Mind the Disclosure Gap

Jennifer Dolman

July 2012

Industry Spotlight
Written by  Richard Foot, Canadian Lawyer Magazine

 

Tony Wilson gets a lot of calls from desperate franchise owners. Not the sophisticated or the wealthy, but small-time operators who re-mortgaged homes or borrowed money from family members, and then lost their shirts in the process, or were bullied by the company they invested with.

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In October, Manitoba will become the fifth province, after Alberta, Ontario, New Brunswick, and Prince Edward Island, to enact legislation requiring franchisors to fully disclose financial data, litigation history, and other information to prospective franchisees.

Disclosure laws offer franchisees a range of protections, including codified standards of good faith and commercial reasonableness, and the ability to enforce an agreement once it has been entered. Most importantly, disclosure documents give franchisees the right to rescind contracts — and fully recoup investments and lost earnings — where a franchisor has failed to disclose the required information.

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Jennifer Dolman, a partner with Osler Hoskin & Harcourt LLP in Toronto, who advises a variety of franchisors, says many other national companies voluntarily disclose to franchisees in non-disclosure provinces.

“Most of the clients we deal with will provide a disclosure document in provinces where there’s no legislation,” she says. “Even though they’re not subject in those areas to legislation, they still want to share information so everyone is properly informed.

Dolman cautions, however, that just because an unregulated franchisee receives disclosure information, that document confers no special legal rights on the franchisee.

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And it’s not just small-time franchisors or newcomers who sometimes operate improperly, says Sotos. “It’s fair to say that the majority of franchisors operate ethically. It is not correct to say that even some prominent names don’t engage in deceptive practices. Being prominent does not preclude somebody from being high handed in their operations.”