Franchise Disclosure and the Right of Rescission in Ontario

The principal legislation governing franchise relationships in Ontario is the Arthur Wishart Act (Franchise Disclosure), 2000. Canada has no national franchise statute; regulation occurs at the provincial level, and six provinces — British Columbia, Alberta, Manitoba, New Brunswick, Ontario and Prince Edward Island — have enacted franchise-specific legislation, with others considering similar measures. Ontario's Act has become the most influential of them, and it shapes the franchisor-franchisee relationship in the province considerably more than most parties appreciate at the point of signing.

The Act is intended to protect franchisees by promoting transparency, imposing a statutory duty of fair dealing on both parties, and providing meaningful remedies where a franchisor fails to meet its obligations. Its definitions determine when it applies. A franchise exists where a franchisee pays fees or other consideration to operate a business, the business is associated with the franchisor's trademark, brand or business system, and the franchisor either exercises significant control over or provides significant assistance to the franchisee's operations. Master franchises and subfranchises fall expressly within the Act's scope.

Disclosure is the central mechanism. A franchisor must provide a prospective franchisee with a comprehensive disclosure document containing its financial statements, information about the franchise system and its management, copies of every agreement the franchisee will be asked to sign, details of the costs and fees involved, and the further information prescribed by regulation. The document must include a certificate signed by the franchisor or by its directors and officers confirming that the disclosure is complete and accurate. The obligation extends to all material facts, interpreted broadly to include anything that could reasonably be expected to influence a decision to acquire the franchise, and it continues in respect of material changes occurring before the agreement is executed.

Ontario courts have adopted a consistently strict approach to compliance. Deficiencies that appear relatively minor may render disclosure materially deficient, which in turn engages the franchisee's statutory rescission rights.

Those rights are substantial. Where a disclosure document is deficient or non-compliant, a franchisee may rescind the franchise agreement within sixty days of receiving it. Where no disclosure document was provided at all, the franchisee may rescind within two years of entering into the franchise relationship. Upon a valid rescission the franchisor must, within sixty days, refund all amounts paid by the franchisee, repurchase inventory, supplies and equipment acquired under the agreement, and compensate the franchisee for losses incurred in establishing and operating the franchise. The commercial consequences of a rescission claim are therefore considerable, and the two-year window means the risk remains live well after a franchise has opened.

The Act does more besides. It imposes a statutory duty of fair dealing on both franchisor and franchisee, requiring each to act in good faith and in accordance with reasonable commercial standards throughout the relationship — in negotiations, in operational decisions, in enforcement action, and on renewal or termination. It protects the right of franchisees to communicate and associate with one another and to form or join franchisee associations, and any contractual provision restricting or purporting to waive that right is void and unenforceable.

It also creates a statutory cause of action for damages arising from misrepresentation in a disclosure document or from a failure to comply with the disclosure requirements. Liability extends beyond the franchisor to its associates, agents, brokers and the individuals who signed the disclosure document. The Act presumes that the franchisee relied on the disclosure document in making the investment decision, which materially eases the evidentiary burden. Defendants can escape liability only in limited circumstances, such as where the franchisee knew of the misrepresentation or where consent was promptly withdrawn on discovering it.

For franchisors, disclosure is not an administrative formality to be completed before closing. For franchisees, a defective disclosure document is frequently the strongest position available to them. Either way, the document warrants careful review by someone familiar with how the courts have treated it.