Canada
Answer ... In the disclosure provinces, a franchise agreement must be signed after at least 14 days have passed since the date of disclosure. No mandatory terms are prescribed by the Franchise Acts.
Typically, a franchise agreement includes terms relating to:
- payment of royalties and other fees;
- territorial grant;
- reservation of rights;
- terms and conditions for renewal;
- restrictive covenants;
- location control;
- training;
- operating assistance and support;
- advertising obligations;
- inspections and audit;
- IP protection;
- confidentiality;
- termination and post-termination obligations;
- transfer and assignment;
- security interests and guarantees; and
- dispute resolution.
Canada
Answer ... The Franchise Acts of the disclosure provinces do not allow the parties to restrict the application of the respective Franchise Acts or the jurisdiction of courts of the respective province by agreement. Therefore, even if the franchise agreement is governed by the laws of another jurisdiction, claims enforceable under the Franchise Act must be heard in the respective disclosure province.
In British Columbia, all claims arising under the franchise agreement must be heard in British Columbia. In Ontario, Alberta, Manitoba, New Brunswick and Prince Edward Island, parties may agree to govern non-statutory claims by the law of another jurisdiction (usually, the franchisor’s home jurisdiction).
Canada
Answer ... There are no specific rights or obligations prescribed by the Franchise Acts. However, the franchisor must:
- perform the franchise agreement and exercise its rights in good faith; and
- permit associations of franchisees.
The content of the duty of good faith is highly fact specific; and while it cannot be used to rewrite the terms of the contract, the exercise of the franchisor’s rights under the franchise agreement will be subjected to the good-faith requirement. For example, even where the agreement gives the franchisor the right to do something ‘in its sole discretion’, the franchisor may not exercise its discretion arbitrarily or capriciously, or knowingly mislead the franchisee. Therefore, the franchise agreement must be drafted expressly and unambiguously to avoid unintentional restriction of the franchisor’s rights.
Canada
Answer ... The Franchise Acts give the franchisees the right to associate and to form an organisation of franchisees. This right includes the right to join a class action lawsuit.
There are no obligations imposed on the franchisee by the Franchise Acts, except for the duty to perform the contract in good faith.
Canada
Answer ... Franchisors can, acting reasonably, impose certain restrictions on the franchisees’ activities commonly seen in franchising, including purchasing requirements, exclusivity, non-compete and non-solicitation restrictions.
Both in-term and post-term non-compete restrictions are common in Canadian franchise agreements. However, to be enforceable, a non-compete covenant must not be overbroad. The Canadian courts have held that non-compete restrictions must be reasonable and specific in terms of geographic boundaries, duration and scope of restrictive activities, and should not constitute an undue restriction on trade or on a person’s ability to earn a living. If a court finds the non-compete clause too broad, it will not rewrite the clause to make it enforceable and will strike down the whole provision. Franchisors should carefully draft their non-compete clauses, including, where necessary, limiting the geographic boundaries, the scope of restrictive activities or the duration. In a 2009 decision, Supreme Court of Canada also refused to uphold a non-compete clause because of the ambiguity of the restricted activities.
In Ontario, an amendment to the Employment Standard Act that retrospectively came into effect in December 2021 banned non-compete agreement in the employment context with a few exceptions. This means that a non-compete provision that a franchisor imposes on a franchisee in Ontario may be void and invalid.
Non-solicitation clauses are viewed as a lesser restraint on a person’s ability to make a living and may be easier to enforce than a non-compete clause.
Vertical price restraints, such as minimum selling prices, may be contrary to the Competition Act if this conduct has had or is likely to have an adverse effect on competition in the applicable industry. This usually happens when the supplier has a significant market power (at least 35% market share), which is not commonly seen in franchising. If the Competition Bureau finds that a franchisor has engaged in price maintenance that has resulted in an adverse effect on competition, it may be ordered to stop the offending activities. There are no penalties prescribed for such conduct. Further to an amendment to the Competition Act that came into force on 23 June 2022, franchisors cannot require franchisees to sign wage-fixing or no-poaching agreements.
Canada
Answer ... The Civil Code of Quebec imposes a general duty of good faith on contracting parties both before and after contract formation. The code states that “no right may be exercised with the intent of injuring another or in an excessive and unreasonable manner and therefore contrary to the requirements of good faith”.
The Franchise Acts also impose a statutory duty of fair dealing on both the franchisee and franchisor in the performance and enforcement of the franchise agreement. The obligations imposed on a franchisor by the duty of good faith and fair dealing are highly fact specific; but generally, this duty requires the franchisor to consider the legitimate interests of its franchisees in exercising its contractual rights (eg, when implementing system changes) so as not to “destroy the rights of the franchisees to enjoy the fruits of the contract”.
Failure to act in good faith will give rise to a right to claim damages against the breaching party.
The Supreme Court of Canada has recognised that a duty of good faith in the performance of a contract is a general, organising principle of common law and applies to all commercial contracts in Canadian common law provinces.
Canada
Answer ... The right of renewal and conditions on which the renewal can be granted are governed by the franchise agreement. It is common to impose certain conditions on the franchisee’s right to renew, such as:
- continuous compliance with the franchise agreement;
- achievement of certain minimum requirements or market penetration; and
- payment of the renewal fee.
The duty to act in good faith applies to the renewal of the franchise agreement in the sense that the franchisor cannot act dishonestly to prevent the franchisee from renewing the agreement if the franchisee meets the conditions for renewal. However, where the franchise agreement does not give the franchisee the right to renew, the duty of good faith cannot be used to impose the obligation to renew on the franchisor.
Canada
Answer ... In the absence of statutory termination provisions in the Franchise Acts, the duty of good faith and the language of the franchise agreement inform the requirements that the franchisor must meet when terminating a franchisee.
It is generally considered unfair to terminate a franchisee for minor infractions or without giving the franchisee an opportunity to cure defaults that are capable of being cured (eg, payment delays). Immediate termination without advance notice should be reserved only for the most serious defaults, such as fraud, abandonment of the franchise business or bankruptcy.
As a practical matter, franchisors should document franchisees’ defaults and send advance notice of default to franchisees. Where applicable, franchisees should be given reasonable time to cure the default. Consistent communication and fair treatment of franchisees can help the franchisor to avoid claims of unfair termination.
Canada
Answer ... There are no such restrictions, unless the franchisor is subject to economic or trade sanctions imposed by the government of Canada.
The tax liability associated with the repatriation of profits will depend on the franchisor’s corporate structure and the existence of a permanent establishment in Canada.
Canada
Answer ... Several types of withholding taxes can apply to franchising activities.
If the franchisor operates in Canada without establishing a permanent presence in the country, the franchisor’s income from initial fees, royalties, management fees and interest payments from Canadian franchisees will be subject to a 25% withholding tax. The tax rate is reduced under some tax treaties. For example, residents of the United States, Australia and the United Kingdom are subject to just 10% withholding tax.
Fees paid to a non-resident franchisor for administrative support may be subject to a separate 25% withholding tax under domestic Canadian law. However, the franchisor may be exempt if there is a tax treaty with the franchisor’s home jurisdiction and the franchisor does not have a permanent establishment in Canada.
Service fees for services rendered in Canada are subject to a 15% withholding tax and an additional 9% if the services are rendered in Quebec. In certain circumstances, a waiver from the Canada Revenue Agency may be obtained in respect of the service fee withholding tax. Some service payments may be considered royalties and be taxed accordingly if the payment is made for the use of trademarks or other IP rights.
The obligation to pay withholding tax lies with the franchisee, who must deduct the amount of the tax from each payment made to the non-resident franchisor. The franchisor can offload the withholding tax liability on franchisees by requiring them to gross-up all payments by the amount of the tax.