Buying a Franchise in Ontario: Your Disclosure Document Rights

Buying a franchise often moves fast. You may be asked to sign an agreement or pay a deposit before you have seen the numbers behind the opportunity. Ontario has a statute that is meant to slow that process down and put the key information in your hands first.

This article explains what the Arthur Wishart Act (Franchise Disclosure), 2000 requires a franchisor to give you, how the timing works, what you can do if it goes wrong, and the situations where the disclosure duty does not apply.

What the franchisor must give you

Under the Arthur Wishart Act, a franchisor must give a prospective franchisee a disclosure document. Ontario's guidance says it must include information about the franchisor and about the offer itself.

• Franchisor information: business background, litigation history, bankruptcy or insolvency information and financial statements.
• Offer information: costs, copies of the proposed agreements and any exclusive territory.
• Supplier restrictions, volume rebate policy and training.
• Termination, renewal and transfer conditions and advertising funds.
• A list of current and former franchisees.

The disclosure document must be delivered as one document at one time, not in pieces. That makes it easier for you, and for your advisers, to review the whole picture together.

The 14-day rule

You must receive the disclosure document at least 14 days before the earlier of two events: signing the franchise agreement or any other agreement relating to the franchise, or paying any consideration to the franchisor. Whichever happens first starts the clock.

If something important changes after you receive the document, the franchisor must give you a written statement of the material change as soon as practicable after the change and before you sign or pay. Read that statement as carefully as the original document.

If disclosure is late, flawed or missing

The Act gives you two main remedies. The first is rescission, which means cancelling the franchise agreement without penalty or obligation.

A notice of rescission must be in writing and delivered to the franchisor personally, by registered mail, by fax, or by another prescribed method. After the effective date of rescission, the franchisor or its associate has 60 days to refund the money received (other than money for inventory, supplies or equipment), buy back inventory, supplies and equipment at the purchase price, and compensate you for losses in acquiring, setting up and operating the franchise, less those amounts.

The second remedy is a damages claim. If you suffer a loss because of a misrepresentation in the disclosure document or a material change statement, or because the franchisor did not comply with s. 5, you can sue for damages. The claim can be made against the franchisor, its agent, broker and associate, and every person who signed the disclosure document. There is an exception: a person is not liable if they prove you acquired the franchise knowing of the misrepresentation or material change.

Other protections in the Act

• Fair dealing: every franchise agreement imposes on each party a duty of fair dealing, including good faith and reasonable commercial standards, in performance and enforcement.
• Associations: a franchisor cannot prohibit or restrict franchisees from forming or joining an organization of franchisees, or penalize them for doing so.
• No waivers: a purported waiver or release by a franchisee of rights under the Act is void.
• Ontario law: a clause restricting the application of Ontario law, or moving jurisdiction or venue outside Ontario, is void for claims enforceable under the Act.

This means a signature on a clause that says you give up your rights under the Act does not, by itself, take those rights away.

When disclosure is not required

The disclosure duty has exceptions, so check whether your purchase fits one before you rely on the remedies above.

• Resale by an existing franchisee: no disclosure is required if the franchisee is not the franchisor, its associate, or a director, officer or employee of either, the grant is for the franchisee's own account, the whole franchise is granted for a master franchise, and the grant is not made by or through the franchisor.
• Additional franchise or renewal: not required for an additional franchise to an existing franchisee that is substantially the same as the one already operated, if there has been no material change, or for a renewal or extension with no interruption in operation and no material change.
• Sale by an executor, administrator, sheriff, receiver, trustee, trustee in bankruptcy or guardian on behalf of someone other than the franchisor.
• Insiders: a grant to someone who has been an officer or director of the franchisor or its associate for at least six months, or a former one if not more than four months have passed.
• Size thresholds: a fractional franchise set at 20 per cent of first-year sales, a total initial investment of no more than $15,000, or one greater than $3,000,000.

Separately, a large franchisor can leave out financial statements if it meets four tests on net worth, number of franchisees, experience and absence of fraud or franchise-law judgments. Because regulations can be amended, a lawyer can confirm the current thresholds.

What to do next

• Note the date you received the disclosure document and keep proof of delivery.
• Do not sign anything or pay anything until at least 14 days after you received the disclosure document.
• Check that it arrived as one complete document and covers the items listed above.
• Read any material change statement before you sign.
• Have a lawyer and an accountant review the agreements and financial information.
• If something looks wrong, ask about your cancellation options quickly, because the 60-day period starts when you receive the document.

Frequently asked questions