PreSale Franchise Disclosure in Ontario

The Wishart Act’s Pre-Sale Disclosure Requirements The Wishart Act sets has three major components; 1) a requirement of fair dealing between parties to franchise agreements, 2) a right for franchisees to associate and 3) the creation of a pre-sale disclosure regime. Fair dealing, good faith and commercial reasonableness have been and will continue to be discussed at length elsewhere. No other component of the legislation, however, created more consternation for franchisors and work for their solicitors than the disclosure obligations, and their ancillary penalty and remedy provisions.

Compliance If a franchisor operating or selling franchises in Ontario already had a disclosure document or an offering circular prepared in accordance with the laws of another jurisdiction, the disclosure requirements of the Wishart Act made it necessary to either create new disclosure documents, or to substantially revise (“Ontario-ize”) their existing document. Disclosure documents or offering circulars prepared prior to the Wishart Act and in compliance with other jurisdictions, or pursuant to the Canadian Franchise Association guidelines do not fulfil the disclosure requirements of the Wishart Act. This fact, combined with the imposition of liability on a host of entities — including personal liability on signatories to the disclosure document – for providing disclosure documents that contain misrepresentations or otherwise fail to comply with the Wishart Act, should make specific and complete compliance with the disclosure requirements of the Wishart Act of primary concern to franchisors and their counsel.

Timing of Disclosure The timing of disclosure is also dictated by the Wishart Act. The disclosure document in prescribed form must be provided to a prospective franchisee at least 14 days prior to the earlier of a) the signing by the prospective franchisee of any agreement relating to the franchise agreement, or b) the payment of any consideration relating to the franchise. Timing is key, and may result in the difference between proper, timely disclosure, and late disclosure, and all the remedies that flow therefrom.

Scope and Application Franchisors from other jurisdictions cannot avoid the requirements of the Wishart Act, which applies to all new franchise agreements, renewals and extensions of existing agreements, if the business is to be operated party or wholly in Ontario. As long as the franchise “operates” to some extent in Ontario, the Wishart Act will apply, subject to some very limited exceptions and exemptions.

Material Facts and Changes Unlike every other jurisdictions in the world (to the knowledge of the authors) Alberta and Ontario have opted for totally open-ended disclosure. The Wishart Act and the Regulations require disclosure relative to about 25 categories of information (we say “about” because the helter-skelter numbering of the Regulations makes navigation through the requirements somewhat confusing). In addition to the approximate 25 categories of disclosure, the Wishart Act also requires that a disclosure document contain “all material facts” and “all material changes”. A material fact is broadly defined by the Wishart Act as “any information about the business, operations, capital or control of the franchisor or franchisor’s associate, or about the franchise system, that would reasonably be expected to have a significant effect on the value or price of the franchise to be granted or the decision to acquire the franchise”, and a material change is defined as any “change in the business, operations, capital or control of the franchisor..., a change in the franchise system or a prescribed change, that would reasonably be expected to have a significant adverse effect on the value or price of the franchise to be granted or on the decision to acquire the franchise and includes a decision to implement such a change made by the board of directors of the franchisors...or by senior management of the franchisor...who believe that confirmation of the decision by the board of directors is probable”.

The continuing disclosure requirement of the Wishart Act imparts a much higher duty and a requirement of enhanced due diligence on the part of those preparing the disclosure document. No longer may a franchisor simply “schedule” their updates to the disclosure document to a calendar. Updates must be made “as soon as is practicable” after the change, and must in any event be reflected in the document or subsequent statements of material change distributed to franchisees. Provided, however, that disclosure is properly made, a franchisor’s obligation to disclose any new material change ceases in respect of the instant sale upon receipt of any consideration or signature of any agreement relating to the franchise.

Exemptions from the Disclosure Obligations Under the Wishart Act The Wishart Act, while imposing a general pre-sale disclosure requirement, includes two sections that allow for various exemptions from the disclosure requirement. Section 5(7) of the Wishart Act contains eight classes of sale transactions that are exempt from the requirement contained in Section 5(1) to provide to a prospective franchisee a disclosure document. Section 13 of the Wishart Act provides a more limited exemption–that from providing financial information in a disclosure document. Both exemption sections are limited in their scope and should not be considered to be a blanket solution to the general disclosure requirement.

Remedies The Wishart Act assists aggrieved franchisees in two general ways. First, the Wishart Act provides the remedy of rescission in cases of late, improper or no disclosure. Second, the Wishart Act provides a “head start” in establishing an action for damages by stating that any misrepresentation in the disclosure document was deemed to have been relied upon by the aggrieved franchisee.

As a remedy, rescission is fairly broad in scope and application and is, in essence, to release the parties from further obligation to each other and restore the parties to the positions they would have occupied if the contract had never been made. Further, section 6(6) of the Wishart Act sets out a list of the franchisor’s duties upon rescission–a list which is significant in scope.

If a franchisor does not provide a disclosure document or statement of material change within the time required by the Wishart Act, or in the event that the contents of the disclosure document do not meet the requirements of the Wishart Act, the franchisee will have a right of rescission for a period of 60 days following the date of receipt of the disclosure document.

If a franchisor who does not provide a disclosure document or statement of material change at all, the franchisee will then have a right of rescission for a period of two years following the date of “entering into the franchise agreement”.

In addition to the rescission remedies available under the Wishart Act, franchise lawyers and franchisors should be well aware of section 7 of the Wishart Act, which governs misrepresentations. It is important to note that in the event of any misrepresentation in the disclosure document, the Wishart Act deems the franchisee to have relied on that misrepresentation. As a result, any misrepresentation, no matter how trivial, may trigger a deemed reliance argument, and liability on the part of the franchisor and its related parties. If a franchisee suffers a loss because of a misrepresentation in the disclosure document or statement of material change, the franchisee can sue the franchisor, the franchisor’s agent, the franchisor’s broker, the franchisor’s associate, and every person who signed the disclosure document.

The imposition of personal liability on the officers and directors who sign the disclosure document should motivate an extra effort to ensure that no misrepresentation is reflected in the disclosure document. Those signing a disclosure document should also receive counselling with respect to appropriate measures for creditor proofing their personal assets.

Conclusion The preparation of a disclosure document has a deceptively facile appearance, due to the simplistic nature of the requirements set out in the Wishart Act and the Regulation. Nothing could be further from the truth. Technicalities and traps abound in the preparation of a compliant disclosure document. It is only through a careful study of the Wishart Act and its regulations that a lawyer will be able to navigate the potential minefield of liability that faces franchisors, and potentially their counsel, in the preparation of franchise disclosure documents.

More information.

For more information on franchising in Canada, the United States and internationally, please contact Peter Macrae Dillon, head of Siskinds Franchise Law Group. Peter is recognized expert in franchising. He is the author of the annotated Ontario Franchise Disclosure Act and the annotated Alberta Franchises Act and over 40 other publications on the subjects of franchising, licensing and distribution. He is licensed in Ontario and New York. Peter can be contacted at 800-816-9596 ext. 389 or by email at peter.dillon@siskinds.com. The information contained in this note is for general reference only, and should not be relied upon as constituting legal advice.

Disclaimer.

This article does not constitute legal advice. If you require assistance with the issues raised in this article, either to determine whether your business constitutes a franchise, to establish a franchise, or to avoid a finding that your business constitutes a franchise, you must obtain competent legal advice. Siskinds would be pleased to assist you in this regard.

peter macrae dillon siskinds franchise franchisor franchising lawyer attorney Toronto Ontario Canada

PreSale Franchise Disclosure in Ontario - To learn more about this author, visit Peter Macrae Dillon's Website.

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