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 frants the right to the franchisee 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 typically, to pay an up-front fee and continuing royalties. Franchise arrangements can take many different forms, from master franchise relationships, area developers, multi-unit franchising and joint-ventures 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 five of the Canadian provinces have enacted franchise legislation, namely Alberta, Ontario, Manitoba, New Brunswick and Prince Edward Island (PEI). Franchisors wishing to establish themselves in those provinces must therefore comply with such legislation which involves notably strict disclosure requirements. There is currently no specific disclosure legislation dealing with franchising although the British Columbia Law Reform Commission has recommended that franchise legislation be implemented in that province and legislation is expected there eventually. Furthermore, many industry sectors prevalent in franchising are subject to regulation by both federal and provincial laws of general application. Finally, 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
As highlighted above, Alberta, Ontario, Manitoba, New Brunswick and PEI are the only provinces with legislation in effect that specifically governs certain aspects of franchising.
The disclosure document must contain information which includes the business of the franchisor, information regarding the start-up costs of a typical franchised establishment, information regarding the termination of franchised establishments, the financial statements of the franchisor and copies of the form franchise agreement or any other ancillary agreements to be signed, as well as all material facts. Generally, franchisors are permitted to use disclosure documents in all legislated jurisdictions 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 Acts in each such jurisdiction. 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 requirements in other provinces.
Financial statements prepared in accordance with generally accepted accounting principles must normally be included within the disclosure document. 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 the franchise agreement.
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 incomprehensible, unreadable or abusive, that provision may be nullified or modified by a court. The same principle applies to “external” clauses (i.e. clauses that are not contained in the contract but to which the contract refers such as provisions contained in operations manuals or other documents). 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 Montreal, 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 provided it specifically stipulates that the parties have agreed that it be drawn up in English. 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.
Additional posts from the blog
CASL also prohibits installing a “computer program” – including an app, widget, software, or other executable data – on a computer system (e.g. computer, device) unless the program is installed with consent and complies with disclosure requirements. The provisions in CASL related to the installation of computer programs will come into force on January 15, 2015.
On April 7, 2014, the Minister of the Environment issued a Notice with respect to hydrofluorocarbons (the “Notice”), pursuant to the Canadian Environmental Protection Act, 1999. The Notice imposes reporting requirements on those who imported, exported, or manufactured certain hydrofluorocarbons (“HFCs”) from 2008 and 2012. A non-exhaustive list of HFCs subject to these reporting requirements can be found in Schedule 1 of the Notice.
In an interesting decision, the Human Rights Tribunal of Ontario has ruled that an employer is not liable for discriminatory and harassing texts sent by a rogue employee to another of its workers.