Although we live in a world of extraordinary medical advances, there is still a very real possibility that you may, as a result of disease or accident, become incapable of managing the every day aspects of your life – where you will live, medical treatment and healthcare, nutrition, shelter, clothing and so forth. By making a Power of Attorney for Personal Care you can appoint one or more persons, usually family members, to look after your personal care in the event of illness, injury, or mental incapacity.

In the event that you become incapable and you have not appointed an attorney for personal care, your loved ones will have no choice but to commence a lengthy and costly court proceeding to appoint a statutory guardian for you. A Power of Attorney is an invaluable planning tool and the importance of planning ahead cannot be understated. However, a Power of Attorney must be made while you are capable of making these decisions.

If you have not yet appointed an Attorney for Personal Care to make personal care decisions on your behalf if you are unable to, we recommend that you take the time to put your affairs in order. If you already have a Power of Attorney for Personal Care you should review it at the same time you review your Last Will and Testament to ensure that the person(s) you have chosen are still in accordance with your wishes and current circumstances.

THE ATTORNEY FOR PERSONAL CARE’S JOB DESCRIPTION: A Short Guide to the Role and Legal Responsibilities of an Attorney For Personal Care

Introduction

The purpose of this article is to explain the role of an Attorney for Personal Care and to outline his or her obligations to the appointee.

 Role and Authority of the Attorney for Personal Care

Unless you restrict your attorney’s powers, the role of your Attorney for Personal Care is to step into your shoes and make decisions on any or all of the decisions regarding your health care, nutrition, shelter, clothing, hygiene and safety that you are incapable of making on your own behalf. You may also provide specific instructions in the Power of Attorney for Personal Care regarding specific decisions that you may want made in certain circumstances and your attorney is bound to make decisions in accordance with these wishes. For example, with regard to decisions about your shelter, you may want to specify that your attorney must keep you in your home for as long as possible. It is also very common for the grantor to provide instructions about health care and various treatment options in the event of illness, especially regarding the termination or continuation of medical treatment in the case of terminal illness. Even if you didn’t provide written instructions but told people your wishes when you were capable, your attorney is obligated to use reasonable diligence to ascertain your wishes.

You may appoint any person as your Attorney for Personal Care who is at least 16 years of age and mentally capable. You may also appoint more than one person, but if you do all attorneys will have to agree on every decision that is made for you unless they are appointed “jointly and severally”, which enables any one of the attorneys to make decisions on their own. to protect against potential abusive situations, the law provides that, you cannot appoint someone who you pay to provide services to you, unless that person is a relative.

 When Does a Power of Attorney for Personal Care Take Effect?

A Power of Attorney for Personal Care takes effect only if you become mentally incapable of making some or all of your personal care decisions. For example, if you become mentally incapable of making decisions about health care but can still make decisions about other personal care matters, such as housing, you would still have the right to make your own decisions with respect to those matters.

“Incapable of making personal decisions” means that you cannot understand the information that is relevant to the particular personal care decision or can’t appreciate what could happen as a result of making (or not making) a certain decision.

Generally your attorney would decide if you are mentally incapable of making personal care decisions unless you name someone else in your power of attorney, with a few exceptions. If the decision is about medical treatment or admission to a long-term care facility, a health professional must determine whether you are incapable of such decisions before your attorney may act. You may name a specific person, such as a family doctor or a family friend, or you may name a class of persons, such as a qualified capacity assessor or psychologist. If your attorney thinks you are incapable, they must arrange for that person to assess you and confirm your incapacity.

 The Main Duties of the Attorney for Property

If you choose not to provide any specific instructions, your attorney must make decisions according to what he or she believes is in you best interests. In deciding what is in your best interests your attorney must take into consideration the values and beliefs that you held when you were capable, your current wishes and whether the decision is likely to improve your quality of life or prevent the quality of your life from deteriorating and if the decision is likely to reduce the rate at which your quality of is likely to deteriorate.

In addition, duties of attorneys for personal care include the duty to:

• act diligently and in good faith;

• as far as possible, try to foster the person’s independence;

• choose the least restrictive and intrusive course of action that is available and appropriate;

• encourage the person to participate, to the best of his or her abilities, in personal care decisions about themselves;

• seek to foster regular personal contact between the incapable person and supportive family members and friends; and

• to consult from time to time with supportive family and friends who provide personal care for the person.

 Cancelling an Attorney For Personal Care

You may cancel a Power of Attorney for Personal Care as long as you are mentally capable of making a Power of Attorney for Personal Care. In order to do so you must state in writing that you revoke it and two people must witness you signing the statement. Also, if you make a new Power of Attorney for Personal Care, all other existing Powers of Attorney that you have made before are automatically cancelled, unless the new one says otherwise.

 Direction from the Court

If an attorney has any question regarding your personal care, he or she may apply to the Court for directions on how to resolve the issue and the Court will give directions as to what it considers to be beneficial to you. In addition to cases involving genuine ambiguity, the ability to apply to the Court for directions often provides a means to resolve disputes which may arise about your care. Such an application should be brought with the assistance of a lawyer.

For more information on estate planning and estate litigation matters, contact Wes Brown or Natalie Schernitzki at (416) 368-0600 or fax (416) 368-6068 or by email at wbrown@businesslawyers.com or nschernitzki@businesslawyers.com.

Morrison Brown Sosnovitch LLP, 2012. All rights reserved.

All of us like to save taxes.

Most of us set up our wills to give all or a substantial portion of our estate to our children (after appropriate provision for our spouse). Except for exceptionally large estates, usually the gifts to our children are outright and absolute, at least after they reach a certain age. As a result, our children will enjoy their inheritance with freedom of choice as to how they invest or use it. The gist of the Will says something like this:

Everything to my spouse, and if my spouse does not survive me, divide it among my children equally when they reach age 25.

Have we just squandered an opportunity for our children to save taxes?

For adult children who already have substantial income, or even for young children who show substantial promise of ability to earn a substantial income in later years, the outright gift to children in the Will forgoes an opportunity to split income between a child and a trust for the child set up in the Will (called a “testamentary trust”).

Suppose instead of giving it directly to children at a certain age, the Will directs that each child’s share go into a testamentary trust. In Canadian tax law, a testamentary trust is taxed like an individual, but with no personal tax credits. This means that a trust enjoys a full set of graduated tax rates.

Consider your daughter, Jane. She is already earning a high salary which puts her taxable income above $132,400. This is the threshold for 2012 to which the top rate of 46.41% applies. If she invests her inheritance from you to help build a retirement nest egg and earns, say, interest of $20,000, her net interest income after tax will be $10,718. If she had been able to invest it in a testamentary trust subject to the graduated tax rates, the applicable rate of combined federal and Ontario tax on this interest income would have been about 20.1%, increasing her net income after tax to $15,980. Assuming that interest rates and tax rates stay the same every year, the saving is $5,262 every year in this example.

It is right to ask whether, by doing so, we have deprived our children of the freedom to use the money as they see fit in the same way as if it had been left to them outright. Although one of the classic reasons for using trusts in Wills is to set up restrictions on use and access by the beneficiaries, this does not have to be the case. A well drafted Will could leave the share of the estate to your children as trustees of their own trust, with a power to use both the income and capital as they see fit for their own benefit. Instead of investing it in the testamentary trust for her benefit to save taxes, this power permits Jane to take out income or capital from her testamentary trust to renovate her house, or buy a shiny new Mercedes.

The gist of such a Will says something like this:

Everything to my spouse, and if my spouse does not survive me, divide it and pay it to each of my children to be held by each child of mine in a separate trust, with the power to use all or any of the annual income and capital to or for the benefit of such child in their sole and absolute discretion.

A carefully worded testamentary trust to this effect still leaves your child in full control of her inheritance in the same way as if it had been given to her outright.

If you have three children, three testamentary trusts multiply the savings. It is fair to assume however that Canada Revenue Agency is not overwhelmed with the elegant beauty of splitting income with multiple testamentary trusts, and in fact, it has the power, when the source of funds to multiple trusts is the same, to deem multiple trusts to be a single trust if the income of the trust accrues to the same beneficiary or class or group of beneficiaries . In the one relevant case of which I am aware (Mitchell v. MNR), four separate trusts were allowed for the taxpayer’s four children. It is also understood that there is an administrative policy to permit multiple trusts if the Will clearly intends separate trusts which do not have any common beneficiaries, and that during the administration of the estate, the accounting is kept separate for each trust.

There are lots of other potential applications of this tax planning strategy. For example, leaving your spouse’s entitlement in a trust of which she is the sole trustee will allow her to split income with her testamentary trust and retain full control of it, which may be very useful if your spouse has and is likely to continue to have a high taxable income in his or her own right.

A word of caution: please don’t try this at home. Your Will will likely be your single largest transfer of assets in your lifetime, and drafting such testamentary trusts effectively, without introducing other concerns, requires an expert. This is especially the case when Wills contain testamentary trusts.

For more information on wills and estate matters, contact Wesley Brown by phone (416) 368-0600, fax (416) 368-6068 or email at wbrown@businesslawyers.com.

© Morrison Brown Sosnovitch LLP, 2012. All rights reserved.

Restrictive covenants have been in the news a lot in recent months. Most recently, there has been considerable high profile sabre rattling by CN concerning the prospective hiring of its former CEO, Hunter Harrison, by its arch competitor, CP. One of the reasons for the higher level of activity is that our economy is becoming increasingly knowledge-based, prompting companies to look for ways to keep their assets from “walking out the door”. These days, companies often attempt to use restrictive covenants to tie up engineers, salespeople, accountants, and others who they think hold sensitive positions, in addition to top management.

The area is also topical on the heels of a recent Court of Appeal decision Mason v Chem-Trend Limited Partnership[i], from which the Supreme Court denied leave.

Some Broad Background

Recognizing that non-competition and non-solicitation covenants are inherently anti-competitive, the courts have always been ready to strike down covenants that are either ambiguous in their wording, or too broad in their factual context having regard to time, place and scope. This is especially so in employment contexts, where the employer’s desire to protect itself have to be balanced against the individual employee’s ability to earn a livelihood using his or her skills and knowledge. It has also become an“up or down” challenge; if a covenant is offside in any way, then the whole covenant is bad and none of it will be enforced.[ii]

The Mason Case and Practical Ambiguity

The Mason case is another case adding to the high hurdles which employers have to negotiate to make their covenants enforceable. One of the prerequisites for enforceability is that the wording of restrictive covenants must be certain and unambiguous.[iii] In Mason, the Court of Appeal agreed that the wording of the covenant was clear and unambiguous, but added that this is not enough – it must also be clear and unambiguous in its practical implementation.The non-solicitation covenant in this case precluded Mr, Masons from contacting “any customer of the business”, and in the circumstances of his employment, could not know which customers were off-limits because the nature and geographic scope of his responsibilities were such that he did not have contact with all of the company’s customers, and therefore after termination could not know whether any particular person or company was a customer of the business.Even though the wording was clear, it was unworkable in practice.

Confidentiality Clauses and the Mason Case

Another aspect of the Mason decision which has wide ranging implications is the Court’s conclusion that since Mr. Mason was also bound by a confidentiality clause which protected the company against disclosure and misuse of its confidential information, the Court found the restrictive covenant to be overreaching and unenforceable.Legal agreements which include restrictive covenants routinely also include separate confidentiality clauses, the existence of which it would appear will constitute a factor to be taken into account when considering whether the restrictive covenant is too broad.

Coming back to the CN and CP dust-up (which actually is governed by Illinois law), CN’spublic position is that even though its restrictive covenant from its former CEO expired
December 31,. 2011, he should be prohibited from competing because he (allegedly) possesses vast knowledge of CN’s confidential information.The former CEO is undoubtedly bound, either by written agreement or by common law, from using or disclosing CN’s confidential information, and the rationale behind this part of the Mason decision strongly suggests that the existence of a separate obligation of confidentiality will not form a basis for extension of a non-competition obligation. We look for CN to find a face-saving retreat from its position.

What should we take away from the Mason decision?

On a technical level, the Mason case confirms and/or establishes that a restrictive covenant must be certain, clear and unambiguous in both its actual wording and in its actual practical implementation in the real world. The case also gives us a clear statement that when we include separate confidentiality clauses, their existence may be used to reduce the scope of enforceable covenants.

On a broader and perhaps more meaningful level, the Mason case reinforces our conviction that when it comes to restrictive covenants, less is more. Pressing the outer limits of enforceability only increases the risk of a “thumbs-down” from the bench. There is something to be said for simple clear wording, practical “real world” meaning, and limits of time, geography and scope that are narrow enough to be reasonably certain of enforceability, but broad enough to somewhat cripple but not eliminate a putative competitor.

Social media has allowed businesses to connect with consumers in unprecedented ways.  The opportunity for businesses to increase brand awareness though comes at the expense of controlling the message being conveyed.  Where the message being conveyed is not consistent with that of the business, the consequences can be severe for the individual who posted the message, the target business, or both.  This was a lesson learned the hard way by Damian Goddard, a host on Rogers Sportsnet.  In response to Twitter posts by hockey agent Todd Reynolds that opposed hockey player Sean Avery’s support of gay-marriage, Mr. Goddard’s freelance contract was terminated after he used Twitter to express his support for Mr. Reynolds.

In the franchise context, a franchisor should take proactive steps to monitor comments related to the franchise.  Specific operational procedures should be established to monitor social media activity.  One way of doing so is by setting up a “Google alert” that will send an email notice of online content that is posted with keywords related to their business.

It is prudent for a franchisor to control social media communications related to the franchise but a franchisor cannot prevent a franchisee from posting comments in the franchisee’s personal capacity that is not necessarily related to the franchise.  Depending on the circumstances, a franchisor may be able to take action against the franchisee by enforcing clauses related to the franchisee’s loyalty, good morals, and preservation of goodwill, or similar clauses.  Thought should be given to whether a franchisor will require franchisees to disclaim personal comments by stating that their comments are the franchisee’s personal views and not those of the franchisor.  However, such a disclaimer may do more harm than good by pointing out the connection with the franchisor, where the connection may not otherwise be obvious.

Despite a franchisor’s desire to control media messages, the democratization of media has led savvy consumers to expect customized, relevant content that may be impractical for a franchisor to provide.  Just as with local advertising, social media content is most effective when it reflects the needs of the local consumer.  For this reason, social media content may be most effective if it is generated by a local franchisee.

Nonetheless, if a franchisor decides to prevent franchisees from posting messages about the franchise by centralizing social media campaigns through head office, consideration should be given to whether advertising fund resources will be purposefully diverted away from traditional advertising and promotions, or whether additional resources are required in order to add social media to its existing advertising framework.  Some franchise agreements allow the franchisor to increase the amount of contribution to the advertising fund. Social media campaigns may be an appropriate reason for doing so.

Whether or not a franchisor allows its franchisees to participate in social media, franchisors are well-advised to ensure that its franchisees’ rights with respect to social media are clearly set-out in the advertising provisions in its franchise agreement and its operations manual.  If a franchisee is allowed to participate in social media, the following essential terms of use should be outlined:

• the franchisee’s requirement to use the trade-mark in accordance with the licence;
• the assignment of all copyrights to the franchisor;
• the franchisee’s indemnity of the franchisor for any losses related to the franchisee’s activities;
• the franchisee’s requirement to obtain prior written consent to use any electronic identifiers (e.g. Facebook pages, Twitter accounts, etc.); and
• the assignment of such identifiers to the franchisor upon termination or expiration of the franchise agreement.

By including specific provisions relating to social media in their franchise agreement, franchisors ensure that they have the proper tools in place to protect their legal rights, while showing that they are remaining competitive and marketable in today’s fast-changing economy.

For more information on franchising, please contact Derwin Wong or Dixie Ho at (416) 368-0600 or by email at dwong@businesslawyers.com or dho@businesslawyers.com.

© Morrison Brown Sosnovitch LLP, 2011. All rights reserved.

The cost of a home is beyond the means of many young couples, and often parents want to help out with some financial contribution to the purchase. This is the point at which things can go seriously astray unless the situation is clearly thought out, and then properly documented. Fodder for future litigation and family conflict is sewn when funds are paid over with vague and ambiguous arrangements of the true intent of the arrangement.

When a parent considers the risks, usually the focus is on the consequences of a breakdown of the marriage. This is an obviously relevant concern, especially since the house will become the matrimonial home which attracts special treatment in Ontario family law. However, there are other potential concerns, such as: (i) the protection of the reasonable expectations of the other children in the parents’ estate (ii) the potential for future impoverishment of the parents when they have been too generous with their largesse; and (iii) the unintentional exposure to claims of creditors of the child. The latter is very relevant if the child or his or her spouse is self employed and has potential exposure for the liabilities of the business, for example, on a guarantee of a bank loan.

The obvious answer is to loan the money to the children, preferably secured by a mortgage on the new home, together a review of the parents’ wills to decide if the arrangements merit a change to the wills. It is very important that the loan be well documented with a formal promissory note, and perhaps also a collateral mortgage registered on title.

A properly documented loan establishes the parents’ continuing claim to repayment as a legal obligation which becomes essential if there is a subsequent breakdown of the marriage, or financial circumstances turn against the parents and they need to recover some or all of the money for their own support.

The loan is also an asset of the parents’ estate, which can be dealt with directly or indirectly in their wills in a way that should help to avoid potential conflicts among their children after their death. For example, it is common for parents to divide their estate among their children, with provision that if the loan continues to be outstanding at their death, its payment is applied against the share of the child who received the financial assistance.

The security of a mortgage significantly strengthens the parents’ position, and a mortgage is essential to establish priority against other creditors if the child later encounters financial difficulties. The existence of the mortgage also protects the parents against the possibility that the children may continue to borrow against the house with, for example, a home equity line of credit.

Parents who really want to bullet-proof the loan and mortgage will require their married child and his or her spouse to obtain independent legal advice so that it can’t later be alleged that the loan was misrepresented to them, that they didn’t understand it, or that the loan documents were signed under coercion.

It is true that requiring proper loan documentation involves some modest cost and inconvenience, and perhaps even some embarrassment for some people, but an ounce of prevention is worth far more than a pound of remorse.

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:

1. 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;
2. 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;
3. 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“;
4. 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;
5. a statement that the prospective franchisee may ask the franchisor for a list of other franchisees operating in the area;
6. 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;
7. 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;
8. 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
9. “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.

© Morrison Brown Sosnovitch LLP, 2008 All rights reserved.

In a bold and somewhat surprising move, the Government of Manitoba introduced Bill 15 last week to enact franchise legislation in that province. If successfully passed, Manitoba would join Alberta, Ontario Prince Edward Island, and New Brunswick as the only jurisdictions in Canada with franchise legislation.

The proposed legislation follows the extensive report of the Manitoba Law Reform Commission in May 2008 which recommended the enactment of such legislation.  Also as recommended by the report, the Bill is modelled on the Uniform Franchises Act that was prepared by the Uniform Law Conference of Canada, and proposes a “disclosure-type” regime as in the other provinces with franchise legislation.

Based on our preliminary review of the Bill, and to assist our clients that either currently franchise in Manitoba or are considering doing so, we have summarized highlights of the proposed Act, its differences with the current Ontario legislation, and, where applicable, its similarities or differences to franchise legislation in the other provinces.

As with the other franchise-legislated provinces and in addition to the provisions referred to in the table below, the Bill proposes to grant rights to franchisees and impose the duties and obligations on franchisors as follows:

• the duty of fair dealing is imposed on both parties;
• a franchisee has the right to associate with other franchisees, which a franchisor cannot interfere with;
• a franchisee may sue the franchisor for damages due to misrepresentations, which the franchisee is deemed to have relied upon; and
• a franchisee’s rights under the proposed Act cannot be waived.

It is expected that a public consultation will follow regarding the draft Bill and its provisions. As such, it remains to be seen whether the proposed Act will proceed in its current form or have any further amendments.

It is also important to note that some of the mechanics and information required to comply with disclosure requirements will not be determined until regulations are prepared in association with the Act if passed. In this regard, the enactment of the regulations to the New Brunswick Franchises Act – being the latest regulations of franchise legislation in Canada and expected this spring – may have an influence over the direction to be taken by Manitoba.

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.

© Morrison Brown Sosnovitch LLP, 2010 All rights reserved.

The Arthur Wishart Act (Franchise Disclosure), 2000 (Ontario) (the “Act”) requires franchisors to provide potential franchisees with a disclosure document containing all material facts, financial statements, copies of agreements to be signed, and other relevant information and documents regarding the franchisor, its principals, franchisees and system. With circumstances ever changing and the potential consequences of rescission and damages against the franchisor, its agent, broker, those who sign the disclosure document, and associates (those who control or are controlled by the franchisor, and who are directly involved in the grant of the franchise), it is critical that every disclosure document be carefully reviewed to ensure that it is current, correct and complete. It is also important that information be set out accurately, clearly and concisely. 

We recommend that you review the following checklist each and every time you prepare a disclosure document.  This checklist is prepared on the assumption that you have a “base” disclosure document that complies with the Act and we have only identified information that is most likely to be subject to change.  This checklist is not a substitute for legal advice and serves only as a guide for further discussion. 

Before providing your disclosure document to a potential franchisee, you should review the following information:

•  The business background of the franchisor:
• Have there been any changes to the franchisor’s legal or operating name, address, or business structure, such as a new corporate structure or a new parent company?
• Have you introduced any new lines of business?
• The business background of the directors, general partners and officers:
• Have there been any new appointments or resignations?
• Have any directors, general partners or officers changed their principal occupation or employer during the five years immediately preceding the date of the disclosure document?
• Are there any pending or have there been any charges or convictions of fraud, unfair or deceptive business practices, or violations of franchise or business law against any of the franchisor, franchisor’s associate or a director, general partner or officer in the ten years immediately before the date of the disclosure document?
• Are there any pending or have there been any administrative orders or penalties imposed against any of the franchisor, franchisor’s associate or a director, general partner or officer of the franchisor under a law of any jurisdiction regulating franchises or business?
• Are there any pending civil actions against the franchisor, the franchisor’s associate or a director, general partner or officer of the franchisor or have there been such civil actions in which any such persons have been found liable for misrepresentation, unfair or deceptive business practices or violating franchise or business law?
• Have any bankruptcy or insolvency proceedings taken place during the six years immediately before the date of the disclosure document against the franchisor, the franchisor’s associate, a corporation of which a current director, officer or general partner of the franchisor was a principal, or a director, an officer or a general partner of the franchisor in their personal capacity?
• Have you included financial statements for the most recently completed fiscal year that have been audited or prepared on a review engagement standard (unless the date of the disclosure document is within 180 days of the end of the most recently completed fiscal year and if the financial statements have not yet been prepared, in which case, the previous year’s financial statements may be used)?
• Have you included copies of all agreements that the franchisee is required to sign, as well as any offer to lease?
• Is the list of the franchisee’s estimated costs to establish the franchise accurate and complete, together with all assumptions underlying the estimate?
• If annual operating costs estimates are provided, have you included complete and accurate assumptions underlying the estimates, together with the location where such information is available for inspection?
• If earnings projections are provided, have you included complete and accurate assumptions underlying the projections, together with the location where such information is available for inspection?
• Have you reviewed what percentage of advertising funds:
• were spent and retained in the two fiscal years before the date of the disclosure document; and
• are projected to be spent and retained for the current fiscal year?
• Have there been any changes in status of the franchisor’s trade-mark, such as changes to the status of trade-mark registrations, additions or cancellations of trade-marks?
• Will an exclusive territory be granted to this potential franchisee? If so, what are the conditions required to be met to maintain such territory?
• Is the list of franchises that have been terminated, cancelled, not renewed or reacquired by the franchisor or otherwise left the system within the last fiscal year immediately preceding the date of the disclosure document accurate and complete?
• Is the list of franchise closures within the three fiscal years immediately before the date of the disclosure document and the reasons for the closure accurate and complete;
• Is the list of the locations of all franchises, including the business address, telephone number and name of the franchisee (or, if there are less than 20 franchises in the applicable province, a list of at least 20 franchises geographically closest to such province), accurate and complete;
• Is the Certificate of Disclosure dated and signed by the sole director or officer or, if there is more than one director or officer, by at least two persons who are directors or officers?

If any material change occurs after disclosure, you must provide the franchisee with a statement of material change as soon as practicable after the change has occurred and, in any case, before either signing any agreement with the franchisee or accepting payment from the franchisee.  Statements of material change are intended to update changes that occur during the 14-day disclosure period.

Franchisors need to pay close attention to the information in each disclosure document to ensure that there are no such deficiencies or else franchisors risk facing the rescission penalties imposed by the Act.  Using this checklist as a roadmap for maintaining your disclosure documents will assist you in this process but you may also consider diarizing an annual or bi-annual review of your disclosure document, your franchise documents and operations manual. In doing so, you will ensure that these “living documents” continue to evolve with your system and with the developments in the law.

For more information on franchising, please contact

Derwin Wong or Dixie Ho at (416) 368-0600

or by email at dwong@businesslawyers.com or dho@businesslawyers.com.

© Morrison Brown Sosnovitch LLP, 2009. All rights reserved.

In a spate of recently decided cases on the issue of rescission, the Ontario Court of Appeal has now weighed in on the issue of whether a franchisor’s failure to deliver a disclosure document on a timely basis is fatal to the entire disclosure process.  Section 5 of the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”) requires a franchisor to deliver a disclosure document at least fourteen days before the signing of a franchise agreement or payment of any monies related to the franchise.  Failure to meet this requirement would allow a franchisee to rescind the agreement and recover all amounts paid.  The battle, as in most cases dealing with rescission, is whether the franchisee would have sixty days from disclosure or two years from the signing of the agreement to exercise this option.

In 4287975 Canada Inc. v. Imvescor Restaurants Inc. , the franchisee sought rescission of its franchise agreement regarding a Baton Rouge Restaurant in Oakville, Ontario.  With respect to the franchisor’s disclosure obligations, the parties agreed to the following facts:

• On June 8, 2005, prior to delivery of a disclosure document by the franchisor, the franchisee paid $15,000 to the franchisor for the franchise.

• On August 15, 2005, before execution of the franchise agreement, the franchisee then received the franchisor’s disclosure document.

• On February 17, 2006 – approximately 6 months after delivery of the disclosure document – the franchisee executed the franchise agreement.

• On February 15, 2008, the franchisee served on the franchisor a notice of rescission in respect of the franchise agreement under the Act.

The basis of the franchisee’s argument was that the breach by the franchisor of its disclosure obligations under subsection 5(1) of the Act – to provide disclosure fourteen days before any payment was made – gave rise to the franchisee’s right under subsection 6(2) to rescind the franchise agreement within a two year limitation period and recover all monies paid to the franchisor. In essence, the franchisee contended that a breach by the franchisor regarding the timing of disclosure should be incurable and treated as if a disclosure document were never delivered.

The motion judge initially hearing the matter disagreed with the franchisee and determined that the franchisee’s right to rescission, if any, was governed by subsection 6(1) of the Act, which provided only a 60-day limitation period and which expired before the franchisee delivered its notice of rescission. The franchisee appealed from this decision.

In arriving at the conclusion to dismiss the franchisee’s appeal, Mr. Justice LaForme, in a unanimous decision of the Ontario Court of Appeal, commented as follows regarding the interaction between sections 5 and 6 of the Act:

In respect to timing, s. 5 of the Act ensures that a prospective franchisee has at least fourteen days to review and consider a disclosure document before signing a franchise agreement or paying consideration in relation to a franchise. In the event that the franchisor does not comply with s. 5, the Act provides the franchisee with an extraordinary remedy: the right to rescind the franchise agreement with two different limitation periods, depending on when and whether the franchisor provides a disclosure document.

First, s. 6(1) permits rescission within sixty days of receipt of the disclosure document if the disclosure document is not provided “within the time required by s. 5”. Not only did the appellant [franchisee] not provide a notice of rescission within sixty days of receiving the document, but it also had six months to consider the disclosure document before entering into the agreement.

Second, under s. 6(2), a franchisee may rescind a franchise agreement within two years, but only if there was no disclosure document provided by the franchisor. In particular, for s. 6(2) to apply, the franchisor must never have provided the disclosure document. The time for rescission under s. 6(2) starts to run from the date when the franchise agreement was signed, owing to the fact that unlike under s. 6(1) – where the applicable time starts when a proper disclosure document is provided – s. 6(2) applies to a situation where there is no disclosure document provided at all.

At the end of the day, the Court agreed with the view of the motion judge that the franchisee had ample time to review the disclosure document before executing the franchise agreement.  With the deficiency in timing, the franchisee had 60 days from receiving the document to provide notice of rescission and recover its payment of $15,000.  Instead, the franchisee took 6 months from receipt of the document to consider the franchise and eventually agreed to be bound by the terms of the franchise agreement.

From this decision of the Court of Appeal, it now appears that any failure of a franchisor to provide a disclosure document fourteen days before any payment or execution of an agreement related to the franchise may be “remedied” by the subsequent delivery of a disclosure document. That is, even if monies have been paid and a franchise agreement signed before delivery of a disclosure document, it may still be considered prudent for a franchisor to nevertheless deliver a disclosure document after the fact since presumably by doing so it may shorten the rescission limitation period from two years from the time of signing of the franchise agreement to sixty days of delivery of the disclosure document.

This proposition may also be helpful to a franchisor that has failed to comply with other disclosure requirements under the Act, which may have otherwise rendered the entire disclosure process in doubt.  

Applying the principles from Imvescor, a franchisor may conceivably limit the rescission period resulting from such fatal deficiencies to sixty days from two years by delivering a proper disclosure document.

As a final caution to any franchisor that may develop a habit of failing to provide timely disclosure, it may be important to note that in Imvescor, the parties had agreed to an assumed set of facts for the purposes of the motion. As such the Court only reviewed the issue of the timing of disclosure and not its adequacy.  With the six-month period between delivery of the disclosure document and signing of the franchise agreement, it would have also been incumbent upon the franchisor to make sure that a statement of material change be delivered for any material facts that may have been altered in the interim. Failing this, the franchisor may still be exposed to a claim of misrepresentation for any inaccuracies or omissions under section 7 of the Act.

For more information on franchising, please contact

Derwin Wong or Dixie Ho at (416) 368-0600

or by email at dwong@businesslawyers.com or dho@businesslawyers.com.

© Morrison Brown Sosnovitch LLP, 2009. All rights reserved.

On the heels of the recent decision in Sovereignty Investment Holdings Inc. v. 9127-6907 Quebec Inc.(1), the Ontario Superior Court of Justice has released its decision in 6862829 Canada Limited v. Dollar It Limited(2), which appears to have expanded the list of disclosure document deficiencies that would be fatal to a franchisor’s compliance with the disclosure obligations under the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”).

Given that the consequences of failing to meet these disclosure obligations provided the franchisee with a statutory rescission right and reimbursement of all amounts paid or incurred to set-up or acquire the franchise, the franchisors in both of these cases strenuously defended the actions by primarily focussing upon the limitation periods in which the franchisee ought to have exercised its notice of rescission.  Section 6(1) of the Act provides that if a disclosure document is delivered late or is deficient in content, the franchisee has 60 days after receiving the disclosure document in which to rescind the agreement and obtain reimbursement of all amounts paid to the franchisor or otherwise incurred to set up or acquire the franchise.  However, section 6(2) goes on to state that if a disclosure document was never provided, the limitation period for rescission by the franchisee is extended to 2 years after signing of the franchise agreement.

As stated by Justice Wilton-Siegal in Sovereignty Investment:

In Dollar It, the franchisee received a disclosure document and, more than 14 days later, paid certain amounts to the franchisor and signed a franchise agreement. As in Sovereignty Investment, the disclosure document delivered to the franchisee did not comply with the requirements of the Act. The franchisee delivered a notice of rescission to the franchisor after the 60-day period from the date of receipt of disclosure but well within the two-year period after the franchise agreement was signed. The question turned on whether the franchisee had the right to rescind the franchise agreement within the 60-day period or within the two-year period.

In interpreting the Act, Justice Linhares de Sousa reviewed the legislation’s statutory intent which was to protect franchisees, and to meet this intent, franchisors were required to comply with rigorous requirements of providing accurate and complete disclosure containing all material facts.  The judge found that, although disclosure was given within the correct time frame and in one document, the disclosure document lacked the following material information:

• financial statements or a balance sheet as required by the Act;
• a completed certificate signed by the franchisor and at least one of its directors;
• notice of a pending law suit against the franchisor by one of its franchisees;
• a copy of the existing offer to lease for the franchised premises; and
• correct information about whether the lawyer stipulated in the disclosure document was authorized to receive service of process in Canada on the franchisor’s behalf.

The Court determined that the absence of the above information resulted in such materially deficiencies that the document completely failed to meet the disclosure obligations under the Act. As such, the franchisee’s rescission notice was validly delivered within the 2-year limitation period.

In Sovereignty Investment, the Court clearly stated that each deficiency on its own was sufficient to disqualify the disclosure document.  Although the decision in Dollar It did not specifically address this point, since both cases cited similar and overlapping deficiencies, it may be logically inferred that each of the deficiencies in this case are also independently fatal.

To summarize and combining the decisions in Sovereignty Investment and Dollar It, each of the following deficiencies on its own will be considered fatal to any disclosure document delivered by a franchisor:

• The failure of the franchisor to include a copy of its financial statements or an opening balance sheet with disclosure as required by the Act and the regulations.
• The failure of the franchisor to include a statement specifying the basis for the earnings projections and estimates, as well as a statement of assumptions underlying the estimates and a location where information was available for inspection to substantiate such estimates and projections.
• The failure of the franchisor to provide disclosure in a single document and delivered at the same time.
• The failure of the franchisor to include a signed Certificate of Disclosure confirming that disclosure was true and accurate and contained all material facts.
• The failure of the franchisor to disclose details of any ongoing or pending lawsuit against it for fraud, unfair business practices, or a violation of any franchise or business laws.
• The failure of the franchisor to provide a copy of an offer to lease or lease, whichever is applicable, for the proposed franchised premises.
• The failure of the franchisor to properly identify the person authorized to accept service in Ontario on behalf of the franchisor.

It is also worth noting that the decision in Dollar It was released after a decision of Justice McLean on another application with identical facts brought against the same franchisor by a different franchisee.(3)  In that other case, Justice McLean reached the opposite conclusion that the rescission period was limited to 60 days because, in considering the matter as a whole, the document was compliant.  It appears that Justice McLean strongly emphasized and relied on jurisprudence that deemed disclosure that is not made in a single document to be no disclosure.(4) Justice McLean’s decision is currently being appealed, and hopefully the Ontario Court of Appeal will provide us with some clearer guidance on which of these conflicting approaches should be taken.

In the meantime, franchisors should be abundantly cautious to ensure that their disclosure documents comply with the Act and its regulations, paying particular attention to the above noted deficiencies that could leave them open to a claim of rescission for a period of up to two years after signing the franchise agreement.

For more information on franchising contact Derwin Wong or Dixie Ho at Morrison Brown Sosnovitch LLP, 1 Toronto Street, Suite 910, Toronto, ON  M5C 2V6, phone (416) 368-0600 fax (416) 368-6068 email: dwong@businesslawyers.com or dho@businesslawyers.com.

NOTES

1. 2008 CanLII 57450 (Ont. S.C.) – Released November 7, 2008 (“Sovereignty Investment”).

2. 2008 CanLII 60699 (Ont. S.C.) – Released November 20, 2008 (“Dollar It”).

3.

6792341 Canada Inc. c. Dollar It Limited, (unreported) – Released June 18, 2008

4.

1490664 Ontario Ltd. V. Dig this Garden Retailers Ltd. (2005), 201 O.A.C. 95; 1518628 Ontario Inc. v. Tutor Time Learning Centres LLC, 2006 CarswellOnt 4593; MAA Diners Inc. v. 3 for 1 Pizza &Wings (Canada) Inc., 2003 CarswellOnt 455.