January 31, 2024 marks 23 years since the Arthur Wishart Act (Franchise Disclosure), 2000 [the “Act”] was declared in force. My partner, Joseph Adler, and I co-founded Hoffer Adler LLP in 2004, just prior to the first significant court decisions beginning to interpret the Act. 2004 marked my first serious foray into franchise law. 2024 marks the 20th anniversary of our firm.
Perhaps it’s timely for a few informal observations on significant elements of the jurisprudence and the practical effect of the Act, based on 20 years of deep immersion into franchise litigation. (Caveat: As a litigator, I deal with disputes, so that’s what I can write about. My comments below are not intended to cast in a bad light the many franchise systems and franchisees who have good and functional working relationships, providing jobs and services and contributions to the economy.) Observations and comments:
1. The Act was intended to curb unscrupulous conduct, largely with a set of provisions designed to protect franchisees from unscrupulous franchisors, but with some provisions imposing obligations on franchisees as well. I don’t think the Act has eliminated unscrupulous conduct, by any means. It has changed the framework in which disputes arising from unscrupulous conduct are worked out. Bad actors still exist. Redress is still very dependent on having sufficient resources and staying power to get to a settlement or a court or an arbitral decision, and on the other side still being around and having resources with which to pay your court or arbitral award, if you can get one.
2. There is a big disconnect between the intended mechanics of the Act and how it plays out in practice. The primary tool imposed by the Act was an extensive disclosure regime. The disclosure was intended to be clear and concise. But because of the general materiality requirement and subsequent interpretation by the courts, most disclosure documents are massive, detailed, and technical. They have to be, to avoid being found inadequate. But they are inaccessible to all but the most sophisticated and patient prospective franchisees. Consequence: In my experience, very few franchisees read and/or understand them.
3. Surprise! A prospective franchisee doesn’t have to read the disclosure document to have a draconian remedy. Result: A deserving franchisee can rescind and get its money back without ever having been misled by anything in the disclosure document. That’s a good result. Second Result: A well meaning and innocent franchisor can get nailed with a very significant claim (even from an undeserving franchisee) just because of a very simple oversight in the disclosure document, that had nothing to do with the franchisee’s decision to enter into the franchise agreement. That’s a bad result. This is a particularly challenging problem for startup and young systems, who are vulnerable to the financial hit. Observation: Most disputes over disclosure are not resolved based on the underlying justice of the relationship between the parties, but rather upon technical compliance with the Act.
4. Development of the case law in key respects has been counter-intuitive in ways that in my view have surprised most of us who are focused on franchise law. Example: the Act says it applies where the franchised business is operated “partly or wholly in Ontario”. What it means is that if the franchised business is operated entirely outside Ontario, but the parties choose to be bound by Ontario law (of which the Act is a part!) then the Act applies even though the Act says it doesn’t apply. Who knew?
5. Another point of interest: a successful rescission is “without penalty or obligation” to the franchisee. That’s what the Act says. What it means though, is that it’s without “obligation” except for the obligation to arbitrate all disputes, if that’s included in the franchise agreement. That’s a bit counter-intuitive. It’s true that in a dispute, you don’t know whether the rescission is valid or not until that question is decided by the court or arbitrator. But if the rescission is valid, it’s hard to see why the franchisee has to arbitrate pursuant to a provision of the rescinded contract. That’s a hardship to the franchisee because arbitration costs money. (I acknowledge that the opposite is also true – it’s hard to see why the franchisor should lose the benefit of the arbitration provision and have to go to court instead, if the rescission turns out to be invalid. So there’s no good answer to this. But speaking of arbitration provisions, see the next point.)
6. On a related note, the Act says franchisees have a right to “associate” with other franchisees. Somehow, that means that franchisees have a right to sue in a class action, and a provision in the franchise agreement that says they can’t is not enforceable. It seems a bit of a stretch to say that’s mandated by the statute, right? At first glance? But of course, not the case if there’s an arbitration provision! Then the franchisee has to arbitrate and the right of association for purposes of a class action is inapplicable.
Hoffer Adler LLP provides practical and cost-effective legal assistance to both franchisors and franchisees about all aspects of the franchising relationship. If you have any questions about a franchising matter, we would like to hear from you.