The Ontario Arthur Wishart (Franchise Disclosure) Act (“AWA”) is designed to address the imbalance of power between a Franchisor and a Franchisee. Inherently the Franchisor is in a more powerful position and may not provide adequate disclosure to properly inform a potential Franchisee. When relying on insufficient disclosure, the Franchisee may enter into a contract in which it may not have otherwise entered into had sufficient disclosure been provided. If in fact there was inadequate disclosure, the Franchisee may be in a position to rescind the contract within a set time frame (normally two years) and claim rescission remedy under AWA.
The rescission remedy is quantified based on the following four categories under sub section 6(6) as:
(a) Refund to the Franchisee any money received from or on behalf of the Franchisee, other than money for inventory, supplies or equipment;
(b) Purchase from the Franchisee any inventory that the Franchisee had purchased pursuant to the franchise agreement and remaining at the effective date of rescission, at a price equal to the purchase price paid by the Franchisee;
(c) Purchase from the Franchisee any supplies and equipment that the Franchisee had purchased pursuant to the franchise agreement, at a price equal to the purchase price paid by the franchisee; and
(d) Compensate the Franchisee for any losses that the Franchisee incurred in acquiring, setting up and operating the franchise, less the amounts set out in clauses (a) to (c) above.
Under the AWA, when quantifying the rescission remedy, it is important for Franchisors to understand and consider the impact of “money received from the Franchisee” or “expenses paid to the Franchisor” versus “direct expenses” (i.e. paid directly by the Franchisee to the service provider).
‘Expenses paid to the Franchisor’ would be categorised under 6(6)(a) above since this is money that the Franchisor received from the Franchisee (which would then be removed from 6(6)(d) above).
“Direct expenses”, however, paid directly by the Franchisee to the service provider (i.e. not flowed through the Franchisor) would only be categorised under 6(6)(d) and have no consequential impact under 6(6)(a).
It is important to note that the calculation under 6(6)(d) is impacted by 6(6)(a). This is because amounts included under 6(6)(a) must be removed from the calculation of operating losses under 6(6)(d). Furthermore, any gain under 6(6)(d) is not offset against 6(6)(a). This implies that any revenues or income actually generated by the Franchisee over the period it operated does not reduce amounts that were paid by the Franchisee to the Franchisor as part of the rescission remedy.
In a scenario where there is a business loss determined under 6(6)(d), the Franchisee would be placed in a pre-franchisee position. However, should a gain be determined under 6(6)(d), the benefit of the gain would continue to rest with the Franchisee and amounts determined under 6(6)(a) would need to be refunded to the Franchisee, leading to a potential windfall for the Franchisee.
In conclusion, the Franchisor should ensure proper disclosure is provided to the Franchisee pursuant to the AWA. Furthermore, to balance the inherently powerful position of the Franchisor with the Franchisee, the contracts should be structured in a transparent manner that is just and equitable for the Franchisee and Franchisor. Wherever possible, any operating expenses, such as payments for rent and other operating costs, should be structured as though they are paid directly by the Franchisee to the ultimate services or materials supplier and not “flowed through” the Franchisor.