Changes are coming to the Arthur Wishart Act, which is the legislation that governs franchising in Ontario.
The Ontario government recently introduced Bill 154, Cutting Unnecessary Red Tape Act, 2017 1. The bill proposes changes to a number of acts, including the Arthur Wishart Act. The changes being proposed to the Ontario franchise legislation have important consequences for both franchisors and franchisees.
Below are some of the ways in which Bill 154 will change Ontario’s franchise legislation.
I) What is a Franchise?
The Arthur Wishart Act currently offers an expansive definition of what constitutes a franchise. Under that definition, a business relationship may be characterized as a franchise (and therefore be captured by the requirements of the Arthur Wishart Act) if “the franchisor or the franchisor’s associate exercises significant control over… the franchisee’s method of operation”.
Under Bill 154, the definition of franchise is proposed to be amended so that the mere right to exercise such control is sufficient for a business relationship to be characterized as a franchise. Actual control by the franchisor will no longer be a requirement.
Accordingly, more businesses stand to meet the definition of “franchise” under the proposed new definition, and will be governed by the requirements of the Arthur Wishart Act.
II) When Is Disclosure Required?
The Arthur Wishart Act currently requires that a franchisor provide a prospective franchisee with a disclosure document not less than 14 days before the earlier of,
(a) the signing by the prospective franchisee of the franchise agreement or any other agreement relating to the franchise; and
(b) the payment of any consideration (for instance, a monetary deposit) by or on behalf of the prospective franchisee.
The effect of that requirement is that the franchisor is typically obligated to disclose before any agreement related to the franchise, no matter how incidental to the actual franchise agreement, is signed by the prospective franchisee. Similarly, the franchisor is typically obligated to disclose before accepting any form of deposit by the prospective franchisee.
Bill 154 proposes to relax this disclosure requirement in a number of specific circumstances.
First, a franchisor will generally no longer have to provide a disclosure document prior to the signing of a franchise agreement or any other agreement relating to the franchise if the agreement only contain terms that:
(a) require any information or material that may be provided to a prospective franchisee to be kept confidential;
(b) prohibit the use of any information or material that may be provided to a prospective franchisee; or
(c) designate a location, site or territory for a prospective franchisee.
In other words, franchisors will now be entitled to enter into certain kinds of confidentiality agreements, non-disclosure agreements with prospective franchisees, or agreements that designate a location or territory for the franchise, without having first to disclose.
Second, a franchisor will no longer have to provide a disclosure document prior to the payment of a deposit if:
(a) that deposit is fully refundable;
(b) that deposit does not exceed a maximum amount that will be defined by the government in the future 2; and
(c) that deposit is given under an agreement that in no way binds the prospective franchisee to enter into a franchise agreement.
III) When is Disclosure Exempted?
The Arthur Wishart Act currently describes a number of circumstances pursuant to which the franchisor is exempt from the obligation to disclose.
Bill 154 clarifies some of these circumstances as follows:
(a) Currently, a franchisor is exempt from having to disclose if the prospective franchisee is a person who has been an officer or director of the franchisor or of the franchisor’s associate for at least six months.
Bill 154 recommends that this exemption be extended to a corporation controlled by that person; Bill 154, however, also imposes stricter time limits on this exemption. To qualify for the exemption, the prospective franchisee either must currently be an officer or director of the franchisor or of the franchisor’s associate; or must have been one no more than four months before the grant of the franchise.
(b) Currently, a franchisor is exempt from having to disclose in respect of certain so-called “fractional franchises”. A fractional franchise is one in which the prospective franchisee is already operating a business unrelated to the franchisor and is being granted a limited right to sell the franchisor’s goods or services; the right is limited because the sale of those goods or services is intended to be a small fraction of that prospective franchisee’s sales pursuant to its existing business. To qualify for the disclosure exemption, the revenues generated by the fractional franchise must be no more than 20% of the total sales of the prospective franchisee’s existing business.
Bill 154 clarifies how the size of the proposed franchise’s revenues must be calculated relative to the prospective franchisee’s existing business: the calculation must compare the sales arising from the franchisor’s goods or services by the prospective franchisee during the first year of operation of the franchise, in relation to the total sales of the prospective franchisee’s existing business during that first year.
(c) Currently, a franchisor is exempt from having to disclose if the acquisition and operation of the franchise will only require the prospective franchisee to make a total annual investment of no more than $5,000. The franchisor is also exempt if the prospective franchisee is required to invest more than $5,000,000 over one year.
Bill 154 changes how the amount of this investment is calculated by referring now to the prospective franchisee’s total initial investment, as described in the disclosure document. The new focus on the prospective franchisee’s initial investment, as opposed to total investment, narrows the circumstances under which the minimum investment exemption will be available.
Bill 154 received a second reading in the Ontario Legislature on October 3, 2017 and has been referred to the Standing Committee on Justice Policy for further review. The bill is anticipated to receive Royal Assent in early 2018, at which time it will become law.
If you have any questions about how these changes to Ontario’s franchise law will affect your franchise, we invite you to contact us.