Uncertainty remains around franchise disclosure obligations
Though a step in the right direction, the long-awaited amendments to Ontario franchise law leave more to be desired, says Andraya Frith, chair of the National Franchise and Distribution Practice Group at Osler Hoskin & Harcourt LLP.
The amendments to the Arthur Wishart Act went into effect Sept. 1, having been passed in the Cutting Unnecessary Red Tape Act back in 2017. The legislation governing franchisee-franchisor relationships is almost two decades old and the evolution of the business environment and the way in which the courts have interpreted the legislation has left uncertainty for franchisors, says Frith. While the amendments help to alleviate some of that uncertainty, further changes would be helpful, she says.
“What I would say about these amendments is that they have been a long time coming. And at the same time, there is quite a bit more work to do, in order to truly modernize the Ontario franchise legislation,” she says.
“Whether it's been through the Ontario Bar Association or through the Canadian Franchise Association, the legal bar is quite collegial and quite focused on trying to bring greater certainty to the franchise disclosure obligations, in particular.”
Still unclear for many of Frith’s clients is the content of their franchise disclosure obligations, the aspect of the franchisor-franchisee relationship which carries the highest risk, she says.
Section 5.4(a) of the Arthur Wishart Act states that a disclosure document must contain “all material facts, including material facts as prescribed.” This “open-ended obligation” of “all material facts” is where both franchisor and franchisee lawyers spend most of their time, says Frith. Lawyers for well-intentioned franchisors, with every desire to deliver an exhaustive disclosure, remain anxious there is something missing, she says.
“We do our best. But after the fact, a franchisee and their lawyer may argue that a particular piece of information was critical to their investment decision,” says Frith. “And a court may ultimately agree with that. But that doesn't provide the well-intentioned franchisor with the guidance that they need up front to make sure that they're giving out that information.”
“What I would say would be a really welcomed development in the legislation, is if the legislature could provide more clarity and certainty around the obligation to disclose ‘all other material facts.’ Because that's something that's quite onerous as a franchisor to not have specific guidance under the legislation… What are the categories of information? And what are the specific pieces of information that the franchisor must include in the disclosure document so that the franchisee can make an informed investment decision?”
Franchise lawyers also want more certainty on the rescission remedy, to which franchisees have access if there are deficiencies in the franchisor’s disclosure. While, according to s. 6.1 of the Arthur Wishart Act, the rescission remedy for a disclosure deficiency should only provide the franchisee 60 days to decide whether to back out of the relationship, the courts have found, repeatedly, that a full, two-year rescission remedy applies, says Frith. The two-year remedy should only apply if the if the disclosure is completely unfulfilled, she says.
Another obligation that has emerged out of caselaw, and which is unique to Canada, is an obligation to provide a customized disclosure document to each franchisee candidate. In the U.S. every franchisee is provide a generic disclosure document, but in Canada, courts have interpreted the material fact obligation to require customization for every candidate, says Frith.
“And that creates a lot of additional cost for franchisors, as you can imagine, and creates an additional burden of compliance to doing business in Ontario,” she says. “So I think if we could get greater clarity and guidance, in terms of what needs to be customized, that would also go a long way to reducing that that burden on the franchisor community.”
Ultimately, the amendments are a positive change, says Frith. Some provisions in the Act are not more aligned with the other five provinces with similar franchise statutes.