The Ontario government is considering radical changes to the Arthur Wishart Act (Franchise Disclosure), 2000, which, if passed, will require much more detailed disclosure to prospective franchisees.

Bill 102

The amendment in question—Bill 102, the Arthur Wishart Amendment Act (Franchise Disclosure) 2010, was introduced for first reading in the Ontario legislature on September 15, 2010, and passed second reading on September 23, 2010. From there, it moved to the Standing Committee on Finance and Economic Affairs for public consultation. The bill had not been put on the legislative agenda in 2010 and the committee stands adjourned until February 2011, the earliest the bill may receive public attention.

Although Bill 102 is a private member’s bill supported by members of all three parties in the legislature, it does not have the explicit support of the government. As a result, it is likely the bill will not be passed into law, particularly in light of its delays through the legislative process.

However, if passed, Bill 102 could dramatically change Ontario’s existing franchise legislation by greatly increasing the quantity and scope of information a franchisor will be required to provide to prospective franchisees. It could also trigger amendments to franchise legislation in place in other provinces.

What does the bill propose?

Bill 102 proposes to add a single new Section 5.1 to the original Arthur Wishart Act. This new section will require a franchisor to provide a prospective franchisee with an “educational document” in addition to a disclosure document as currently required. The content of the educational document goes far beyond that of a disclosure document. For example, it would include many items that do not relate to the particular franchise system. These items, which are likely beyond the specific knowledge of any given franchisor, have traditionally been considered the responsibility of potential franchisees.

The following are among the proposed items that would be included in the educational document:

  • self-evaluation criteria for franchisees to help them determine whether they have the capital, skills, education and experience to run a franchise successfully; whether the franchise being considered is the best suited for them; or whether they actually need a franchise to be successful in the line of business being considered;
  • a record of the franchisor’s selectivity when choosing franchisees;
  • information regarding the goods and services the franchise offers, such as the uniqueness of the offering and whether demand is reasonable, along with data on competitive pricing and supply guarantees;
  • sales potential and future growth potential of the sales territory;
  • an offer to provide a directory of current franchisees in the area and a list of topics to be discussed with them;
  • an explicit recommendation that the prospective franchisee have a lawyer and accountant review the franchise agreement; and
  • discussion of other issues, such as deferral of royalties; flexibility of franchisor systems, controls and policies; and compensation for goodwill built up by the franchise.

Much of this information is currently gathered during the prospective franchisee’s due diligence process when the franchisee should investigate the franchise system, speak with current franchisees, and consult with experienced advisors, including bankers, accountants and lawyers.

Opposition to Bill 102

A number of franchisors, along with the Canadian Franchise Association, have made submissions to all three political parties opposing Bill 102, for several reasons. Franchisors have pointed out that if the bill is passed, it could put franchisors into a conflict or prejudicial position. Under the educational document provisions, franchisors would be required, in essence, to act as an advisor to prospective franchisees, while still ensuring their own interests are protected. For example, being required to provide information to prospective franchisees about the franchisor’s “selectivity” when choosing franchisees might require the franchisor to reveal information about a rejected franchisee. Apart from privacy law considerations, franchisors normally want to keep this information confidential to avoid possible disputes with the rejected prospect.

In addition, the bill is not well drafted, and contains many broad and undefined terms such as:

  • new innovations;
  • unique goods and services;
  • reasonable demand;
  • fair price;
  • future growth potential; and
  • hidden or unexpected costs.

These terms are open to a many different interpretations, which could lead to increased conflict and potential lawsuits between franchisors and franchisees, requiring the courts to interpret the meaning and application of the terms. It also remains to be seen whether the educational document will be considered to be purely informative, or whether its contents will be considered to constitute a representation or warranty by the franchisor.

In addition, Bill 102 does not specify the consequences for franchisors that provide an inaccurate educational document, or fail to provide one at all. Conversely, the current legislation includes a right of rescission available to a franchisee in the event the franchisor fails to provide a disclosure document or provides an incomplete or misleading document. Bill 102 does not include a rescission remedy for the educational document.

From the franchisor’s perspective, compliance with the type of information required in the educational document will be extremely time consuming, onerous and expensive. In fact, it may be impossible for many franchisors to gather the required type of information.

Even if Bill 102 is never passed into law, and despite the fact its contents are poorly drafted and open to interpretation, it could be a forerunner of future changes to the type of franchise legislation that has become the norm in Canada. Franchisors must stay in touch with the progress of Bill 102.