Many equate a franchise with the well-known and recognized quick-service restaurants and coffee shops that are prevalent in most communities. But you would be surprised to learn that many of the goods and services providers that you use on a regular basis are franchised. In fact, the use of franchising as a means of distributing goods and services, both to consumers and to other businesses, crosses almost every business category. What may be more surprising is that your distribution arrangement may be a franchise under provincial franchise law and thus subject to strict disclosure obligations and the harsh remedies for non-compliance.
The provinces of Ontario, Alberta, Prince Edward Island, New Brunswick and Manitoba have each enacted franchise legislation which requires pre-sale disclosure to prospective franchisees in order to ensure that a prospective franchisee has the information necessary to make an informed investment decision. The legislation and, in particular, the disclosure obligation imposed on franchisors, has been broadly interpreted by the Courts in order to remedy the perceived imbalance of power in the franchisor-franchisee relationship. Failure to provide proper disclosure in compliance with the legislation may permit a franchisee to rescind (terminate) the franchise agreement, with the resulting obligation imposed on the franchisor to compensate the franchisee for the costs, expenses and losses incurred in establishing its franchised business. The legislation also provides franchisees with the right to bring a claim against the franchisor and against others involved in the franchise grant in their personal capacity, for misrepresentation or for failure to comply with the disclosure requirements.
A "franchise" means a right to engage in a business where the franchisee is required to make a payment or payments to the franchisor in order to acquire or operate the business, and where the franchisor either:
- grants the franchisee the right to sell goods or services that are substantially associated with the franchisor's trade-mark or other commercial symbols while exercising significant control over the franchisee's method of operation (or, under Alberta's legislation, the business is to be operated in accordance with the franchisor's marketing or business plan); or,
- grants the franchisee the distribution rights to sell goods or services supplied by the franchisor while providing location assistance to the franchisee
So long as there is some payment element and an element of control or assistance, any business arrangement that involves the sale or distribution of goods or services associated with another's trade-mark or brand may be a "franchise". As a result, the definition of "franchise" can apply to arrangements not intended by the parties to be a franchise.
You should consult with your professional advisors to determine whether your distribution arrangements fall within this franchise definition or to properly structure them so that they don't.
This arises largely because of the strict wording of the definition of "franchise", which uses relatively few, but very broad elements to define the two types of franchise models (business format franchises and product distribution franchises). As a result, the definition of "franchise" may capture business transactions whose parties may not have intended, or anticipated, that their activities were "franchises".
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.