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Log In / Register | Dec 19, 2014

Do Franchisors in Canada Have Post-Sale Duty to Disclose to Franchisees?

Last week I attended the Canadian Franchise Association’s Law Day in Toronto where there was record attendance. Disclosure continues to be a huge topic in Canadian franchise law. It’s clear that per-contractual disclosure is required under Canadian franchise statutes but what many in franchising are not yet certain about is whether there is any duty to disclose once the franchise agreement has been signed.

The five provinces with franchise legislation are Ontario, Alberta, New Brunswick, Prince Edward Island and Manitoba. Each of these franchise statutes prescribe that unless an exemption applies, a franchisor must provide a prospective franchisee with a disclosure document at least 14 days before any agreement is signed by the parties or payment is received by the franchisor. All five statutes include regulations that prescribe in detail what a franchisor must include in a disclosure document.

Once a franchise agreement has been signed, there is no express obligation under franchise legislation for a franchisor to make ongoing disclosure to a franchisee. Some franchisees have claimed, however, that the duty of fair dealing, both at common law and under statute, requires that disclosure continue. Our courts have started to explore this issue but we don’t yet have all of the answers.

What we do know is that the duty of fair dealing doesn’t mean a franchisor has to share information/documentation with a franchisee so that it can verify that the franchisor is abiding by its various contractual obligations. A claim by the representative plaintiffs franchisees that Shoppers Drug Mart Inc. had breached its duty of fair dealing by failing to provide sufficient financial information to verify that there had been no breaches of the franchise agreement was recently struck out as “untenable” in Spina v Shoppers Drug Mart Inc. “Apart from the fact that complying with this pre-litigation oriented duty of disclosure is likely impossible and a recipe for strife, it is not consistent with the relationship between franchisor and franchisee and rather turns over the design, supervision and management of the franchise system to each franchisee, who gets to fish for grounds to sue the franchisor based on the franchisor’s interpretation of the Associates Agreement,” Justice Perell stated.

What we don’t yet know is whether a court will agree with arguments by franchisees and their counsel that on account of the duty of fair dealing, a franchisor may, during the course of a franchise relationship, be required to disclose material facts known to it that might reasonably affect a decision by the franchisee to enter into a new agreement with the franchisor, such as minutes of settlement or a termination agreement. To date, Ontario courts have only recognized that there may be such a duty and no court, to my knowledge, has finally determined the matter.

Examples are 1323257 Ontario Ltd. v Hyundai Auto Canada Co., in which Justice Brown, in granting an interlocutory injunction to a franchisee, found that “a very arguable” case exists that the franchisor had a duty to disclose certain material facts to its franchisee before asking it to sign minutes of settlement; and Trillium Motor World v General Motors of Canada Inc., in which Justice Strathy, in the course of certifying the franchise class action, stated it was not inconsistent with the purposes of the Arthur Wishart Act to suggest that General Motors had an obligation to disclose material facts concerning the company’s financial condition and restructuring plan to those dealers to whom it had offered wind-down agreements. The Hyundai case did not proceed to trial, and the class action against General Motors has yet to proceed to trial.

What else our courts may say about a franchisor’s post-sale duty of disclosure remains to be seen and is definitely on my watch list.

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