What is a Franchisor’s Associate and Why Should a Franchisor Care?

Author: j.mcrookston@goldmanhine.com

Date: SEP 12th, 2014

Topic: Industry Experts

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

(b) who,

(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.

So Who Is a Franchisor’s Associate, Anyway?

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:

  1. Sole directors and officers: It is relatively certain that, in most cases, people who are sole directors and officers of franchisor corporations are “franchisor’s associates” of those corporations, and that the same likely holds true in cases involving closely-held franchisor corporations with few directors and officers.

  2. Some Ontario cases have found majority shareholders who are involved in the running of a franchisor corporation, or the grant of a franchise, to be a franchisor’s associate. In one case, a corporate shareholder of the franchisor, who happened to be the franchisee’s landlord, was found to be a franchisor’s associate.

  3. A sub-landlord controlled by the same individual who controlled the franchisor was held to be a “franchisor’s associate”. (Although the Court noted that the sub-landlord was called a “franchisor” in the sub-lease.)

  4. Franchisor companies and associated landlords which were treated by their owners as if they were one entity, were held to be “franchisors”, even though owned by two different people.

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.