There are plenty of successful franchises...
Most franchisors now appreciate that Ontario's franchise legislation, the Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, (the "Wishart Act"), requires a franchisor to provide a franchisee with proper disclosure document before that franchisee buys a franchise. Many franchisors understand that, if this document is not provided, or is missing information, the franchisor is required to refund a franchisee all its money, and pay all its losses.
However what very few franchisors appreciate is that this liability can apply not only to the franchisor (i.e. often the company engaged in franchising), but also the personal operators of such a company. This is because of the definition in the Wishart Act, of a “franchisor’s associate”.
This “associate” is a person who is connected to the franchisor and either involved in the grant of a franchise or who exercises control over the franchisee. The definition in the Wishart Act is quite wide and captures people in its scope who might not think they are related to the franchisor. The actual definition reads:
“franchisor’s associate” means a person,
(a) who, directly or indirectly,
(i) controls or is controlled by the franchisor, or
(ii) is controlled by another person who also controls, directly or indirectly, the franchisor, and
(i) is directly involved in the grant of the franchise,
(A) by being involved in reviewing or approving the grant of the franchise, or
(B) 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
(ii) exercises significant operational control over the franchisee and to whom the franchisee has a continuing financial obligation in respect of the franchise; (“personne qui a un lien”) [underlining added]
Why is this definition important? Because for many purposes, the Wishart Act treats franchisors and franchisor’s associates as related parties that share duties and liabilities. For example, as noted in the introduction, franchisor’s associates share liability for rescission damages, for misrepresentations made in the disclosure documents, and for any damages resulting from a franchisor stopping franchisee’s from associating.
Given the potentially serious liability that franchisor’s associates face, it is important to determine who might be found, at law, to be such as associate.
Clearly, the Wishart Act intended to label as “associates” the guiding minds of franchisor companies. However, the phrasing used, which states “who, directly or indirectly, controls or is controlled by the franchisor”, is ambiguous. It does not clearly describe whether it is directors, officers, or shareholders - or possibly all three - who should bear personal liability.
In fact, this ambiguous language has been interpreted such that it catches a number of entities that might not have anticipated personal liability, including non-director shareholders, sub-landlords, trade-mark owners, and companies related to the franchisor. For example:
As more cases are decided under the Wishart Act, more clarity will come to this section. However, franchisors ought to be aware that the ambiguous definition of a “franchisor’s associate” may unexpectedly catch related parties in its ambit. Franchisors must be appropriately prepared for the resulting liability, possibly by structuring legal relationships so as to minimize this risk.