Can You Be in a Franchise Relationship Without Knowing It?
The Arthur Wishart Act imposes extensive disclosure obligations on franchisors in order to allow prospective franchisees to make an informed decision as to whether to purchase the franchise. Where a franchisor fails to comply with these disclosure obligations, a franchisee may be entitled to rescind the franchise agreement and make a claim arising out of a misrepresentation.
It is important to understand that the disclosure obligations set out under the Act may also apply to a business arrangement that may not be viewed or explicitly treated as a franchise relationship. Put another way, it is possible to be in a franchise relationship and thereby owe or be owed disclosure obligations even if there is no mention of the word franchise in the agreement governing the relationship between the parties. Can a licensing agreement, marketing agreement, distribution agreement be actually a franchise agreement in substance?
In fact, a franchise relationship has been found to exist between two parties despite there being explicit language in an agreement stating that there is no franchise relationship or franchise agreement between the parties. This is because it is the substance of the relationship that determines whether two parties are in a franchise relationship. When determining whether two parties are in fact in a franchise relationship the courts often look at a number of factors, including:
- The payment scheme: Is one party required to make an initial payment and to make continuing payments to the other party in the course of operating the business?
- Use of trade-mark: Is one party’s business operations substantially associated with the other party’s trade-mark, trade name, logo or other commercial symbol?
- Control: Does one party exercise significant control over or provide significant assistance in the method of operations of the other party? For instance: Does one party control the logo, marketing, phone line, billing etc.? Are there buildout specifications? Is there location assistance or control? Is there an operations manual mandated? Are there restrictions on where one party can operate or to whom it can sell its products or services?
A few business owners have found themselves in a position of being deemed a franchisor and thereby required to provide extensive information on their business operations. Having failed to disclose in compliance with the Act, the deemed franchisees were entitled to rescind the contract, receive a refund of their initial payment and be reimbursed for damages (usually taking the form of loss of income and moving expenses).
Understanding what a franchise relationship means is important as it reminds us that a franchise relationship exists based on the substance of the relationship and not on the label of the agreement. The Arthur Wishart Act does impose onerous disclosure obligations on a franchisor and some business owners have tried to avoid entering into a franchise relationship for this reason. Still, business owners need to be cautious; if the relationship is in substance a franchise relationship, a written agreement stating the opposite intention may not matter. A business owner does not want to find itself in a position of having a de facto franchise relationship with another party without having fulfilled the obligations set out in the Act. Such a scenario leaves a business owner greatly exposed.
If you are concerned about your current business arrangement or are interesting in franchising or becoming a franchisee, do not hesitate to reach out. We would be happy to answer any of your questions.