Franchise Legislation
Franchise Legislation
Until 1997, Canada had been relatively free of franchise legislation, with Alberta being the only province in Canada to have legislation directed specifically at franchising. However, the increasing number of law suits between franchisor and franchisee has prompted other provinces to re-assess the need to introduce some form of franchise legislation. On May 17, 2000 the Arthur Wishart Act (Franchise Disclosure), 2000 (the ” Ontario Act”) was passed by the Ontario Legislature and came into force on January 31, 2001. In substance, the Ontario Act is very similar to the Alberta Act. In June 2205, Prince Edward Island enacted franchise legislation (the “PEI Franchises Act”), which is similar in respect of disclosure requirements to both Alberta and Ontario’s disclosure requirements.
The provisions of the Alberta Act applies to the sale of a franchise if the franchised business is to be operated partly or wholly in Alberta and the purchaser of the franchise is an Alberta resident or has a permanent establishment in Alberta. Whereas; in Ontario and PEI the acts apply only if the franchised business is to be operated partly or wholly in those provinces respectively.
The franchisor is required to provide you with a copy of their disclosure document at least 14 days before the signing of any agreement relating to the franchise, or the payment of any consideration relating to the franchise, whichever is earlier. If you are investigating a franchise in a province other than Alberta, Ontario and PEI, and the franchisor is operating in any of those provinces, you can request a copy of the franchisor’s disclosure document that the franchisor is required to provide in those provinces. The disclosure document must contain copies of all proposed franchise agreements, financial statements of the franchisor, reports and other documents in accordance with the regulations. A certificate must be signed by at least 2 officers or directors of the franchisor, which states that the disclosure document contains no untrue statement of a material fact and does not omit to state a material fact. The information contained in the disclosure provides a good basis for assessing the merits of a franchise operation but don’t assume that the franchisor’s compliance with disclosure or registration requirements implies that the regulatory authority has approved or recommends the franchise in any way. It is essential that you verify the information disclosed by the franchisor by speaking with existing franchisees, your lawyer, your accountant, or a franchise consultant.
Earnings Claims
The franchisor is required to provide details of any earnings claims information used by the franchisor, including material assumptions underlying its preparation and presentation, whether it is based on actual results of existing outlets and the percentage of outlets that meet or exceed each range of results. The earnings claim information must have a reasonable basis at the time it is prepared. The disclosure documents must also state the place where substantiating information is available for inspection by franchisees. If the information is given in respect of a franchisor-operated outlet, the franchisor must state that the information may differ in respect of a franchisee outlet. Earnings claims consist of information from which a specific level or range of actual or potential sales, costs, income or profit from franchisee or franchisor outlets can be ascertained.
Franchisee’s Right of Rescission
If a franchisee suffers a loss because of a misrepresentation contained in a disclosure document, the franchisee has a right of action for damages against the franchisor and every person who signed the disclosure document. If the franchisor fails to provide the disclosure document within the time requirements, the prospective franchisee may rescind the agreement by giving notice of cancellation no later than 60 days after receiving the disclosure documents, or no later than 2 years after the granting of the franchise. A franchisor must, within 30 days of receiving a notice of cancellation, compensate the franchisee for any net losses the franchisee has occurred in acquiring, setting up, or operating the franchised business.
Norman P. Friend
President
Franchise 101 Incorporated.
