Canada: Franchise And Distribution @ Gowlings - Volume 7 - Number 2

Editors: Pam Vermeersch and Juliana Mah

Franchise Legislation May Soon Be a Reality in British Columbia

In October 2012, the British Columbia Law Institute (BCLI) began a project to bring forth recommendations for a Franchise Act for British Columbia. So far, five of the 10 provinces in Canada have franchise legislation. Provinces that have enacted franchise legislation are: Alberta, Ontario, New Brunswick, Prince Edward Island, and most recently, Manitoba. This leaves British Columbia as the most populated province in Canada that has yet to put franchise legislation in place.

The BCLI released Consultation Paper on a BC Franchise Act setting out tentative recommendations back in March 2013. It encouraged members of the franchise community to review the paper and to provide comments by September 30, 2013 after which time it will prepare a final report and recommendation for submission to the B.C. legislature.

According to the Canadian Bar Association's "An Agenda for Justice" issued on February 5, 2013, a Franchise Act for British Columbia would fairly balance the interests of both franchisors and franchisees and would provide protection to small business franchises. According to the report, the quick implementation of a Franchise Act for British Columbia would be a low-cost or no-cost legislative reform that could provide certainty for businesses.

In addition, Jim Emmerton, Executive Director of BCLI, recently had this to say: "Given the prevalence of franchised businesses in BC and their importance to the provincial economy, it is surprising that BC has no franchising legislation." "The introduction of BC franchise legislation would further increase the degree of harmonization of regulatory standards within Canada, while also giving appropriate and needed protection to BC franchise owners."

Businesses Brace for Tough Anti-Spam Legislation in Canada

While Canada remains one of the last developed countries to implement anti-spam legislation, it has responded with some of the toughest anti-spam legislation in the world. The new law is designed to protect Canadians from receiving commercial electronic messages unless the recipient has specifically "opted-in" and consented to such messages, and certain required elements (such as an unsubscribe mechanism) are included in each message.

While the legislation was passed in December 2010, a specific date for the anti-spam legislation's coming into force has not yet been set. However, many commentators are predicting that the legislation and its regulations will likely come into force before the end of this year.

The anti-spam legislation goes against the trend in other countries which have adopted an "opt-out" approach. This means that recipients must agree to have a message sent to them prior to it being sent, as opposed to having to unsubscribe to opt-out of receiving further messages. This system creates a perplexing problem for message senders as they will require advance consent in order to send messages.

Penalties under the Canadian anti-spam legislation are severe in the event of non-compliance. The penalties range from up to $1,000,000 for individuals, and up to $10,000,000 for businesses and organizations. Moreover, directors or officers may be found to be personally liable for violations, and there is also a separate right for affected individuals to bring a statutory claim for compensatory damages arising from the violation.

For most businesses, existing consents will not be sufficient under the new rules and fresh consents will need to be sought from recipients. In addition, there will be no phase-in period for compliance to allow business and organizations time to implement the requirements of the legislation. Instead, the government is urging businesses and organizations to act now and begin reviewing their activities to prepare for compliance.

The detailed working Regulations under this new legislation have not yet been published (at the time of writing) in their final form. It is likely that some period of time will be allowed following publication of the Regulations and the coming into force of the legislation, to enable preparations to be made for compliance.

There will also be an initial 3-year transitional period during which consent to send commercial electronic messages will be implied, where there is a pre-existing relationship with the recipient.

British Columbia Shifts the Cost of Recycling From Tax-Payers To Producers

In May 2011, the BC Government amended the Recycling Regulation (the "Regulation") to include the Packaging and Printed Paper Product Category. In order to facilitate compliance with the Regulations, Multi-Material BC ("MMBC"), a non-profit corporation established by the Government of British Columbia, has developed a stewardship plan to hold the producers of packaging and printed materials accountable for the costs associated with recycling. Franchisors that 1) have residency in BC; 2) supply packaging and printed materials to BC residential consumers; and 3) are brand owners, first importers or franchisors of packaging or printed paper, are considered producers under the plan and were required to appoint an agency to carry out its duties under the Product Stewardship Plan by November 19, 2012 or were required to submit non-binding letters of intent to MMBC appointing MMBC as its agent by March 31, 2013. The purpose of the Regulation is to shift responsibility upstream in the product life cycle to the producer and away from municipalities and general taxpayers.

By May 19, 2014, MMBC will be submitting a list to the Ministry of Environment of businesses that have failed to comply with its obligations. Those contravening the Regulation are liable for enforcement action which can include fines of up to $200,000 upon conviction and/or may be prohibited from selling, offering for sale, distributing or using packaging and printed materials in a commercial enterprise in British Columbia.

For those who currently do not fall within the requirements of a producer as defined by the Regulations but will fall into this category in the future, representatives from MMBC have indicated that they will likely be required to identify themselves and provide statistics to MMBC regarding the weight of their packaging and printed materials immediately after the producer's first year of business.

As of September 13, 2013, 1,279 producers have registered with MMBC. Such producers are providing packaging and printed materials such as paper or plastic carry-out bags, disposable plates and cups, take-out and home delivery food service packaging such as pizza boxes, cups, folded cartons, wraps, trays, gift wrapping/tissue paper, paper envelopes and all paper that is not packaging but is printed with text or graphics as a medium for communicating information, such as flyers and advertisements. MMBC encourages businesses who are uncertain about whether they are a producer to check the list of producers to identify whether competitors have registered with MMBC.

The cost of this Plan for registered members is currently unknown. This is because the cost, which will not be finalized until Q4 2013, will depend upon the contracts negotiated on behalf of registered producers based on factors such as sorting costs, tonnage, and curb-side pick-up. Cost for producers will be based upon the specific type of packaging or printed material and the percentage of its product's contribution to the total tonnage of material.

Currently, Ontario, Manitoba, and Quebec have implemented programs for packaging and printed material. While each program has its subtleties, the overall program design is similar to the programs in effect in those provinces.

An Update on the Dunkin' Donuts Appeal and its Franchisees' New Lawsuit on the Horizon

The Bertico v Dunkin' Brands Canada Ltd. 2012 QCCS 2809, decision involved a claim brought by twenty-one Quebec Dunkin' Donuts franchisees for the purpose of seeking formal termination of their leases and franchise agreements, plus damages for breach of the franchise agreement. Starting in 1996, the franchisees began to alert the franchisor to the progressive increase in the fast food coffee and donut market share being absorbed by Tim Hortons. However, little was done by the franchisor in response and Dunkin' Donuts' market share continued to decline. In 2000, the franchisees demanded that the franchisor respond to the decreased presence of the brand in Quebec and expressed concerns regarding the management of the franchise system. Later that year, the franchisor proposed a remodel incentive program which offered the franchisees a financial incentive if they made a commitment to renovate their stores prior to the time prescribed in their franchise agreements. As a condition precedent to entering the remodel incentive program, the franchisees were obligated to sign an agreement that would bar them from bringing a claim of any kind against the franchisor. Committing to the remodel incentive program required a significant financial investment and there was no guarantee that by making that investment the franchised businesses would succeed. Those that participated in the program did not see an increase in business. As a demonstration of Dunkin' Donuts' fall from grace, it was noted that there were 210 stores in Quebec in 1998 and at the time this decision was released this number had been reduced to 13.

The trial judge found that the most important obligation the franchisor assumed under its franchise agreements was the promise to protect and enhance the Dunkin' Donuts brand. The court held that "(b)rand protection is an ongoing, continuing and 'successive' obligation", one that was not fulfilled by the franchisor in the Quebec market between 1995 and 2005, resulting in a breach of this fundamental responsibilities to the franchisees. The trial judge articulated this failure on the part of the franchisor as "some five years of benign neglect in the face of a determined new player in the Quebec fast food market." In other words, the franchisor did not attempt to adapt its system in order to compete with the popularity of Tim Hortons.

Further, the trial judge ruled that the remodel incentive program recommended by the franchisor in 2000 was abusive considering the dire circumstances faced by the franchisees, and therefore consent was missing or vitiated. Any release that was signed by a franchisee was deemed to be a nullity. Those franchisees that entered into the program were not barred from bringing the action against the franchisor.

As a result, the franchisees were awarded $16.4 million for lost profits and lost investments as an "immediate and direct consequence of (the franchisor's) default."

While the franchisor's appeal from the judgment is pending, six other Dunkin' franchisees have commenced a lawsuit in the Quebec Superior Court modelled after the first lawsuit, Services Alimentaires Kojo Inc et al v Enterprises Dunkin Brands Canada Ltee, Docket No L66005222. The first lawsuit covered the period from 1995 to 2005. This second lawsuit covers the period from 2008 to 2012.

British Columbia's New Two-Year Limitation Period for All Civil Claims

A new limitations act for British Columbia came into force on June 1, 2013. The Limitation Act, SBC 2012, c 13, brings BC's limitation laws in line with those of other provinces. The most significant change to the legislation is the creation of a single, two-year basic limitation period for all civil claims. Previously, claimants had six years from the date a cause of action arose to commence the action.

Unless a statute establishes a specific limitation period, the limitation period in the new Limitation Act will apply. This new Limitation Act will require claimants to commence a proceeding within two years of discovering the claim. The new Act will protect a claimant's legitimate claim for relief while enhancing a defendant's ability to fairly defend itself given the decreased likelihood that memories will have faded and evidence will have deteriorated, been lost, or destroyed.

Controversial Language Bill in Quebec will Impose New Requirements for Small Business

Due to the strong support from the Coalition Avenir Québec, Quebec's controversial Bill 14 is making its way through the Quebec legislature despite strong opposition from Quebec's Liberal opposition party. Bill 14 would amend the Charter of the French Language (the Language Charter) and several other laws currently in force in Quebec. The unique civil laws of Quebec already pose a challenge to businesses desiring to expand their presence in Canada but the language bill may further hurt business in Quebec. This is because while the current language law makes it mandatory for companies with 50 or more employees to impose French as the language of communication in the workplace, Bill 14 will extend Francization requirements to businesses with 26 to 49 employees. Non-compliance with the Language Charter is an offence punishable by law, with fines ranging from $600 to $6,000 in the case of an individual and $1,500 to $20,000 in the case of a legal person for first offences, with fines doubled for a subsequent offence.

In addition, employers with 10 or more employees will be required to post a special sign in the workplace that informs all employees of their right to work in French. This will require employers to take reasonable steps to prevent discrimination or harassment of employees for asserting a right to work in French. Employees will be able to file a complaint with the Commission des norms du travail if they feel that their rights are being violated.

Who is the True Employer within a Franchisor-Franchisee Relationship?

In February 2010, the Canadian Union of Postal Workers filed an application for certification for the purpose of representing the employees working at postal outlets in various Shoppers Drug Mart and Pharmaprix drug store franchises across Canada. The union argued that the franchisor, the Canada Post Corporation, was the employer of the postal outlet employees.

However, in a decision of the Canada Industrial Relations Board ("CIRB") on July 3, 2013 (Canada Post Corporation, 2013 CIRB 690), the CIRB ruled in favour of Shoppers Drug Mart, Pharmaprix franchisees and Canada Post Corporation, by dismissing the Canadian Union of Postal Workers' application for certification.

No Duty of Good Faith in Exercising Right of Non-Renewal

The Supreme Court of Canada granted leave to appeal in August 2013 in one case that is likely to be of significant interest to Canadian franchisors and franchisees. The decision, Bhasin v. Hrynew 2013 ABCA 98, from the Alberta Court of Appeal held that the corporate defendant did not have to act in good faith in exercising a right to give notice to end a contract. The contract provided for an initial term of three years and which would be automatically renewed for successive three year periods, unless either party notified the other at least six months prior to the end of the current term that they wanted to end the agreement. The provision read:

3.3 The term of this Agreement shall be for a period of three years from the date hereof (the "Initial Term") and thereafter shall be automatically renewed for successive three year periods (a "Renewal Term"), subject to earlier termination as provided for in section 8 hereof, unless either CAFC or the Enrollment Director notifies the other in writing at least six months prior to expiry of the Initial Term or any Renewal Term that the notifying party desires expiry of the Agreement, in which event the Agreement shall expire at the end of such Initial Term or Renewal Term, as applicable.

The Court refused to imply a term in the agreement that a party seeking to terminate it must have good reason for doing so. As the Court wrote: "The parties did not intend or presume a perpetual contract, as they contracted that either party could unilaterally cause it to expire on any third anniversary."

No Obligations of Disclosure on Renewal if there are No Material Changes

1201059 Ontario Inc. v Pizza Pizza Ltd., 2013 ONSC 5200, is a recent decision out of Ontario that addresses the disclosure requirements of a franchisor with respect to the obligation of a franchisee to incur substantial costs to renovate a store on renewal of the franchise agreement.

The franchisee claimed that the franchisor did not meet its obligations under the Arthur Wishart Act (Franchise Disclosure), 2000 (the "Act") by failing to disclose details of the franchisor's renovation plans and costs with respect to the Pizza Pizza location operated by the franchisee. The court held that the franchisor did not have an obligation to provide a fresh disclosure document prior to the execution of a franchise renewal agreement because the proposed renovations to the Plaintiff's restaurant did not constitute a "material change" since the date that the original franchise agreement was entered into by the parties.

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