As you may have read last month in our Franchise Law Alert, radical changes have been proposed to Ontario’s franchise disclosure law, the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”). Since then, Bill 102 passed Second Reading and has now been referred to the Standing Committee on Finance and Economic Affairs where it will not doubt be the subject of much debate. It is also expected that the Standing Committee will hold public consultations, during which the franchise community in Ontario will have an opportunity to voice concerns about the Bill. Click here for a copy of Bill 102
At the heart of Bill 102 is the requirement that a franchisor provide a prospective franchisee with an “educational document” setting out extensive criteria to be considered in respect of a prospective franchisee’s decision to enter into a franchise agreement and to obtain from the prospective franchisee, prior to entering into the franchise agreement, a signed, written acknowledgement that the franchisee has reviewed the educational document. Some of the criteria to be provided in this educational document include the following:
- Self-evaluation criteria to consider including:
- whether the prospective franchisee has the capital required for the investment;
- whether the prospect has the necessary management skills, education and work experience;
- whether the prospect is fully aware of the work involved in operating the franchised business;
- what would be the best franchise for the prospect considering lines of business that are successful and that expected to continue to be successful and lines of business which the prospect is interested in; and
- whether entering into the franchise agreement is the only means by which the prospective franchisee may succeed in the line of business which he is interested in.
- Issues for the prospective franchisee to consider relating to the franchisor and the franchised business, including:
- the financial stability of businesses associated with the franchise;
- the extent to which the franchisor is selective when choosing prospective franchisees; and
- whether the franchisor has introduced any new innovations.
- Issues for the prospective franchisee to consider with respect to the goods and services to be sold or offered from the franchised business, including:
- what makes the goods or services unique; and
- whether there is reasonable demand for the goods and services
- Issues with respect to location and sales territory, including:
- whether the territory is clearly defined and exclusive and what guarantees are provided (emphasis added); and
- the sales potential for the territory.
- Issues that the prospective franchisee may wish to raise with other franchisees, including:
- any hidden or unexpected costs;
- the frequency and reliability of deliveries from the franchisor; and
- any serious disagreement with the franchisor, the nature of the disagreement and the resolution.
- Issues with respect to the franchise agreement, including:
- whether the agreement protects both franchisor and franchisee
- whether royalty payments may be deferred to a later, more profitable month; and
- whether the prospective franchisee is required to follow franchisor controls and policies exactly or whether some creativity may be exercised.
The above is only a fraction of the criteria and matters proposed by Bill 102 to be included in the educational document. What is unclear is whether the prescribed information to be provided in the educational document is in addition to that which is already required to be disclosed under the Act.
While there are doubts among those in the franchise bar that Bill 102 will pass into law, the private members Bill was tabled as a joint effort by members of Ontario’s 3 main political parties and passed Second Reading notwithstanding the well-founded concerns put forward by the Canadian Franchise Association to the members of the Ontario legislature.
The amendments proposed by Bill 102 will add to the already significant disclosure obligations imposed upon franchisors in Ontario and will also require that the franchisor now serve as educator to prospective franchisees in this province.