Published on December 6, 2012
Posted in: Blog
Among lawyers and businesspeople in Ontario, the Arthur Wishart Act (Franchise Disclosure) (the “Wishart Act”) is now widely known as the authoritative law governing franchisees and franchisors. While it is true that the purpose of the Wishart Act is primarily to govern the relationships between franchisees and franchisors, its scope also impacts a broad range of individuals and entities falling under the definition of “franchisor’s associates”. While often not party to a franchise agreement, franchisor’s associates play a role in the granting or operation of franchises, and as a result they are governed by the Wishart Act and subject to stringent regulations and potentially punitive sanctions for noncompliance. It is therefore essential for franchisors and franchisees to understand which individuals and corporate entities are subject to the Wishart Act and to ensure that these entities are clearly disclosed prior to entering into any franchise agreements.
The definition of a franchisor’s associate under the Wishart Act is broad and somewhat unclear in the legislation as it involves two distinct requirements. Below is a summary of the definition in plain English.
A franchisor’s associate can be either an individual or corporation that meets both of the following requirements.
A Relationship of Control with the Franchisor: A franchisor’s associate must control or be controlled by the franchisor. Alternatively, the associate may be controlled by the same person that also controls the franchisor.
- Involvement in the Grant of the Franchise: The Act states that an associate is one who is “involved in reviewing or approving the grant of the franchise.” Involvement does not need to be intensive to meet this requirement. “Reviewing” the grant of the franchise does not require a great deal of involvement or authority. Involvement can also take place during the period in which the prospective franchisee is considering the franchise opportunity. Anyone who makes representations to the prospective franchisee on behalf of the franchisor may be a franchisor’s associate. What constitutes a “representation” is open to interpretation, but all staff of the franchisor must be conscious of what a franchisee may rely upon. Even a junior employee could face exposure under the Wishart Act for making representations on behalf of the franchisor that induce the franchisee to pursue the franchise opportunity.
- Exercising Operational Control over the Franchisee: Operational control extends beyond the grant of the franchise to the actual business relationship between franchisor and franchisee. Often a franchisor will use an associate to administer an aspect of its business which the franchisee will inevitably form a business relationship with. A common example is a company set up by the franchisor to administer its leases and subleases. Where a franchisee is required to make payments to the leasing corporation, that leasing corporation may have operational control over the franchisee. Therefore, even though the associate may not have had any involvement in the granting of the franchise, it is subject to the Wishart Act in much the same way as the franchisor.
Franchisor’s Associates are Subject to the Wishart Act
The broad definition of a franchisor’s associate creates potential liability for the officers and directors of corporations involved in franchising, in addition to various related entities such as corporations set up to administer trade-marks, real estate, or distribution. Prior to the grant of the franchise, the existence of these related corporations should always be clearly disclosed to franchisees in a comprehensive Disclosure Document. During the course of the franchise agreement, franchisors should consider which entities have operational control over the franchisees, in a widely-defined sense, and regularly scrutinize the practices of these entities to ensure they are compliant with the requirements of the Wishart Act.