Published on October 6, 2016
Posted in: Blog, Jean-Marc Leclerc
What if a franchisor has an interested candidate but no site has been chosen? A recent decision of the Ontario Superior Court of Justice explains the risks of franchises in these situations.
Lawyers are often asked to prepare franchise disclosure documents for franchisors when the proposed grant is not specific to any known site. Practically speaking, franchisors do not want to undertake the cost and effort and possible risk of finding and securing a site unless they have a committed franchisee. Franchisors consider franchisees to be committed only once they have signed a franchise agreement or at least paid some initial franchise fee or deposit.
While this is a common business scenario, the legal framework is fraught with risk. Ontario’s Arthur Wishart Act (Franchise Disclosure) 2000 and its regulation require franchisors to disclose all “material facts” together with the amount of any deposit and estimates of the costs for leases and leasehold improvements. The purpose is to provide full and accurate disclosure so the franchisee can make a properly informed decision about whether they make the investment: 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd. (2005), 2005 CanLII 25181 (ONCA) at para. 16.
The recent decision of the Ontario Superior Court of Justice in Raibex Canada Ltd. v. ASWR Franchising Corp., 2016 ONSC 5575, considered what a franchisor is required to disclose when it has not yet secured a site for the prospective franchisee. The answer provided by the court was clear: a franchisor must disclose information about leasing arrangements to all franchisees. If it is impossible to do so because the information is not yet available, then “the franchisor is not yet ready to deliver the statutorily required disclosure document. The franchisor must wait – it does not get excused from its statutory obligations,” the court concluded.
The Raibex decision does not mean that longstanding franchisor practices of granting franchises to site-less franchisees are doomed. For many years, lawyers at Sotos LLP have developed practical solutions to minimize the legal risks to franchisors. A copy of John Yiokaris’ blog post from June 17, 2013 provides insight. will be speaking on the topic at the Ontario Bar Association’s 16th Annual Franchise Law Conference on November 17, 2016.
We look forward to continuing to assist our clients to proactively navigate the choppy waters of franchise law.