Understanding Franchise Law in Ontario And Why Your Lawyer Is Your Best Advocate
Are you considering business ownership and buying a franchise? It seems like a good financial plan but it’s important to know about franchise law before you sign any contracts. Entering into a franchise agreement can be a complex and challenging process. The legal landscape surrounding franchising in Canada is intricate, with specific laws varying by province. To manage these complexities and ensure compliance, it is essential to work with an experienced franchise lawyer.
What Is a Franchise?
You’ve likely encountered franchises if you’ve ever visited a Tim Horton’s or a Subway. A franchise is a business model where the franchisee pays the franchisor for the right to use their brand, products, and services. The franchisor also offers the franchisee training, support, and business assistance. In return, franchisees must run their businesses according to the guidelines and systems established by the franchisor.
What is Not a Franchise?
While it seems easy to understand what a franchise is, it’s equally important to know what a franchise is not. With various commercial relationships in Ontario, identifying a franchise can be challenging. The following types of relationships are not covered by Ontario’s Franchise Act:
- Employer-employee relationships
- Partnerships
- Memberships in cooperative association
- Agreements to use trademarks, trade names, logos, advertising, or other commercial symbols
- Lease agreements between a franchisee and a landlord
- Service contracts or “franchise-like arrangements” with the Crown or its agents
If you are considering a business arrangement, it’s important to consult with a skilled business lawyer to confirm the nature of your arrangement and identify the applicable laws and regulations.
Franchise Law In Canada
In Canada, provinces regulate franchising. Six provinces have specific franchise laws: Ontario, British Columbia, Alberta, Manitoba, New Brunswick, and Prince Edward Island. These laws mainly focus on pre-sale disclosure.
The Ontario Franchise Act, also known formally as Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000, is a provincial law that regulates the relationship between franchisors and franchisees. Its main purpose is to ensure that franchisors provide potential franchisees with comprehensive information about the franchise before they commit to a purchase. The Act also outlines certain rights that potential franchisees have when entering into a franchise agreement. It is advisable to consult with a lawyer to fully understand these obligations and rights and ensure compliance with the Act.
The Key Points of A Franchise Disclosure Document
Franchisors must provide a Franchise Disclosure Document (FDD) at least 14 days before a franchisee signs the agreement or makes a payment. This document should include:
- Background information about the franchisor and its management.
- Costs to start the franchise.
- Information on closed franchises.
- Policies on goods and services, volume rebates, and financial benefits.
- Advertising fund expenditures.
- Territorial rights.
The FDD must also cover specific details like head-lease agreements and previous franchise management issues. Financial statements for the most recent fiscal year are mandatory unless an exemption applies.
Legal Protections and Remedies
Providing the disclosure document is only part of the process. After a franchisor gives a disclosure document to a potential franchisee, they must also inform the potential franchisee of any “material changes” that occur before the franchise agreement is signed.
A material change is usually an event that could negatively impact the franchise’s value or influence the potential franchisee’s decision to purchase the franchise. It is crucial to have a legal review of these documents and updates to ensure compliance and protect the interests of all parties involved.
If a franchisee does not receive a compliant FDD, they can cancel the agreement and receive compensation. The rescission period is 60 days for minor deficiencies and two years for significant issues or no FDD.
Franchise agreements cannot waive any rights or duties provided by franchise laws, and foreign franchisors cannot avoid these laws through contract clauses.
Once The FDD Is Signed, A Franchisee Still Has Rights
Once a franchise agreement is in place, the Ontario Franchise Act provides additional protection for franchisees. Franchisors and franchisees must deal with each other in good faith and act honestly and fairly. Failing to do so can lead to legal action by either party.
Franchisees also have the right to associate with other franchisees, regardless of the franchise agreement terms. This means they can join associations or participate in activities with other franchisees, and the franchisor cannot prohibit this. A franchisor’s attempt to prevent such association can result in legal action. Keeping your lawyer informed of any issues is important to ensure your rights are protected.
Although The Franchise Act Protects You, It’s Still Vital To Consult An Experienced Business Lawyer
Prospective franchisees are well-protected under Ontario’s Franchise Act. The disclosure requirements ensure franchisees have the necessary information to make informed decisions, and their rights to fair dealing and association are safeguarded.
However, franchise agreements can be complex. It’s essential to consult an experienced business lawyer before signing. This step helps you understand the relevant laws and regulations and how they affect your business rights.
For expert guidance in franchise transactions, contact Hukam Law. Our team has the expertise to help you navigate the legal aspects of buying a franchise and minimize potential legal issues. Reach us at 705-915-0884 or info@hukamlaw.ca for assistance with your franchise acquisition.
***The information provided in this blog is for general informational purposes only and should not be construed as legal advice. If you have legal questions, we strongly advise you to contact us.