A franchise disclosure document and the franchise agreement are the backbone of the franchising relationship between the owner of the franchise (franchisor) and the potential buyer of the franchise (franchisee).
The franchise disclosure document is a legally required document that the franchisor must provide to the prospective franchisee before the signing of the franchise agreement. The failure to meet the obligations means costly consequences for the franchisor.
A franchisor’s obligations
A franchisor must abide by the Arthur Wishart Act. The Ontario government enacted the Arthur Wishart Act, also known as the Franchise Disclosure Act, to address power imbalances between a franchisor and prospective franchisee. The legislation provides three main rights to the franchisee:
- Mandatory disclosure obligations on the part of the franchisor
- Good faith and fair dealing between the parties
- Right of franchisees to associate
Most notably, a franchisor cannot waive any of the rights provided in the legislation through a franchise agreement.
What is a franchise agreement?
A franchise agreement is the contract that contains the operating terms and conditions that the prospective franchisee must follow. The franchise agreement can contain information like upfront franchise fees, specific equipment that must be purchased prior to running the franchise, and ongoing royalties that the prospective franchisee must pay to the franchisor. The franchise agreement can also dictate the terms of terminating, renewing, or transferring the franchise. Needless to say, the franchise agreement can be restrictive and a significant financial commitment on the part of the franchisee.
The rights provided under the Arthur Wishart Act returns some decision-making power back to the (prospective) franchisee. For example, a franchisee must be provided with a franchise disclosure document prior to the signing of the franchise agreement in order for the relationship to be valid.
What is a franchise disclosure document?
A franchise disclosure document is a summary of all relevant material information pertaining to the franchise. This is a tricky area even for experienced franchisors because relevant “material information” can have a very broad meaning. For certainty, if the information could reasonably help the franchisee make an informed decision on whether to invest in the franchise, it should be provided in the franchise disclosure document.
The franchise disclosure document must also be provided at least 14 days before: a) the signing of the franchise agreement or any agreement relating to the franchise, or b) any payments made to franchisor for anything related to the franchise, whichever is earlier.
If information provided in the franchise disclosure document is incomplete or not provided according to the timelines set out by the law, the franchisee can rescind the franchise agreement and effectively require the franchisor to place the franchisee back in the same financial position as to before the signing of the franchise agreement. In certain instances, the franchisee may also make a legal claim for misrepresentation.
Whether you are a franchisor or franchisee, seeking a legal opinion before entering into a franchising agreement is always a smart decision. Our Business Lawyers can help ensure the longevity of the franchisor-franchisee relationship and prevent costly legal disputes down the road. Contact Hazlo Law – Business Lawyers today.
This article is for informational purposes only and does not constitute legal advice. If you wish to discuss your issue with a lawyer, contact Hugues today. 613-747-2459 ext.304, [email protected]