In Canada, franchisors are required to provide a disclosure document to franchisees only in three provinces: Ontario, Alberta and Prince Edward Island. (There will be a fourth province requiring such disclosure once New Brunswick’s legislation comes into effect). Outside of these provinces, disclosure is not required by law and franchisors are free to determine their own disclosure practices. Such practices have varying pros and cons. Some franchisors refrain from providing any disclosure. This could result in the franchisor selling fewer franchises. It would result in inconsistent disclosure practices among provinces and less control over what representations are being made to prospective franchisees. In addition, these practices would almost invariably result in the absence of any written record of what representations were made or what information was provided about the franchised business to the franchisee prior to the execution of the franchise agreement.
Alternatively, other franchisors provide a copy of the Ontario Disclosure Document (or a disclosure document that has been drafted pursuant to the disclosure requirements of another jurisdiction) on a voluntary basis outside Ontario, Alberta and Prince Edward Island (PEI). However, this practice may attract unintended liability for misrepresentation (i.e., if information specific to Ontario (or the other jurisdiction) is inaccurate, incomplete or misleading with respect to other provinces). It also may run afoul of privacy legislation.
Finally, a franchisor could develop a form of disclosure document to be distributed only in voluntary disclosure provinces: but, this practice entails the additional cost and administrative burden of preparing and maintaining an additional document.
Accordingly, franchisors should consider developing a single national disclosure document that satisfies the disclosure requirements of the three (soon-to-be-four) provinces listed above and that can also be delivered in any other province. This single national disclosure document could take the place of the Ontario Disclosure Document, the Alberta Disclosure Document (or the Alberta addendum to the Ontario Disclosure Document), the PEI Disclosure Document (or the PEI addendum to the Ontario Disclosure Document) and the voluntary document. Despite the fact that there are risks inherent in developing and distributing a national disclosure document, proper preparation of the document can help reduce these risks.
In preparing a national disclosure document, a franchisor must:
- ensure that the national disclosure document responds to all statutory disclosure items, addressing all of the unique requirements of each province and adopting the highest standard from all of the statutes in the event that a particular item is treated differently;
- review all information in the disclosure document to ensure either that it is applicable to all franchisees in all provinces (i.e., is stated in a generic manner if the information will not change between provinces) or that it is clearly qualified by a disclaimer and explanatory note regarding any restrictions in its applicability in other provinces (unless, of course, it is required disclosure in other provinces);
- refrain from disclosing personal information of its franchisees other than in Ontario, Alberta or PEI, and then only to the extent that such disclosure is required by law (i.e., including in the national disclosure document only the list of former franchisees applicable to that province), unless it has obtained appropriate consent to disclose the information;
- include a franchisor’s certificate in the national disclosure document or a statement of material change only in the three provinces in which it is specifically required; and
- include in the national disclosure document or an accompanying letter the appropriate disclaimers about the receipt of the national disclosure document by prospective franchisees in voluntary disclosure provinces.
Identifying the Risks Associated with a National Disclosure Document
Distributing an unmodified Ontario Disclosure Document in voluntary disclosure provinces risks contravening privacy legislation and potentially exposes the franchisor to a claim of misrepresentation.
(a) Privacy Concerns
One of the primary concerns of distributing a disclosure document on a voluntary basis is that it may disclose personal information about the franchisor’s franchisees in contravention of privacy legislation. Canada’s federal and provincial privacy legislation define personal information as any information about an identifiable individual. The legislation requires that an organization to obtain an individual’s consent prior to the collection, use and disclosure of that individual’s personal information. However, note that privacy legislation generally exempts from the definition of personal information any business contact information. (This is known as the “business card” exemption.)
An exception to this consent requirement is if the collection, use or disclosure is required by law. In the mandatory disclosure provinces, certain personal information about franchisees (i.e., that which may be included in the lists of existing and former franchisees) is required to be disclosed by the applicable franchise law. In this case, no consent from the franchisee is required. However, if the franchisor distributes a national disclosure document in a voluntary disclosure province, the “required by law” exemption does not apply. Consequently, consent for the inclusion of personal information is required or the information must be removed from the document. To otherwise disclose the franchisees’ personal information in this manner would run afoul of applicable privacy legislation.
Each delivery of a disclosure document brings with it the risk of a claim for misrepresentation in the event that any information is incomplete, inaccurate or misleading. If a franchisor provides a disclosure document on a voluntary basis outside Ontario, Alberta and PEI, the franchisor runs the risk of a claim of the common law tort of negligent misrepresentation.
While PEI’s and Alberta’s franchise legislation each permit a franchisor to use a province-specific addendum to a disclosure document prepared in accordance with the laws of another jurisdiction (usually, the Ontario Disclosure Document), the addendum must specify what information in the underlying document is incomplete, inaccurate or misleading for that province, failing which the franchisor could be liable for statutory misrepresentation under the franchise legislation.
Preparing a National Disclosure Document
A national disclosure document must (i) satisfy the disclosure obligations in each mandatory disclosure province, (ii) not run afoul of any privacy legislation and (iii) minimize the potential claim for misrepresentation (either statutory or common-law). Note also that each franchise statute requires that the disclosure document be presented in a manner which is clear and concise. If electing to create a national disclosure document for all jurisdictions in Canada, the franchisor must ensure that all information is presented in a manner that is consistent with this “clear and concise” requirement. The following are examples of disclosure topics that are dealt with differently among the three provinces:
(i) Mandatory Statements/Risk Warnings
(ii) List of Directors and Officers
(iii) Criminal Prosecutions/Administrative Orders/Civil Actions
(iv) Disclosure of Advertising Fund Information
(v) Licenses, Permits & Authorizations
(vii) Dispute Resolution
(viii) Earnings Projection
(ix) Operating Costs
(x) List of Current Franchisees
(xi) List of Franchisee Closures
(xii) Security Agreements
(xiii) Termination, Renewal and Transfer Provisions
(a) Disclosure Obligations
When addressing these topics in the national disclosure document, franchisors must ensure that they have addressed the specific disclosure requirements for Ontario, Alberta and PEI. To the extent that the requirements vary from province to province, the franchisor must adhere to the highest standard of full disclosure. Likewise, to the extent that any information conflicts or changes based on a particular province, this conflict or change must be explicitly stated in the document.
If the disclosure document includes information about an identifiable individual, the franchisor cannot include this information in the national disclosure document unless it is required to do so by law (i.e., in the mandatory disclosure provinces) or it has the individual’s consent to do so.
Typically, privacy concerns arise in the context of voluntary disclosure of the lists of former franchisees and current franchisees. If these lists contain personal information (that does not fall within the “business card” exemption) and the franchisor has not otherwise obtained consent for the disclosure, the franchisor must include in the national disclosure document only the list of franchisees applicable to each of Ontario, Alberta and PEI, and omit the lists from the voluntary disclosure provinces. Unfortunately, this means that there is no "one-size-fits all" list that can be included with the national disclosure document. The lists of franchisees applicable to the province in which the document is being delivered must be inserted into the document prior to delivery by the franchisor, unless no personal information is included or the franchisor has the franchisees’ consent for such disclosure.
Note that franchisors are, with increasing frequency, including a standard privacy provision in the franchise agreement to solicit such consent, thereby avoiding the need to remove and replace these exhibits in the national disclosure document for each province.
(c) Avoiding Claims of Misrepresentation
The risk of a misrepresentation claim arises from the possibility that certain disclosure information prepared for a particular province is incomplete, inaccurate or misleading vis-à-vis other provinces. In provinces with mandatory disclosure, the only way to reduce the risk of such a claim is through the exercise of care and diligence when preparing the disclosure document. In voluntary disclosure provinces, once the franchisor has made the decision to provide a disclosure document on a voluntary basis, that document must clearly advise the franchisee that the information may not be complete or accurate in that province, or the franchisor must review all information for each province to ensure its accuracy.
For example, the chart of the estimated costs of establishing a franchise may vary significantly across the provinces: what is a reasonable cost estimate in Ontario may be materially different in Alberta. Other sections of the disclosure document that require modification are not as obvious. For example, disclosure documents often include an estimate of how long it will take to construct and equip the business for operation as part of the general description of the franchised business. In Alberta, for example, this estimate would have to be revised to take the current labour shortage into account.
Accordingly, to avoid a claim of misrepresentation in voluntary disclosure provinces, franchisors should:
- include a statement on or with the document that the document is for information purposes only and is not to be relied upon; and
- include a statement on or with the document saying that it was prepared specifically contemplating the disclosure laws of Ontario (or the applicable jurisdiction , if not Ontario) and that the information may not be applicable in the franchisee’s province.
In the event a franchisee in a voluntary disclosure province makes a claim for misrepresentation, such statements will cast doubt on whether the franchisee acted reasonably in relying on the information in the document, which is a key element for a claim of negligent misrepresentation.
In voluntary disclosure provinces, a franchisee’s chances of successfully pursuing such a claim of negligent misrepresentation would likely increase if the franchisor were to include any of the three statutory forms of the franchisor’s certificate (in Ontario, Alberta or PEI) in the national disclosure document. The certificate essentially certifies to the franchisee that the information is complete and accurate. A certification of this sort could make it difficult for a franchisor to later claim that the franchisee’s reliance on the information was not reasonable. Accordingly, before delivering the national disclosure document in a non-disclosure province, franchisors should remove the franchisor’s certificate from the document. Doing this does not, however, preclude a misrepresentation claim: a franchisee could still claim that it had relied on the information in the document to its detriment and that it was reasonable to rely on the information. even in the absence of a certificate.
Using a properly prepared national disclosure document permits franchisors to avoid the administrative complications and expense of creating and maintaining separate disclosure documents or addenda for each province. It also provides for consistent disclosure practices across the country and helps reduce the risk of misrepresentation in voluntary disclosure provinces.