With threeProvinces in Canada having enacted franchised legislation (Alberta, Ontario and Prince Edward Island), a fourth likely to proclaim its legislation before the end of 2010 (New Brunswick), and a fifth (Manitoba) having introduced legislation in April, 2010, franchisors, franchisees and their advisors are becoming well acquainted with the concept of statutory franchise disclosure in Canada. However, to many, franchise disclosure focuses almost exclusively on mandated disclosure through legislation, depending upon the particular jurisdiction in which a franchised business will be operated. Legislative franchise disclosure is a creature of statute. Accordingly, the requirements for delivery of a disclosure document, the exemptions from disclosure, and the format of a disclosure document are contained in the relevant franchise statutes. Disclosure documents must contain specific statements and describe specific disclosure items. They must follow a standard format, contain mandated warnings, be responsive to specific disclosure items, and contain copies of all agreements required to be signed by a perspective franchisee, and financial statements as prescribed, and are usually completed with the execution of a standard form of disclosure certificate. Much has been written about the additional requirement of Canadian disclosure documents to include “any other material fact” beyond those specific disclosure items prescribed in the regulations to the legislation
However, for a variety of reasons, not every prospective franchisee receives a disclosure document. Firstly, in those provinces which do not have franchise legislation, if disclosure documents are provided they are done so on a voluntary basis and are usually stated to be for informational purposes only. Secondly, a voluntary disclosure document will not have the same force and effect (if any) on the franchise relationship as a legislated disclosure document. Thirdly, there are many situations in which an exemption from disclosure may apply, in which case a franchisee may never receive a disclosure document.
The other side of franchise disclosure which has been somewhat overlooked with the advent of franchise disclosure legislation is the practice followed by well informed and leading franchisors to include full disclosure of relevant matters in their franchise agreements or operations manuals. There are many critical items in the franchise relationship which have serious impact on both parties, both from a financial and legal perspective. If franchise disclosure legislation touches on these items, it often does not require extensive disclosure dealing with all critical items. It has long been the practice of the Osler Franchise Law Group to recommend to its clients that franchisors should disclose in their franchise documents the key legal terms and conditions of the relationship to ensure that franchisees are well informed prior to entering into the relationship, to minimize uncertainty and possible dispute at a later date, and to invoke best practices on an ongoing basis. Some examples will help to illustrate this best practices theory.
When it comes to the subject of rebates, which is a frequently contested issue, Canadian franchise disclosure legislation is at best partially sufficient as it does not require any details of rebate practices. Those franchisors who wish to invoke best practices in order to avoid uncertainty and future disputes will disclose in their franchise agreements or collateral documents their entitlement to receive rebates, a description of the types of rebates contemplated, their policies or practices with respect to retention or sharing of rebates, and the requirements of franchisees to account for rebates they obtain from authorized suppliers.
Another area of relatively insufficient disclosure in franchise legislation pertains to the subject of advertising funds. At present, the amount of required disclosure with respect to advertising funds generally consists of the percentages of advertising funds spent or proposed to be spent on national versus local advertising. What franchise legislation does not require is; disclosure of all details relating to the amount of advertising contributions, the ability of a franchisor to change the amount, the method by which advertising contributions are calculated, the ability of the franchisor to charge an advertising fund for its direct and indirect costs incurred in establishing and administering the advertising fund, the obligation (if any) of the franchisor to provide financial statements of the fund, and the opportunity, if any, of franchisees through an advisory council or otherwise to make suggestions or contribute to the advertising programs to be conducted by the franchisor.
The final example of an area in which there is frequent contention between franchisors and franchisees pertains to policies utilized by a franchisor for important business matters not required to be disclosed pursuant to franchise legislation. Some franchisors have impact policies which are used to consider the possible encroachment on an existing franchisee’s business by the establishment of another franchise in close proximity to the existing franchisee. While policies as a general rule can be modified, changed or cancelled at the discretion of the franchisor, nevertheless they should be disclosed to franchisees in order to establish a thorough understanding of the ground rules under which the franchise system will operate.
Other policies adopted by some franchisors pertain to the ability of existing franchisees to apply for and to be granted a second or multiple franchises, or to the conditions under which a franchisor will approve an application for a resale or assignment of an existing franchise. Policies of this type will often be referred to in the franchise agreement with details being contained in the franchisor’s operations manual.
Franchisors who disclose critical business and legal matters of this type at the beginning of the relationship will minimize the likelihood of conflicts at a later date, and establish a relationship of confidence and trust as opposed to suspicion and distrust.