In some provinces in Canada, there are specific laws that govern franchising, both in the relationship between franchisor and franchisee, and in the way in which franchises are sold. Non-compliance with these franchise laws can have drastic and costly consequences, and a franchise lawyer will assist you in compliance with the relevant franchise laws.
Currently, six provinces (Alberta, British Columbia, Manitoba, New Brunswick, Ontario, and Prince Edward Island) have legislation that govern over franchised businesses.
There are four common features to these province’s laws:
- requiring that franchisors provide pre-sale franchise disclosure to prospective franchisees, through a “franchise disclosure document”;
- imposing on all parties to a franchise agreement a duty to act in good faith;
- providing to franchisees a right to associate; and
- mandating that a small number of legal requirements will apply to all franchise agreements.
The franchise disclosure document, or FDD, is a comprehensive document that contains every material fact a prospective franchisee might want to know prior to investing in a franchise. This is one of the areas wherein a franchise lawyer traditionally provides assistance to its franchise clients; both in drafting the FDDs for franchisors and in interpreting them and providing independent legal advice for franchisees. The purpose of the FDD is to help a prospective franchisee make an informed decision prior to their investment. The law in all of the provinces with franchise legislation mandates a 14-day cooling off period after delivery of the FDD to provide franchisees with ample time to review the FDD. During this time, a franchisor cannot accept any payment of any kind from the prospective franchisee, nor can they sign any franchise or related agreement.
How do I know if these laws apply to my business?
If your business fits within the definition of a “franchise” under the legislation, and operates partly or wholly in a province with franchise legislation, then the franchise laws will apply to your business. According to Ontario’s franchise legislation, one type of franchise involves the right to engage in a business where the franchisee is required by contract or otherwise to make a payment or continuing payments to the franchisor in the course of operating the business. Further, the franchisor grants the franchisee the right to sell or distribute goods or services that are substantially associated with the franchisor’s trademark, service mark, trade name, or other commercial symbol, and the franchisor exercises significant control over, or offers significant assistance in, the franchisee’s method of operation. If some or all of these elements are present in your business, franchise laws may apply.
What happens if I don’t abide by the franchise laws?
If a franchisor sells a franchise and does not provide a FDD, the franchisee may rescind the franchise agreement without cause, obligation or penalty within two years after entering into the franchise agreement. If the franchisor disputes the fact that the franchisee has an entitlement to rescind, costly litigation often ensues. If a rescission claim is successful, the franchisor must:
- Refund to the franchisee any money received from the franchisee, aside from money for inventory, supplies, and equipment
- Purchase remaining inventory, supplies, and equipment that the franchisee was obligated to purchase
- Compensate the franchisee for any losses incurred in acquiring, setting up, and operating the franchise
What if a franchisor delivers a FDD, but it does not comply with the legislation?
The legal requirement is that the FDD must include all prescribed materials and any and all material facts about the franchise being offered. Further, the FDD must be delivered within certain prescribed time periods and in certain prescribed methods. If any of these obligations are not followed, but the FDD is delivered nonetheless, a franchisee may potentially rescind the franchise agreement no later than 60 days after receiving the FDD. The same consequences as mentioned above for rescission would apply.
It should be noted that courts to date have not hesitated in finding a materially deficient FDD to amount to no disclosure at all; that is, the error or omission was so important that it was as if no FDD was provided at all. This would have drastic results, as it would engage the two-year statutory right of rescission, as opposed to the 60-day statutory right of rescission. Clearly, compliance with disclosure obligations is crucial.
As you can see, there can be serious consequences for not complying with franchise laws, and the importance of a franchise lawyer for your business should not be understated.
While this article should provide you with certain important information, it cannot be considered a complete substitute for a more thorough evaluation and discussion of your situation. The information contained herein is not legal advice.
Associate, Business Law and Franchise Law Groups
Cassels Brock & Blackwell LLP