Over the last 10 years, Ontario, Prince Edward Island, New Brunswick and Manitoba joined Alberta to enact laws that specifically regulate franchising.
While the laws are not identical, they all impose very similar obligations on those wishing to grant someone the right to operate a franchise. They are also significantly important to all business owners, including those in British Columbia, because if not diligent, a potential franchisor could open itself up to significant financial risk.
Granting a franchise is in essence one party licensing another to use a method or system of distributing goods and services to the public.
Franchising is prevalent in our country, with approximately 76,000 individually franchised businesses operating in Canada. It’s estimated that one out of every five consumer dollars is spent at a franchise.
The exact definition of when a franchise is granted differs between provinces, but it generally happens whenever one party grants another the right to use its trademarks or distribute its products in circumstances where there is either the payment of a fee or significant control over how the products or services are marketed to the public.
It is often forgotten that provincial franchise laws apply not only to those businesses that are commonly considered to be franchises, but also the distribution of products or services through less-traditional means, including the sale of branded products such as lawn mowers, sporting goods and hardware.
If a franchise is granted in a province that has franchise laws, the party granting the franchise (franchisor) is required to provide a disclosure document to the potential franchisee at least 14 days prior to signing any agreement or even accepting money from the potential franchisee.
Typical disclosure documents are quite lengthy and contain detailed information about the franchisor including financial statements and background on the franchisor’s directors, the cost of establishing the franchise, as well as any other specific facts that might impact the potential franchisee’s decision to acquire the franchise or how much money they might pay for the franchise.
Failing to provide a proper disclosure document within this time frame has very significant legal consequences for a franchisor.
A franchisee that is not given a disclosure document within the required time frame is entitled to rescind a franchise agreement up to the latter of 60 days after the receipt of a disclosure document or two years after entering into a franchise agreement if no disclosure document was given. It is an absolute right under provincial franchise laws. If the franchisee rescinds the agreement, the franchisor must refund all monies that were previously paid by the franchisee; repurchase any inventory, supplies or equipment purchased by the franchisee; and compensate the franchisee for any and all losses it incurred in acquiring, setting up and operating the franchise.
In the last few years, there have also been several high-profile cases in Ontario where franchisors have provided disclosure documents to franchisees that have not materially complied with the province’s franchise laws.
The courts held that providing a materially deficient disclosure document is as if the franchisor had not given the franchisee a disclosure document at all. In these circumstances, the courts granted the franchisee a full two years from signing the franchise agreement in order to rely on the statutory right of rescission.
All business owners who could potentially be entering into a franchise relationship with another party must be mindful of their responsibilities and engage legal counsel that is well versed in each individual province’s specific franchise laws. Failure to do so could have significant financial consequences and could impact the livelihood of a flourishing business.