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Q&A With Frank Zaid: Changes to franchise legislation in Ontario

Business lawyers made recommendations that have now been implemented in Ontario’s new legislation.

By Frank Zaid

Q: What changes has Ontario’s government made to its franchise legislation and what else can we expect in the future?

A: Ontario’s Bill 154, the Cutting Unnecessary Red Tape Act, was introduced on Sept. 14, 2017, and received royal assent on Nov. 14, 2017. This omnibus bill amends more than 40 provincial statutes in an effort to simplify and clarify some of their provisions. Among the affected legislation is the Arthur Wishart (Franchise Disclosure, 2000) Act (AWA).

The new bill implements a number of recommendations that were made by Ontario’s Business Law Advisory Council (BLAC) in fall 2016, along with others contributed by certain interest groups, including the Ontario Bar Association’s (OBA’s) franchise law section. The following are the key amendments to the AWA.

Definition of ‘franchise’
The definition of ‘franchise’ has been expanded to recognize how a franchisor itself may be a licensee, rather than an owner, of the intellectual property (IP) for a franchise system.

Another amendment clarifies how the right to exercise control over a business—rather than the actual exercising of that control—may be sufficient for the purposes of characterizing that business as a franchise. In the past, the AWA provided for the franchisor to exercise significant control over its franchisees’ method of operation or to provide significant assistance, but now it also defines a franchise by the franchisor’s right to do so.

Exemptions from disclosure obligations
The bill amends AWA to allow franchisors to enter confidentiality agreements and site, location or territory reservation agreements with prospective franchisees and to accept non-refundable deposits (without deduction) up to $20,000 without triggering disclosure obligations.

This change brings Ontario into conformity with other provinces, most notably British Columbia. Indeed, permitting the use of confidentiality agreements means franchisors operating in Ontario can engage in a practice that is already acceptable in most international jurisdictions that regulate franchising.

There are qualifications to the confidentiality exemption from disclosure obligations, in that it does not apply to any franchise agreement containing terms that:

  • require the information to be kept confidential or prohibit the use of that information if it (a) comes into the public domain, other than as a result of a contravention of the agreement, (b) is disclosed to any person, again other than as a result of a contravention of the agreement, or (c) is disclosed with the consent of all parties to the agreement.
  • prohibit the disclosure of information to an organization of franchisees, other franchisees of the same system or a franchisee’s professional advisors.

As such, for a confidentiality agreement to qualify for the new disclosure exemption, it will have to be limited in scope.

There are also changes that determine disclosure exemptions for ‘small franchisees’ and ‘sophisticated franchisees,’ based on their total initial investment. AWA already contained such exemptions for both situations where a prospective franchisee was required to (a) spend less than $5,000 to acquire and operate a franchise (i.e. the ‘de minimis investment’ exemption) or (b) invest more than $5 million to acquire and operate a franchise for its first year (i.e. the ‘large investment’ exemption)—but the legislation never provided any direction as to how either of these calculations was to be made. With the new amendments, AWA now requires each of these amounts—referred to as the ‘total initial investment’—to be determined as prescribed under its regulations, which in turn are anticipated to be amended to require calculation in the same manner as with “the franchisee’s costs associated with the establishment of the franchise” under another existing disclosure obligation.

Finally, another amendment extends an existing disclosure exemption for prospective franchisees who are or were directors or officers of the franchisors, so as to include corporations under the control of such directors or officers; but the exemption now expressly expires four months after such director or officer has left the franchisor.

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