The 12th Annual Franchise Law Conference
For Better or For Worse:
Franchise Relationships Over the Long Term
Lessons Learned:
The Most Common Mistakes Made by Franchise Counsel
in the Disclosure Process and How to Avoid Them
Andraya Frith
Osler Hoskin & Harcourt LLP
and
Darrell Jarvis
Fasken Martineau DuMoulin LLP
and
Rosanne Manson
Claims Counsel, LawPRO
November 6, 2012
Ontario Bar Association
Continuing Professional Development
Introduction
The costs of franchise-related solicitor negligence claims are high relative to other areas of the
law and the number of claims is increasing. These are not just claims against lawyers that are
not yet aware of the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”)1, the
obligation of franchisors to disclose, or the right of franchisees to rescind (although there are still
many of these claims). These include claims against experienced franchise counsel where the
lawyers have failed to confirm in writing the extent of their mandate, inadequately advised their
franchisor clients in writing as to the risks and consequences of failing to conform to the Act, or
have strayed into the area of providing perceived financial advice, without confirming in writing
that they are not doing so. Lawyers are not adequately providing written advice as to the required
contents of a disclosure document or its required methods of execution and delivery. This paper
describes the eight most common types of disclosure-related solicitor negligence claims (from
the perspective of both franchisor and franchisee counsel) and provides practical suggestions as
to how to avoid them. We believe that any franchise counsel reviewing the eight most common
claims will at the very least pause to reflect on his or her personal practices or, more likely, will
recognize elements of his or her own practice that requires adjustment.
PART I
Treatment of Solicitor Negligence Claims By LAWPRO
LAWPRO categorizes claims against lawyers based on area of law of practice. Franchise law
claims are incorporated into the corporate/commercial area of practice. Over the past 10 years
approximately 110 claims relating to franchise law were reported to LAWPRO. Although there
have been approximately 11 claims filed each year, there has been an increase over the last
couple of years with 15 claims reported in 2010, 17 claims reported in 2011 and XX claims filed
so far in 2012.
When a claim is reported to LAWPRO, claims counsel assigns a “cause” of the claim based on a
list of categories which comprise the most common errors made by lawyers in the province. As
outlined on Chart A, with respect to franchise law claims the causes were characterized as
follows:
45% poor communication;
17% errors of law;
12% inadequate investigation;
11% conflict of interest;
6% time management;
3% clerical errors; and
6% “other”.
1
Arthur Wishart Act (Franchise Disclosure), 2000 SO 2000, c 3, s 5(3).
-2When a franchise law claim (or any claim) is reported to LAWPRO, an assessment is made as to
whether the insured lawyer made any error or omission in the course of his or her retainer. If it
is determined that the insured erred, the next step is to determine whether the matter can be
“repaired”. If a repair is not possible, generally speaking attempts are made to negotiate a
settlement.
In the event it is determined that the insured made no error or omission, a denial of liability is
issued. If an action is commenced against the insured the costs of responding to the claim begin
to mount. In addition, pursuant to the LAWPRO policy, upon the filing of a statement of defence
on behalf of an insured, half of the insured’s deductible is called upon with the other half being
called upon with the commencement of discoveries. Deductibles range anywhere from nil to
$25,000 with the majority being $5,000. In addition, in the event LAWPRO makes an indemnity
payment on behalf of an insured, a levy surcharge is applied to the insured’s premiums in the
amount of $2,500 per year for 5 years (for a total of $12,500). In the event another claim has
been paid on behalf of the insured within 5 years, the surcharge increases to $5,000 per year for 5
years.
The Growth in Franchise Related Solicitor Negligence Claims
Between 2002 and 2006, the total cost of claims in the franchise law area was $3.3 million. Of
this amount 70% or roughly $2.3 million was spent on indemnity and roughly $1 million was
spent on defence costs. (See Chart B)
Between 2007 and 2011, $6.5 million was spent on franchise law claims. Of this amount
approximately $5 million was spent on indemnity with approximately $1.5 million spent on
defence costs. (See Chart C)
Given the number of claims per year since 2002 has remained relatively consistent, the sharp
increase in the total cost of claims is largely due to the significant increase in cost per claim to
settle the matter. It is also important to note that relative to all other claims settled by LAWPRO,
an indemnity is paid in 29% of franchise claims compared to only 12% in all other cases and
only 25% of franchise claims are settled at no cost to LAWPRO, whereas 50% of all other claims
are settled at no cost to LAWPRO.
With respect to the areas in the province where franchise claims arise, it is similar to most other
regional statistics: 52% occur in Toronto/GTA and the balance are spread across the province.
-3-
Chart A
-4-
Chart B
-5-
Chart C
-6-
PART II
The Nature of Franchise-Related Solicitor Negligence Claims
In the course of reviewing the 110 franchise-related solicitor negligence claims filed since 2002,
a number of common types of claims become evident. We have identified the most common
claims and discuss the top eight types of claims below.
1.
Contents of a Disclosure Document
Claims have been successfully made against lawyers for failure to adequately advise
franchisor clients in writing as to the required contents of a disclosure document.
It is not uncommon for lawyers to elicit the information required to complete a disclosure
document by using a questionnaire, or, perhaps more prevalent today, by asking the client
questions based on the lawyer’s model form of disclosure document.
Franchise lawyers must of course explain to clients the meaning of “material fact” in an effort to
elicit appropriate information. Based on the case law of the last few years, it should be clear that
lawyers should be advising franchisor clients as to the necessity of providing site-specific
information, as a component of the material facts, and eliciting information in that regard. This
explanation and advice should be in writing.
It is very unlikely, however, that many lawyers are providing a written memorandum to their
clients detailing the itemized disclosure document requirements set out in Section 5(3) of the
Act2 and Part II of Ontario Regulation 581 created pursuant to the Act (the “Regulation”).3 The
claims would suggest that this would be a prudent approach, although we may question its
practicality.
2.
Execution and Delivery
Claims have been successfully made against lawyers for not adequately advising their
clients as to the requirements for execution and delivery of the disclosure document. It
could well be that in such instances the lawyer has advised the client as to the
requirements, but has failed to document the advice in writing.
While lawyers may feel that they can control the franchise disclosure document while it is under
their care, generally that control ends when the disclosure document is provided to the client to
execute and deliver. Indeed, in many if not most cases, the lawyer is not directly involved in the
preparation of a particular candidate’s franchise disclosure document. In addition to relying on
the client to properly execute the franchisor’s certificate forming part of the disclosure document,
the lawyer may rely on the client to attach certain schedules, including the financial statements,
before delivering the disclosure document to the prospective franchisee. The lawyer is also
likely instructing the client, and relying on the client to, retain evidence of delivery, whether by
2
3
Ibid, s 5(3).
O Reg 581/00, s 7(1).
-7attaching the receipt to a fully executed duplicate copy, or by simply retaining a receipt and
record of the document. However, lawyers may not be certain as to whether all of these
administrative details were adequately executed. What is clear, however, is that lawyers should
be advising their clients in writing as to the requirements for proper execution and delivery of the
disclosure document and as to the best practices for maintaining evidence of having properly
effected execution and delivery.
Execution
The courts have determined that the certificate is the “lynchpin” of the disclosure document and
that failure to properly execute the certificate is tantamount to not providing a disclosure
document at all, giving rise to the full two-year right of rescission.4
The Regulation provides that every disclosure document must include a certificate, certifying
that the disclosure document: (a) contains no untrue information, representations or statements;
and (b) includes every material fact, financial statement, statement and other information
required by the Act and the Regulation. If the franchisor is incorporated, the certificate must be
signed and dated by at least two officers or directors, or, if the corporation has only one director
or officer, the certificate must be signed and dated by that person. In the rare instance that the
franchisor is unincorporated, the certificate must be signed and dated by the franchisor himself /
herself. 5 Photocopies of the signed and dated certificates are satisfactory (the officers and
directors do not necessarily have to personally execute each disclosure document).
It is hard to imagine why franchisors are sending out unexecuted disclosure documents. It is
possible that lawyers have neglected to instruct their clients to execute the documents prior to
issuing them (certainly some lawyers have neglected to provide adequate instructions in writing).
Perhaps the practice of some franchisors to issue candidates ‘draft’ disclosure documents prior to
issuing a ‘final’ disclosure document has contributed to sloppiness in issuing the ‘final’
disclosure document containing the executed certificate. Perhaps it is the urgency that often
surrounds the issuing of disclosure documents that leads to the execution being missed in the
haste to meet a courier deadline. Or, perhaps some franchisors have failed to appreciate the
consequence of issuing an unexecuted disclosure document and have not treated the exercise
with adequate seriousness. Franchisors may also be issuing disclosure documents that are
signed, but signed by only one director or officer, or perhaps signed by employees that are not
directors or officers. In any event, lawyers are advised to protect themselves by ensuring that
they have advised their clients in writing as to the need to execute and date the certificate and the
manner in which to do so.
Delivery
The disclosure document must be delivered personally, by registered mail or by any other
prescribed method.6 There are no other prescribed methods. Although not required by statute, it
4
Hi Hotel Partnership v Holiday Hospitality Franchising Inc., 2007 ABQB 686 (CanLII). See also 6792341
Canada Inc. v Dollar It Limited, 2009 ONCA 385 and Sovereignty Investment Holdings Inc. v 9127-6907
Quebec Inc., [2008] OJ No. 4450 (SCJ) [Sovereignty Investment].
5
Supra note 1, s 7(2).
6
Supra note 1, s 5(2).
-8is certainly a minimum and necessary practice to obtain the prospective franchisee’s signature on
a receipt. Of course, the disclosure document must be delivered to the prospective franchisee
note less the 14 days before the earlier of (a) the signing by the prospective franchisee of the
franchise agreement or any other agreement relating to the franchise; and (b) the payment of any
consideration by or on behalf of the prospective franchisee to the franchisor or franchisor’s
associate relating to the franchise.
Delivery by registered mail is not practical because the size of the document is generally larger
than Canada Post will deliver through registered mail. Breaking the document down into smaller
pieces for delivery by registered mail would almost certainly offend the requirement that the
document must be delivered as one document at one time. 7
Likely the most common method of delivery is by courier. Delivery by courier is not specifically
permitted by the Act, but has been adopted as the practical alternative to registered mail, or
perhaps on the basis that delivery by courier is a means of affecting personal delivery. Although
we are not aware of any claims challenging the delivery of a disclosure document by courier,
lawyers recommending that their clients effect delivery by courier should be advising their
clients that delivery by courier is not specifically permitted by the Act and that there may be
some risk associated with it, albeit likely a low one.
There is currently a somewhat academic debate among lawyers as to whether electronic delivery,
or delivery of electronic media is permitted in Ontario, both of which are specifically permitted
in PEI, New Brunswick and Manitoba. ‘Electronic delivery’ refers to delivery of the disclosure
document by electronic means, such as email, whereas delivery of electronic media refers to the
physical delivery (such as by personal delivery or by registered mail) of the document on
machine-readable media, such as a CD or thumb drive, as opposed to on paper. Some lawyers
have argued that delivery of a disclosure document in machine-readable format may be
permissible in Ontario. The source of the debate is the Electronic Commerce Act, 2000,8 which
states at Section 5 that a legal requirement that information or a document be in writing is
satisfied by information or a document that is in electronic form if it meets certain requirements.
The document must: (a) be accessible by the other person so as to be usable for subsequent
reference; and (b) capable of being retained by the other person. 9 Further, the recipient of the
document must consent to its delivery in electronic format. We have referred to the debate as
being ‘somewhat academic’ because, while there may be disagreement as to whether delivery of
an electronic document may be permissible, there is general agreement among practitioners that
without judicial determination on the issue, the risks associated with delivering documents in an
electronic form are too high to recommend its use.
As with the manner of execution of the disclosure document, lawyers should be advising their
client in writing as to how to effect delivery of the disclosure document.
7
Ibid, s. 5(3).
Electronic Commerce Act, SO 2000, c 17.
9
Ibid, s 6(1).
8
-93.
Risks and Consequences of Failure to Properly Disclose
Claims have been successfully made against lawyers by their franchisor clients for failing
to adequately advise clients as to the risks and consequences of providing inadequate
disclosure to franchisees.
Perhaps inherent in the allegation is the notion that if the clients were better advised as to the
risks and consequences of inadequate disclosure, they would have taken the disclosure document
preparation and process more seriously.
The statutory remedies for inadequate disclosure are rescission and damages for
misrepresentation and/or deficiencies in the disclosure document.
With respect to the rescission remedy, Sections 6(1) and 6(2) of the Act provide the following:
Rescission for late disclosure
6.(1) A franchisee may rescind the franchise agreement, without penalty or obligation,
no later than 60 days after receiving the disclosure document, if the franchisor failed to provide
the disclosure document or a statement of material change within the time required by section 5
or if the contents of the disclosure document did not meet the requirements of section 5.
Rescission for no disclosure
(2) A franchisee may rescind the franchise agreement, without penalty or obligation, no
later than two years after entering into the franchise agreement if the franchisor never provided
the disclosure document.
In light of recent case law interpreting these statutory remedies, no lawyer should simply advise
their franchisor clients, however, that a straight-forward reading of those sections adequately
describes the risk of rescission. The Ontario courts have identified a number of ‘material’
deficiencies that are ‘fatal’ to a disclosure document, placing the franchisor that has provided a
‘materially deficient’ disclosure document in the same position as the franchisor that has not
provided disclosure at all. In Sovereignty Investment, the court identified four deficiencies in the
franchisor’s disclosure document that were fatal, and the court indicated that each of the
deficiencies on its own would have been fatal to the document.10 The deficiencies noted by the
court were the following:
10

Failure to provide financial statements of the franchisor;

Failure to specify the basis and assumptions for the earnings projections that were
included in the disclosure document, together with the location where the underlying
information would be available for inspection;

Failure to deliver the document as a single document at one time;
Sovereignty, supra note 4 at para 15.
- 10 
Failure to provide an executed certificate.
The franchisor’s obligations on rescission are obviously quite significant, and simply stated
basically require the franchisor to return the franchisee to the same position it was in prior to
entering into the franchise agreement. Upon rescission the franchisor and/or the franchisor’s
associate must:

Refund any money received from or on behalf of the franchisee;

Purchase from the franchisee any inventory, supplies and equipment at original price; and

Compensate the franchisee for any losses that the franchisee incurred in acquiring, setting
up and operating the franchise (less the amounts above).11
In addition, the franchisor (together with any franchisor’s associate, broker and agent and the
people who executed the disclosure document) is liable for statutory damages resulting from any
loss suffered by the franchisee because of a misrepresentation contained in a disclosure
document (or a material change statement) or as a result of the franchisor’s failure to comply in
any way with its disclosure obligations under the Act. Further, the franchisee is deemed to have
relied on any such misrepresentation. If there is a material change and the franchisor failed to
fulfill its disclosure obligations with respect to a statement of material change, the franchisee is
deemed to have relied on the information set out in the disclosure document.
4.
Personal Liability of Signatories to the Disclosure Document
Claims have been brought against solicitors for failing to adequately advise franchisor
clients as to the exposure to personal liability of the signatories to the certificate attached to
the disclosure document.
Under Section 7 of the Act, each person who signs the franchisor’s certificate forming part of the
disclosure document or a statement of material change is personally liable, together with the
franchisor and the other parties mentioned above, for damages resulting from claims for
misrepresentation , as well as losses incurred by the franchise as a result of the franchisor’s
failure to comply in any way with its disclosure obligations under Section 5 of the Act, as
discussed in section 3 above.12 The signatories’ liability is joint and several with the franchisor
and the franchisor’s associate, broker and agent, if any. 13 In Sovereignty Investment, as part of
its reasoning for determining the failure to execute a disclosure certificate to be fatal a deficiency
in the document, the court cites the personal liability of the signatories. 14 Unlike the rescission
remedy under Section 6(2), the right of the franchisee to make a claim for misrepresentation is
not subject to the same two-year limitation commencing on the entering into of the franchise
agreement. The limitation for a statutory damages claim for misrepresentation or deficiency
would be governed by the Limitations Act, 2002 (“Limitations Act”), and would commence on
11
Supra note 1, s 6(6).
Ibid, s 7(1)(e).
13
Ibid, s 8(3).
14
Sovereignty, supra note 4 at para 19.
12
- 11 the day that the franchisee became aware or ought reasonably to have been aware that it had a
claim. 15
Often, franchise counsel receives his or her instructions from a designated point person within
the franchisor’s organization. In some instances, the lawyer may have some unease with respect
to the disclosure decisions being made by the franchisor, as conveyed through the point person.
In such instances, a lawyer may consider whether to advise the signatories to the disclosure
document to seek independent legal advice, given that the lawyer’s client is the franchisor, but
the lawyer recognizes that the signatory is about to take on significant exposure to personal
liability.
5.
Financial Advice
Claims have been brought against solicitors which could have been avoided if the solicitor
had advised in writing that it was not providing financial advice with respect to the
disclosure document.
The commentary to Rule 2 (Competence) of the Law Society of Upper Canada Rules of
Professional Conduct provides, in part:
“A lawyer must be alert to recognize any lack of competence for a particular task and the
disservice that would be done to the client by undertaking that task. If consulted in such
circumstances, the lawyer should either decline to act or obtain the client’s instructions to retain,
consult, or collaborate with a lawyer who is competent for that task. The lawyer may also
recognize that competence for a particular task may require seeking advice from or collaborating
with experts in scientific, accounting, or other non-legal fields, and, in such a situation, the
lawyer should not hesitate to seek the client’s instructions to consult experts.”
It also provides:
“In addition to opinions on legal questions, the lawyer may be asked for or may be expected to
give advice on non-legal matters such as the business, policy, or social implications involved in
the question or the course the client should choose. In many instances the lawyer’s experience
will be such that the lawyer’s views on non-legal matters will be of real benefit to the client. The
lawyer who expresses views on such matters should, where and to the extent necessary, point out
any lack of experience or other qualification in the particular field and should clearly distinguish
legal advice from other advice.”
The disclosure document includes or touches upon a number of areas dealing with financial
matters. One would fully expect that the lawyer would provide legal advice with respect to each
of these areas, however, there is a risk that the lawyer may be perceived to be going further and
providing financial advice, which he or she may not be competent to give. The areas in which
the spectre of providing financial advice could possibly be raised include the following aspects
of the disclosure document.
15
Limitations Act, 2002, SO 2002, c 24, s 5.
- 12 Financial statements and the question as to whether the franchisor’s financial statements
comply with the requirements of the Regulation. This includes whether statements that were
prepared in another jurisdiction were prepared in accordance with generally accepted auditing
standards that are at least equivalent to those set out in the Canadian Institute of Chartered
Accountants Handbook, or in accordance with generally accepted accounting principles that are
at least equivalent to the review and reporting standards applicable to review engagements set
out in the Canadian Institute of Chartered Accountants Handbook. Lawyers should convey the
standards contained in the Act, but should not opine as to whether a franchisor’s statements meet
that standard.16
Financial statement exemption and whether the franchisor qualifies for the exemption
from disclosing financial statements based on the net worth of the franchisor or the
company controlling the franchisor.17 It is important to note that this is not an exemption from
having to prepare financial statements that meet the standards contained in the Act. Rather, it is
an exemption from having to disclose those otherwise qualifying financial statements.
Qualification for the exemption also depends on a question as to whether the financial statements
of the franchisor or the company controlling it were prepared in accordance with generally
accepted auditing standards that are at least equivalent to those set out in the Canadian Institute
of Chartered Accountants Handbook or in accordance with generally accepted accounting
principles that are at least equivalent to the review and reporting standards applicable to review
engagements set out in the Canadian Institute of Chartered Accountants Handbook.
Estimates of annual operating costs or earnings projections. Most lawyers would counsel
their clients to be conservative in developing any estimates of operating costs or earnings
projections, and it would not be difficult to stray into a discussion of what should appropriately
be included or excluded from such statements, perhaps opening the door to an allegation that the
lawyer was providing financial advice. Further, the Regulation requires that where a franchisor
discloses operating cost information or an earnings projection, it must state the basis for the
estimate or projection and the underlying assumptions, creating another area where a lawyer may
engage in a discussion of financial issues.
Costs related to establishing the franchise. We don’t imagine that franchise lawyers are shy to
wade into a discussion concerning the list of costs associated with the establishment of a
franchise. Some clients will even ask lawyers to identify additional costs that the client may have
missed, or ask for a pro forma list from another client’s document.
While it is not practical to avoid discussions on the above key elements of the franchise
disclosure document, the lawyer would be well-advised to establish in writing at the outset that
he or she is not providing financial advice.
6.
Failing to Specify the Parameters of the Lawyer’s Mandate
There has been at least one recent successful claim relating to a lawyer’s failure to outline
in writing the parameters of the lawyer’s mandate, the areas that were being handled in-
16
17
Supra, note 1, s 3(1).
Ibid, s 11(1)1.
- 13 house by the client, and the issues for which the client was not expecting to receive advice
from outside counsel.
This can be a particular risk for lawyers serving more sophisticated clients with internal legal
resources. In those instances, some tasks are likely being handled by in-house lawyers and, as a
consequence, there may not be complete clarity as to the areas for which the client is relying on
the lawyer for advice or for which it expects the lawyer to identify and alert the client to issues.
This can apply to the greater lawyer/franchisor relationship in circumstances in which the client
is really ‘running the show’ and the lawyer is consulted on a periodic basis: the lawyer should
confirm in writing what the client is responsible for and what the lawyer is not.
7.
Advising Franchisee Clients as to their Rights under the Act and their Time Sensitivity
There have been successful claims against lawyers for failure to advise their franchisee
clients as to their rights under the Act, and particularly in relation to the time-sensitivity of
those rights.
As discussed in Sections 3 and 4 above, franchisees have remedies under the Act that include
rescission and claims for losses resulting from misrepresentation and from the failure of the
franchisor to fulfill its disclosure obligations under Section 5 of the Act. Under Section 6(1) of
the Act, the sixty day limitation period for exercising the right of rescission with respect to a
deficient disclosure document or a disclosure document (or material change statement) that is
late starts to run upon receipt of the disclosure document. The two year limitation period for a
rescission claim based on the failure to deliver a disclosure document or on the delivery of a
fatally flawed disclosure document, commences on the date the franchisee enters into the
franchise agreement. The limitation period for a claim under Section 7(1) for losses resulting
from misrepresentation or from the failure of the franchisor to fulfill its disclosure obligations
under Section 5 of the Act is governed by the Limitations Act and starts to run once the
franchisee knew or ought reasonably to have known that it has a claim. 18
8.
Failure to Serve a Notice of Rescission or Commence a Claim in Time
There have been successful claims against lawyers for failure to issue and deliver notices of
rescission under Section 6(1) or 6(2) of the Act or commence claims for damages under
Section 7(1) of the Act within the applicable limitations periods.
These claims have usually resulted more from lawyers’ lack of familiarity with the Act and its
limitations than from a lack of have appropriate systems to track critical dates.
PART III
Where is the Basis for Future Solicitor Negligence Claims?
Much like successful franchisors and their legal counsel who attempt to “stay ahead of the
curve” by identifying trends in franchisee litigation and by anticipating where future claims of
rescission or statutory misrepresentation are likely to arise, it is not sufficient to only be aware of
18
Supra, note 15.
- 14 the most common mistakes currently being made by franchise counsel. In order to avoid
negligence claims, franchise solicitors should also try and predict the basis for future solicitor
negligence claims and ensure that they have properly advised their clients in order to mitigate the
risk of such a claim.
Crystal-Ball Gazing
One way to do this is to try and identify areas where there is some uncertainty in the law due to
the wording of the franchise legislation and/or due to the fact that the courts have yet to consider
a particular issue or set of circumstances.
Similarly, if there is a known difference of opinion, view or approach on a particular issue within
the Ontario franchise bar, this is another indicator that the issue may give rise to the basis for a
future solicitor negligence claim if the lawyer’s client is not properly advised of the uncertainty
and of the possible risks to the franchisor if the other view or approach ultimately prevails in the
courts.
Another signal that a lawyer needs to update his or her reporting letter or approach to advising
clients is if the lawyer notices that multiple franchisor clients, particularly the more sophisticated
ones, are surprised to learn about a particular issue or area of uncertainty under the franchise
legislation.
Of course, if there are significant developments in the law as a result of judicial interpretation of
the Act (such as the recent line of cases interpreting the 60 day versus two year rescission
remedy), lawyers should not only consider the impact of these developments on their clients’
disclosure documents and franchise agreements, but also on their standard client reporting letter
or onboarding memo.
Increased Use of Statements of Material Change to Provide Customized Information
Recent case law has demonstrated that courts are expecting that disclosure documents be
customized to include specific material facts about the actual franchise being granted.
Accordingly, the disclosure document must include a particular prospective franchisee’s specific
territory, initial fee, head lease (if applicable) and other information about his or her franchise,
not just general descriptions of these disclosure items or formulas for their calculation.
If such information is known at the time of disclosure, it must be included in the disclosure
document. If it is not known at the time of disclosure, the franchisor should provide the
information to the franchisee by way of a statement of material change once it becomes known.
There are some franchise practitioners, however, who claim that a statement of material change
cannot be used to provide such information, and re-disclosing with a customized disclosure
document (and re-starting the 14-day disclosure period) is the only way to comply with the
franchise disclosure legislation.
Accordingly, while the use of the statement of material change to provide site-specific and other
customized information about the franchise being granted is becoming more and more common
and is certainly a more practical approach to ensuring the franchisee has all relevant information
necessary to make an “informed investment decision”, this approach to disclosure is not entirely
- 15 without risk to the franchisor. Although LAWPRO has not yet received any claims related to the
propriety of using a statement of material change in this way, it is important for the solicitor to
ensure that his or her franchisor client is aware of the differing views within the bar and of the
risk of rescission in the event a court agrees that the statement of material change is not an
effective way to disclose the site-specific information.
Who is a “Franchisor’s Associate”?
Again, while LAWPRO has not yet received any claims related to a lawyer’s failure to advise the
franchisor of the important concept of a “franchisor’s associate” and of the potential liability of
the franchisor’s associate in the event of a rescission claim or statutory damages claim for
misrepresentation or a deficient disclosure document, this is an area that deserves increased
attention and reporting to the client when preparing or commenting on the franchise disclosure
document.
Given the broad approach to the threshold question of “control” under the definition of a
“franchisor’s associate”, it is possible that (in addition to corporate control) contractual control
may be sufficient to satisfy this element of the definition such that many US master franchisors
(and certainly corporate affiliates of the franchisor) likely meet this first part of the test. As a
result, depending on how involved the US master franchisor or corporate affiliate is in approving
or rejecting franchisee applicants or (if there is a fee or other consideration paid directly to the
US master franchisor or corporate affiliate) depending on how involved it is in the day-to-day
management or operation of the franchisees, the US master franchisor or corporate affiliate may
be found to be a franchisor’s associate.
The franchise solicitor is well-advised to raise the concept of a franchisor’s associate in an early
draft of the franchise disclosure document and/or in a related written communication to the client
in order to make sure there is a record of having brought the issue to the client’s attention. The
analysis is a heavily fact-based one and, at least in the first instance, the solicitor is unlikely to
have enough information to provide a view or opinion on the issue. Ultimately, the client may
decide not to pursue the issue further and/or not to treat the other entity as a franchisor’s
associate for the purposes of the contents of the disclosure document, but at least the solicitor
will have a record of having raised the issue and the related potential liability in the event a
statutory claim is brought against the franchisor and/or the franchisor’s associate.
Record Retention Practices
It is not uncommon for a franchisor, when facing a rescission or statutory damages claim or the
threat of such a claim, to be unable to produce a complete copy or duplicate original (including
all exhibits and attachments) of the franchise disclosure document that was actually provided to
the franchisee and a record of when it was received by the candidate. In the event of a dispute
about the contents of the disclosure document and/or the timing or method of delivery, courts
will take a negative inference if the franchisor is unable to produce evidence of the actual
disclosure document and details about its delivery.
Depending on the nature and scope of the franchise solicitor’s engagement (and even where the
franchisor is a regular and ongoing client), in many cases the solicitor does not have insight into
the franchisor’s actual record retention practices and procedures. It may ultimately prove “too
- 16 late” to have the discussion with the client if the first time the question arises is in the face of a
rescission notice.
Franchise solicitors are therefore strongly encouraged to make sure their clients understand the
importance of adequate record retention practices and how critical it is that they be able to
produce evidence of what and when disclosure was provided to each candidate. In particular, the
solicitor should advised his or her franchisor client to retain, for each prospective franchisee, (i) a
record of when the disclosure document was delivered, (ii) to whom it was delivered, (iii) the
method of delivery, (iv) the signed receipt (when received from the prospective franchisee), and
(v) a duplicate copy of the entire disclosure document, including all exhibits, schedules and the
signed franchisor’s certificate. As a best practice, it would be helpful to identify various
approaches that some franchisors adopt and the advantages and disadvantages of each record
retention system. For example, some clients elect to retain a master copy of the disclosure
document, and have the receipt relate to that master copy, rather than creating and retaining a
duplicate copy of the entire document. However, the franchisor should be advised that this
approach has its limitations, including if (i) the master copy cannot be located, (ii) the receipt
fails to reference a specific master copy, or (iii) the master copy was customized for any
particular franchisee. While retaining a complete copy for each prospective franchisee may be
administratively burdensome, the franchisor should be advised that whatever retention system it
chooses to adopt, it is imperative that the franchisor be able to substantiate what was disclosed,
to whom, how and when.
PART IV
How to Reduce the Risk of Solicitor Negligence Claims
Given LAWPRO’s statistics indicate that nearly half of all franchise solicitor negligence claims
are due to “poor communication”, it naturally follows that the best way to help limit one’s
exposure to a negligence claim is to improve client communications.
Engagement Letters
Certainly, a detailed and customized engagement letter can serve to outline in writing the scope
and parameters of the outside counsel’s mandate, and which areas of the disclosure document
and disclosure process fall outside the scope of the retainer. In practice, however, the usefulness
of the engagement letter is somewhat limited as they tend to be relatively standard firm letters
and, in many cases, the letter is issued so early in the process that the full scope and limitations
of the retainer may not be known. Engagement letters are also less helpful tools for reducing the
risk of a negligence claim where the disclosure advice is being provided to a long-standing
franchise client.
Where there are obvious and clear limitations to the scope of the outside lawyer’s retainer, such
as where the lawyer is asked to prepare a national disclosure document based on the franchisor’s
existing province-specific disclosure documents and/or wraparounds and the franchisor has
indicated that it does not want the lawyer to satisfy itself that the existing disclosure documents
contain all prescribed information, it is very important to have a written record of these
limitations. Similarly, a client may engage the lawyer for the limited purpose of updating an
existing disclosure document to comply with a new franchise disclosure statute. This record can
- 17 form part of the estimate or fee quote (if one has been requested) or as part of an early
communication (perhaps when the first draft of the disclosure document is provided to the client
for comment and input).
Detailed “Onboarding” or Reporting Letters
A more practical and client-friendly tool for reducing solicitor negligence claims is the use of a
detailed model form of letter or memorandum that can be sent to the client either at the
beginning of the mandate or at the end of the project. If necessary, the model letter or
memorandum can be customized to address a particular issue or set of issues that arose on a
particular file. For the most part, however, many if not all of the most common LAWPRO
negligence claims brought against franchise lawyers in the past decade could have been avoided
through the relatively simple use of a model reporting document.
There are several advantages to providing a detailed “onboarding memorandum” to a new or
ongoing franchise client at the beginning of each disclosure document project (regardless of
whether the disclosure document is being prepared for the very first time or as part of an annual
update). Much of the information about a franchisor’s general disclosure obligations and the
consequences of deficient disclosure that would typically be provided at the end of a mandate
can just as easily be provided to the client at the beginning of the retainer.
There are several benefits to providing a detailed “onboarding memorandum” early in the
disclosure document project. The client is more likely to read the onboarding memorandum at
this stage of the process. Communicating the franchisor’s disclosure obligations earlier in the
project is also likely to result in the franchisor having additional questions and being more
engaged in the document preparation process. This has the additional benefit of giving the
franchise lawyer more opportunities to communicate and clarify any areas of uncertainty or
misunderstanding on the part of the franchisor client.
An early “onboarding memorandum” is also good protection in the event of a “runaway client”
(i.e., where the client stops using the lawyer’s services before the disclosure document is
finalized). In these cases, it is also a best practice for the lawyer to send a written
communication to the client indicating that the lawyer cannot provide any assurances that the
draft disclosure document is in full compliance with the franchise disclosure legislation.
The Importance of a Written Record
Where unique, novel or particularly sensitive issues arise during the course of preparing the
disclosure document, the lawyer should have a written record of the related advice that was
provided. In some cases, this “written record” may well be limited to notes taken during a call
with the client. As a best practice, particularly on sensitive issues which give rise to potential
statutory claims, the lawyer is well-advised to prepare an email to himself or herself which is
then date and time stamped to coincide with the date the advice was given. On highly sensitive
issues, it is always most prudent to send a detailed email or memorandum to the client
summarizing the issues and the potential risks associated with the various options available to the
franchisor or decision the franchisor has made. Sending such an email or memorandum
(particularly where it has not been requested by the client) can be potentially damaging from a
client relationship standpoint, but depending on the circumstances and the possible negligence
- 18 claim exposure to the lawyer and the law firm, the lawyer may feel he or she has no choice but to
have a written confirmation of the advice that was given to the client.
What Should Be in Your Model Onboarding Memo or Reporting Letter?
The following is a checklist of issues that franchisor solicitors should include in their model
forms of onboarding memoranda and/or reporting letters. This list is not intended to be an
exhaustive list of issues. In addition, standard reporting documents are not static documents and
it is very important to revisit them on a regular basis and keep them up-to-date in response to
case law and statutory developments and emerging disclosure best practices and areas of
uncertainty.
Scope and General Limitations

Which provincial disclosure laws have been taken into consideration when preparing
the disclosure document?

What information has been relied on when preparing the disclosure document (i.e.,
the franchise agreement, specific ancillary agreements, supplemental information
provided by the franchisor, the US franchise disclosure document (if applicable) and
the lawyer’s interpretation of specified legislation and regulations

Confirmation that the lawyer is not providing financial advice (i.e., in connection
with financial statements, earnings projections or costs estimates)

Special considerations if providing the disclosure document to candidates in the
“voluntary provinces”
Obligation to Disclose

Timing of disclosure obligation (i.e., the “14 day waiting period”)
 How to calculate the 14 day waiting period (it’s actually 15 days in Ontario
and New Brunswick and 16 days in Alberta, PEI and Manitoba!)
 Unique issues if a confidentiality agreement is part of the package of
documents
 Deposit agreement and site selection agreement considerations

Proper methods of delivery of the disclosure document
 Electronic disclosure do’s and (in Ontario) don’t’s

Obligation to disclose “all material facts”
 Recommend including the complete definition of “material fact” and
“material change”
 Consider including a list of sample possible “material facts” based on case law
and practices of other franchisors

Obligation to customize the disclosure document
 Site-specific information
- 19 

Potential issues raised by use of statement of material change to provide this
information
Additional customization if disclosure document being used as part of a
renewal, franchisee transfer or corporate conversion

Obligation to disclose any “material changes”
 Timing and delivery of statement of material change
 Form of statement of material change required and signature requirements

Financial statements
 Standards prescribed under the legislation
 Exemption from disclosure of financial statements
 Grace periods

Franchisor’s certificate
 Prescribed form
 Dated and signed by two officers or directors of the Franchisor (unless there is
only one officer or director in which case one signature is sufficient)
 Certificate signatories face potential person liability for any misrepresentation
or deficiency with the disclosure document

Earnings projections
 Broad statutory definitions
 Inadvertent earnings projections

Exemptions from disclosure obligation
 Detailed information about the various exemptions
 Highlight need to consult with counsel on case-by-case basis
 Given risk of rescission, generally recommend disclosure

Retaining an archive copy of the complete disclosure document
Updating the Disclosure Document

Disclosure document is not a static document and annual updates may not be
sufficient

Specify information which must be current as at the date of the disclosure document

Specify limited information which is tied to fiscal year end

Obligation to disclose new material facts as they arise
Improper Disclosure and Franchisee Remedies

Damages for misrepresentation or deficient disclosure document
- 20 


Broader group of possible defendants (i.e., franchisor, franchisor’s associate
or broker, as well as every person who signs the franchisor’s certificate)
Common law claims for misrepresentation in regulated and voluntary
provinces
Rescission
 60 day rescission versus 2 year rescission remedy
 Summary of trends and case law interpreting the 2 year rescission remedy
 Consequences of rescission remedy and nature of financial exposure to
franchisor and franchisor’s associate
Conclusion
Given the increasing complexity of preparing a compliant franchise disclosure document due to
recent trends in the case law and in light of the increasing number and cost of resolving franchise
solicitor negligence claims, it is imperative to consider whether one’s existing client reporting
and file management practices are adequate to protect oneself against a negligence claim. In
order to assist you with this self-assessment, we have attempted to highlight the most common
franchise solicitor negligence claims over the past decade, as well as to provide you with tools to
help predict where future claims may arise.
There are at least two very important lessons learned from the most common mistakes made by
franchise counsel: (1) the best way to help limit one’s exposure to a negligence claim is to
improve client communications and (2) just like your client’s franchise disclosure document,
standard reporting documents are not static documents.
The importance of a written record, including through the use of a customized engagement letter,
a detailed onboarding memorandum and/or reporting letter, and additional emails and
memoranda on important issues that arise throughout the mandate, cannot be overstated.
Moreover, it is critical to revisit these documents and your approach to client communication on
a regular basis and to keep these documents and practices up-to-date in response to judicial and
legislative developments and emerging disclosure best practices.