Franchise disclosure document vs franchise agreement

Someone buying a franchise, from the franchisor or from an existing franchisee, may be handed a thick set of papers and not know which one is the contract. The two documents do different jobs. The disclosure document gives information before a decision is made. The franchise agreement is the contract signed afterwards. The Canadian Franchise Association says franchise disclosure is regulated at the provincial level rather than through a single national law, and that there are important differences between jurisdictions. This page covers Ontario, British Columbia and Alberta only. For any other province, read its own Act.

What the disclosure document is

Under Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000, a franchisor must provide a prospective franchisee with a disclosure document, and the franchisee must receive it not less than 14 days before the earlier of signing the franchise agreement or any other agreement relating to the franchise, and paying any consideration relating to the franchise, subject to the exceptions in s.5(1) for certain agreements and deposits. Both the Ontario and BC Acts require the information to be set out accurately, clearly and concisely, and British Columbia’s Act also requires the document to include all material facts. In Ontario it must be one document, delivered at one time.

What the franchise agreement is

The franchise agreement is the contract that sets the terms of the relationship. The Canadian Franchise Association notes that system-specific responsibilities required of the franchisee are outlined in the franchise agreement. Ontario’s Act defines it as any agreement that relates to a franchise between the listed parties. Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement under the Ontario Act, and Alberta’s Franchises Act has a fair dealing provision of its own. Check the agreement itself for its transfer, renewal and termination terms.

How the two fit together

The agreement is part of the package. Ontario requires the disclosure document to contain copies of all proposed franchise agreements and other agreements relating to the franchise to be signed by the prospective franchisee. British Columbia’s Act likewise requires copies of all proposed franchise agreements, and Alberta’s Act requires the document to contain them. So the disclosure document describes and attaches (see what a franchise disclosure document is and why it matters); the agreement is what binds the franchisee once signed.

Different duties and different remedies

The disclosure document carries a duty before the contract exists, and the agreement carries duties during performance. The remedies follow that split. In Ontario, a franchisee may rescind the franchise agreement, without penalty or obligation, no later than 60 days after receiving the disclosure document if it was late or its contents did not meet the Act’s requirements, and no later than two years after entering the agreement if it was never provided. Section 7 gives a franchisee who suffers a loss because of a misrepresentation in the disclosure document, or because the franchisor failed to comply with section 5, a right of action for damages, and a franchisee is deemed to have relied on a misrepresentation. BC’s Act sets the same 60-day and two-year rescission periods, on its own conditions. A breach of the fair dealing duty gives, in Ontario, a right of action for damages.

Exemptions and resales

The Acts contain exemptions, and in any proceeding under the Ontario Act the burden of proving an exemption is on the person claiming it. One of the Ontario exemptions is the grant of a franchise by a franchisee, on the conditions the section sets out. So a resale may involve no disclosure document where those conditions are met. The exemption does not remove the franchise agreement itself.

Factors to check

If the buyer is a new franchisee dealing with the franchisor, check the delivery date against the signing and payment dates. If the buyer is taking over from an existing franchisee, check whether an exemption applies and who must prove it. If any proposed agreement is missing from the package, or the contents fell short, ask a franchise lawyer about the rescission periods and when they run.