Franchise legislation in Ontario, Prince Edward Island (PEI) and Alberta requires a franchisor to provide a franchisee with a written statement of a material change if the material change occurs during the time between (a) the receipt by the franchisee of the disclosure document and (b) the execution by the franchisee of any franchise agreement or the payment of any consideration. The statement must be prepared and delivered as soon as is practicable after the change occurs. In other words, franchisors have an ongoing obligation to disclose any material change between the time of receipt of the disclosure statement and the time the franchisee pays any consideration or signs a franchise agreement. This ongoing obligation ceases once either of the latter two events occurs.
“Material Change” Defined
The definition of a “material change” in the Alberta and PEI legislation is substantially similar to the definition in the Ontario legislation, which provides as follows:
a material change means a change in the business, operations, capital or control of the franchisor or franchisor’s associate, a change in the franchise system or a prescribed change that would reasonably be expected to have a significant adverse effect on the value or price of the franchise to be granted or on the decision to acquire the franchise and includes a decision to implement such a change made by the board of directors of the franchisor or franchisor’s associate or by senior management of the franchisor or franchisor’s associate who believe that confirmation of the decision by the board of directors is probable.
“Franchise System” Defined
Further, the term “franchise system,” as used in the definition of “material change,” is defined as follows under the Ontario legislation:
“franchise system” includes,
(a) the marketing, marketing plan or business plan of the franchise,
(b) the use of or association with a trade-mark, service mark, trade name, logo or advertising or other commercial symbol,
(c) the obligations of the franchisor and franchisee with regard to the operation of the business operated by the franchisee under the franchise agreement, and
(d) the goodwill associated with the franchise.
In considering what constitutes a material change, note the broad scope of the definition, especially when considering the definition of “franchise system.” Further, note that the change need not have actually occurred; the decision to implement a material change is sufficient to trigger the disclosure obligation.
Franchisors must be diligent in considering whether any material change has occurred as the consequences of failing to deliver a material change statement are significant: the franchisee could have both a 60-day right of rescission and a claim for misrepresentation if the franchisee suffers a loss due to a misrepresentation in the statement of material change or the franchisor’s failure to provide the statement.
There are no prescribed requirements for the form of the material change statement, except under the PEI legislation, which requires that a specific form of certificate of the franchisor be attached to a material change statement.
Finally, any information distributed in a material change statement should be simultaneously incorporated directly into the disclosure document as a material fact. If the franchisor has provided a national disclosure document on a voluntary basis, the franchisor should also provide a statement of material change in the applicable provinces. This practice would help avoid common-law claims of misrepresentation in such voluntary disclosure provinces.