Canada: Guide To Doing Business In Canada: Franchise Law

Last Updated: November 21 2016
Article by Peter V. Snell and Debi Sutin

FRANCHISE LAW

With a vibrant economy and close proximity to the United States, Canada is the natural first destination for U.S. franchise companies looking to expand internationally. There are approximately 1,300 franchise brands and over 78,000 franchise units operating throughout Canada, crossing almost 50 different sectors of the economy, including retail, hospitality, automotive and health care — accounting for one out of every five consumer dollars spent in Canada on goods and services, and approximately $68 billion in annual sales.

While Canada is an attractive destination for international expansion, franchisors must be aware of the franchise-specific disclosure laws currently in effect in five of the Canadian provinces.

1. Franchise disclosure legislation

The provinces of Alberta, Manitoba, New Brunswick, Ontario and Prince Edward Island have each enacted franchise disclosure legislation. The rights and obligations under the franchise legislation of these five provinces are very similar, with the general aim being to regulate the franchise marketplace and to protect both prospective franchisees and those already party to a franchise relationship. The law is remedial and is intended to address the perceived imbalance of power in the franchisor-franchisee relationship. It adopts three key principles:

  • The obligation imposed on franchisors to provide disclosure
  • The duty of good faith and fair dealing imposed upon franchisors and franchisees
  • The right of franchisees to associate

Failure to comply with any of these obligations gives rise to significant remedies for franchisees. Furthermore, a franchisee cannot contract out of the rights granted to it or grant a waiver of the obligations imposed on franchisors under the legislation.

The franchise legislation in the five provinces also deems unenforceable any provision in a franchise agreement that restricts the application of the laws of the province, or that restricts the jurisdiction or venue to a forum outside of the province with respect to claims enforceable under that province's franchise legislation.

On October 5, 2015, the province of British Columbia introduced its own franchise legislation, titled the Franchises Act, which is expected to come into force in 2017 upon completion of the drafting of the Regulations. The legislation is similar to that of the five aforementioned provinces.

2. The disclosure obligation

A franchisor wishing to grant a franchise in any of the five provinces noted above must provide the prospective franchisee with a disclosure document at least 14 days before the earlier of either: (i) the signing of the franchise agreement, or any agreement relating to the franchise, by the prospective franchisee, or (ii) the payment of any consideration relating to the franchise.

A disclosure document must contain all of the information prescribed by the regulations under the legislation, as well as all other "material facts" (as discussed below) that would reasonably be considered relevant to a prospect's decision to acquire the franchise. The disclosure document must also contain the franchisor's financial statements in either audited or review-engagement form. Large, mature franchisors may be exempt from the requirement to include financial statements if they meet certain criteria.

a. Material facts

A "material fact" is broadly defined to include any information about the business, operations, capital or control of the franchisor or the franchise system that would reasonably be expected to have a significant effect on the value or price of the proposed franchise, or on the decision to acquire the franchise.

The requirement for the disclosure of information beyond that specifically prescribed by provincial legislation has led to some of Canada's most significant franchise-related court decisions. As a result, disclosure documents must, in many circumstances, be customized to include information applicable to the subject matter of the franchise grant or the location of the proposed franchise.

b. Certification

A disclosure document must be certified as complete disclosure in accordance with the applicable provincial statute. A signed and dated certificate is not a mere formality but a mandatory requirement. Failure to provide a proper certificate will result in a determination that no disclosure was provided to the franchisee.

The certificate must be signed and dated in the manner prescribed by the applicable provincial statute. In particular, an incorporated franchisor must ensure that the certificate is signed by two of its officers or directors (or one, if there is only one). It must be signed personally and not on behalf of the franchisor.

c. Remedies

Franchise legislation has been broadly interpreted by the courts to ensure that the purpose of the legislation is met and that a prospective franchisee is provided with the information necessary to make an informed decision.

In the event of a franchisor's failure to comply with its disclosure obligations, there are two separate remedies available to a franchisee: rescission and claims for misrepresentation.

A franchisee has the right to rescind a franchise agreement if a franchisor fails to properly comply with the disclosure requirements. Following a valid rescission, the franchisor is obliged to put the franchisee back into the position it had been in prior to the purchase of the franchise. A franchisor faced with a rescission claim is required to:

  • Refund all monies paid to the franchisor by the franchisee
  • Purchase all inventory, equipment and supplies purchased by the franchisee pursuant to the franchise agreement at the price paid by the franchisee
  • Compensate the franchisee for all losses incurred to establish and operate the franchised business

Two separate time periods are available to a franchisee to rescind:

  • No later than 60 days after receiving the disclosure document, if the disclosure document did not comply with the delivery requirements of the legislation or if the contents of the disclosure document did not meet the legislation's requirements
  • No later than two years after entering into the franchise agreement, if the franchisor never provided the disclosure document

The courts' interpretation of the rescission remedy has blurred these two time periods by holding that a materially non-compliant or deficient disclosure document is no disclosure at all, entitling a franchisee to rescind within two years after entering into the franchise agreement. As a result, strict compliance with the delivery requirements and the prescribed contents of a disclosure document is a necessity. The provision of a generic "standard form" disclosure document will not suffice to protect a franchisor from claims of non-compliance — particularly in cases where additional material information regarding the proposed franchise is known to the franchisor and is not fully disclosed.

In addition to the rescission remedy, franchisees have the right to bring a claim for damages for misrepresentations made in the disclosure document or for a franchisor's failure to comply with the disclosure requirements. Accordingly, if a franchisee misses the time period for rescission, it can still seek damages for breach of the disclosure obligation.

Claims for misrepresentation can be made against not only the franchisor, but also against individuals, including any director or officer of the franchisor who signed the certificate of disclosure. "Misrepresentation" is defined broadly to include an omission, and a franchisee is deemed to rely on a misrepresentation in a disclosure document and on the information contained in the disclosure document provided.

3. The duty of fair dealing

Franchise legislation in Canada imposes on all parties to a franchise agreement a duty of fair dealing in the performance and enforcement of the agreement. This includes the duty to act in good faith and in accordance with reasonable commercial standards.

The courts have interpreted the duty of fair dealing to require that the franchisor enforce the franchise agreement in a manner that takes into account the interests of the franchisee (but not to the exclusion of the franchisor's interests) without malice or ulterior purpose. In effect, the obligation imposes limitations on a franchisor's discretion in enforcing its strict contractual rights where such exercise negatively impacts the interests of the franchisee. A breach of the duty of fair dealing is imposed on both the franchisor and a franchisee, and entitles the non-breaching party to claim damages for the breach.

4. The right of association

Franchisees have the right to associate with other franchisees and to form or join an organization of franchisees without penalty or interference from the franchisor. Any provision in a franchise agreement that restricts this right is void, and a franchisee has a right of action against the franchisor for breach of this right. The right of association has been used by the courts to protect a franchisee's right to participate in a class action claim.

5. Rights cannot be waived

Under the franchise legislation, rights given to a franchisee and obligations imposed on a franchisor cannot be waived. Accordingly, a release by the franchisee as a condition to the franchisor's consent to a renewal or transfer of its franchise must expressly exclude rights and obligations imposed by the legislation.

Therefore, the applicable provisions in the franchise agreement requiring a release by the franchisee on renewal or transfer must expressly state that the release excludes these rights and obligations — or the condition requiring delivery of the release will be rendered void. However, the courts will uphold a release given by a franchisee of existing known claims as part of a negotiated settlement of a dispute.

6. Province of Québec

The province of Québec is a civil law jurisdiction. While Québec has no franchise-specific legislation, both the Civil Code of Québec and the Charter of the French Language apply to franchising.

Québec's Civil Code contains provisions governing "contracts of adhesion," which include franchise agreements and other standard form agreements of a franchisor. One interesting provision of the Civil Code states that any terms of a contract that are not fully known to a party, such as a franchisee, at the time of signing will not be enforceable. This could affect the usual franchise agreement term that requires franchisees to comply with the operations manual, and would require franchisors to arrange for a confidential disclosure of the manual to a prospective franchisee before the franchise agreement is signed.

The Civil Code also contains a statutory duty of good faith. This duty is broader than the duty of fair dealing included in the provincial franchise legislation, as it applies to the negotiation as well as the performance and enforcement of franchise agreements.

The Charter of the French Language mandates French as the required language of doing business in Québec and in the workplace in Québec. "Doing business" applies to forms, advertising (including websites), posters and signs. In addition, if a French version of a trademark has been registered, it must be used by a franchised business in Québec.

While the Charter requirements typically result in the equal use of French and English, there are some provisions, such as those governing the use of signs and posters, where the use of the French language must be "markedly predominant." This usually means a French-to-English ratio of two-to-one in size of wording or number of items.

In the workplace, working documents must be available in French, including software if French-language versions exist.

Franchising is a significant and well-recognized means of doing business in the province of Québec, and although there are specific laws intended to preserve and entrench the French language in the province, they are usually not difficult to comply with.

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 Mondaq.com.

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

Authors
Events from this Firm
19 Sep 2019, Seminar, Birmingham, UK

Providing GCs, Heads of Legal and senior in-house lawyers with timely, topical and practical legal advice on a variety of topics.

26 Sep 2019, Seminar, London, UK

Providing GCs, Heads of Legal and senior in-house lawyers with timely, topical and practical legal advice on a variety of topics.

8 Oct 2019, Seminar, Birmingham, UK

Supporting the development of paralegals, trainees and lawyers of up to five years' PQE by providing valuable knowledge and guidance together with practical tips.

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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