Canada: "Wannabe" Franchisees are Entitled to Protection Under the Franchise Act

Last Updated: March 23 2004
Article by W. Brad Hanna, FCIArb.

Those of you involved in the franchising industry are likely aware that Ontario enacted franchise-specific legislation in July, 2000. The Arthur Wishart Act (Franchise Disclosure), 2000 (the "Act") created significant obligations and new standards of conduct for parties to a franchise relationship.

The Act defines "franchisee" as "a person to whom a franchise is granted…". As described below, franchisors owe certain duties to their "franchisees" under the Act. What about prospective or "wannabe" franchisees? Do they have rights under the Act? A recently reported decision of the Ontario Superior Court of Justice has just considered this issue. Franchisors beware – the answer to this question is yes.

Brief Overview of the Act

The Act provides, among other things, that every party to a franchise agreement owes the other a duty of fair dealing in performing and enforcing the terms of the agreement. Fair dealing is defined to include the duty to "act in good faith" and in accordance with "reasonable commercial standards". The Act also imposes some fairly onerous disclosure obligations on franchisors. Franchisors must provide prospective franchisees with a disclosure statement containing all material facts, financial statements, and other information required to assist the prospective franchisee make an informed investment decision. The disclosure document must be provided to the prospective franchisee at least fourteen days before the franchisee signs any franchise agreement or makes any payment. The Act provides harsh consequences for the failure to make full and accurate disclosure.

The Act entitles "franchisees" to sue franchisors, as well as their brokers, agents and associates, and anyone who signed the disclosure document, for misrepresentation or failure to disclose. Basically, a franchisee may rescind the agreement and recoup from the franchisor all money the franchisee invested in the enterprise.

What if a person agrees to buy a franchise business but then changes his or her mind and wants to get out before the deal actually closes? Are such persons (who are technically only "prospective franchisees") entitled to the right of rescission given to "franchisees" under the Act?

The Act Protects Someone Who is Not Yet a Franchisee

In Bekah v. Three for One Pizza the Ontario Superior Court of Justice considered whether a purchaser of a franchise in a transaction that has not yet closed is a "franchisee" within the meaning of the Act and therefore entitled to the right of rescission. The facts of the Bekah case are simple.

The plaintiff in Bekah signed an agreement to purchase the assets of a pizzeria, including the right to sublease a facility and operate a pizza business under the defendant’s franchise. The plaintiff provided a deposit of $25,000. The defendant did not provide the financial disclosure required by the Act, however, and before the transaction closed, the plaintiff notified the defendant that it would not be proceeding. The plaintiff delivered a formal notice of rescission and asked for a return of its deposit. The defendant refused to refund the plaintiff’s $25,000 deposit and took the position that the plaintiff was not entitled to rescind the transaction.

Essentially, the defendant argued that the remedy of rescission under section 6 of the Act (which states that a "franchisee may rescind the franchise agreement" where the franchisor fails to provide the requisite disclosure) is only available to a "franchisee". The defendant asserted that the plaintiff was only a prospective franchisee because the transaction never closed. The plaintiff, by contrast, argued that it was a franchisee because it had entered into a binding "franchise agreement" within the meaning of the Act. The plaintiff claimed that it should therefore be entitled to rescind the franchise agreement and have its deposit refunded based on the defendant’s failure to comply with the disclosure obligations imposed by the Act.

The court found in favour of the plaintiff and, in doing so, rescinded the franchise agreement and ordered the defendant to return the $25,000 deposit. The court noted that to "insist that a franchisee must have concluded the franchise transaction is not required by the language [of the Act] and would illogically leave a gap in the protection of the statute". In finding for the plaintiff, the court relied upon the facts that: the parties had signed a binding agreement for the purchase and the sale of a franchise business; monies were paid under that agreement; and the plaintiff was obligated to enter into a franchise relationship as a result of the agreement.

The court concluded that the plaintiff was a party, as a "franchisee", to a "franchise agreement" as that term is defined in the Act. The court held that the plaintiff is therefore entitled to protection under the Act. The court ordered that the franchise agreement be rescinded and that the defendant must return the plaintiff’s deposit.


The logic of the Bekah decision is intuitively appealing. As the court itself observed, to hold that the plaintiff is not a "franchisee" simply because the transaction had not fully closed would "run counter to the scheme of the Act, the definitions of franchise agreement and prospective franchisee and would deprive the plaintiff of a remedy for the breach of a franchisor’s obligation to give full disclosure".

The Bekah case should put franchisors on notice that, in certain circumstances, wannabe franchisees are entitled to protection under the Act. It also underscores the importance of complying with the Act’s significant disclosure obligations.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2004 McMillan Binch LLP

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

W. Brad Hanna, FCIArb.
In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions