In Ontario, two core legal documents help to define the franchise relationship between franchisors and franchisees: the Franchise Disclosure Document (FDD) and the Franchise Agreement. Both documents are informed by requirements of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the “Wishart Act”), which was enacted to ensure fairness and transparency between Franchise System owners (franchisors) and potential buyers (franchisees). Here, we discuss both documents and their differences, outline key compliance requirements under the Wishart Act, and set out practical steps to minimize risk.
The Franchise Disclosure Document (FDD)
The FDD is the pre-contractual disclosure required by the Wishart Act and similar laws in other provinces. In Ontario, franchisors are required to provide an FDD to prospective franchisees at least 14 days before a franchisee signs an agreement or makes any payment relating to acquisition of a franchise. This document provides prospective franchisees with essential information on the franchised business, allowing them to make an informed investment decision. Under the Wishart Act, the FDD must include information about the franchisor and specific details about the franchise offer, such as:
- Business Background: Company history, key officers’ backgrounds, any past litigation, and details regarding current and former franchisees.
- Financial Statements: Up-to-date financial statements that outline the financial status of the franchise.
- Franchisee Costs: A breakdown of initial deposit, fees, ongoing costs, and any required expenditures (e.g., marketing or training costs).
- Territorial Rights: Detailed information on the territorial exclusivity or limitations for each franchisee.
- Contracts & Obligations: Copies of the Franchise Agreement and any other contracts (including leases where they are available) plus all material facts and restrictions impacting franchisees, including the conditions relating to termination, contract renewal and potential transfer or sale of the franchised business.
In the event there are any changes that would affect the potential franchisee’s decision to acquire the franchise (“Material Changes”) that occur in the 14-day period following receipt of the FDD – for instance, changes to the deal structure or lease term, requirement to renovate, or the existence of new litigation – the Franchisor must provide a Statement of Material Change to the franchisee detailing the changes as soon as practicable, and prior to signing the franchise agreement or the exchange of any funds.
Failure to provide a compliant and/or accurate FDD or, where appropriate, Statement of Material Change can lead to severe consequences, including the franchisee’s right to rescind (void) the agreement or claim damages. Additionally, if the franchisor never provided the FDD, or if the FDD is materially deficient (not in compliance with the Wishart Act), the franchisee may rescind the Franchise Agreement within 2 years of signing.
As a franchisor, ensuring that your FDD is comprehensive and compliant not only protects you legally but also builds confidence among potential franchisees. Franchisors should regularly review and update their FDD, invest in legal counsel familiar with franchise law, and provide clear, honest communication throughout the franchise process to foster positive relationships and mitigate risks.
The Franchise Agreement
The Franchise Agreement and the FDD are not the same document. The Franchise Agreement is one of the many documents which the Franchisor must ensure is included with the FDD. The Franchise Agreement also formalizes the business relationship between the Franchisor and Franchisee. There may be a great deal of overlap in the information provided in the Franchise Agreement and the other information which the Franchisor may include in the FDD. Signing a receipt for having received the FDD is not the same thing as entering into or signing the legally binding Franchise Agreement. The Franchise Agreement specifies both parties’ rights and obligations, covering key terms such as:
- Brand Usage and Standards: Clear guidelines on brand usage and operational standards.
- Royalties and Fees: Details on the ongoing financial commitment, including royalties, advertising fees, and other dues.
- Territorial and Operational Boundaries: Conditions for operating within the defined territory, and franchisor’s obligations for initial setup, training and ongoing support
- Termination Conditions: Rules for renewing, transferring, or ending the franchise relationship.
Compliance Risks and Recommended Actions for Franchisors
While the FDD promotes transparency, the Franchise Agreement enforces mutual commitments. Neglecting Ontario’s disclosure requirements can result in serious liabilities, such as rescission rights, which allow franchisees to void the agreement within two years if the FDD was deficient or if it was never provided.
To mitigate these risks, franchisors should:
- Engage Legal Experts: Franchise laws differ by province, so working with an experienced franchise lawyer ensures your FDD and Franchise Agreement meet all applicable regional requirements.
- Keep Documents Updated: Regularly revisiting these documents is critical as franchise law evolves and your business grows.
- Follow the Terms of the Franchise Agreement: Transparency with prospective franchisees sets clear expectations and reduces potential disputes. The Franchise Agreement governs the relationship between franchisee and franchisor.
By focusing on these elements, franchisors not only protect themselves legally but also foster franchisee trust, setting the stage for long-term success. Franchising, when the required documentation is executed thoughtfully and compliantly, can be a powerful vehicle for business growth.
Our Franchise Law Team, Caterina Di Tommaso, Tanya Kuzman, and Peter Gottschlich represent both established franchisors and franchisees across Canada. Whether you are a Franchisor who owns a Franchise System, or a Franchisee contemplating a purchase or sale – we can assist you. For advice on navigating the legal obligations associated with running a franchise in Ontario, please contact us at 416-863-0125 or send us an email.
At Mills & Mills LLP, our lawyers regularly help clients with a wide range of legal matters including business law, real estate law, estate law, employment law, health law, and tax law. For over 140 years, we have earned a reputation amongst our peers and clients for quality of service and breadth of knowledge. Contact us online or at (416) 863-0125. The material provided through the Mills & Mills LLP website is for general information purposes only. It is not intended to provide legal advice or opinions of any kind.
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