The underlying policy goal of the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”) is to address the imbalance of power between franchisors and franchisees, which typically strongly favours franchisors.
To achieve this end, the Act imposes obligations and liabilities, not only on franchisors, but on certain parties related to franchisors, defined under the Act as “franchisor’s associates”.
The expansion of liability beyond franchisors protects franchisees by capturing any other parties who are closely involved with the franchisor and ensuring that franchisors cannot structure their businesses to avoid responsibility under the Act.
Who is a franchisor’s associate under Ontario franchise law?
The Act defines a franchisor’s associate as a person:
- Who directly or indirectly,
- Controls or is controlled by the franchisor, or
- Is controlled by another person who also controls, directly or indirectly, the franchisor, and
- Is directly involved in the grant of the franchise,
- By being involved in reviewing or approving the grant of franchise, or
- By making representations to the prospective franchisee on behalf of the franchisor for the purpose of granting the franchise, marketing the franchise or otherwise offering to grant the franchise, or
- Exercises significant operational control over the franchisee and to whom the franchisee has a continuing financial obligation in respect of the franchise.
This definition is conjunctive. The first part creates a requirement of control by or over the franchisor, while the second part focuses on the individual’s direct involvement in relation to the franchise in question. Both of those features must be present for a person to be a “franchisor’s associate”.
What are a franchisor’s associate’s obligations and liabilities under the Act?
Cooling-off Period After Disclosure
The Act requires a franchisor to wait, before receiving payment from a prospective franchisee, at least 14 days after delivering to that prospective franchisee a disclosure document or a written statement of material change. Similarly, a franchisor’s associate also cannot accept any payment or consideration before this statutory cooling-off period has elapsed.
Right to Association
The Act gives franchisees the right to associate with other franchisees. It prohibits both the franchisor and any franchisor’s associate(s) from preventing franchisees from, or penalizing them for, exercising this statutory right. A franchisee is entitled to sue both the franchisor and any franchisor’s associate(s) for their respective contraventions of this section.
When a franchisee rescinds its franchise agreement due to the franchisor’s failure to comply with the franchisor’s disclosure obligations, the Act gives a franchisee the right to be refunded for all amounts it paid for the franchise, inventory, supplies and any other amounts incurring in acquiring, setting up and operating the franchise. The obligation to pay these amounts belongs both to the franchisor and any franchisor’s associate(s).
Liability for Misrepresentation or Failure to Disclose
The Act gives a franchisee the right to sue for damages both the franchisor and any franchisor’s associate(s) if the franchisee suffer a loss because of a misrepresentation contained in either the disclosure document (or statement of material change), or because of the franchisor’s failure to comply with the Act’s disclosure obligations.
How have the courts interpreted the term, “franchisor’s associate”?
The courts have shown a willingness to interpret the term “franchisor’s associate” flexibly, when doing so permits them to achieve the Act’s objective of protecting franchisees.
Directors and Officers
The courts have typically found that, where the franchisor is a corporation that has only one director, officer, or shareholder, that individual is a “franchisor’s associate” because he or she both controls the franchisor and is typically the one making representations to prospective franchisees.
However, the court in WP (33 Sheppard) Gourmet Express Restaurant Corp v WP Canada Bistro & Express Co held that there was no requirement that a franchisor’s associate to be a director or officer of a company. The court noted that the focus of the definition is on the nature of the parties’ involvement in the franchise relationship.
The Court of Appeal in 2483038 Ontario Inc v 2082100 Ontario Inc confirmed this principle. The franchisor in this case argued that the individual alleged by the franchisee to be a “franchisor’s associate” was merely an employee. The court found that, though he was not actually a director (since the franchisee was not a corporation), the individual was controlled by an individual who, in turn, also controlled the franchisor. The individual was also found to have made representations to prospective franchisees by meeting with them to advertise the system. As such, the court held that he was a franchisor’s associate.
The decision in New Vision Renaissance MX Ltd v The Symposium Café Inc emphasized that it is not the title of an individual, but the nature of his or her involvement in the franchise that makes him or her a franchisor’s associate. The franchisor in this case had 2 shareholders and directors. Both were found to be in control; however, only the shareholder/director who was actively involved in the franchisee’s business was held to be a franchisor’s associate. The silent partner was not.
Where the franchisor is a corporation, the shares of which are held by more than one shareholder, the courts have not strictly construed the meaning of “control” under the Act’s definition of “franchisor’s associate” to mean 51% of shares. In 1490664 Ontario Ltd v Dig This Garden Retailers Ltd, two shareholders each holding 50% of the shares argued that neither could effectively control the franchisor without a majority of shares. The court rejected this argument and held both to be franchisor’s associates.
In MBCO Summerhill Inc v MBCO Associates Ontario Inc, a 50% shareholder who was neither a director nor officer was held to be a franchisor’s associate. This was because he not only held 50% of shares, but also had met with franchisees to negotiate franchise agreements and had run the day-to-day business of the franchisor.
A number of decisions have seen the courts declare a sub-landlord to be a franchisor’s associate.
In 6792341 Ontario Inc et al v Dollar It Ltd et al, the Court of Appeal found that the sub-landlord was a corporation controlled by the same individual who controlled the franchisor corporation. This individual signed the franchise agreement on behalf of the franchisor but also signed the sublease on behalf of the sub-landlord. A similar opinion was held by the courts in other cases including Sovereignty Investment Holdings Inc v 91276907 Quebec Inc and MBCO Summerhill Inc v MBCO Associates Inc.
Multiple Entities Acting Together
In Burnett Management Inc v Cuts Fitness for Men, the franchisee interacted in the course of business not only with the franchisor, but also with the Canadian parent company of the franchisor and the franchisor’s principal. The court held that all three of these parties carried on business as a common enterprise, and as such all three were held to be franchisor’s associates.
MAA Diners v 3 for 1 Pizza & Wings (Canada) Inc resulted in a similar outcome. The franchisee purchased an existing franchise from a holding company. The franchisee entered into a franchise agreement with the franchisor and leased space from a corporation controlled by the same principal as the holding company. In this case, the court held that all three parties were actually franchisors because the franchisee had treated the three entities as one. The court made this declaration even though the principal of the franchisor was a different person from the principal of the other entity.
Franchisors and franchisee should be aware that the term “franchisor’s associate” has been construed liberally by the courts to capture any parties who are closely involved in the grant of the franchise and who control, or are controlled by, the franchisor. It is probably the case that many of the parties found to be “franchisor’s associates” by Ontario courts – and therefore liable to the franchisee – had never intended to assume liability for the franchisor’s obligations to the franchisee. The policy goal of the Act encourages the court to look beyond the signatories to the franchise agreement in order to hold responsible any party who becomes involved in the franchisee’s investment decision and who controls the franchisor or is controlled by the franchisor.