Legal Resources

Overview

Franchising as a method of business expansion and organization represents one of the most dynamic commercial sectors in Canada. In a typical franchise relationship, the franchisor licenses the franchisee the right to sell products and services under the franchisor's trademark using the franchisor's prescribed business format. In return, the franchisee agrees to comply with the standards of the franchise system and to pay an upfront fee and continuing royalties. Franchise arrangements can take many different forms, from master franchise relationships involving multiple locations to single unit franchise agreements for individual locations.

Franchise Disclosure, Registration and Regulation

Alberta, Ontario and Prince Edward Island are the only provinces in Canada with legislation specifically governing certain aspects of franchising. Although the New Brunswick legislature passed Bill 32, the Franchises Act, in June 2007, the bill has not yet come into force. Various governmental bodies have been charged with the administration of franchise legislation in each province: the Franchises Act (Alberta) (the "Alberta Act") is administered by the Alberta Securities Commission, the Arthur Wishart Act (Franchise Disclosure) (Ontario) (the "Ontario Act") is administered by the Ontario Ministry of Consumer and Business Services and the Franchises Act (Prince Edward Island) (the "PEI Act") is administered by the Consumer, Corporate and Insurance Services Division of the Office of Attorney General. Each of these Acts contains broad definitions of what constitutes a franchise, and as a result, many distribution and dealership arrangements may also be subject to their requirements.

In substance, the Alberta, Ontario and PEI Acts are all very similar. They primarily contain disclosure requirements and a number of relationship provisions. None of these Acts directly regulates the substantive aspects of the franchise relationship. The Acts require fair dealing between parties to franchise agreements, require that franchisees have the right to associate, and impose disclosure obligations on franchisors.

All three Acts require franchisors to provide a disclosure document to prospective franchisees. The disclosure document must contain copies of all franchise agreements and financial statements, and all material facts including specifically listed material facts. In Alberta and PEI, franchisors are permitted to use disclosure documents acceptable under franchise legislation in jurisdictions outside Alberta and Prince Edward Island, as the case may be, provided that these disclosure documents include, by way of an addendum or "wrap around" document, any information necessary to meet the requirements of a disclosure document under the Alberta Act or the PEI Act, as applicable. The Ontario Act does not specifically provide for an addendum or "wrap around" document. As a result, a disclosure document is often prepared for Ontario in accordance with the Ontario Act and then a "wrap around" prepared to meet Alberta and PEI requirements.

Financial statements prepared in accordance with generally accepted accounting principles must normally be included within the disclosure statement. The minimum standards of review under the Acts are those of review engagement standard. Certain franchisors are exempt from the requirement to include financial statements in their disclosure documents. The disclosure document must also include a certificate certifying that the disclosure document contains no misrepresentation. The Acts impose on the parties to a franchise agreement a duty of fair dealing in the performance and enforcement of that agreement. They also provide the franchisee a private right of action for damages against the franchisor and every person who signed the disclosure document if the franchisee suffers a loss because of a misrepresentation contained in the disclosure document. Also, if the franchisee did not receive the franchise disclosure document within the time limits set out in the appropriate Act, the franchisee has the right to rescind all franchise agreements.

Québec

Franchising in Québec is different than in the other provinces in that the law is governed by the Québec Civil Code. One interesting feature of the Québec Civil Code is the concept of "contracts of adhesion," where the essential provisions are imposed by one of the contracting parties and are not negotiable. The courts of Québec have often characterized a franchise agreement as an adhesion contract when it has been shown that its essential provisions could not be negotiated.

The consequences of a contract being qualified as a contract of adhesion are that if one of its provisions is incomprehensible, unreadable or abusive, that provision may be nullified or modified by a court. The same applies to "external" clauses (i.e., clauses that are not contained in the contract but to which the contract refers).

Other Areas of Law Affecting Franchising Arrangements

In addition to complying with the specific franchise legislation, businesses expanding into Canada by way of franchising will also want to ensure that they comply with other laws of general application affecting franchising arrangements. These include ensuring:

Franchise businesses intending to operate in Québec must also comply with French language laws and in particular the Charter of the French language. Franchisors should realize that they will be expected to carry on business in French, especially outside Montreal, and have all of their materials (operations manuals and other documentation for use by employees) translated into French, although the franchise agreement itself need not be translated.

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