Franchising in Canada
Oct 2, 2020
Franchising is not as heavily regulated in Canada as it is in a number of other jurisdictions, including the United States. In Canada, franchising is a purely provincial matter and there is no federal franchise legislation applicable across the country. Currently, only six provinces have franchise legislation in effect: Alberta, British Columbia, Manitoba, Ontario, Prince Edward Island and New Brunswick. While there are slight differences in the legislation and regulatory requirements of each province, they are all derived from the U.S. model of mandated disclosure by a franchisor to prospective franchisees, coupled with a duty of good faith and fair dealing owed by each party to the other, and a right of franchisees to associate freely among themselves.
Unlike in the United States, no Canadian province requires either the registration of franchisors or the public filing or approval of their disclosure documents. There is no government agency in Canada that is responsible for regulating or overseeing compliance with franchise legislation. In the result, there is nobody from whom any permission must be sought or any assurances may be obtained in advance (regarding compliance with or the non‐application of franchise legislation, the availability of a disclosure exemption or otherwise). While knowledgeable franchise counsel could certainly provide a prospective franchisor with guidance and advice in this regard, any determination relating thereto would only be ultimately made by a court in the event that a dispute regarding the application of or compliance with the requirements of applicable franchise legislation went to trial.
Put simply, a franchise relationship is an ongoing relationship that is found to exist under provincial franchise legislation where the franchisor grants the franchisee the right to use the franchisor’s trade‐marks and other intellectual property and business methodology (often within a specific territory or at a specific location only) in exchange for a fee. In most cases, a franchise relationship requires that the franchisor exercises significant control over, or offers significant assistance in, the franchisee’s method of business operation. In a franchise relationship, the parties are independent contractors and neither party is an agent for the other party. This designation as a “franchise” is fact‐based and occurs when the statutory definition is met, whether a company intends to operate as a “franchise” or not and irrespective of how the parties themselves describe the arrangement. As such, when utilizing distributorships or granting licences in Canada, it is important to consider the potential implications of franchise legislation and the extent of a company’s involvement in and/or control over the operation of the new distributor or retailer.
Among the most significant features of franchise legislation is the disclosure obligation, which requires that franchisors deliver detailed pre‐sale disclosure documents to prospective franchisees at least 14 days before an agreement is signed or any fees are paid. The disclosure document must contain all of the information prescribed by provincial regulations (substantially similar but with some differences in each province with franchise legislation) and any additional material facts about the franchise that could reasonably be expected to influence the prospective franchisee’s assessment of the value of the franchise or decision to enter into a franchise arrangement. If the disclosure document does not comply with the requirements of the legislation, is delivered late or is not delivered at all, then the franchisee has the right for a specific period of time to rescind the franchise agreement and the franchisor is required to compensate the franchisee for all losses incurred to establish and operate the franchised business (in addition, in certain provinces, to repurchase obligations). Franchisees can also bring a claim for damages for misrepresentation if the franchisor does not meet the applicable disclosure requirements.
Canadian franchise legislation also establishes mutual duties of good faith and fair dealing for parties to a franchise agreement and provides franchisees with a right to associate with one another without interference from the franchisor.
Generally speaking, franchise legislation is remedial legislation enacted to protect franchisees and accordingly, it is not possible to contract out of its provisions. Court cases in this area have noted the intention of franchise legislation to address an asymmetry of information and imbalance of power between a franchisor and franchisee and have tended to generously and broadly interpret franchise legislation to afford franchisees with the intended protection. This means that properly identifying one’s business as a franchise system that is subject to franchise legislation is of critical importance in properly establishing, structuring and documenting your new business venture in Canada.