May 23, 2023

Compliance With the Arthur Wishart Act: Understanding Franchise Disclosure Documents

In Ontario, when an individual or entity enters into a franchise agreement, the franchisor must adhere to certain obligations under the Arthur Wishart Act, 2000, SO 2000, c. 3 (AWA). As per the AWA, the franchisor must provide the franchisee with a franchise disclosure document at least 14 days before the signing of the franchise agreement or any other agreement related to the franchise and the payment of any consideration in relation to the franchise,[1] subject to certain exceptions. For example, the AWA permits a franchisor to accept fully refundable deposit payments if they do not exceed 20% of the franchise fee up to a maximum of $100,000.00, so long as the deposit payment does not bind the franchisee to the franchise agreement.[2] Accordingly, the AWA permits the franchisor to enter into ancillary agreements, such as confidentiality agreements, non-disclosure agreements, or agreements pertaining to the franchise’s location, site, or territory, during the 14-day period.[3]

The franchise disclosure agreement will typically contain, among other things, the number of active franchise locations, directors’ backgrounds, start-up costs, financial statements, and any other material facts about the franchise. If a franchisor fails to disclose a material fact in the franchise disclosure documents, the franchisee may be able to rescind the franchise agreement under the AWA. It is important to note that the franchisor’s disclosure obligation is ongoing, which means that if the franchisor learns about information or if new information arises that should have been included in the franchise disclosure document after it has been sent to the franchisee, then the franchisor must send the franchisee a statement of material change including the material fact.

OBLIGATIONS UNDER THE AWA

The AWA imposes certain obligations on the franchisor-franchisee relationship. For example, the franchisor and franchisee have an obligation of fair dealing, which includes the duty to act in good faith and with reasonable commercial standards. The common law has held that for the purposes of the AWA, the duty of fair dealing and good faith include the franchisor exercising its powers under the franchise agreement with regard to the franchisees’ interests, the parties not acting in a way that defeats the objectives of the franchise agreement, and not causing significant harm to the other party.[4]

The AWA further grants the right of franchisees to associate with other franchisees and to bring action against the franchisor for breach of their obligations under the AWA. If a franchisor attempts to contract out any of these rights, the contract or provisions may be void.[5] Section 11 of the AWA further prohibits a franchisee from waiving or releasing the franchisor from any obligation or right afforded to the franchisee under the AWA. It is important to note, the common law has developed an exception to section 11, that permits franchisees to waive or release a franchisor of their obligations under the AWA during settlement agreements.[6] This judicially developed exception was further approved in the Court of Appeal case of 405341 Ontario Limited v Midas Canada Inc, [2010] ONCA 478[7] and has only been applied in limited circumstances.

RESCISSION OF THE FRANCHISE DISCLOSURE AGREEMENT

Sections 6(1) and 6(2) of the AWA permit the franchisee to rescind the franchise agreement if the franchisor provides the franchise disclosure document late, or if they never provide a franchise disclosure document at all. The common law has determined that if a franchisor delivers a franchise disclosure document, but withholds a material fact, this may permit the franchisee to rescind the franchise agreement within two years, in accordance with section 6(2) of the AWA.

To determine whether disclosure deficiencies are serious enough to justify a rescission under section 6(2) of the AWA, the Court of Appeal in Raibex Canada Ltd v ASWR Franchising Corp, [2018] ONCA 62 (Raibex) created an objective test, which asks whether the deficiency would deprive the franchisee the opportunity to make an informed investment decision.[8] Examples of facts which the courts have ruled to be material include failure by the franchisor to provide complete financial statements,[9] failure by the franchisor to inform the franchisee they are operating the first-non mall location of the franchise,[10] and the franchisor’s failure to disclose a head lease.[11] It is important to note, that while the aforementioned deficiencies have been found to be material in a franchise disclosure document, the Court of Appeal in Raibex, stated that the determination of whether a breach of section 5 of the AWA was sufficient to justify a rescission of the franchise agreement under section 6(2) should be determined on a case-by-case basis.[12] For example, in 2611707 Ontario Inc, et al v Freshly Squeezed Franchise Juice Corporation, et al, [2021] ONSC 2323, the courts held that the franchisor’s failure to disclose that the franchisor had not secured a head lease was mitigated by the fact that the franchisor disclosed this information to the franchisee.

If you are considering franchising your business or becoming a franchisee, our business law team can help you navigate the complexities of franchise agreements and franchise disclosure documents. [Contact us] today to schedule an initial consultation.

[1] Arthur Wishart Act, 2000, SO 2000, c. 3, s. 5(1).

[2] Arthur Wishart Act, 2000, SO 2000, c. 3, s. 5(1).

[3] Arthur Wishart Act, 2000, SO 2000, c. 3, s. 5(1.1).

[4] Fairview Donut Inc v The TDL Group Corp, [2012] OJ No 834.

[5] Arthur Wishart Act, 2000, SO 2000, c. 3, s. 4(4).

[6] 1518628 Ontario Inc v Tutor Time Learning Centres, LLC, [2006] CanLII 25276.

[7] 405341 Ontario Limited v Midas Canada Inc, [2010] ONCA 478.

[8] Raibex Canada Ltd v ASWR Franchising Corp, [2018] ONCA 62.

[9] 2611707 Ontario Inc, et al v Freshly Squeezed Franchise Juice Corporation, et al, [2021] ONSC 2323.

[10] 2611707 Ontario Inc, et al v Freshly Squeezed Franchise Juice Corporation, et al, [2021] ONSC 2323.

[11] Raibex Canada Ltd v ASWR Franchising Corp, [2018] ONCA 62.

[12] Raibex Canada Ltd v ASWR Franchising Corp, [2018] ONCA 62, at para 52.

Disclaimer:

The information contained in this article is not to be construed as legal advice. The content is drafted and published only for the purpose of providing the public with general information regarding various real estate and business law topics. For legal advice, please [contact us].

About the Author:

Shahriar Jahanshahi is the founder and principal lawyer at Jahanshahi Law Firm with a practice focus on representing business star-ups and investors in the province of Ontario. For further information about Shahriar Jahanshahi, click here.

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