As a surprise to many in the franchise industry, a private member’s bill was introduced in the Ontario Legislature as Bill 102 on September 15, 2010 to amend the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”). Unfortunately, it appears that the Bill, if passed, will only further complicate the disclosure requirements for franchisors.
The Bill, which is co-sponsored by representatives from all three main political parties 1, proposes to amend the Act by requiring a franchisor to provide a prospective franchisee with an “educational document” containing specified information either before or at the same time it provides the disclosure document. In addition, before entering into a franchise agreement, the prospective franchisee is required to provide the franchisor with a signed, written acknowledgment confirming that the franchisee has examined the educational document.
In its current form, the Bill will require the following information to be included in an educational document:
- self-evaluation criteria for consideration by the prospective franchisee, including: whether the franchisee has the necessary capital, management skills, education, and work experience; whether the prospective franchisee is fully aware of the work involved in the operating the business; what would be the “best” franchise for the prospective franchisee upon considering lines of business that are successful and that are “expected to continue” to be successful; and whether entering into the franchise agreement is the only means by which the prospective franchisee may succeed in engaging in that line of business;
- issues to be considered in respect of the franchisor or the businesses associated with the franchise, including: the franchisor’s background; the financial stability of the business associated with the franchise; how many businesses associated with the franchise are operating and whether any have failed; and, if the franchise is new, the “record of accomplishment” of the businesses associated with the franchise;
- issues to be considered with respect to the goods or services to be sold, offered for sale or distributed, including: whether there is a”reasonable demand” for the goods or services; and whether they are “competitively priced with similar goods or services“;
- issues to be considered with respect to location and sales territories, including: whether the territory is clearly defined and exclusive; the sales and growth potential of the territory; and competition within the territory;
- a statement that the prospective franchisee may ask the franchisor for a list of other franchisees operating in the area;
- issues that the prospective franchisee may wish to raise with other franchisees, including: the total investment required; any “hidden or unexpected costs“; the length of time before the franchisee was able to draw a reasonable salary; any serious disagreements with the franchisor; the helpfulness of the franchisor; and whether the franchisor would recommend entering into the franchise agreement;
- a statement advising the franchisee to have a lawyer and an accountant review the entire franchise agreement particularly with respect to bankruptcy, termination, renewal, transfer and sale of the franchise;
- issues to be considered with respect to the franchise agreement, including: whether the agreement “protects” the franchisee as well as the franchisor; whether the rights and obligations of both parties are clearly stated, particularly with respect to payments, reports, the purchase of supplies, verbal promises, renewal, construction and improvements, assignment, cure periods for defaults and restrictive covenants; and
- “any other prescribed information”.
The foregoing only highlights some of the points to be included in the “educational document”; the requirements contained in the Bill are even broader and more detailed. The Bill passed Second Reading on September 23, 2010, and it is unknown at this time whether there is significant support for it among other members of the provincial legislature. The Bill will now proceed to the Committee stage, where it is expected that it will receive extensive public consultation. The Canadian Franchise Association has come on record in its opposition to the Bill.
There was very little information from the members, either at the Bill’s introduction or at second reading about its objectives, the circumstances that led to its introduction, or what deficiencies in the existing Act they hope the Bill will resolve. While certain members of the provincial parliament spoke of the desire to provide a prospective franchisee with sufficient information to make an informed decision, the Bill does not appear to address many of the ambiguities and criticisms espoused by the franchise community in the 10 years since Ontario passed the original Act. Prince Edward Island, New Brunswick and, most recently, Manitoba have all had the opportunity to review Ontario’s experience through extensive and thorough consultation following which each province proceeded to enact, or are enacting in the case of Manitoba, similar disclosure-type legislation without the need for an “educational document”.
More importantly, the Bill contains numerous requirements that appear to duplicate existing disclosure requirements in the Act or its regulations, and some of the prescribed information to be provided by the franchisor is either speculative or subjective at best. For example, the franchisor is required to provide information regarding the sales potential for the territory, its future growth potential, and competition in the territory. For many franchisors who cannot afford the expense of a detailed statistical and demographical analysis of each territory, this type of information may be beyond its means to state in any reliable manner. Moreover, it also raises concerns that a franchisor may be exposing itself to further liability if any projection or forecast does not come to fruition.
Although the Bill will make the “educational document” a part of the disclosure process, it does not state the consequences for a franchisor which fails to meet its obligations in this regard. Many franchisors are already toiling with some of the onerous disclosure requirements imposed by the Act, and the current trend from recent cases is that a court will carefully scrutinize disclosure to determine whether any deficiencies are significant enough to entitle the franchisee to a 2-year rescission period and to extensive damages for setting up and operating the business. Bill 102 will only serve to aggravate this situation for franchisors.
We will continue to monitor Bill 102’s path and report to you regarding its progress.
For more information on franchising contact Derwin Wong or Dixie Ho
(416) 368-0600 fax (416) 368-6068
email: dwong@businesslawyers.com or dho@businesslawyers.com.
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