Sam Oliver Hall
Published on September 21, 2009
Posted in: Blog
Franchise business consultants provide a wide range of support services for franchisors and franchisees alike. For franchisees, these services include providing advice on evaluating the franchise investment, screening prospective business opportunities, formulating business plans, drafting franchise applications, and counseling on marketing strategies within the context of a franchise relationship. Franchisors use consultants for such things as to develop operational manuals, screen prospective franchisee applicants, assist in purchase and sale transactions of existing franchise units and provide advice on franchise system expansion strategies.
Frequently, a franchise consultant is used to assist a franchisor in meeting its disclosure requirements. It is therefore crucial for the franchise consultant to have a deep understanding of the legislation which governs the disclosure process to minimize the risk of legal exposure both to the consultant and to his or her client.
The significance of a franchisor’s obligation to provide a disclosure document to a franchisee that conforms with the strict requirements of Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”), is too regularly overlooked by participants to franchise transactions, including some franchise consultants.
The Act specifically contemplates that where:
(i) a franchisee does not receive a disclosure document; or,
(ii) receives a disclosure document which fails to set out all “material facts” (a defined term under the Act), which includes prescribed and non-prescribed material facts that would be expected to have a significant effect on the value or price of the franchise to be granted or the decision to acquire a franchise; or
(iii) where the disclosure document contains a misrepresentation (i.e. an untrue statement of material fact or 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),
a franchisee may rescind its franchise agreement without penalty or obligation and may in addition to or alternatively bring an action in damages, as the case may be.
On first blush, it may seem that the duty to provide a disclosure document which conforms to the requirements of the Act is one that rests solely on the shoulders of a franchisor. However, this is not the case. The rescission remedy may be exercised not only against the franchisor but also a “franchisor’s associate”.
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