Any time you are buying something, you need to...
When Manitoba passed The Franchises Act (the "Act") on October 1, 2012, potential purchasers of franchises in Manitoba were afforded some significant new protections in the form of a requirement imposed upon franchisors to provide a franchise disclosure document to all prospective franchisees. In addition, the new legislation reinforced the common law principles of the duty of fair dealing between franchisors and franchisees and provided remedies for misrepresentations in the franchise documents.
There are currently five provinces in Canada (Alberta, Manitoba, Ontario, New Brunswick and Prince Edward Island) which have passed legislation requiring franchisors to provide disclosure documents. The requirements with respect to the content of the disclosure document vary somewhat from province to province, but the concept is the same in all of these jurisdictions - franchisors are required to provide certain prescribed information, certificates, financial statements and other documents to franchisees at least 14 days prior to the signing of the franchise agreement or the payment of any non-refundable moneys for the purchase of the franchise. In addition to the prescribed information, franchisors are also required to ensure that the disclosure document contains "all material facts" necessary for the potential franchisee to make an informed decision to purchase the franchise.
There are serious consequences for a franchisor if the disclosure requirements are not met. If the disclosure document is not provided within the prescribed timeline or if it does not meet the requirements of the legislation, the franchisee has 60 days after signing the agreement to give notice to the franchisor of the franchisee's intention to rescind the agreement. Manitoba's legislation contains an exception for technical irregularities and states that "substantial compliance" with the requirements is sufficient. However, this exception is not set out in the legislation in some of the other provinces.
The franchisee also has a right to rescind the agreement within two years if the franchisor "never provided" the disclosure document. Courts have interpreted this to apply in some circumstances in which a form of disclosure document was provided, but the document was so insufficient as to amount to no disclosure document at all. Although there is no case law on this in Manitoba yet, we can look to the case law established in other provinces with similar rescission provisions. It may come as a surprise to some franchisors that there have been cases in which although a disclosure document was provided, several of the requirements set out in the legislation were missing and the courts have permitted the franchisee to rescind the agreement during the two year rescission period. In some instances, where there was only one piece of information missing, the courts have held that the missing information was so significant that the two year rescission remedy was applicable.
The consequences of rescission are significant. The franchisor will have to refund all money paid for the purchase of the franchise, buy back all remaining inventory (at cost), buy back all equipment and supplies purchased by the franchisee under the franchise agreement (at cost) and compensate the franchisee for any other losses sustained in operating the franchise.
The legislation also provides that if the franchisee suffers a loss because of a misrepresentation contained in the disclosure document or as a result of a failure to comply with the disclosure requirements, the franchisee can sue not only the franchisor for damages, but may also be able to sue certain associated companies, the broker and the individuals who signed the disclosure document (subject to exceptions set out in the Act). In addition, a breach of the duty of fair dealing may also give rise to a claim for damages.
The disclosure document, franchise agreement and related documents are generally very long and complex documents. It is very important to take these documents to a lawyer as soon as you receive them. A lawyer experienced in franchise law will be able to point out areas of concern which may not stand out to someone reading their first franchise disclosure document. Your lawyer will also be able to explain anything which is unclear and guide you through the process of conducting your own due diligence before deciding to buy the franchise. In addition, the lawyer should be able to assist you in determining whether to incorporate, assist with the review of any financing documents you may be required to sign with your lender and assist you with lease negotiations if you will be leasing space. As with any new business venture, the purchase of a franchise always involves some level of risk and it is important to have all of the information you need at the outset to make an informed decision.