Franchise Disclosure Documents:

An Overview

By Jonathan Hureau

There are various pieces of legislation across Canadian provinces governing the disclosure obligations that franchisors have to franchisees who are purchasing a franchise. In Ontario, these obligations are set out in the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the “Act”), which requires a franchisor to assemble and deliver a franchise disclosure document (the “FDD”) by a certain timeline and in a prescribed format, subject to the exceptions available under section 7 of the Act. In terms of the required timeframe for provision of the FDD by the franchisor, subsection 5(1) of the Act specifically provides as follows:

5 (1) A franchisor shall provide a prospective franchisee with a disclosure document and the prospective franchisee shall receive the disclosure document not less than 14 days before the earlier of,

(a) the signing by the prospective franchisee of the franchise agreement or any other agreement relating to the franchise, other than an agreement described in subsection (1.1); and

(b) the payment of any consideration by or on behalf of the prospective franchisee to the franchisor or franchisor’s associate relating to the franchise, excluding the payment of a deposit if it,

(i)  does not exceed the prescribed amount,

(ii)  is refundable without any deductions, and

(iii)  is given under an agreement that in no way binds the prospective franchisee to enter into a franchise agreement. 2000, c. 3, s. 5 (1); 2017, c. 20, Sched. 9, s. 3 (1).

As to the content of the FDD, it must be in a form to include disclosure documentation regarding the franchisor that may, in general terms, be categorized under the following headings: 1) background of the business; 2) history of any litigation; 3) any bankruptcy or insolvency information; and 4) financial statements.¹ With regard to the latter category, and subject to the qualifying provisions in the Act, the financial statements to be provided are those for the franchisor’s latest fiscal year.

Additionally, the FDD must include specific information about the franchise offer. Some notable items to which this information must pertain include the following: copies of proposed franchise agreements, descriptions of costs (e.g. deposits or fees), descriptions of any exclusive territory for the prospective franchisee, restrictions on the franchisee (e.g. to purchase from certain suppliers), and the conditions of termination, transfer, and renewal of the contract for the franchise.² Other areas that would be addressed by the information included in the FDD are franchisee training and other assistance programs, advertising funds, and lists of current and former franchisees.³

It should be noted that “franchise agreement” has a comprehensive definition in the Act encompassing any agreements that relate to the franchise. Ancillary documents such as leases, deposit agreements and trademark licenses fall under this definition, among others.⁴

It is important for franchisors to appreciate the consequences of failing to provide the FDD in the proper form. Indeed, the failure of a franchisor to deliver such a FDD can trigger a two year right of recission from the date of the franchise agreement. Moreover, the failure by the franchisor to provide a compliant FDD triggers a sixty day right of recission from the date of receipt by the prospective franchisee. To confirm, the recission right permits the franchisee to obtain the return of its franchise fees, inventory and equipment costs, as well as compensation for losses incurred in setting up and operating the franchise business.⁵ This is particularly significant given that the franchisee is not required to establish that it relied upon such a deficiency or that it was related to the losses.⁶  

In summary, it is essential for a franchisor to take great care in arriving at and providing the final form and content of the FDD. It is equally important for a franchisee to have an appreciation of the requirements for the FDD to ensure the protection of their interests.

Legal Disclaimer: The above article is for informational purposes only. It does not constitute legal advice on any matter or create a solicitor-client relationship.