Can a franchise agreement be executed in a Canadian franchise statute jurisdiction without the franchisor delivering a franchise disclosure document (FDD)?
Most franchisors would say no – and with good reason. Disclosure is the cornerstone of Canadian franchise law and franchisors that fail to discharge their disclosure obligations can face serious consequences, including statutory rescission and misrepresentation claims. However, the recent decision in Re: TBS Canada has raised important questions about the rigidity of these rules when they are applied in the insolvency context, and particularly in circumstances where timing and business continuity are of central importance and sophisticated parties are involved.1
Background
The Body Shop Canada Limited (the TBS Canada) found itself in a liquidity crisis when its parent company, The Body Shop International Limited (the UK Parent) unexpectedly filed for administration in the United Kingdom on February 13, 2024, effectively halting all financial support for TBS Canada and its operations. On March 1, 2024, TBS Canada filed a Notice of Intention to Make a Proposal under the Bankruptcy and Insolvency Act (Canada) (the BIA).
On July 5, 2024, TBS Canada transitioned the proceedings under the BIA to proceedings under the Companies’ Creditors Arrangement Act (Canada) (the CCAA), a statute designed to facilitate the restructuring of larger, more complex businesses. The Court ordered TBS Canada, with oversight from Alvarez & Marsal Canada Inc. (A&M) as court-appointed monitor, to begin a formal sales process of its assets and businesses (the Canadian Sales Process).2
TBS Canada did not own “The Body Shop” trademark but instead operated under a license granted through a distribution and franchise agreement with the UK Parent. Because a parallel sales process was also underway in the United Kingdom for the UK Parent’s assets, any prospective buyer had to enter into two separate agreements: an asset purchase agreement (the APA) with TBS Canada and a franchise agreement with the ultimate purchaser of the UK Parent’s assets, once a purchaser was identified. On September 6, 2024, the purchaser of the UK Parent’s assets by consortium led by Aurea Group (the UK Purchaser) was announced.
Ultimately, Body and Lotion Inc. (the Purchaser) emerged as the successful bidder in the Canadian Sales Process and was also selected by the UK Purchaser as its preferred franchisee for the Canadian market. On December 6, 2024, the Purchaser entered into an APA with TBS Canada, subject to court approval.
The Court’s Endorsement
On December 14, 2024, Justice Osborne approved the purchase and sale transaction contemplated by the APA. In connection with the approval of the transaction, the Court made a declaration that TBS Canada, the monitor, the UK Purchaser, and others would have no liability for failure to comply with certain disclosure requirements, if any, under applicable franchise law.
More specifically, the order made clear that no liability would attach for failure to comply with the disclosure requirements under Section 5 of Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 (the Wishart Act), which mandates that franchisors provide a FDD to prospective franchisees, as well as equivalent provisions in other Regulated Province’s provincial franchise statutes across Canada.3 This relief applied solely to the execution of the new franchise agreement between the Purchaser and the UK Purchaser. In practice, the Court’s order meant that the parties were not required to provide a FDD, normally a legal requirement in any Regulated Province before the signing of a new franchise agreement.
Key Reasons for the Relief Granted
In granting the relief from franchise disclosure requirements, the Court considered several key factors:
- Preferred Franchisee
The UK Purchaser had identified the Purchaser as its preferred franchisee for Canada following extensive negotiations. Importantly, the UK Purchaser made it clear that it would not proceed with signing the franchise agreement unless the Court granted the requested declaration. Because the transaction was time-sensitive (due to, among other things, termination of services from the UK Parent, upcoming lease expiries, and declining inventory levels), the parties needed the franchise agreement to be executed quickly. Complying with standard franchise disclosure rules would have delayed the process significantly, negatively impacting recoveries for creditors of the Company.
- Urgency of the Closing
The Court acknowledged that the transaction needed to close by December 16, 2024, so as to avoid serious economic consequences. Typically, preparing a FDD takes time, in addition to the mandatory 14 day “cooling-off” period between delivering a FDD and signing a franchise agreement. These timing requirements would have made it impossible to meet the closing deadline. As such, exempting the parties from these obligations was a practical path to move the deal forward.
- Public Policy Considerations
The Court weighed the public interest and broader commercial impact of the decision. Had the deal fallen through due to the disclosure delay, it would have caused:
- Financial harm to creditors and stakeholders
- Potential job losses for over 400 full-time employees
- Loss of retail locations due to expiring leases
- Loss of critical shared services (IT and point-of-sale systems) from the UK Parent Company, which were set to terminate by December 31, 2024.
Recognizing the potential fallout, the Court concluded that the disclosure exemption was justified in the circumstances.
- Sophistication of Purchaser
Franchise disclosure laws are designed to protect individuals or small businesses who are entering into a franchise arrangement. These laws ensure prospective franchisees receive clear and detailed information about the franchise, including its risks, obligations, and costs, before the signing of any agreement.
However, in this case, the Purchaser was not a typical small-business investor. It was an affiliate of a global private equity firm with deep expertise in franchising and Canadian retail operations. The Purchaser had been conducting due diligence on the Company since June 2024, had been actively negotiating with the UK Purchaser since September 2024, and was advised by experienced legal counsel. The Court was satisfied that the Purchaser was equipped and able to make an informed investment decision and did not need the added protections of a formal FDD. The Purchaser swore an affidavit confirming his intent to sign a release in favour of the parties even if the order was granted, demonstrating a nuanced understanding of franchise law. Taken together, these factors led the Court to conclude that waiving the disclosure requirements was appropriate and aligned with the legislative intent behind the Wishart Act.
Implications for Franchisors
This decision marks a significant development in how Canadian courts may interpret franchise laws in complex, time-sensitive situations, as least in the context of a CCAA proceeding.
By recognizing that sophisticated, well-advised parties, like the Purchaser in this case, may not require the same level of statutory protection, the Court has signaled a willingness to adopt a more flexible and commercially pragmatic approach to the FDD requirement. This flexibility opens the door to a more nuanced application of franchise laws in complex transactions where timing and deal certainty are critical.
Also notable was the Court’s willingness to balance public policy objectives, such as preserving jobs, maintaining retail operations, and protecting stakeholder value, against the rigid application of franchise legislation. In this case, the preservation of over 400 jobs and the continued operation of TBS Canada’s business took precedence over enforcing technical disclosure formalities.
For franchisors, this ruling offers more than a procedural exception. It presents a potential shift toward a more pragmatic and business-minded interpretation of franchise law, particularly in urgent and complex transactions. While this flexibility emerged in the context of a CCAA proceeding, it offers a theoretical framework for future cases where strict compliance with disclosure requirements could hinder viable deals.
Looking Ahead: The Future of Franchise Disclosure Requirements
It remains to be seen how broadly this precedent will be applied beyond the CCAA context; however, the case provides helpful insight into how Canadian courts may approach franchise disclosure obligations in complex commercial situations. Franchisors involved in a restructuring or asset sale should keep this decision in mind as a potential reference point when navigating similar legal and business challenges.
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1 Re: The Body Shop Canada Limited (CV-24-00723586-00CL), Endorsement dated December 14, 2024.
2 Cassels represented A&M as Monitor in the CCAA proceedings and as proposal trustee in the proceedings under the BIA.
3 “Regulated Provinces” refer to the Canadian provinces that have enacted franchise-specific legislation. As of the date of publication, six provinces have franchise legislation currently in force: Alberta, British Columbia, Manitoba, New Brunswick, Ontario, and Prince Edward Island. Saskatchewan is the seventh and most recent province to enact such legislation, having received Royal Assent on May 8, 2024; however, it will not come into force until a later date to be determined by the Saskatchewan government.