How a Franchise Agreement and a Franchise Disclosure Document differ
There are two documents that are of vital importance...
The Ontario Wishart Act (Franchise Disclosure), 2000 (“Wishart Act”) governs franchising and franchising relationships in Ontario. Enacted in 2001, the Wishart Act was Ontario’s first franchising legislation.
Its primary aim is to encourage franchisors to provide information to prospective franchisees before they purchase the franchise. The Wishart Act requires a franchisor to disclose to a prospective franchisee all “material facts” in what is called the disclosure document. This disclosure document is given to a prospective franchisee before it purchases the franchise, and the franchisee is encouraged to take the document away and review it with professional advisors to determine whether buying the franchise at issue would be a good decision.
Over the last 14 years, both owners and purchasers of franchised businesses have become better acquainted with the Wishart Act. However, despite the fact that it is increasingly recognized in the business community, many people still don't realize that the Wishart Act goes beyond merely laying out this disclosure regime. In fact, it also lays out two major protections that apply during the term of the franchise relationship to one or both of the parties involved.
The first such protection is that the Wishart Act imposes upon all parties to a franchise agreement a duty of fair dealing, which includes the duty to act in good faith and in accordance with reasonable commercial standards. If this duty is breached, the aggrieved party has a right to sue for damages.
The term “good faith” is not formally defined in the Wishart Act and its boundaries are still being defined by Ontario courts. However, as examples, parties must not lie to one another, withhold important information, or act so as to defeat the purpose of the franchise agreement through their actions. In a 2012 case, Tim Horton’s was sued for breach of good faith for a major change to its franchise system. It survived the challenge, as the judge in that case felt that the Tim Horton’s franchisor had acted in good faith by involving its franchisees in the decision to change the system and considering the impact of the change on its franchisees. In another recent case, a franchisor who withheld information critical to a franchisee, in particular the possibility that the franchisee could renew its lease, was held to be acting in bad faith.
The second such protection is that the Wishart Act provides that franchisees have the right to associate, meaning they may freely form or join any organization of franchisees, and the franchisor may not restrict this right in any way or penalize franchisees for exercising this right. This promotes free discussion and organization amongst franchisees. Again, if this right is breached, a franchisee has a right to sue its franchisor for damages.
While the business community frequently associates the Wishart Act solely with disclosure obligations, parties to franchise agreements ought to keep in mind that the Act also contains these ongoing rights, and ensure that they and their counterparts to any franchise agreement abide by these responsibilities.
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