Published on September 21, 2009
Posted in: Blog
In my last article for this newsletter I said that providing a disclosure document to a prospective franchisee before signing a franchise agreement is a one-time affair. My point then was that a disclosure document, in order to be valid, must include all required information and documents in one bound document delivered at one time at least 14 days before the franchisee enters into the franchise agreement or pays any money to the franchisor.
So you may be surprised by the title of this article. This time, my point is that the duty on a franchisor to provide disclosure to a franchisee does not end once the initial disclosure document is delivered to the prospective franchisee. In fact, there are times when it is essential to provide fresh disclosure to a franchisee long after the franchisee has entered into the franchise agreement. This is because the Arthur Wishart Act (Franchise Disclosure), 2000 (AWA). requires a disclosure document to be given to a franchisee14 days before any agreement relating to the franchise is signed. An ‘agreement that relates to a franchise’ includes more than just a ‘franchise agreement’ as that term is ordinarily understood – i.e. the agreement granting the franchise.
It is well understood that franchisors must deliver to a prospective franchisee a complete disclosure document at least 14 days before the franchisee either a) pays any money to the franchisor or b) signs a franchise agreement. This is consistent with one of the overriding purposes of the legislation which is to ensure that a franchisee is fully informed of its rights and obligations, and has enough time to reflect on the decision and obtain proper advice before entering into the franchise relationship.
However, pre-contractual disclosure is not the end of the story. A plain reading of the AWA shows that the obligation to disclose also arises when an existing franchisee asks to, or is invited by the franchisor or its associate to sign a new agreement that relates to a franchise.
This comes up quite often in franchise relationships. Take for instance the case where a franchisor develops a software program for the benefit of its franchisees and wishes to have the franchisee enter into a software license agreement. The software agreement could be construed as an agreement that relates to a franchise and, so, it could be argued that there is an obligation on the franchisor to provide the franchisee with a fresh disclosure document before the franchisee signs the software license agreement.
If no disclosure is given, the franchisee will have a right to rescind the agreement within two years of entering into it. In some cases, the nature of the agreement will be such that the risk of a franchisee rescinding the agreement will be minimal and the franchisor may make a calculated decision to forego the cost of providing fresh disclosure. Where the stakes are higher though, it becomes imperative to provide complete disclosure to the franchisee at least 14 days before any new or amending agreement is signed.
There are some exceptions to the obligation to re-disclose to an existing franchisee. For instance, a franchisor is not required to re-disclose when an existing franchisee renews or extends its franchise agreement if the has continually operated and there have been no material changes since the original franchise agreement was entered into. What exactly constitutes a ‘material change’ is something which reasonable people may disagree on. The cautious approach is to provide fresh disclosure even on renewals or extensions.
The duty to re-disclose before each new agreement relating to the franchise is signed is an integral part of the disclosure regime in Ontario. Franchisors and franchisees who contemplate entering into new agreements during the course of the franchise relationship would be well advised to seek legal advice as to whether or not the disclosure obligation exists and what the consequences are of failing to provide proper disclosure.