Canada: Give Your Franchise Agreement A Facelift

Last Updated: April 8 2016
Article by Faye Lucas and Peter Viitre

Changes in technology, customer needs, and the laws governing franchising require franchise agreements to evolve reactively, to accommodate such shifts as they happen, and proactively, in anticipation of what the future might bring. Regular review of your franchise agreement can help you stay on top of the waves of change, address current and potential business issues, and help protect your legal interests in the event of a dispute or termination of the agreement. To help get you started, we have created a three part article outlining common provisions in franchise agreements that you might want to consider revamping.

1. General Releases

Franchise agreements often stipulate that franchisees must release all claims against the franchisor as a condition for granting a transfer or renewal of the franchise. For example:

"The Franchisor shall not unreasonably withhold its approval of a transfer, provided that the following conditions are met:

... The Franchisee must have executed a general release, in form satisfactory to the Franchisor, of any and all claims against the Franchisor..."

Recently the Ontario Court of Appeal confirmed that a franchise agreement provision requiring a franchisee to release its claims against the franchisor under the Arthur Wishart Act (Franchise Disclosure), 20001 (the "Act"), violates Section 11 of the Act and is therefore unenforceable, and that any release obtained pursuant to such a provision will be void.2 Although the provision set out above does not specifically reference the Act, it states that any and all claims are to be released, which would, on a plain reading of the provision, include claims under the Act. One way to revise such a general release provision in light of Cora could be to add a carve-out for claims under the Act (e.g., "all claims are released except to the extent limited or prohibited by the Arthur Wishart Act (Franchise Disclosure), 2000").

2. Interest Rates

U.S.-based franchisors ought to be wary of carrying over their form of franchise agreement when expanding into Canada as certain legal concepts may not translate to the Canadian context. One example is the American practice of stating interest rates as "the lesser of [X]% and the highest lawful rate of interest permitted by applicable law". In the US, many state laws provide for certain statutory maximum interest rates that may be charged (called the "usury limit"). The usury limits differ from state to state and range from approximately 5% to 24%. State law also provides state-specific exemptions from usury limits. Given these differences, the interest provision set out above ensures that the franchisor is on-side of such usury laws without the need to adapt its form of franchise agreement for each state.

Unlike the U.S., however, Canada does not have usury limits under provincial laws which franchisors would be at risk of contravening in the normal course. Instead, franchisors must take note of other legislation governing interest rates when drafting such provisions. First, it is an offense under the Criminal Code to charge and collect interest over 60% per annum.3 In that regard, a common pitfall for franchisors is the failure to realize that lump sum penalties levied against franchisees for late payments may also be considered interest, especially since these penalties are often assessed monthly for every month the arrears remain outstanding. Accordingly, when such lump sum penalties are levied against franchisees in addition to the interest charged for late payments, the aggregate amount can result in the effective rate of interest under the agreement being greater than the criminal rate. Franchisors should also be wary, more generally, of applying late payment penalties of any sort, particularly when the penalties are very large in comparison to the actual amounts of the late payments to which they are applied. Second, the Interest Act requires that for interest rates exceeding 5%, the interest rate must be expressly stated on a yearly basis regardless of whether the interest is payable at a rate for a period that is less than a year (e.g., monthly interest rate).4 Failure to state the effective annual interest rate will result in interest rate being limited to 5% and any sum paid for interest over that amount would need to be returned.

3. Ability to Rebrand

As markets change, franchisors must consider the impact on their brand offering and their strategy to stay relevant. If there is a business case for rebranding the system or refreshing its image and marks, the next inquiry will be whether, and to what extent, the franchisor's existing franchise agreements give it the rights to change the current marks being used.

In Halligan v. Liberty Tax Services Inc.5 a franchisor sought to terminate its franchisee when the franchisee refused to change its name from "U & R Tax Services" to "Liberty Tax Services" in accordance with the franchisor's decision to rebrand the system. The governing franchise agreement contained the following language:

"Tax Depot may choose to replace or modify certain Licensed Marks. Franchisee agrees to adopt and use, at Franchisee's cost, all Licensed Marks which Tax Depot designates in the Policy and Procedure Manual. Franchisee agrees to cease use of all Licensed Marks as indicated in the Policy and Procedure Manual." [Emphasis added.]

In Liberty Tax, the court found that the franchisee was entitled to continue using the old business name and that the franchisor did not have the right to terminate the franchisee for failing to rebrand its store. In coming to this conclusion, the court focused on the phrase "certain Licensed Marks" in the clause cited above, noting that while it allowed the franchisor to change or modify the trademarks, no reference was made to changing the name of the franchise or business. The lesson to be learned from Liberty Tax is thus that, in order to mandate an overall rebranding of a franchise system, the franchise agreements must expressly provide the franchisor with the right to change the primary mark and rebrand the system under a different trade name and trademark, as opposed to merely allowing the franchisor to substitute or change the trademarks (a right that is typically associated with the (limited) need to replace marks that are held to infringe upon the rights of third parties). Finally, to complete the exercise, the franchise agreement should require the franchisee to discontinue use of any modified or substituted trademarks as directed by the franchisor.

Another issue to consider when rebranding is the risk that franchisees might bring a claim against the franchisor for any business losses they experience as a result of the rebranding. To help reduce such risk, it may be helpful to include a provision in the franchise agreement requiring franchisees to provide a release against all claims arising from a change to the brand; bearing in mind, however, that such release could not cover the release of claims under applicable franchise laws. More practically speaking, many franchisors try to reduce their risk of franchisee claims by making any rebranding of their system voluntary for their existing franchisees (i.e., even if their franchise agreements permit the franchisor to force the issue) and usually pay at least part of the franchisee's cost to implement the change (i.e., by providing new signage, uniforms and other forms of trade dress free-of-charge).

Finally, franchisors looking to rebrand might also be assisted by having the flexibility to use the advertising fund monies for general marketing undertakings, which could include rebranding efforts. In this regard, provisions surrounding use of the advertising fund by the franchisor should be reviewed carefully, particularly in light of the risks described immediately above.

4. Social Media and Online Marketing Policy

Franchise agreements typically prohibit the franchisee from establishing websites using the system's trademarks and trade names. Such prohibitions should include appropriate restrictions and guidelines on the use of social media platforms by franchisees. For example, without a social media policy, franchisees in a system might post inconsistent marketing and messaging, or worse, publish comments that are damaging to the brand. In particular, responses to negative online reviews by customers need to be carefully managed and either dealt with centrally by the franchisor or by the franchisee at issue in accordance with guidelines. The acts of franchisees online could also easily offend advertising laws and anti-spam legislation if left unmonitored.

Franchise agreements should contain provisions requiring the franchisee to obtain the franchisor's prior written consent to use any of its trademarks, including online, and to follow all directives regarding marketing through social media.

5. Dispute Resolution Clauses and Waiver of Class Actions

Increasingly, franchise agreements include clauses whereby the franchisee waives its right to pursue a class action. Based on current case law, such clauses are not invalid. However, they will not necessarily be enforced by a court.

In 1146845 Ontario Inc. v. Pillar to Post Inc.6, a franchisor sought to stay a class action brought by some of its franchisees. The franchise agreement contained a class action waiver clause and mandatory arbitration provisions. The franchisees argued that Section 4 of the Act (which provides franchisees the right to associate with other franchisees and prohibits franchisors from interfering with that right) included the right to bring a class action. The court rejected that argument. However, in granting the franchisor's motion to stay the class action, the court relied on the mandatory arbitration clause in the franchise agreement, not the class action waiver. Thus, while the class action waiver clause was not specifically invalidated by the court, the clause was not specifically upheld, either.

In addition, in 2038724 Ontario Ltd. v. Quizno's Canada Restaurant Corporation7, the court found that the mere fact that a class action waiver clause was in a franchise agreement was insufficient justification for staying a class action proceeding. However, the court noted that a class action waiver clause would be a strong factor in determining whether a class proceeding is the preferable procedure.

In light of the Pillar to Post and Quizno's decisions, therefore, we can conclude that inclusion of a mandatory arbitration provision in a franchise agreement might be more effective for those franchisors wishing to avoid class action proceedings than inclusion of a class action waiver clause, alone.

On a related note, if arbitration is provided for in the franchise agreement, franchisors should consider specifying the related processes and procedures. For example, the franchise agreement should set out how an arbitration proceeding is initiated, how an arbitrator is chosen, timelines, etc.. With respect to choosing the arbitrator, the franchise agreement may allow the franchisor to choose the arbitrator8 provided that such discretion is exercised in good faith as required by Section 3 of the Act (e.g., appointment of a non-arms length party would likely not be upheld by a court).

6. Non-Competes

Developing a successful franchise system requires significant time, effort and resources. Naturally, a franchisor's proprietary information, including its operating methods, standards and specifications, is incredibly valuable. Post-term restrictive covenants, such as non-competition provisions, can help ensure that franchisees do not use that know-how to run a competing business and damage the goodwill of the franchise system once the relationship ends. Under Canadian law, non-compete provisions are generally considered to be contrary to public policy, in that they constitute restraints on trade. They will, however, be enforced if the restrictions they contain are reasonable, having regard to both the interest the covenantee is seeking to protect and the extent to which they prevent the covenantor from being able to make a living. The key parameters to consider in such an analysis are the duration of the covenant (i.e., for how long the covenantor is prohibited from competing) and its geographic scope (i.e., the area in which the covenantor is prohibited from competing). For this reason, franchisors are advised to consider very carefully how much protection they actually need and to draft the temporal and geographic scope of their non-compete provisions to reflect that minimum amount of protection.

Two additional practices also deserve consideration. First, franchisors will sometimes insert into their franchise agreements a non-compete clause that contains a cascade of restricted times and/or areas in which the prohibition will apply, with the intention that the court will strike out (i.e., "blue pencil") the overly-broad parameters, thus leaving the parties with a clause that is properly enforceable. An example of such a clause is as follows:

"Following the expiration of this Agreement the Franchisee shall not, for a period of two (2) years, operate, carry on or be engaged in or be concerned with or interested in a Competing Business:

  1. within the Territory; or
  2. within a radius of 3km of any office and each and every other office from which the Franchisor or franchisee thereof operates; or
  3. within the Province of Ontario; or
  4. within Canada; or
  5. within Canada and the United States; or
  6. within Canada, the United States and Europe.

The Franchisee agrees that the restrictions in Section 15.3 are reasonable, that sub sections (a),(b) (c), (d), (e),and (f) thereof are separate and distinct agreements, that the greatest restriction of them should apply, failing which the next greatest restriction, and that if one of them is determined to be void or unenforceable it shall not affect the validity of the other."

Unfortunately, while this practice is quite common and effective in other jurisdictions, such as the United States, Canadian courts have historically been quite reluctant to give effect to it, primarily on the argument that the court is not there to "re-make" the contract between the parties (i.e., to amend an otherwise unenforceable contract to render it enforceable).

Notably, in Shafron v. KRG Insurance Brokers (Western) Inc.9, the Supreme Court of Canada confirmed that "blue-pencil" severance, may only be applied if the parties would have agreed to the remaining obligation without varying other terms of the contract (in other words, the part that is severed is not the main purpose of the clause). Accordingly, non-compete provisions that include multiple geographic scopes, such the above example, would likely not be enforceable under Canadian law. Again, the better practice would be to draft such provisions to stipulate only the minimum distance and time period necessary to protect the franchisor's legitimate business interests.

The second practice franchisors typically employ to get around this issue is to insert non-solicitation clauses into their franchise agreements, either in addition to or in place of the non-compete. Canadian courts are generally much more willing to enforce clauses that restrict the covenantor from soliciting the employees or customers of the covenantee, primarily because the nexus between the restriction and the interest that the covenantee is seeking to protect is much clearer, and the damage the covenantor would cause by violating the restriction much more readily foreseeable.


When reviewing and revising your franchise agreement, the importance of clear and comprehensive drafting cannot be overemphasized. Since franchise agreements have been found to be "contracts of adhesion" (i.e., they are typically in a standard form and presented on a "take it or leave it basis"), courts will interpret the provisions of franchise agreements with a view to protect the more vulnerable contracting party (i.e., the franchisee).10 This means that any ambiguities in drafting will be resolved in favour of the franchisee, and even where the drafting is clear, the court will construe the provisions to give the franchisee the most preferable position possible as opposed to construing the provisions in accordance with commercial reasonableness.

As a final tip, franchisors must ensure that the franchise disclosure document and ancillary agreements are updated to accord with any changes made to their form of franchise agreement and consider whether and how such amendments might be implemented for franchise agreements currently in force.


1. S.O. 2000, c. 3.

2. 2176693 Ontario Ltd. v. The Cora Franchise Group Inc 2015 ONCA 152 [Cora].

3. Section 347, R.S.C. 1985, c. C-46.

4. Section 4, R.S.C. 1985, c. I-15.

5. 2003 MBQB 174 [Liberty Tax].

6. 2014 ONSC 7400.

7. [2008] O.J. No. 833.

8. 2162683 Ontario Inc. v. Flexsmart Inc., 2010 ONSC 6493.

9. 2009 SCC 6.

10. Cora, para 38.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions