Ontario passes franchise disclosure act

The optimistic view of these amendments is that they were necessary to avoid more troubling changes being made to the statute. The pessimists, on the other hand, are saying the sky is falling on franchisors in Ontario.

Canadian Franchise Association website
October 12, 2000

Ontario passes franchise disclosure act
Edward N. Levitt and Deborah E. Palter of Levitt, Beber

On May 17, 2000 the Arthur Wishart Act (Franchise Disclosure), 2000 (the " Ontario Act") was passed by the Ontario Legislature. The Arthur Wishart Act? Yes, you read that correctly and probably wondered who in the world is Arthur Wishart and why does his name grace such a significant piece of legislation. The naming of the Ontario Act and a number of troubling last minute amendments to the original Bill 33 were one without adequate consultation with the franchise community. These amendments arose out of bargaining following the public hearings on Bill 33, to gain the support of the Liberal and New Democratic Parties. The optimistic view of these amendments is that they were necessary to avoid more troubling changes being made to the statute. The pessimists, on the other hand, are saying the sky is falling on franchisors in Ontario. The truth is that, for the vast number of franchisors who already follow a franchising best practices approach to their businesses, the Ontario Act will change their lives very little.

Date of Proclamation
The Ontario Act will come into force on a date to be determined by the Government. This date will be set only after the regulations to the Ontario Act are completed. Regulations to the Ontario Act are particularly important because the Ontario Act is primarily disclosure legislation and the regulations will set out detailed disclosure requirements. The members of the Franchise Sector Working Team will be meeting shortly with ministry representatives to begin the process of drafting the regulations. While it is anticipated that the regulations will be similar to the regulations under the Alberta Franchises Act (the " Alberta Act"), there is no predicting what unique Ontario " twists" will be included, as was done in the Ontario Act itself. The Cabinet has the last say on what goes into the regulations, without the checks and balances of the legislative process. The best guess right now is that the regulations may be completed by November of this year. The Ontario Act will apply to franchise agreements entered into after the date of proclamation. The relationship provisions of the Ontario Act will also apply to franchise agreements in existence prior to the date of proclamation.

General Scheme of the Ontario Act
In substance, the Ontario Act is very similar to the Alberta Act. It contains primarily disclosure requirements and a smattering of relationship provisions. A franchisor is required to disclose to a potential franchisee all " material facts," as defined in section 1, relevant to the decision to purchase the franchise, including those matters specifically required by the regulations. A disclosure document is required to be given to a prospective franchisee 14 days before the prospect signs any binding agreements or pays any money in respect of the franchise. The relationship provisions provide that franchisees in Ontario are protected from retribution if they attempt to organize a franchisee association and, like Alberta, the Ontario Act imposes a duty of fair dealing on each party to a franchise agreement.

The remainder of this article will discuss the amendments to Bill 33 which deviate from the Alberta Act and present some unique issues for those engaged in franchise activity in Ontario.

Fair Dealing, Good Faith and Reasonable Commercial Standards
Section 3(1) of the Ontario Act and section 7 of the Alberta Act provide that:

Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement.

Section 3 of the Ontario Act, however, goes further than the Alberta Act by providing that:

1. A party to a franchise agreement has a right of action for damages against another party to the franchise agreement who breaches the duty of fair dealing in the performance or enforcement of the franchise agreement.

2. For the purpose of this section, the duty of fair dealing includes the duty to act in good faith and in accordance with reasonable commercial standards.

At present, there are no reported cases decided under section 7 of the Alberta Act and the debate rages as to whether or not the statutory duty of fair dealing is a new duty or simply a restatement of other rules of interpretation or enforcement from the common law. How have subsections 3(2) and 3(3) of the Ontario Act changed matters for Ontario?

For sure, the inclusion of a right of action for damages in the Ontario Act technically goes further than the Alberta Act and the common law. However, good faith is not a novel legal concept in Ontario. In 1995, the phrase " good faith" appeared 426 times in the Revised Statutes of Ontario. Many common law principles are grounded in good faith considerations, including unconscionability, various kinds of estoppel, illegality, forbearance, capacity and enforceability of exculpatory clauses.1 There is no Supreme Court of Canada decision which provides a definitive interpretation of " good faith" in the context of franchise agreements. When looking at good faith, the focus is generally on commercial decency, fairness and reasonableness. Some argue that the doctrine of good faith can only be understood by reference to the bad faith conduct it excludes.2 In most cases, bad faith can be said to occur when one party, without reasonable justification, acts in relation to the contract in a manner where the result would be to substantially nullify the bargained objective or benefit contracted for by the other, or to cause significant harm to the other, contrary to the original purpose and expectation of the parties.3

As suggested by Professor Edward P. Belobaba in 1985, and others, good faith is, at most, a minimum standard. It is not a high ideal. Professor Belobaba goes on to say:

[Good faith] is not about transactional altruism or " commercial good samaritanism." It has nothing to do with " judicial moralism." Indeed, the explicit adoption of a good faith doctrine today would not impose any new contractual obligations or responsibilities. It would simply consolidate existing doctrinal approaches and provide a more precise remedial vocabulary.4

David Stack suggests that the major problem with the doctrine of good faith in Canada is not that there are too many meanings of good faith but that there are too many standards of good faith.5

A review of the academic commentary and Canadian case law suggests that there are two major standards of good faith which have been applied. One standard relies on concepts like commercial reasonableness. The other standard relies on the expectations and intentions of the contracting parties.6

The commercial reasonableness standard of good faith has been criticized. Some suggest that enforcement of a contract should be about enforcement of the objective intention of the parties and not a wholesale enforcement of norms and concepts external to the contract.7 Including reasonable commercial standards in the definition of fair dealing provides the concept of fair dealing with the contextual clarification it requires and is consistent with a standard of good faith already applied in the Canadian common law.

Canadian courts rarely impose standards like good faith in a manner that would override express contractual provisions. To do so would have the effect of defeating rather than fulfilling the reasonable expectations of the parties as to the benefit they should receive from the agreement.8 Now that courts have been provided with statutory authority, they may be tempted to apply the duty of fair dealing in a manner which is contrary to the express terms of a franchise agreement. At this point, however, there is no foreseeable reason why the courts would use their new found statutory authority to override express contractual provisions when they have been reluctant to do so in the past. It is submitted that the statutory obligation of good faith will likely be interpreted in light of the good faith considerations already present in the Canadian common law and that the specific reference to good faith in section 3(3) of the Ontario Act clarifies the meaning of fair dealing and provides an important and useful starting point for its interpretation.

Who Can be Liable Under the Ontario Act?
Under both the Ontario Act and the Alberta Act, an action for damages for misrepresentation and for failure to provide the required disclosure can be brought against the franchisor and every person who signed the disclosure document. Additionally, in Ontario, the " franchisor’s agent", the " franchisor’s broker" and the " franchisor’s associate" are potentially subject to such lawsuits.

Reference to the " franchisor’s agent" in section 7(1)(a.1) is a new addition to the Ontario Act but is not defined. Who then could fall within the definition of a franchisor’s agent? If the ordinary agency law rules are applied, a wide array of people could be found liable under the Ontario Act for such failures. The concept of the " franchisor’s broker" is also a new addition, but the term is defined in subsection 7(1)(a.2) of the Ontario Act to mean a person performing the typical role of a broker. As a result, franchise brokers will want to be heavily involved in the preparation of the disclosure document and/or obtain the appropriate assurances and security from the franchisor as to the completeness and correctness of the disclosure document. The definition of a " franchisor’s associate" was improved in the Ontario Act from what existed in Bill 33. It is now clear what type of conduct around the grant of a franchise could give rise to liability for associated individuals and corporations. For such liability to arise, the associate would have to either be involved in reviewing or approving the grant of the franchise or make representations to the prospective franchisee in the granting or marketing of the franchise.

Required Statements
Anyone familiar with legislation in the securities field knows about the warnings and statements of risk contained in prospectuses; none of which create any liability for the parties responsible for the prospectus. The Ontario Act will require some such statements to be made in every disclosure document. At the time of writing this article, the expected statements deal with the availability of commercial credit reports, the seeking of independent legal or other advice, the contacting of current and former franchisees, the cost of goods and services sold to the franchisee and the nature and availability of mediation.

The Competition Act
Apparently, the Ontario Minister of Consumer and Commercial Relations, Robert Runciman, was quite concerned about the possible problems which could arise from the growing influence of franchising on the Ontario economy and the common franchise practice of the franchisor controlling the sources of supply. However, it was concluded that the Province did not have constitutional jurisdiction to deal with such matters. As a result, Minister Runciman wrote a letter on May 17, 2000 to John Manley, the federal Minister of Industry suggesting that Mr. Manley, " …include the issue of restrictive product supply/sourcing practices relative to the franchise marketplace…" in his upcoming review of the Competition Act. If this initiative takes flight, the changes and problems for franchisors in Ontario, or elsewhere in Canada, could be significant.

Once the Regulations under the Ontario Act are finalized and the Ontario Act is proclaimed in force, franchising in Ontario will be forever changed. Will that change be for good or for ill? That depends on your point of view, however, everyone can agree that the ultimate objective of any franchise specific legislation is to improve the franchise marketplace for all concerned, whether they be franchisor, franchisee, consumer or otherwise. In its worst light, the franchise legislation will impede the expansion of franchise systems, add to the expense of franchising (which will ultimately be passed on to the franchisee), create more uncertainty and generate more litigation. In its best light, the new legislation will help franchisees make better decisions about purchasing franchises, make it harder for unscrupulous franchisors to operate and increase the overall quality of franchising in Ontario. Reactions to the Ontario Act will be as important in determining the direction of franchising in Ontario as the contents of the Ontario Act and the regulations themselves.

1 S. K. O’Byrne, “Good Faith in Contractual Performance: Recent Developments” (1995) 74 The Canadian Bar Review 70 at 71.

2 D. Stack, “The Two Standards of Good Faith in Canadian Contract Law” (1999), 62 Sask.L.Rev. 201 at 202 [hereinafter Stack].

3 Gateway Realty Ltd. v. Arton Holdings Ltd. (1991), 106 N.S.R. (2d) 180 at 197 (S.C.); aff’d (1992), 112 N.S.R. (2d) 180 (C.A.) [hereinafter Gateway].

4 E.P. Belobaba, “Good Faith in Canadian Contract Law” in Commercial Law: Recent Developments and Emerging Trends (Special Lectures of the Law Society of Upper Canada, 1985) (Don Mills: De Boo, 1985) 73 at 78.

5 Stack at 203.

6 Stack at 203.

7 Stack at 204.

8 Gateway at 198. Also see P. M. Dillon, Annotated Alberta Franchises Act (Vancouver: Western Legal Publications (1982) Limited, 1998) at 7-8.

Ned Levitt is the General Counsel for the Canadian Franchise Association


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