A: Franchising is a great way to expand your company into new markets and increase your brand awareness. When entering a franchise agreement, there are three primary obligations to abide by: the contract, franchise legislation, and the common law.
The day-to-day relationship between franchise parties is governed by a contract called the franchise agreement. A franchise agreement will typically set out the parameters of the business model, including:
- the operating standards;
- the territory that will be covered by the franchise;
- fees, terms, and renewal timelines;
- protocols for selling or transferring the franchised business;
- the franchisor’s obligations;
- the rights of the franchisee;
- restrictive covenants; and
- dispute resolution procedures, among other things.
Most franchise agreements contain a section specifically identifying the franchisor’s obligations to the franchisee, which may include providing training, access to goods and services, customer referral networks, and other obligations unique to the franchise system.
These obligations are often defined carefully and precisely by the franchisor, and franchisees should carefully review what is and is not included.
Franchising is a matter of provincial jurisdiction and, currently, six out of the 13 provinces and territories across Canada have enacted franchise legislation: Alberta, British Columbia, Manitoba, New Brunswick, Ontario, and Prince Edward Island.
Four key features common to each statute are:
- Requiring franchisors to provide a pre-sale disclosure document to prospective franchisees, with prescribed content and delivery requirements, including the obligation to disclose all “material facts” relevant to the franchise being acquired;
- Imposing a duty to act in good faith and with fair dealing on both the franchisor and franchisee;
- Establishing a franchisee’s right to associate with other franchisees, free of interference from the franchisor; and
- Mandating compliance with certain legal requirements in all franchise agreements, including restrictions on venue and the governing law of the contract, and prohibitions on waivers of statutory rights.
Franchisors are required to provide prospective franchisees with a disclosure document (often called a franchise disclosure document or “FDD”) at least 14 days before they sign a franchise agreement or make any payment of consideration for the franchise. The FDD must include certain prescribed information about the franchisor such as business background, litigation history, bankruptcy or insolvency information, and financial statements, in addition to “all material facts” which may have an impact on the price or the franchisee’s decision to acquire the franchise.
Before a prospective franchisee signs a franchise agreement or makes any payment, the franchisor is obliged to disclose whether there have been any material adverse changes since the franchisee first received the FDD by providing a “statement of material change.”
A franchisor’s failure to provide a disclosure document or meet the statutory disclosure requirements grants the franchisee the right to rescind the agreement without penalty or obligation either 60 days after receiving disclosure (where disclosure is late or deficient) or up to two years after signing the franchise agreement (where no disclosure is provided).
Courts have interpreted various deficiencies in disclosure documents to be so fatal as to render the disclosure the equivalent of no disclosure and have allowed franchisees to rescind within two years in such circumstances.
Franchisors have a responsibility to update the franchise disclosure document regularly to immediately reflect any material facts that change during a franchise operation. If a franchisee suffers a loss because of a misrepresentation contained in a disclosure document, the franchisee has a right of action against the franchisor.
Pursuant to franchise legislation, franchisors and franchisees owe each other a duty of fair dealing in the performance and enforcement of their franchise agreements. This statutory duty of fair dealing is a codification of the common law duty of good faith, which requires both parties to act honestly in their performance of the franchise agreement and to comply with reasonable commercial standards. Breach of the duty allows either party to take legal action for damages suffered as a result.
Freedom of Association
Franchisees have a statutory right to associate with other franchisees. This means that franchisors can’t interfere with a franchisee’s decision to form or join an organization of franchisees. The right of association also prevents franchisors from interfering in their franchisees’ participation in class actions. Any such interference may expose franchisors to liability for damages.
Choice of Law and Forum
Each of Canada’s provincial franchise statutes mandate that franchise agreements can’t restrict the application of provincial law to the agreement and the venue for certain disputes arising under the agreement to a forum outside of that province.
Franchisors’ statutory obligations and rights given to franchisees by law can’t be waived. The only exception to this is with respect to releases of known, existing claims granted in the context of a dispute settlement with the benefit of independent legal advice.