In Franchising Law, one of the most critical steps of the franchising process is circulating the franchise’s disclosure document (“Disclosure”). This process is so crucial because, if done incorrectly then a franchisee has the option of rescinding the franchise agreement (without penalty). That is, if a Disclosure is considered late or the contents of the Disclosure are incomplete, the franchisee can rescind the agreement within 60 days of receiving the Disclosure. In the event that no Disclosure is provided (or that there was such material deficiency to the point that it was akin to no Disclosure at all), the franchisee may rescind the franchise agreement within two years of entering into such agreement. A rescission would result in serious financial consequences to a franchisor, as they would be liable for damages to put the franchisee back into the position they would have been in had the agreement never been entered into.
In Ontario, the required contents of the Disclosure are set out in section 5 of the Arthur Wishart Act (the “Act”) and include disclosing material facts, financial statements, copies of the proposed franchise agreement and ancillary documents, and specific statements prescribed by the Act’s regulations that must appear at the beginning of the Disclosure.
While the Act provides a broad and non-exhaustive definition of what is considered a “material fact”, the list continues to grow as the case law surrounding the issue develops. For example,
Entering into an unchartered market;
In 2611707 Ontario Inc v Freshly Squeezed Franchise, the judge determined that the proposed location would be the first “non-mall” retail location was a material fact that ought to have been disclosed
Providing the location head lease; or
In 6792341 Canada Inc v Dollar It Limited, the judge determined that the failure to disclose the head lease of the location (without an opt-out provision for the franchisee) was a material fact that ought to have been disclosed
In the context of a re-sale, management particulars of the franchise
In 1518628 Ontario Inc v Tutor Time Learning Centres, it was held that the franchisor’s failure to disclosure serious issues with the overall management and financial arrangements of the previous franchisee were material facts that should have been disclosed
In essence, it is best to err on the side of caution and include as much information as possible about the franchise such as (but certainly not limited to) the history of the franchise, the key personnel, the anticipated start-up and ongoing costs involved, the lease or the processes for finding a location and the onboarding/training procedures.
Lastly, sending the Disclosure in and of it self requires a franchisor to follow strict procedures. For example, this includes ensuring the Disclosure:
Contains a certificate certifying the completeness and accuracy of the Disclosure, signed by the franchisor (or its directors, if incorporated), and dated with the same date that the Disclosure is sent; and
If sent in an electronic form, ensuring the entire Disclosure is provided in its entirety, there are no external links in the Disclosure and a written acknowledgment of receipt is obtained.
The strict requirements and disclosing processes require the assistance of an experienced franchise lawyer. If you are considering entering the world of franchising the experienced lawyers at Scott Law Group would be thrilled to assist you in the legal process and support you as your business grows.