Amendments to Ontario franchise law take effect

The Canadian provinces of Alberta, British Columbia, Manitoba, New Brunswick, Ontario and Prince Edward Island all have franchise disclosure laws. The similarities between these laws are that they:

• require franchisors to provide pre-sale franchise disclosure to prospective franchisees through a franchise disclosure document that is compliant with the requirements of each province’s laws
• impose a duty of good faith on franchisors and franchisees and
• give franchisees a right to associate.

Ontario law

Ontario was the second province in Canada to enact franchise legislation. The Arthur Wishart Act (Franchise Disclosure) (the Act) came into force in 2001 and is now one of six provincial franchise disclosure laws in Canada.

The Act has presented challenges for franchisors over the years. For example, one of the main complaints with the Act is that it did not permit franchisors to accept a deposit or enter into a confidentiality agreement prior to issuing the required disclosure document and waiting the required 14 days.

On September 1, the Act was amended to address this and other red tape. Here is a summary of the key changes:

1. Exceptions for confidentiality and location

Franchisors in Ontario are now able to enter into an agreement with prospective franchisees prior to issuing a disclosure document to them if the agreement only (a) requires the franchisees to keep information confidential; (b) prohibits use of the franchisor’s information; or (c) designates a location or territory for the prospective franchisee.

For the confidentiality exception to apply, the agreement must not obligate the franchisee to keep confidential any information that has become public or that has been disclosed to any person other than due to a breach of the agreement, or that has been disclosed with the parties’ consent. The agreement also must not prohibit the disclosure of information to an organization of franchisees, to other franchisees of the same system, or to the franchisee’s professional advisors.

2. Refundable deposits

Franchisors in Ontario are now also able to accept a deposit from a prospective franchisee prior to issuing a disclosure document, provided that the deposit: (a) is fully refundable; (b) does not exceed 20 percent of the franchisee fee (to a maximum of CA$100,000); and (c) is given under an agreement that does not in any way bind the franchisee to enter into a franchise agreement.

3. Material changes

Franchisors in Ontario are required to give prospective franchisees a statement of any material changes prior to signing any agreement with the franchisee and prior to receiving any consideration from the franchisee. This obligation now excludes the confidentiality and location/territory agreements and the refundable deposits described above.

In addition, a statement of material changes must contain a certificate similar to the one attached to a disclosure document and must be signed by at least two officers/directors of the franchisor.

4. Exemption for franchisor’s directors/officers

The Act previously contained an exemption which allowed franchisors to grant a franchise to an officer or director of the franchisor without providing a disclosure document, as long as the individual had been an officer or director for at least 6 months. This exemption has been revised to include corporations owned by those officers/directors. The exemption now also requires that the individual be a current officer/director, or have ceased to be an officer/director for no more than four months.

5. Exemption for fractional franchises

The Act previously contained an exemption which allowed franchisors to grant a fractional franchise, which meant that at the time of the grant, the parties expected that the sale of the franchisor’s goods and services would be no more than 20 percent of the overall business. This exemption has been revised so that the relevant period for the calculation is the first year of operation of the franchise.

6. Exemption for small purchasers

The Act previously contained an exemption which allowed franchisors to grant a franchise without issuing a disclosure document if the franchisee’s annual investment to acquire and operate the franchise was no more than CA$5,000. This has been changed to an initial investment of no more than CA$15,000. The $15,000 limit includes deposits, franchise fees, inventory, leasehold improvement, equipment, leases, rentals, and other costs.

7. Exemption for sophisticated investors

The Act previously contained an exemption which allowed franchisors to grant a franchise without issuing a disclosure document if the franchisee’s investment to acquire and operate the franchise over a year was more than CA$5 million. This has been changed to an initial investment of more than CA$3 million.

8. Financial statements

The Act previously required financial statements to be prepared in accordance with standards that were at least equivalent to those set out in the Canadian Institute of Chartered Accountants Handbook. The changes now refer to the CPA Canada Handbook and also include certain standards of the American Institute of Certified Public Accountants, the Public Company Accounting Oversight Board of the United States, the Financial Accounting Standards Board of the United States, the International Auditing and Assurance Standards Board, and the International Accounting Standards Board.

9. Service marks

Finally, the Act has been updated to delete references to “Service Marks” because that term is not used in Canadian federal trademark law. The proper term (“trademarks”) is now used instead.

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Overall, these are welcome changes which help align Ontario’s legislation with other jurisdictions and with the expectations of franchisors. Indeed, US franchisors – many of whom choose Canada as their first market for international expansion – will recognize that the exemptions from disclosure in the amended Act now more closely parallel exemptions available to franchisors under US federal and state franchise disclosure laws. The changes also help clarify some of the uncertainty in Ontario’s franchise laws.

Find out more about this development by contacting your DLA Piper relationship attorney or any member of the Franchise group.