Published on September 21, 2008
Posted in: Blog
When it came to elections, Maurice Duplessis, the autocratic former premier of Quebec, was fond of telling his supporters to “vote early and vote often”. When it comes to selling franchises in Ontario, franchisors would be better advised to “disclose fully and disclose once”. This is because the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”) imposes serious financial consequences on franchisors who disclose material facts, including earnings projections, to franchisees outside of a formal disclosure document.
Before the Act came into effect, franchises were often sold based on glossy brochures distributed by the franchisor with little consideration for their legal implications. Projections as to future sales and profitability of the location were routinely provided, but their reliability was a different matter. Some were based on actual results of the units within the chain, but often they were no more than the franchisor’s hopes about what level of sales and profitability were achievable under optimal conditions. The problem was that there was no way of knowing whether they were reliable or mere puffery. The franchisee either had to take the franchisor at his or her word, or lose out on the next big opportunity which the franchisor was offering. The franchise agreements contained provisions, called “entire agreement” or “integration” clauses, which meant that any representations outside the agreement itself were unenforceable.
The introduction of mandatory disclosure requirements under the Act was supposed to change all of that. Stringent disclosure requirements were backed up by powerful rights and remedies to ensure that they were followed. Out went the profit projections given to franchisees on the proverbial “back of the napkin” and in came the newly legislated disclosure document with its strictly regulated contents.
It is beyond the scope of this article to state what information the disclosure document must contain. Suffice it to say that it requires a high level of disclosure about the franchise system, the agreements that the franchisee must sign and the business background of the principals of the franchisor. The disclosure document must be provided to prospective franchisees at least 14 days before any agreements are signed or any money is paid toward the franchise.
So, has the Act changed the way franchises are sold in Ontario? Yes and no. Most franchisors are careful to provide a disclosure document to prospective franchisees within the 14 day deadline. The problem, however, is that old habits die hard and many franchisors can’t resist the urge to provide additional disclosure outside of the formal disclosure document.
What these franchisors overlook is that the Act requires all material information about the franchise to be included in the disclosure document, which must be a single document delivered at one time. Any statements, whether oral or written, made by a franchisor or its representatives regarding the profitability of other franchisees, the system in general, or even about the particular location which is for sale must be included in the disclosure document. Otherwise, the franchisor, its officers and the individuals involved in the sale of franchise may be exposed to serious, personal financial liability.
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