Epiq Systems, Inc.
Franchise

More room for improvement following franchise law changes

Toronto franchise lawyer Joseph Adler says franchisors will be relieved by legislative amendments that allow them to enter confidentiality agreements with prospective franchisees without triggering disclosure obligations. 

The change is one of several made to Ontario’s Arthur Wishart Act (AWA) made as part of the omnibus Bill 154, Cutting Unnecessary Red Tape Act, which received Royal Assent in November.

Until now, Ontario was the only jurisdiction with franchise legislation that did not permit non-disclosure agreements to be signed before the delivery of a disclosure document.

“That has been a big problem in the past,” Adler, a partner with Hoffer Adler LLP, tells AdvocateDaily.com. “My franchisor clients would always be dumbfounded when I told them they would have to hand over all this potentially sensitive information without any right to impose a confidentiality covenant on the prospective franchisee.”

He says the old rules may have encouraged some franchisors to be less forthcoming in their disclosure documents out of fear that proprietary information would be released without protection, which however exposed them to risks if a franchisee ever attempted to exercise its right of rescission — for failure to disclose material information — further down the road.

“With this amendment, there is less of a reason to hold back,” Adler says.

The new amendments also allow franchisors to accept fully refundable deposits without triggering the disclosure document obligation. The final amount has yet to be set, but under B.C.’s franchise law, the requirement only kicks in once a deposit exceeds 20 per cent of the initial franchise fee.

“This is another important change for franchisors because they spend all this time and money on courting prospective franchisees, without knowing how serious they are. They could be just kicking the tires or may even be potential competitors,” Adler says. “Allowing franchisors to accept deposits gives them some sense of comfort that the person is genuinely interested.”  

Other changes to the AWA under Bill 154 include:

  • All references to “service marks” are removed, since the term originates in the U.S. law and is not recognized in Canadian trademark law.
  • Disclosure exemptions are expanded to include the grant of a franchise to corporations controlled by certain former directors or officers.
  • Fractional franchise disclosure exemptions are brought into line with other Canadian franchise law jurisdictions

Despite the update to the law, Adler says he’s hopeful more amendments to the AWA will follow in the near future.

“There’s much more work that needs to be done on the legislation, but at least this is a start,” he says. “There are still all kinds of ambiguities in the Act that create uncertainty in the marketplace, and these changes don’t attempt to iron any of those out.”  

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