How a Franchise Agreement and a Franchise Disclosure Document differ
There are two documents that are of vital importance...
Only Alberta, Manitoba, Ontario, New Brunswick and Prince Edward Island require that franchisors provide prospective franchisees with a disclosure document. Enough information is to be provided in order to allow a prospective franchisee to make an informed decision. Legislation is an attempt to balance the scales given the general one-sided nature of franchise agreements.
The disclosure document must contain all material facts, including specific information set out in the various Acts. It must also be certified by certain officers of the franchisor. A disclosure document with an unsigned certificate is considered no disclosure by the Courts. Simply attaching the proposed agreements (i.e. sublease) to the document is not sufficient either. A separate section setting out the key terms of attached agreements is to be included.
There is a “rigorous duty to disclose all material facts.” (6862829 Canada Limited et al. v. Dollar lt Limited et al). Material facts are broadly defined and include information about the business, operations, capital or control of the franchisor or about the system that would reasonably be expected to have a significant effect on the value of the franchise or the decision to enter into the franchise. This broad definition leaves room for unsatisfied franchisees to argue a breach of the requirement to disclose.
Disclosure of material facts must be current. There is a continuing obligation to disclose material changes in the business, operations, capital or control of the franchisor, a change in the franchise system or a decision to implement a change which occurs after the initial disclosure but before the execution of the franchise agreement. Franchisors should not have a franchisee sign additional documents after disclosure that were not included in the disclosure. There is an obligation to re-disclose in some situations.
The information is to be provided in one document. The perspective franchisee should not be required to take additional steps to find the information required by the Acts. Alberta, Prince Edward Island and New Brunswick allow for “substantial compliance” to the extent that there is some leeway. This is not the case in Ontario where piecemeal disclosure is no disclosure (1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd.).
The consequence of improper disclosure could be the difference between a 60 day rescission period versus a 2 year period wherein the improperly disclosed franchisee is entitled to the return of funds invested in acquiring and operating the franchise (i.e. accounting fees, legal fees, and loan interest). Personal liability of the officers who signed the disclosure document is also a possibility.
Well informed prospective franchisees will have been advised when improper disclosure has been provided and to use the failure of the franchisor as a “get out of jail free card”, testing the franchise knowing that there is the ability to invoke their right to a refund.
Franchisors need to be extra careful given the tools available to prospective franchisees such as the internet. It is not always clear what the obligation to disclose entails and when it ends. Disclose too little and a franchisor risks a claim for incomplete disclosure. The Acts allow for some exceptions to disclosure however the burden of proving that an exemption from disclosure exists is on the franchisor. As a general rule, when in doubt, disclose.
