This article was originally prepared for the Canadian Franchise Association, April 2007

ABSTRACT

This paper provides a brief overview of Canadian common-law and statutory franchise disclosure obligations, and discusses the problem of suitably converting an Ontario disclosure document for use elsewhere in Canada.

1.  INTRODUCTION

You are a franchisor with twenty-two franchisees, all operating in Ontario, and have an up-to-date disclosure document that complies with Ontario’s franchise legislation.  You have decided that it is high time you expanded your franchise system into Canada’s other nine provinces and its three territories.

Do any of these jurisdictions require you to use a disclosure document to offer franchises there?  If so, which ones?  May you use your Ontario disclosure document there?  If not, why not, and what can you do about it?

The answers to these questions may surprise you.

To find these answers we need to determine which (if any) of the nine provinces and three territories requires franchisors to make pre-sale disclosure in the first place (i.e. how broad the Canadian disclosure net is), and then for each jurisdiction that requires disclosure we need to determine how much disclosure is required (i.e. what the scope of disclosure is).

2.     HOW BROAD IS THE CANADIAN DISCLOSURE NET?

To determine the breadth of the Canadian franchise disclosure net we must look at both the statute law and case law of each Canadian jurisdiction.  We begin with the statute law.

(a)  The Statutory Disclosure Net

To date in Canada only Alberta, Ontario and Prince Edward Island have enacted franchise-specific disclosure laws[1], although New Brunswick will soon join them[2], and in due course other common-law provinces may decide to follow suit.  While Quebec has no franchise-specific disclosure law, the Quebec Civil Code imposes an obligation to negotiate certain types of contracts in good faith, and we must consider what, if any, effect that has.  The remaining Canadian provinces and territories have neither franchise-specific laws nor the equivalent of Quebec’s “negotiate in good faith” requirement.

(i) New Brunswick and P.E.I.

You needed your Ontario disclosure document to offer rights to your business concept in Ontario because your concept fell within the following definition of “franchise” in the Ontario Act and was not exempt[3]:

“franchise” means a right to engage in a business where the franchisee is required by contract or otherwise to make a payment or continuing payments, whether direct or indirect, or a commitment to make such payment or payments, to the franchisor, or the franchisor’s associate, in the course of operating the business or as a condition of acquiring the franchise or commencing operations and,

(a) in which,

(i) the franchisor grants the franchisee the right to sell, offer for sale or distribute goods or services that are substantially associated with the franchisor’s, or the franchisor’s associate’s, trade-mark, service mark, trade name, logo or advertising or other commercial symbol, and

(ii) the franchisor or the franchisor’s associate exercises significant control over, or offers significant assistance in, the franchisee’s method of operation, including building design and furnishings, locations, business organization, marketing techniques or training, or

(b) in which,

(i)                 the franchisor, or the franchisor’s associate, grants the franchisee the representational or distribution rights, whether or not a trade-mark, service mark, trade name, logo or advertising or other commercial symbol is involved, to sell, offer for sale or distribute goods or services supplied by the franchisor or a supplier designated by the franchisor, and

(ii)              the franchisor, or the franchisor’s associate, or a third person designated by the franchisor, provides location assistance, including securing retail outlets or accounts for the goods or services to be sold, offered for sale or distributed or securing locations or sites for vending machines, display racks or other product sales displays used by the franchisee.”

The PEI Act and New Brunswick’s Bill 32 have the same definition of “franchise”[4].

This is a very complicated definition having two main parts to it that describe three different types of business arrangement.  Subsection (a) defines two of these types of arrangement, popularly called “business format” franchises and “distributorship” franchises, and subsection (b) defines the third type of arrangement, popularly called “business opportunity” franchises.  We briefly describe the difference between these three types:

Distributorship Franchise. In a distributorship franchise the franchisor licenses the franchisee to sell goods marked or identified with the franchisor’s trade-mark within an exclusive geographic distribution area large enough to assure profitability.  The franchisee is usually prohibited from selling outside that area.  Franchisees thus have a strong incentive to deal only (or at least primarily) in the franchisor’s goods.  The franchisor offers only limited assistance and imposes only minor controls on the franchisee’s business operation, each franchisee being free to adopt his or her own business style and distribution technique.  The public therefore perceives the franchisee as an independent owner/operator, whose only link to the franchisor is the brand name of the goods being distributed[5].

Business Format Franchise. In a business format franchise, the franchisor licenses the franchisee to sell goods or services marked or identified with the franchisor’s trade-mark, and in addition licenses the franchisee to use a comprehensive business format, operating system and marketing strategy that the franchisor has developed.  The franchisor usually provides the franchisee with comprehensive continuing support and imposes extensive controls on most aspects of the franchisee’s business operation.  There is an almost complete merging of the business identity of the franchisee with that of the franchisor, so that the public perceives the franchisee’s outlet as being part of a larger chain of identical outlets, all offering the same high quality goods and services.

Business Opportunity Franchise. In a business opportunity franchise the franchisor puts the franchisee into the business of distributing goods that are supplied by the franchisor or someone designated by the franchisor, and represents that the franchisor will establish retail accounts for the goods, or will place vending machines or display racks for the goods in suitable locations, or will provide the services of someone to do this.  The franchisee must pay a fee to the franchisor, or purchase goods or equipment (for example the display racks or vending machines) from the franchisor or its designated supplier, or both.  The most common types of business opportunity franchise are rack or vending machine routes for the goods of a well-known third party (e.g. magazines, travel accessories, juice, film, candy, cigarettes, etc.).  Ordinary product distributorships will often satisfy the elements of a business opportunity franchise.

As you can see from the statutory definition of “franchise”, certain elements must exist before a business arrangement will be classified as a franchise.  To be classified as a business format or distributorship type of franchise the business arrangement must have a payment element, a trade-mark element and an assistance or control element.  We briefly describe these:

The Payment Element. The payment element exists whenever the franchisee is required by contract or practical necessity to make or commit to make one or more direct or indirect payments to the franchisor or its associate to acquire, establish or operate the franchise.  Almost every business arrangement that you can imagine will have this payment element.

The Trade-mark Element.    The trade-mark element exists whenever the franchisee’s distribution of goods or services is substantially associated with a trade-mark that is owned by the franchisor or its associate.  But how much association is “substantial” association? The legislation does not provide an answer, nor have Canadian courts provided one to date.  However the U.S. FTC Rule[6] and eight of the U.S. franchise registration states[7] also use “substantial association” with the franchisor’s trade-mark as one of the elements in their definitions of “franchise”.  According to American case law and FTC/state advisory opinions, use of the franchisor’s trade-mark as part of the franchisee’s operating name will always be “substantial association” with the mark, but mere appearance of the franchisor’s trade-mark on the goods or their packaging will not be “substantial association” with the mark unless that branding contributes substantially to the potential for success of the franchisee’s business.

The Assistance or Control Element.    The assistance element will exist whenever the franchisor or its associate offers the franchisee significant assistance in the franchisee’s business operation.  The control element will exist whenever the franchisor or its associate exercises significant control over the franchisee’s business operation.  But how much assistance or control is “significant” assistance or control?  Once again neither the legislation nor Canadian courts have provided an answer, but since the FTC Rule also uses the assistance/control element as part of its definition of a business format or distributorship type of franchise, we can again look to FTC advisory opinions for guidance.  According to the FTC, the term “significant” relates to the degree to which the franchisee is dependent on the franchisor’s superior business expertise, an expertise that the franchisor communicates by offering assistance to and exercising control over the franchisee’s business operation.  In other words, does the control that the franchisor exerts or the assistance that it offers significantly increase the franchisee’s potential for success?

To be classed as a business opportunity type of franchise the business arrangement must have a payment element, a supplier element and a location assistance element.  We briefly describe these latter two elements (we have already described the payment element):

 

The Supplier Element.    The supplier element will exist whenever the franchisor or anyone designated by the franchisor supplies any of the goods or services that the franchisee distributes.  Note that the franchisee need not be required to purchase from that source, nor need there be any association with anyone’s trade-mark.

The Location Assistance Element. The location assistance element will exist whenever the franchisor, its associate or someone whom the franchisor designates provides the franchisee with “location assistance”, non-exhaustive examples of which are[8]

  • The franchisor secures for the franchisee retail accounts for the goods or services being sold
  • The franchisor secures for the franchisee locations for vending machines, display racks or other equipment that the franchisee uses to dispense the goods
  • The franchisor provides the services of someone who will secure these accounts or locations for the franchisee

So much for the statutory definitions of “franchise”.

As you no doubt know, the Ontario Act does not apply unless the franchise will be operated either wholly or partly in Ontario, and the Act excludes certain types of business relationship and provides certain exemptions from its requirements[9].  Because you are using an Ontario disclosure document you must reviewed and considered these exemptions and exclusions (but obviously could not take advantage of them), so we may fairly assume that you are familiar with them and will not take up your time further describing them.  The PEI Act and New Brunswick’s Bill 32 have similar exemptions and exclusions[10], but provide two important additional exclusions not found in the Ontario Act: neither the PEI Act nor Bill 32 applies to an arrangement arising out of an agreement for the purchase of a reasonable amount of goods at a reasonable wholesale price, or for the purchase of a reasonable amount of services at a reasonable price[11].  Thus, unlike Ontario, P.E.I. and New Brunswick do not regulate most automobile or gas station dealerships, soft drink bottling or similar distribution arrangements as franchises[12].

(ii) Alberta

The Alberta Act has a different definition of “franchise”[13]:

“franchise” means the right to engage in a business

(i)                 in which goods or services are sold or offered for sale or are distributed under a marketing or business plan prescribed in substantial part by the franchisor or its associate,

(ii)              that is substantially associated with a trademark, service mark, trade name, logotype or advertising of the franchisor or its associate or designating the franchisor or its associate, and

(iii)      that involves

(A)             a continuing financial obligation to the franchisor or its associate by the franchisee and significant continuing operational controls by the franchisor or its associate on the operations of the franchised business, or

(B)              the payment of a franchise fee, …”

This definition has the now familiar trade-mark element, a “marketing plan” element, and a “franchise fee” element.  The Alberta Act defines “marketing or business plan” as any plan or system that specifies a material aspect of conducting business[14].  The Alberta Act defines “franchise fee” as any direct or indirect payment to purchase or operate the franchise, other than payments for:

  • reasonable quantities of goods at reasonable wholesale prices
  • reasonable amounts of services at reasonable prices
  • reasonable service charges paid by vendors to credit or debit card issuers[15].

Thus the Alberta Act’s definition of “franchise” encompasses business format franchises, but does not encompass most distributorship franchises (because usually they have no franchise fee element), and does not encompass most business opportunity franchises (because usually they have no trade-mark element).

The Alberta Act applies only if the franchise will be operated either wholly or partly in Alberta and the franchisee is either an Alberta resident or has a permanent establishment in Alberta for corporation tax purposes[16].  Although the Alberta Act does not provide any other exclusions, it does provide all but one of the disclosure exemptions found in the Ontario Act, the PEI Act and New Brunswick’s Bill 32 (with slightly different conditions of exemption)[17].

(iii) Quebec

Quebec’s legal system, which is codified in the Civil Code of Quebec[18], is based on civil law and so is unique in Canada.  In contrast to the common-law jurisdictions, Quebec case law does not bind Quebec courts, although it is frequently used by the courts to interpret the Civil Code.

The Civil Code does not contain franchise-specific legislation, so the formation and continuation of a franchise relationship will be regulated by the principles of the Civil Code that govern contracts.  For franchise disclosure the most important of these principles are:

  • Article 1375:  The parties to any contract must act in good faith when the contract is created, when it is performed, and when it ends.
  • Article 1379:  A contract of adhesion is a contract drawn up by or on behalf of one of the parties (the “stipulating party”) that contains essential terms for the stipulating party’s benefit that he or she refuses to negotiate with the other party (the “adhering party”).
  • Article 1435:  A clause (called an “external clause”) in a contract of adhesion that refers to or incorporates another clause that is not included in the contract of adhesion or its schedules is void, unless the external clause was specifically brought to the adhering party’s attention when the contract was formed.
  • Article 1436:  An illegible or incomprehensible clause[19] in a contract of adhesion is void if the adhering party suffers damages as a result of the clause, unless the stipulating party explained the nature and effect of the clause to the adhering party before acting on it.
  • Article 1437:  A clause in a contract of adhesion that is excessively and unreasonably detrimental[20] to the adhering party is either void or may be modified by the court to lessen its impact.

Most Quebec lawyers believe that the Article 1375 requirement to act in “good faith” in creating a contract requires each party to disclose sufficient information to the other party to allow the other party to make an informed decision about whether to enter into the contract[21].  In the franchise context this means that a franchisor must provide some sort of pre-sale disclosure to a prospective franchisee, and in Part 3 of this Paper we shall see how much.  As well, since virtually every franchise agreement is a contract of adhesion Articles 1435 to 1437 require a franchisor to disclose to a prospective franchisee all external, indecipherable or abusive clauses in the franchise agreement or else lose their benefit.

(b)     The Common Law Disclosure Net

At common law mere silence is not a misrepresentation.  Therefore a franchisor ordinarily has no common law duty to disclose material facts which are within its knowledge but are unknown to a prospective franchisee, even if the franchisor knows that the prospective franchisee has formed a wrong impression that would be corrected by disclosure[22].

However there are several important exceptions to this common law “no disclosure duty”, each requiring a contracting party to disclose relevant facts to the other party before the contract is formed.  These exceptions include the following situations:

  • The first party makes a factually correct statement that will be misleading unless other facts are also disclosed
  • The first party makes a factually correct statement but a subsequent event makes that statement false or misleading
  • The first party represents a fact by conduct, without ever speaking a word; unless he corrects that impression he will be bound by it
  • The nature of the relationship places one of the parties at a special disadvantage[23]

As we have seen, the Alberta Act, the Ontario Act, the PEI Act, New Brunswick’s Bill 32 and the Civil Code all require a franchisor to make disclosure, so each automatically creates the first of the above exceptions. This is of great importance, as we shall see in Part 4 below.

(c)     The CFA Disclosure Net

For many years the Canadian Franchise Association has required its franchisor members to comply with CFA’s franchise pre-sale Disclosure Rule.  The Rule requires franchisors to deliver a written document to each prospective franchisee that discloses certain information in sixteen different information categories and that includes a certificate of disclosure.  Since you are reading this Paper you are probably a CFA member and are familiar with CFA’s Disclosure Rule, so we will not take up your time by further describing its content.  Note that by requiring certain disclosures the CFA Disclosure Rule also automatically creates the first of the exceptions described in Part (b) above.

3.     THE SCOPE OF DISCLOSURE

 

By “scope of disclosure” we mean how much information has to be disclosed.

(a)     The Common Law Scope

The common law scope of disclosure follows from the first exception to the common-law “no disclosure duty” rule: you may not mislead by omission.  Thus a franchisor who chooses (or is forced by CFA or a statute) to disclose a fact concerning a particular matter must disclose all material facts concerning that matter.

(b)     The Statutory Scope

(i) Alberta

 

The scope of disclosure created by the Alberta Act is much broader than that at common law.  The Alberta Act requires a franchisor to include in its disclosure document:

  • all “material facts”
  • copies of all “franchise agreements”
  • specified financial statements and other specified documents
  • other specified information and statements
  • a certificate of accurate and complete disclosure

and also to disclose in writing any “material change” to this information before the prospective franchisee acquires the franchise[24].

The Alberta Act defines the terms “material fact”, “material change” and “franchise agreement”:

1(1)(e):  “franchise agreement” means any agreement that relates to a franchise between

(i)        a franchisor or its associate, and

(ii)       a franchisee or prospective franchisee.”[25]

1(1)(o):  “material fact means any information about the business, operations, capital or control of the franchisor or its 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 sold or the decision to purchase the franchise.”[26]

1(1)(m):  “material change means

(i) a change in the business, operations, capital or control of the franchisor or its associate, or

(ii) a change in the franchise system,

that would reasonably be expected to have a significant adverse effect on the value or price of the franchise to be granted or the decision to purchase the franchise, and includes a decision to implement the change made by the board of directors of the franchisor or its associate or by senior management of the franchisor or its associate who believe that confirmation of the decision by the board of directors is probable.”[27]

The Alberta Act also defines the term “franchise system” (appearing in the definitions of “material fact” and “material change”):

1(1)(g):  “franchise system includes

(i)        the marketing or business plan of the franchise,

(ii)       the use or association with a trademark, service mark, trade name, logotype or advertising,

(iii)      the obligations of the franchisor and franchisee with regard to the operation of the franchised business, and

(iv)      the goodwill associated with the franchise.”[28]

As you can see, the scope of disclosure under the Alberta Act is very broad because of the “all material facts” and “all material changes” requirements: it is at least as broad as the “full, plain and true” scope of disclosure under Alberta’s securities legislation[29].

(ii)     P.E.I. and New Brunswick

The PEI Act and Bill 32 have an even broader scope of disclosure than the Alberta Act, for two reasons.  First, they use the Alberta Act’s definitions of “material fact” and “material change” but have added the words “or about the franchise” to the shopping list of  “any information about the business, operations, capital or control of the franchisor or its associate, or about the franchise system, …etc.”[30].  Second, in addition to including copies of all proposed franchise agreements the disclosure document must include copies of “all other agreements relating to the franchise proposed to be signed by the franchisee”[31].

(iii) Ontario

The Ontario Act’s definition of “material fact”[32] starts with the word “includes” instead of “means”, but otherwise tracks the Alberta Act definition.  Thus Ontario has created an open-ended definition of “material fact”, thereby enormously increasing the scope of disclosure in that province.  An Ontario disclosure document must include all information that would be reasonably likely to significantly affect a decision to acquire the franchise, regardless of whom or what that information concerns.

One final thought on the statutory definitions of “material fact”.  In determining whether or not specific information is a “material fact” the franchisor is clearly best able to determine whether the information is likely to have a significant effect on the value or price of the franchise.  As long as the franchisor uses reasonable subjective business judgement in making that determination its decision is unlikely to be challenged by the court.  In contrast, a reasonable prospective franchisee is clearly best able to determine whether the information is likely to have a significant effect on the decision to acquire the franchise.  So in determining a materiality issue a franchisor must remember to look at the information not only from its own perspective, but also from the perspective of a reasonable person who is unfamiliar with the franchise and the industry segment within which it operates.

(iv) Quebec

As we mentioned in Part 2, most Quebec franchise lawyers believe that the pre-contractual good faith obligation in Article 1375 of the Quebec Code requires franchisors to disclose sufficient information to prospective franchisees to allow them to make an informed decision about whether to enter into the franchise agreement (i.e. whether to acquire the franchise).  It follows that a franchisor must make pre-sale disclosure of any information that would reasonably be expected to significantly affect a decision to acquire the franchise, so that the Civil Code’s scope of franchise disclosure is as broad as that of the Ontario Act.

(c)     The CFA Scope

The last of the sixteen information categories of CFA’s Disclosure Rule is:

“The franchisor should describe, in reasonable detail, any other information material to the franchise, the franchise relationship or about the franchisor”.

It follows that the scope of CFA’s Disclosure Rule concerning material facts is somewhat less than that of the PEI Act and New Brunswick’s Bill 32[33], and is far less than that of the Ontario Act.

4.     CONSEQUENCES OF INADEQUATE DISCLOSURE

By “inadequate disclosure” we mean that the scope of the franchisor’s disclosure falls short of that required by the subject jurisdiction.

(a)     Common Law Consequences

We have seen in Part 2 of this Paper that at common law a franchisor must not by word or deed make an untrue statement of a material fact, and that if a franchisor chooses to disclose any information concerning a particular matter it must disclose all material facts about that matter.  If a franchisor does not meet this common law scope of disclosure, then a franchisee who reasonably relied[34] on the inadequate disclosure to acquire the franchise may:

(a)  rescind (i.e. undo) the franchise grant and all of the franchise contracts, provided that the parties can be restored to their former positions[35], or
(b)  recover damages from the franchisor, provided that the franchisee can show that the franchisor’s inadequate disclosure was made fraudulently or negligently, or amounted in law to a collateral warranty.

These remedies are time-limited by the relevant limitation statutes of the provinces and territories (usually two years after a reasonable person would have discovered the misrepresentation).

(b)     Statutory Consequences

The Alberta Act, Ontario Act, PEI Act and New Brunswick’s Bill 32 all provide the franchisee with a statutory damages remedy for inadequate disclosure, and the latter three also provide a statutory rescission remedy for inadequate disclosure.  To effect this these Acts and the Bill define the term “misrepresentation”, all in more or less the same terms.  In the PEI Act, for example:

“misrepresentation” includes

(i)        an untrue statement of a material fact, or

(ii)       an omission to state a material fact that is required to be stated, or that is necessary to make a statement not misleading in light of the circumstances in which it was made.”[36]

Alberta Consequences.   If a franchisee suffers a loss because of a misrepresentation in the disclosure document, the Alberta Act provides the franchisee with a statutory action for damages against the franchisor and anyone who signed the disclosure document; the franchisee need not prove reasonable reliance on the misrepresentation[37].

Although the Alberta Act allows a franchisee to rescind the franchise agreement within 60 days after receiving a disclosure document if the franchisee received the disclosure late, or within two years after the franchise is granted if the franchisee never received disclosure in the first place, surprisingly it does not provide a right to rescind for a misrepresentation in a disclosure document[38].  But since the Alberta Act preserves any common law rights and remedies that a franchise may have[39], a franchisee who receives inadequate disclosure can still rescind at common law after the statutory 60-day limitation period has passed provided the franchise can show the necessary reliance and the parties can be substantially restored to their former positions.

Ontario, New Brunswick and PEI Consequences. The Ontario Act, PEI Act and New Brunswick’s Bill 32 provide a statutory action for damages if the franchisee suffers a loss due to a misrepresentation in the disclosure document or due to any other failure of the franchisor to comply with the statutory disclosure content, delivery or timing requirements; as in Alberta, the franchisee need not prove reasonable reliance on the misrepresentation[40].  These Acts and the Bill also greatly expand the list of possible defendants to a statutory damages action[41], so that the consequences of a franchisor not strictly following the statutory disclosure requirements can be visited not only upon the franchisor and those who signed the certificate of disclosure, but also the franchisor’s broker and sales staff, and anyone who is the franchisor’s associate.  As well, recent case law shows that if a franchisee properly exercises the Ontario Act’s statutory rescission right but the franchisor fails to make the required statutory compensation payment, then the franchisee may bring a statutory damages action to collect those payments from the expanded list of defendants[42].

The Ontario Act, PEI Act and New Brunswick’s Bill 32 also provide 60-day and two-year rescission remedies if the disclosure document was delivered late or not at all, and in addition provide a 60-day rescission right if the document contained a misrepresentation[43].   As in Alberta, this legislation preserves any common law rights and remedies that a franchise may have[44], so a franchisee who receives inadequate disclosure can still rescind at common law after the statutory 60-day limitation period has passed provided the franchise can show the necessary reliance and the parties can be substantially restored to their former positions.

(c)     CFA Consequences

CFA publicizes to inquiring prospective franchisees and others both the existence and purpose of its Disclosure Rules, and that CFA members are required to follow those Rules.  It follows from this holding  out that CFA has a positive duty to enforce its disclosure requirements against a non-complying member by all reasonable means, including, if necessary, revoking the membership of the culprit.  Should CFA fail to properly police its members and enforce its Disclosure Rules against them, then there is little doubt that a franchisee of a non-compliant member who relied on CFA’s publicity in buying the franchise and who suffered a loss because of the non-compliant member’s disclosure (or failure to disclose), could successfully sue CFA for that loss.

5.     WHERE DO WE GO FROM HERE?

Although by assumption your Ontario disclosure document meets the Ontario Act’s disclosure content requirements, it most certainly does not meet the content requirements of the other regulated Canadian provinces, nor of the unregulated provinces or territories if you decide to disclose voluntarily or in order to meet CFA’s requirements.  This is because first, all of the information in your disclosure document must be relevant to the locale where your prospective franchisee intends to establish and operate the franchise[45], and second, Alberta, Ontario, P.E.I. and New Brunswick have differing disclosure scope requirements for certain material facts, information statements and disclosure certificates.

One way to deal with these differing geographic/content issues is to create a province/territory-specific disclosure document by suitably modifying the body text of your Ontario disclosure document.  But there is another (and possibly better) option.  Both Alberta and P.E.I. permit a franchisor to use as its disclosure document within the province a disclosure document that has been authorized by the franchise laws of another jurisdiction, if supplementary information is included which discloses any additional information needed to make the foreign document comply the provincial statutory disclosure requirements[46].  The usual way that franchisors provide this supplementary information is to add a province-specific addendum to the “home grown” disclosure document, or to “sandwich” the home-grown disclosure document between a header comprising a face page summary, suitable risk warnings and a cross-reference sheet, and a trailer comprising the additional statutory disclosure and certificate, thus creating a three-part “wrap-around” disclosure document.  Obviously the wrap-around or addendum technique may also be used in jurisdictions that do not require franchise disclosure.  But be careful: should you decide to use the wrap-around or addendum technique rather than directly modifying the body text of your Ontario disclosure document the resulting disclosure must be clear and concise[47].  This will not be a problem unless many amendments are needed to your Ontario disclosure document.

To summarize this Part of the Paper: unless you always modify your Ontario disclosure document before using it in another Canadian province or territory you risk facing a statutory or common law rescission or damages claim.

6.     CONCLUSION

We have given a brief overview of the disclosure content requirements of Canadian franchise legislation and proposed legislation, of the Quebec Civil Code, of the Canadian common law and of the “private legislation” of the Canadian Franchise Association.  We have also summarized the Canadian statutory and common law remedies that are available to a franchisee for inadequate (or no) disclosure.  Finally, we have explained why and how a franchisor must change its Ontario disclosure document before it can use that document elsewhere in Canada.

Franchisors expanding from Ontario into the other Canadian provinces and territories operate at their peril if they ignore the disclosure requirements imposed by these jurisdictions, or try to overreach the legitimate boundaries of the franchise relationship as re-drawn (or proposed to be redrawn) by Alberta and Prince Edward Island and New Brunswick.


[1] Alberta: Franchises Act, R.S.A. 2000, c.F-23 (the “Alberta Act”); Ontario: Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c.3 (the “Ontario Act”); Prince Edward Island: Franchises Act, S.P.E.I. 2005, c. 36 (the “PEI Act”).

[2] On February 23, 2007 New Brunswick’s Bill 32, the Franchises Act, received first reading.

[3] Ontario Act: 1(1).  The exemptions are discussed further later in this Paper.

[4] PEI Act: 1(1)(b); New Brunswick Bill: 1(1).

[5] The main differences between the distributorship franchise and a more traditional distribution arrangement are the greater identification with the franchisor’s trade-mark, the greater level of support services provided to the franchisee and the greater concentration of effort on selling the franchisor’s brand-name goods.  Automobiles, soft drinks,  gasoline, consumer appliances and other goods which require a large degree of pre- or post-sale service are especially well-suited to distribution by this type of franchising.

[6] Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures, 16 C.F.R. Part 436.

[7] California, Illinois, Indiana, Maryland, North Dakota, Oregon, Rhode Island and Wisconsin.

[8] Once again FTC advisory opinions help us because location assistance is also one element of the FTC Rule’s definition of a business opportunity type of franchise.  For example, according to the FTC the location assistance element will not be satisfied if only wholesale accounts or outlets are secured: the outlet or account must belong to an independent retailer who carries the goods or provides the services for final sale to the end user.

[9] Ontario Act: 2, 5(7) and 5(8).

[10] PEI Act: 2(3) and 5(7) to 5(10); Bill 32: 2(4), 5(8) and 5(10) to 5(12).

[11] PEI Act: 2(3)(g); Bill 32: 2(4)(g).

[12] In both PEI and New Brunswick there will obviously be a considerable grey area between such an unregulated goods/services purchase arrangement and a regulated distribution or business opportunity franchise.  This will require some fine judgement by the advising lawyer.

[13] Alberta Act: 1(1)(d).

[14] Alberta Act: 1(1)(l): the definition provides some non-exhaustive examples of “marketing or business plans”.

[15] Alberta Act: 1(1)(f).

[16] Alberta Act: 3.

[17] Alberta Act: 5.  There is no “single license of its kind” exemption.

[18] R.S.Q., c.64 (the “Civil Code”).

[19] e.g. sentences that contain “legalese” or that are complex, convoluted or otherwise difficult to understand.

[20] e.g. an absolute prohibition against transferring a unit franchise, or an unreasonable waiver of franchisor liability.

[21] Correspondingly, they say, Article 1375 requires the other party to make all necessary enquiries and seek appropriate business and professional advice concerning the proposed contract.

[22] Bell v. Lever Brothers, Ltd., [1932] A.C. 161, per Lord Atkin at 127; Smith v. Hughes (1871), L.R.6 Q.B. 597.

[23] Examples include lawyer and client, priest and penitent, principal and agent, a company and its promoters, and an insurer and the insured.  Relationships of this type are called “fiduciary”, and contracts of this type are uberrimae fidei (of the utmost good faith).  Since 1970 Canadian courts have consistently held that a franchise relationship will be classed as fiduciary only in exceptional circumstances: Jirna Ltd. v. Mister Donut of Canada Ltd., [1972] 1 O.R. 251, aff’d [1975] 1 S.C.R. 2.

[24] Alberta Act: 4(3) and 4(4).

[25] Alberta Act: 1(1)(e).

[26] Alberta Act: 1(1)(o).

[27] Alberta Act: 1(1)(n).

[28] Alberta Act: 1(1)(g).

[29] Franchisors should count themselves lucky because legal fees for preparing and registering a preliminary prospectus and final prospectus typically run to six figures.

[30] PEI Act: 1(1)(k) and 1(1)(l); Bill 32: 1(1).  The definitions of “franchise agreement” and “franchise system” are the same as those in the Alberta Act.

[31] PEI Act: 5(4)(c); Bill 32: 5(4)(B).  Because of the definition of “franchise system” and the extended definition of “material fact” the material terms of these additional agreements must be disclosed.

[32] Ontario Act: 1(1).

[33] Because CFA’s Disclosure Rule does not require prescribed statements “for the purpose of assisting the prospective franchisee in making informed investment decisions”, nor does it require the disclosure document to include copies of contracts.

[34] A clause in the franchise agreement disclaiming liability for misrepresentation or other inadequate disclosure will negate reasonable reliance only if the clause was sufficiently brought to the prospective franchisee’s attention before entering into the contract.

[35] The court will not insist on an exact return to status quo ante:  “…the court can take accounts of profits and make allowance for deterioration.  And I think the practice has always been for a court of equity to give this relief [i.e. rescission] whenever, by the exercise of its powers, it can do what is practically just, though it cannot restore the parties precisely to the state they were in before the contract”.  Erlanger v. New Sombrero Phosphate Co. (1878), 3 App. Cas. 1218, per Lord Blackburn at 1278-9.

[36] PEI Act: 1(1)(n).  See also Alberta Act: 1(1)(q), and Ontario Act and Bill 32: 1(1).

[37] Alberta Act: 9.

[38] Alberta Act: 13 and 14.  Note, too, that the Alberta Act preserves any common law rights and remedies of the franchisee: 15.13 and 14.

[39] Alberta Act: 15.

[40] Ontario Act: 7.

[41] Ontario Act, PEI Act and Bill 32: 7.

[42] 190664 Ontario Limited v. Dig This Garden Retailers Ltd., [2004] O.J. No.3008 (S.C.J.), aff’d [2005] O.J. No. 1340 (CA); Personal Service Coffee Corp. v. Beer, [2005] O.J. No.3043 (CA).

[43] Ontario Act, PEI Act and Bill 32: 6.

[44] Ontario Act: 9; PEI Act and Bill 32: 10.

[45] For example, rent rates for space in downtown Dryden will be very much less than the rates for space in downtown Toronto.

[46] Alberta Regulation 240/95: 2(2);  P.E.I. EC232/06: 3(2).  Presumably New Brunswick will follow suit if it passes Bill 32.

[47] PEI Act: 5(6); Ontario Act: 5(6); Bill 32: 5(7).  There is no equivalent in the Alberta Act, but since the purpose of pre-sale franchise disclosure is to allow the prospective franchisee to make an informed investment decision, this clear and concise requirement is surely applicable not only in Alberta, but also in all of the unregulated all Canadian provinces and territories.  Dictionary definitions of “clear” include: “easily understood”, “free of ambiguity”, “evident” and “plain”.  Dictionary definitions of “concise” include: “brief but comprehensible”, “succinct” and “terse”.  , General Instruction 150 of the UFOC Guidelines also offers us useful insight:

150.  “Disclose” means to state all material facts in an accurate and unambiguous manner.  Disclose clearly, concisely and in a narrative form that is understandable by a person unfamiliar with the franchise business.  For clear and concise disclosure avoid legal antiques and repetitive phrases.([47])  When possible, use active, not passive voice.  Limit the length and complexity of disclosure through careful organization of information in the disclosure.  Avoid technical language and unnecessary detail.  Make the format and chronological order consistent within each Item.