Legal Guide

Franchising, as a method of business expansion and organization, represents one of the most dynamic commercial sectors in Canada. In a typical franchise relationship, the franchisor licenses the franchisee the right to sell products and services under the franchisor’s trade-mark using the franchisor’s prescribed business format. In return, the franchisee agrees to comply with the standards of the franchise system, and to pay an up-front fee and continuing royalties. Franchise arrangements can take many different forms, from master franchise relationships involving multiple locations to single unit franchise agreements for individual locations.

The importance of franchising to the Canadian economy should not be underestimated. Not only does Canada offer a powerful economic environment, but the legal framework for franchising is encouraging. Currently, only Alberta, Ontario and Prince Edward Island have specific registration or disclosure legislation in force, with which a franchisor looking to set up a franchise system in those provinces must comply. There is currently no specific registration or disclosure legislation dealing with franchising which is in force in the other provinces, although, as noted below, New Brunswick has passed such legislation (it has not come into force yet, but is currently expected to be in force by late 2010) and the Manitoba Law Reform Commission has recommended that franchise legislation be implemented in Manitoba. However, many business practices prevalent in franchising are subject to regulation by both federal and provincial laws of general application. In addition, franchisors that are members of the Canadian Franchise Association are encouraged to comply with the minimum disclosure obligations of that organization.

Franchise Disclosure, Registration and Regulation

Alberta, Ontario and Prince Edward Island are the only provinces with legislation in effect that specifically governs certain aspects of franchising. Although the New Brunswick legislature passed Bill 32, Franchises Act, in June 2007, the bill has not yet come into force (currently expected to come into force in late 2010). The Manitoba Law Reform Commission published its report on franchise law in May 2008 and recommended that franchise legislation be implemented in Manitoba, but the Manitoba government has not yet announced any further developments in this regard. Various governmental bodies have been charged with the administration of franchise legislation in each province that currently has franchise legislation: the Franchises Act (Alberta) (the “Alberta Act”) is administered by the Alberta Securities Commission, the Arthur Wishart Act (Franchise Disclosure) (Ontario) (the “Ontario Act”) is administered by the Ontario Ministry of Consumer and Business Services, and the Franchises Act (Prince Edward Island) (the “PEI Act”) is administered the by Consumer, Corporate and Insurance Services Division of the Office of the Attorney General. Each of these Acts contains broad definitions of what constitutes a franchise and, as a result, many distribution and dealership arrangements may also be subject to their requirements.

In substance, the Alberta, Ontario and PEI Acts are very similar. They primarily contain disclosure requirements and a number of relationship provisions. None of these Acts directly regulate the substantive aspects of the franchise relationship. The Acts require fair dealing between parties to franchise agreements, that franchisees have the right to associate, and they impose disclosure obligations on franchisors.

All three Acts require franchisors to provide a disclosure document to prospective franchisees. The disclosure document must contain copies of all franchise agreements and financial statements, and all material facts, including specifically listed material facts. In Alberta and PEI, franchisors are permitted to use disclosure documents acceptable under franchise legislation in jurisdictions outside Alberta and Prince Edward Island, as the case may be, provided that these disclosure documents include, by way of an addendum or “wrap around” document, any information necessary to meet the requirements of a disclosure document under the Alberta Act or the PEI Act, as applicable. The Ontario Act does not specifically provide for an addendum or “wrap around” document. As a result, a disclosure document is often prepared for Ontario in accordance with the Ontario Act, and then a “wrap around” is prepared to meet Alberta and PEI requirements.

Financial statements prepared in accordance with generally accepted accounting principles must normally be included within the disclosure statement. The minimum standards of review under the Acts are those of review engagement standard. Certain franchisors are exempt from the requirement to include financial statements in their disclosure documents. The disclosure document must also include a certificate certifying that the disclosure document contains no misrepresentation.

The Acts impose on the parties to a franchise agreement a duty of fair dealing in the performance and enforcement of that agreement. They also provide the franchisee a private right of action for damages against the franchisor, and every person who signed the disclosure document if the franchisee suffers a loss because of a misrepresentation contained in the disclosure document. As well, if the franchisee did not receive the franchise disclosure document within the time limits set out in the appropriate Act, the franchisee has the right to rescind all franchise agreements.

Quebec

Franchising in Quebec is different than in the other provinces, in that the law is governed by the Civil Code of Québec. One interesting feature of the Civil Code of Québec is the concept of contracts of adhesion, where the essential provisions are imposed by one of the contracting parties and are not negotiable. The consequences of a contract being qualified as a contract of adhesion are that if one of its provisions is incomprehensable, unreadable or abusive, that provision may be nullified or modified by a court. The same applies to “external” clauses (i.e. clauses that are not contained in the contract but to which the contract refers). The courts of Quebec have often characterized a franchise agreement as an adhesion contract, when it has been shown that its essential provisions could not be negotiated.

Franchise businesses intending to operate in Quebec must also comply with French language laws and, in particular, the Charter of the French language. Franchisors should realize that they will be expected to carry on business in French, especially outside Montréal, and have all of their materials (operations manuals and other documentation for use by employees) translated into French, although the franchise agreement itself need not be translated. (For more information on some of these topics, please refer to the corresponding sections in this publication.)

Other Areas of Law Affecting Franchising Arrangements

In addition to complying with the specific franchise legislation, businesses expanding into Canada by way of franchising will also want to ensure that they comply with other laws of general application affecting franchising arrangements. These include ensuring that their trade-marks are protected under Canadian trade-mark legislation, that their products and practices comply with applicable product labelling (e.g. for food and drugs) and consumer protection legislation, and that their arrangements comply with Canadian competition laws (which deal with matters such as exclusive dealing, market restriction and tied-selling) and applicable tax requirements.