a written statement of any material change as soon as practicable after the change has occurred before the earlier of the signing of the agreement and the payment of any money.

Material change is a change in a material fact that would be expected to have a significant adverse effect on the value or price of the franchise or a decision to acquire the franchise.

There are certain types of franchises that are exempt from the disclosure requirements, including a franchise sold to an officer or director of the franchisor, or to a sophisticated investor, or to a person or company buying an additional substantially similar franchise to an existing franchisee.

If a franchisee is not given the disclosure required by the legislation, a franchisee will be able to rescind the franchise agreement without penalty within 60 days after receiving the disclosure document or if the franchisor never provided the required disclosure, within two years after entering into the agreement.

The franchisor has a number of obligations on rescission, including refunding money received, re-purchasing inventory, supplies and equipment, and compensating the franchisee for any losses.

As well, a franchisee who suffers a loss because of misrepresentation or non-disclosure in a disclosure document has a right of action for damages against the franchisor. However, a franchisor will not be liable in an action for misrepresentation if the franchisor proves the franchisee acquired the franchise with knowledge of the misrepresentation.

The bill is now before the standing committee on regulation and private members bills, which has the mandate to review the proposed legislation and make recommendations to the government. The committee held traveling hearings during March in Toronto, Sault Ste. Marie, Ottawa and London.

David Petras is head of the Waterloo Region Technology Law Group of Gowling, Strathy & Henderson

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Risks: Canadian Franchise Association, CFA, Arthur Wishart Act (Franchise Disclosure), 2000, Canada, Disclosure laws: 10 per cent solution, Canada, 20000426 Franchise law

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