In Ontario, the Arthur Wishart Act, 2000, S.O. 2000, c.3 (the “Arthur Wishart Act”) is legislation which, among other things, sets out the franchisee’s rights as it pertains to franchise agreements and the disclosure they are owed by franchisors. The franchise lawyers and litigation lawyers at Walker Law can assist you with your franchise matters. To help you understand the exceptions to the financial disclosure required from a franchisor under the Arthur Wishart Act it is best that we start with the basics and explain by way of a hypothetical example.
The Basics and the Hypothetical Example
A franchisor is an established entity with a licensed business model. For the purposes of our example, we will call the franchisor “ABC Corp”. ABC Corp has over 100 locations and millions in revenue. On the other hand, a franchisee is a person or a corporation that owns and operates a business using the model that the franchisor licensed to the franchisee. In our example, the franchisee is John Doe and ABC Corp licensed its business model to John Doe for a fee and other terms.
On January 1, ABC Corp and John Doe discuss their potential franchising relationship and franchise opportunity. This is John Doe’s first time entering into a franchise agreement. ABC Corp. explains that its business model is very profitable. John Doe is interested in ABC Corp’s business model and asks ABC Corp to let him know what the next steps are. On January 2, John Doe receives a document titled “disclosure document” from ABC Corp. On January 3, John Doe received a document titled “franchise agreement” from ABC Corp. ABC Corp asks John Doe to sign the franchise agreement on the same day, as the franchise is in high demand and is being licensed on a first come first served basis. John Doe is excited about the opportunity and does not want to lose the opportunity to another potential franchisee. On January 3, John Doe signs the franchise agreement and provides a deposit in the amount of $50,000. John Doe then begins operating his new business.
On April 15, after experiencing a lot of hardship with his new business, John realizes that the opportunity presented to him by ABC Corp isn’t panning out as ABC Corp had represented to him. John decides to go back to the documents provided to him in January and realizes that no financial statements were provided to him before he signed the franchise agreement. John feels like he didn’t receive all the information he needed at the time of entering into the franchise agreement and seeks a franchise lawyer’s help in trying to cancel the franchise agreement and receive the compensation he deserves.
Franchisee Rights to Disclosure
John Doe’s situation is unfortunately not a unique one. The franchise lawyers and litigation lawyers at Walker Law regularly assist franchisees with upholding their rights under the Arthur Wishart Act and franchise claims. If the necessary financial disclosure is not provided to a franchisee, the franchisee has a right cancel the franchise agreement and seek compensation through litigation.
Going back to our example, under section 5 of the Arthur Wishart Act, ABC Corp was required to provide John Doe with a disclosure document at least 14 days before John signed the franchise agreement. Under the legislation, the disclosure document must contain financial statements prepared with generally accepted accounting principles (as defined in O. Reg. 581/00). Notwithstanding that ABC Corp didn’t provide the disclosure 14 days in advance, the disclosure document did not include any financial statements at all.
Financial statements are key to a franchisee when making a decision on whether or not they wish to invest in the franchising opportunity. In our example, John Doe did not receive the financial statements and as such, felt as if he was not able to make an informed decision. Now, we know that under the Arthur Wishart Act, John Doe is owed financial disclosure, but does this apply without exception to every franchisor?
Unfortunately, the answer is no.
Exceptions to the Right to Financial Disclosure
The exceptions to financial disclosure under the Arthur Wishart Act provide some franchisors (and franchisees) with flexibility where full disclosure may not be feasible or required. Notable exceptions to the mandated financial disclosure by franchisees include, but are not limited to the following:
- Third Party – If a third party buys a franchise from an existing franchisee (i.e John Doe buys from a third party as opposed to ABC Corp) the financial disclosure obligations may not apply;[1]
- Franchisee is an Officer/Director – If the franchisee is an officer or director of the franchisor, then the obligation may not apply (i.e. if John Doe was an officer or director of ABC Corp.);[2]
- Existing Franchisee – If the franchisee is an existing franchisee[3] (i.e. John Doe already owns another franchise from ABC Corp.);
- Fractional Franchise – If the franchisee combines the franchise opportunity with a pre-existing business;[4]
- Renewal/Extension – If the franchise agreement is being renewed and/or extended, the mandated financial disclosure under the Arthur Wishart Act may not apply;[5]
- Small Franchisor – If the franchise is small and it only requires the franchisee to spend $15,000 or less to establish the franchise, the financial disclosure obligation may not apply; or
- Large Franchisee – If the franchisee is sophisticated and was required to make an investment greater than $3,000,000, the financial disclosure obligations may not apply.
Receiving financial disclosure is crucial to a franchisee like John Doe. By being aware of exceptions such as those outlined above, franchisees can make more informed business decisions with respect to their franchise business. That is why understanding the exceptions to financial disclosure under the Arthur Wishart Act is important. The exceptions permit flexibility, but it is always best to seek legal advice from franchise lawyers like those at Walker Law before and after you enter into a franchise agreement to ensure your rights are protected. We as litigation lawyers at Walker Law invite you to contact us should you have any queries related to your franchise and/or franchise law.
[1] Section 5(7)(a) of the Arthur Wishart Act
[2] Section 5(7)(b) of the Arthur Wishart Act
[3] Section 5(7)(c) of the Arthur Wishart Act
[4] Section 5(7)(e) of the Arthur Wishart Act
[5] Section 5(7) (f) of the Arthur Wishart Act
Tags: Franchise Law