How the Ontario law will affect U.S. franchisors

After decades of debate and false starts, Ontario, Canada’s most populous province, now has franchise legislation.

Franchise Times
February 1, 2001

How the Ontario law will affect U.S. franchisors
Ned Levitt

After decades of debate and false starts, Ontario, Canada’s most populous province, now has franchise legislation. The new statute, called the Arthur Wishart Act, is primarily concerned with pre-sale disclosure for franchise purchases, with a smattering of relationship regulation.

The definition of a franchise in the Ontario Act is very broad and will most probably capture distribution businesses, which have not traditionally thought of themselves as franchisee. The Ontario Act clearly applies to the classic business opportunity offering. While there are a number of narrow exemptions from the operation of the Act or simply from the disclosure requirements, there are no exemptions by industry sectors or for larger franchise systems. However, under certain circumstances, larger more experienced franchisors can obtain exemptions from financial disclosure only. Without the franchise residency requirements of the Alberta Act, master franchise deals for Canada, as a whole will require compliance with the Ontario Act.

U.S. franchisors would like to be able to use their own disclosure documents in Canada and Alberta specifically allows this, provided a “wrap-around” addendum for compliance with the Alberta
Act is included. The Ontario Act does not allow or prohibit the use of foreign disclosure documents, nor does it prescribe the form of a disclosure document. However, it does require that the disclosure document be accurate, clear and concise, which would indicate that many U.S. disclosure documents should not be used in Ontario. Material changes occurring after the initial disclosure must be disclosed before the franchise sale is completed and for all renewals and extensions of franchise agreements.

Not content with holding the franchisor and everyone who signed the disclosure document liable under the statute, the Ontario Act also imposes various degrees of liability on the “franchisor’s associate”, the “franchisor’s broker” and the “franchisor’s agent”. To complicate matters, there is no definition of a “franchisor’s agent” in the Ontario Act or its regulations. If the ordinary common law definition of agent applies, the liability net will be cast very widely. An amendment to the statute is anticipated to rectify this problem. For franchise brokers, it will be important to be closely involved in the creation of the disclosure document of their franchisor clients. We will likely see the use of agreements by franchise brokers, which contain representations and warranties as to the completeness and veracity of the contents of disclosure documents. We might even see franchise brokers requiring indemnity agreements from their franchisor clients. The very powerful remedy of rescission is available to franchisees who never receive a disclosure document or who receive it later than required. Essentially, the franchisee receives back everything paid to establish the franchise, as well as any losses incurred.

Following a trend in such legislation, the Ontario Act requires that Ontario law be applied and Ontario forums be used for any matters covered by the Ontario Act. Any rights and remedies not covered by the Ontario Act are specifically preserved and would not have to be determined in Ontario or under Ontario law.

Levitt is general counsel to the Canadian Franchise Association and a member of the Franchise Sector Working Team, which has been instrumental in shaping Ontario’s new franchise legislation.

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Risks: Arthur Wishart Act (Franchise Disclosure), 2000, Franchise laws protect franchisors, not franchisees, Canadian Franchise Association, CFA, Franchise Sector Working Team, Canada, 200100201 How the

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