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Ontario franchise law is unusually protective of franchisees and unusually unforgiving of franchisors who get disclosure wrong. Both sides need the rules understood before anything is signed.
Arrange a Call →Section 5 of the Arthur Wishart Act requires a franchise disclosure document to be delivered at least 14 days before the franchise agreement is signed or any money changes hands. A franchisor that never delivers one faces a right of rescission for two years after the franchise is granted.
Section 5 of the Arthur Wishart Act (Franchise Disclosure), 2000 requires a franchisor to give a prospective franchisee a complete disclosure document at least 14 days before the earlier of the signing of the franchise agreement or any related agreement, and the payment of any consideration relating to the franchise. The document must be delivered as one document at one time.
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Franchising in Ontario is governed by the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3, and its regulation. The Act does three things that make Ontario distinctive: it requires pre-sale disclosure in a prescribed form, it gives franchisees statutory rescission rights when that disclosure is defective or absent, and it imposes a statutory duty of fair dealing on every party to a franchise agreement, along with a protected right for franchisees to associate with one another.
The Act also removes the usual ability of the stronger party to draft around it. Any purported waiver or release of a right given by the Act is void, so a franchise agreement clause saying the franchisee acknowledges receiving adequate disclosure or waives rescission has no effect. A clause requiring disputes to be resolved outside Ontario, or under another jurisdiction's law, is likewise void in respect of a franchise operated in Ontario. Franchisors who use a national or American template without adapting it for Ontario routinely create exposure they are unaware of.
Lexaltico LLP acts for both sides. For prospective franchisees we review disclosure documents and franchise agreements before signing, and advise on rescission and misrepresentation claims afterwards. For franchisors we prepare and update disclosure documents, build compliant franchise agreements, and set up the internal process that makes disclosure defensible each time a franchise is granted.
It must be one document delivered at one time, containing everything the Act and regulation require, with a certificate signed as prescribed by the franchisor.
No franchise agreement or related agreement may be signed and no consideration may be paid during this period. A refundable deposit arrangement is permitted only within the narrow limits the Act allows.
If a material change occurs after delivery, the franchisor must give a written statement of material change before the agreement is signed or money is paid.
Only after the disclosure period has run and any material change has been disclosed.
Disclosure must be refreshed for each new grant, and the duty of fair dealing applies to the performance and enforcement of the agreement for as long as it lasts.
The regulation prescribes the contents in detail: the franchisor's business background, the litigation and bankruptcy history of the franchisor and its directors and officers, all costs and payments associated with establishing the franchise, financing arrangements, training, territorial rights, restrictions on goods and services, renewal, transfer and termination terms, lists of current and former franchisees, and prescribed risk warning statements. Financial statements prepared to the required standard must be included, subject to limited exemptions. Any earnings projection provided must be accompanied by the assumptions and the basis for it.
| Situation | Rescission window | Franchisor obligation on rescission |
|---|---|---|
| Disclosure delivered but deficient or late | 60 days after receiving the disclosure document | Refund and compensation within 60 days of the notice of rescission |
| No disclosure document ever delivered | Two years after the franchise was granted | Refund and compensation within 60 days of the notice of rescission |
| Misrepresentation in the disclosure document | Statutory action for damages, subject to the applicable limitation period | Liability of the franchisor, its associate, and directors, officers and agents who signed the certificate |
Rescission under the Act is not a simple unwinding. On receiving a valid notice of rescission, the franchisor must within 60 days refund all money received from or on behalf of the franchisee, other than money for inventory, supplies and equipment; purchase from the franchisee any inventory, supplies and equipment purchased under the franchise agreement at the price paid; and compensate the franchisee for losses incurred in acquiring, setting up and operating the franchise. For an unsuccessful outlet, that liability can substantially exceed the franchise fee.
Ontario courts have treated the disclosure obligation strictly. Delivering the document piecemeal rather than as one document at one time, omitting required financial statements, failing to include a properly signed certificate, or providing a document so materially deficient that it does not amount to disclosure at all can each support the two-year remedy rather than the sixty-day one. Franchisors should treat disclosure as a compliance process with a checklist and version control, not as a document assembled shortly before a signing.
The Act contains a closed list of exemptions from the disclosure obligation, and each is narrower than franchisors typically assume. They include certain grants to an existing officer or director of the franchisor, some resales by an existing franchisee where the franchisor is not materially involved in effecting the sale, fractional franchises where the new business is a small proportion of the franchisee's existing sales, franchises below or above prescribed monetary thresholds, and renewals or extensions where there has been no interruption in operation and no material change since the original disclosure.
Relying on an exemption is a decision with a two-year tail. If the exemption is later found not to apply, the franchisee has the full no-disclosure rescission remedy. A franchisor considering an exemption should document the analysis at the time, and in marginal cases the cheaper course is usually to disclose anyway, because voluntary disclosure carries no downside while a mistaken exemption carries a substantial one.
Section 3 of the Act imposes a duty of fair dealing on each party to a franchise agreement in its performance and enforcement, including the duty to act in good faith and in accordance with reasonable commercial standards. It is not limited to franchisors. It commonly arises where a franchisor enforces standards selectively, changes a supply arrangement, refuses consent to a transfer, encroaches on a territory, or terminates without a fair process, and it gives rise to a right of action for damages.
Prospective franchisees should focus on a short list of provisions. Territory: is it exclusive, protected, or merely a designated area the franchisor can carve up, and does it restrict online sales into the territory by others. Term and renewal: how long is the initial term, what conditions attach to renewal, and can the franchisor impose the then-current form of agreement on renewal. Fees: the initial fee, ongoing royalties, advertising fund contributions, technology fees, and any required purchases from the franchisor or designated suppliers at prices the franchisor sets.
Then the exit provisions. Termination rights and cure periods, what happens to the lease if the franchisor holds the head lease and sublets to the franchisee, restrictions on transferring the franchise and what the franchisor may charge to consent, post-termination non-competition covenants, and whether the franchisor has a right of first refusal or an option to purchase the assets on termination. A franchise with a strong brand and a weak exit is a business that cannot be sold, which is often the franchisee's largest financial exposure.
The commercial lease deserves separate attention. Many franchise systems require the franchisee to occupy premises under a lease that is coterminous with the franchise agreement, or under a sublease from the franchisor with a conditional assignment on default. Personal guarantees of both the franchise agreement and the lease are standard, and they survive the failure of the corporation. A franchisee should know exactly what they have personally guaranteed before signing anything.
A franchisor expanding into Ontario needs the disclosure document prepared for Ontario law specifically, financial statements that meet the prescribed standard, a franchise agreement consistent with the disclosure document, trademark protection registered in Canada before the system is licensed, and internal procedures that record when and how each disclosure document was delivered and who received it. Disclosure has to be updated as the system changes, and each grant assessed on its own facts.
Franchisors should also consider how the advertising fund is structured and accounted for, since disputes about the use of franchisee contributions are common and the duty of fair dealing applies to their administration. Supply arrangements and rebates from designated suppliers should be disclosed accurately, because non-disclosure of rebates is a recurring basis for misrepresentation claims. Territory definitions should anticipate online and delivery channels, which older systems drafted before those channels existed rarely address.
Whether you are considering buying a franchise or granting one, get advice before the fourteen-day clock is relevant rather than after. A disclosure document review costs a fraction of a rescission claim, and for franchisors an annual compliance review is inexpensive relative to the exposure created by a single defective grant. Contact our corporate group to review a disclosure document, a franchise agreement, or your franchise system.
Most franchise disputes begin with one of a small number of events: a franchisee falls behind on royalties, a franchisor issues a default notice over standards or reporting, a transfer is refused or conditioned, a territory is encroached upon by a new outlet or a delivery channel, or a supply arrangement changes in a way that alters the franchisee's economics. In each case the first questions are procedural: what does the agreement require by way of notice and cure, has that process been followed exactly, and has either party by its conduct waived a right it now wishes to assert.
Rescission claims run on their own timetable. The notice of rescission must be delivered in the manner the Act requires, and the franchisor's obligations to refund, repurchase and compensate arise within sixty days of that notice. Where the parties dispute whether the disclosure was adequate, the underlying question is often whether what was delivered amounted to disclosure at all, which determines whether the sixty-day or the two-year window applies. Claims for damages for misrepresentation in a disclosure document, and claims for breach of the duty of fair dealing, are subject to the limitation periods that apply to civil claims, so delay narrows the options here as elsewhere.
Franchisees facing a system-wide issue should be aware of their statutory right to associate. The Act protects the right of franchisees to associate with each other and to form or join an organisation of franchisees, and prohibits a franchisor from interfering with, prohibiting or penalising the exercise of that right; a provision in a franchise agreement purporting to restrict it is void. Collective action through an association is often more effective and considerably cheaper than individual litigation, and it is expressly protected conduct.
Because the Act voids clauses that would require disputes to be determined outside Ontario or under another jurisdiction's law, Ontario franchisees generally have access to Ontario courts regardless of what the agreement says. Mediation clauses remain useful and are frequently honoured, and many disputes settle once each side has had its position assessed against the statute rather than against the agreement alone. Getting that assessment early, before a default notice expires or a rescission window closes, is what determines the range of outcomes available.
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