Direct distributionOwnership structures
May a foreign supplier establish its own entity to import and distribute its products in your jurisdiction?
Generally, yes. There is no specific filing or regulatory review process applicable to foreign suppliers looking to establish a business entity or joint venture in Canada. However, if a subsidiary is established in Canada, certain corporate statutes set out requirements as to the residency of directors pursuant to which at least one director (or 25 per cent of the directors if there are more than four) must be a Canadian resident.
May a foreign supplier be a partial owner with a local company of the importer of its products?
Generally, yes. If a subsidiary is established in Canada, certain corporate statutes set out requirements as to the residency of directors pursuant to which at least one director (or 25 per cent of the directors if there are more than four) must be a Canadian resident. Pursuant to the Investment Canada Act, foreign business entities seeking to acquire or establish a Canadian business are required to notify Innovation, Science and Economic Development Canada no later than 30 days following such acquisition or establishment.
What types of business entities are best suited for an importer owned by a foreign supplier? How are they formed? What laws govern them?
There are several different vehicles available to foreign suppliers who want to carry on business in Canada, each with varying tax and corporate consequences. A foreign supplier may:
- choose to contract directly with a Canadian distributor without carrying out business in Canada directly;
- opt to appoint a local agent or representative to sell its products in Canada;
- opt to carry on business in Canada using a Canadian branch or division; or
- choose to carry out business in Canada through a federally or provincially incorporated subsidiary or other affiliate.
The preferred choice of vehicle used for an importer owned by a foreign supplier to enter the Canadian market is the incorporation of a Canadian subsidiary or other affiliate. Though corporations may be incorporated under Canadian federal law, provinces have also enacted statutes regulating the formation of corporate and other non-corporate entities, including corporations, unlimited and limited liability companies and partnerships. Business entities must usually register with the relevant corporate or business registry of each province in which they want to conduct business, pay the prescribed fees and file corporate or business registry forms containing basic information about the business and its ownership and management.Restrictions
Does your jurisdiction restrict foreign businesses from operating in the jurisdiction, or limit foreign investment in or ownership of domestic business entities?
No substantive restrictions on investment exist, except with respect to very large transactions or investments. Pursuant to the Investment Canada Act, foreign business entities seeking to acquire or establish a Canadian business are required to notify Innovation, Science and Economic Development Canada no later than 30 days following such acquisition or establishment. An onerous and thorough review process applies to non-World Trade Organization investors where the asset value of the acquired Canadian business in 2018 is at least C$5 million for direct acquisitions or C$50 million for indirect acquisitions. However, the C$5 million threshold will apply to indirect acquisitions where the asset value of the acquired Canadian business represents more than 50 per cent of the asset value of the global transaction. The review threshold for World Trade Organization investors as of 1 January 2019 was equal to an enterprise value of C$1.045 billion. This threshold is indexed annually based on growth in nominal GDP.
In addition, Canada has a federal system of parliamentary government, and the regulation and administration of certain trans-provincial industries fall within the sphere of federal legislative powers. As for those under provincial jurisdiction, various provinces have regulated certain industries that are viewed as having particular importance or significance. Thus, several federal and provincial statutes place restrictions on specific industries, such as aviation, collections, engineering, farming, fisheries, banking, trusts and loans, securities, broadcasting, telecommunications, insurance, liquor sales, cannabis and industries that involve the exploitation of Canada’s natural resources. Depending on the products being distributed, these restrictions may affect international distribution arrangements where the foreign supplier has a direct or indirect presence in Canada.Equity interests
May the foreign supplier own an equity interest in the local entity that distributes its products?
Generally, yes, subject to certain restrictions.
There are several different vehicles available to foreign suppliers who want to carry on business in Canada, each with varying tax and corporate consequences. A foreign supplier may:
- choose to contract directly with a Canadian distributor without carrying out business in Canada directly;
- opt to appoint a local agent or representative to sell its products in Canada;
- opt to carry on business in Canada using a Canadian branch or division; or
- choose to carry out business in Canada through a federally or provincially incorporated subsidiary or other affiliate.
The preferred choice of vehicle used for an importer owned by a foreign supplier to enter the Canadian market is the incorporation of a Canadian subsidiary or other affiliate. If a subsidiary is established in Canada, certain corporate statutes set out requirements as to the residency of directors pursuant to which at least one director (or 25 per cent of the directors if there are more than four) must be a Canadian resident.
Though corporations may be incorporated under Canadian federal law, provinces have also enacted statutes regulating the formation of corporate and other non-corporate entities, including corporations, unlimited and limited liability companies and partnerships.Tax considerations
What are the tax considerations for foreign suppliers and for the formation of an importer owned by a foreign supplier? What taxes are applicable to foreign businesses and individuals that operate in your jurisdiction or own interests in local businesses?
Depending on the business structure selected by a foreign supplier wanting to sell goods in Canada, different taxes may apply on its income.
Canadian residents are taxed on their worldwide income, whereas non-residents may be taxed in Canada when they sell taxable property or earn employment income in Canada. If the supplier carries on business in Canada through a fixed place of business or permanent establishment, any income derived in respect thereof will generally qualify as business income that is taxable in Canada on a net income basis.
Canada has entered into taxation-recognition treaties with a large number of countries; if the foreign supplier is from a treaty country, it will generally be exempt as long as it does not carry on its activities through a permanent establishment in Canada.
The income of a non-resident supplier carrying on business through a ‘branch’ type of operation in Canada will typically be subject to a 'branch tax', which is the income tax that applies when a non-resident corporation carries on a business in Canada through a branch (ie, by itself having offices, employees, files or other aspects of a permanent establishment in Canada) as opposed to a Canadian subsidiary. The base rate for branch tax is 25 per cent of the Canadian taxable income earned through the branch in Canada, but it may be reduced by tax treaties, if applicable.
If a foreign supplier appoints a local agent or representative to sell its products in Canada, the income earned by the supplier through sales originating from the agent may, depending on the agent’s commission or fee structure, be characterised as passive income and subject in Canada to a withholding tax. If so, the agent would be responsible for withholding the tax and remitting amounts to Canadian tax authorities. The standard withholding tax rate of 25 per cent under Canadian income tax legislation is often reduced to 10 per cent by tax treaties, if applicable.
Canadian withholding tax on passive income would not be payable if a subsidiary or other affiliate is established in Canada. Nonetheless, dividends paid to its parent would be subject to a withholding tax of 25 per cent. This rate can be reduced to as low as 5 per cent by tax treaties, if applicable.
In conclusion, a thorough review of all relevant Canadian legislation pertaining to each structure and a careful evaluation of the effect of tax treaties entered into and ratified by Canada with the foreign supplier’s jurisdiction, on a case-by-case basis, is strongly advised.
Local distributors and commercial agentsDistribution relationships
What alternative distribution relationships are available to a supplier?
There are a number of options available to suppliers for establishing a distribution structure. The most common structures and their principal features are outlined below.
- Direct distribution: the foreign supplier uses a Canadian subsidiary or its own employees to sell goods in Canada.
- Independent agents and representatives: the supplier relies on an agent or representative to originate sales of goods in Canada and pays them a commission on the goods sold to customers in Canada.
- Trademark licensing: the supplier gives a Canadian entity a licence entitling it to use its intellectual property rights to manufacture and distribute goods for the Canadian market.
- Franchises: this gives rise to special considerations given that several Canadian provinces (namely, Ontario, British Columbia, Alberta, Prince Edward Island, New Brunswick and Manitoba) have enacted franchise-specific legislation (the Franchise Acts), under which the term ‘franchise’ is broadly defined. As a result, a variety of other contractual relationships, including distribution, agency and trademark licensing agreements, may possibly be encompassed. Prior to formalising any particular distribution, agency or trademark licensing arrangement for Canada, parties should carefully examine provincial legislation and consider whether they would be subject to franchise legislation, which entails a duty of disclosure and fair dealing and may give rise to additional requirements for a supplier that are not generally intended in the context of a distribution, agency or trademark licensing arrangement.
- Private label: a Canadian distributor sells the foreign supplier’s products under its own name and trademark. This allows the foreign supplier to sell products in Canada while having the benefit of being recognised under local brand name. However, it generally provides very little control by the supplier.
- Joint ventures: the supplier relies on a local distribution partner that is owned in part by the supplier.
Each of the above can be established by a contractual arrangement, and the parties are generally free to determine their respective rights and obligations under the agreement, subject to certain restrictions.Legislation and regulators
What laws and government agencies regulate the relationship between a supplier and its distributor, agent or other representative? Are there industry self-regulatory constraints or other restrictions that may govern the distribution relationship?
In general, parties to a distribution or agency agreement are free to establish the terms of their relationship by contract, subject to the expansive definition of a franchise under the Franchise Acts. In addition, certain industries are specifically regulated by federal or provincial law. As a result, care should be exercised when structuring an arrangement that may fall within the ambit of the Franchise Acts or that, by its nature, may be subject to restrictions in a regulated industry.
Additional restrictions arise as a result of competition laws.Contract termination
Are there any restrictions on a supplier’s right to terminate a distribution relationship without cause if permitted by contract? Is any specific cause required to terminate a distribution relationship? Do the answers differ for a decision not to renew the distribution relationship when the contract term expires?
The parties to a distribution or agency agreement can provide for termination without cause in the contract. If the contract stipulates that this termination can occur without notice and with immediate effect, the stipulation will generally be enforced as long as it is provided for in express and unequivocal terms. If the contract is silent as to the requirement to provide notice in the event of a termination without cause, the length of the notice period will vary according to certain factors.
No specific cause is required to terminate a distribution or agency contract. If the contract is silent as to the possibility of terminating without cause, it is generally possible to terminate the arrangement upon reasonable notice. (What constitutes reasonable notice will be determined according to certain factors.)
As for termination with cause, the parties may establish, by contract, occurrences that constitute events of default giving rise to termination. Where the contract is silent, Canadian courts have generally required evidence of a fundamental breach (or, in Quebec, a serious or material breach) to find cause for termination. Short of establishing a cause, the provision of reasonable notice would be necessary to lawfully terminate the relationship. In addition, Quebec law requires that termination rights always be exercised in good faith.
If the contract is for a fixed term, it would naturally expire at the end of the term, and there would not generally be any compensation payable at that time. However, if the parties choose to continue their relationship after the end of the term, it may constitute an implicit renewal or an extension of the contract for an indeterminate term.
Is any mandatory compensation or indemnity required to be paid in the event of a termination without cause or otherwise?
There are no statutory provisions governing compensation upon termination for distribution or agency agreements. In general, courts have found that no compensation is due if reasonable notice has been given, and compensation equivalent to reasonable notice is typically granted where a contract is terminated without notice. The amount of the indemnity, which effectively replaces the notice period, would be estimated based on past profits, and would take into account factors such as the length of the relationship, the nature of the relationship (including whether it was exclusive), industry practice, investments made by the distributor for purposes of the agreement and the time it would take the distributor to obtain a similar source of income from an alternative supplier.
Parties can agree to pre-establish a liquidated damages clause or, pursuant to the Civil Code of Quebec, a termination penalty, and the contractual provision will be enforceable unless it is deemed unreasonable by the courts.Transfer of rights or ownership
Will your jurisdiction enforce a distribution contract provision prohibiting or restricting the transfer of the distribution rights to the supplier’s products, all or part of the ownership of the distributor or agent, or the distributor or agent’s business to a third party?
Generally, yes. If the contract is silent with respect to transfers or changes of control, then it is generally assumed that such an operation is permitted without the supplier’s consent unless the arrangement constitutes an intuitu personae contract.
However, in Quebec, if the contract does not provide whether an assignment or transfer may occur without the other party’s consent, their consent would generally be required.
Regulation of the distribution relationshipConfidentiality agreements
Are there limitations on the extent to which your jurisdiction will enforce confidentiality provisions in distribution agreements?
Confidentiality agreements are normally enforceable under Canadian law, subject to certain exceptions, such as being compelled to disclose under law or in the course of legal proceedings. Under Quebec law, disclosure of confidential information is also permitted for public health or safety reasons.
Information that is publicly available or generic cannot be regarded as confidential. Trade secrets that meet the jurisprudential criteria of being known by only a few people within a given business and are treated as such within that business would be protected irrespective of contractual provisions. However, it is generally prudent to include a contractual provision regarding restrictions on the use of information acquired in the course of the distribution or agency agreement, especially where it could be used by one party to the detriment of the other.Competing products
Are restrictions on the distribution of competing products in distribution agreements enforceable, either during the term of the relationship or afterwards?
In general, yes, subject to restrictions established by the Competition Act.
Restrictions on distributing competing products during the term of the relationship are generally enforceable. However, restrictions on competition that extend beyond the term of the agreement must be reasonable and coherent with the contract’s purpose and are read restrictively by Canadian courts. Non-competition clauses must be limited with regard to the term, geographic area and activities restricted, the whole in accordance with what is necessary to protect the supplier’s or principal’s legitimate interests, failing which the provision risks not being enforced in any aspect. Moreover, a supplier or principal would not generally be able to rely on this restriction if the agreement is terminated without cause by them or as a result of their conduct.Prices
May a supplier control the prices at which its distribution partner resells its products? If not, how are these restrictions enforced?
Price maintenance is a reviewable trade practice under the Competition Act. The threshold for enforcement authorities to apply sanctions on the basis of price maintenance requires that the supplier influence upwards or discourage the reduction of the prices charged or advertised by another business that is either a customer of the supplier or a competitor, and that the supplier’s conduct be likely to adversely affect competition. As such, price maintenance would not be recognised in a commercial agency relationship whereby an agent is simply soliciting orders on behalf of its principal rather than purchasing and reselling products itself. It is common for suppliers to provide suggested retail prices on packaging and labels.
The Competition Tribunal may make orders for a reviewable trade practice to cease or compel a business to accept a customer or order on reasonable trade terms. Fines may also be applicable if conduct is found to lessen competition, and compensation may be payable to private parties who have been granted leave by the Tribunal to bring a claim.
May a supplier influence resale prices in other ways, such as suggesting resale prices, establishing a minimum advertised price policy, announcing it will not deal with customers who do not follow its pricing policy, or otherwise?
Minimum advertised price policies are common and, while they constitute reviewable trade practices under the Competition Act, they are only viewed as problematic where there is an adverse effect on competition.
Minimum advertised price policies must be established unilaterally by the supplier and must be uniformly enforced. They should also specifically allow products to be sold at prices lower than the minimum advertised price as this provides distributors and agents with the requisite flexibility to offer on-location discounts, coupons and other rebates.
May a distribution contract specify that the supplier’s price to the distributor will be no higher than its lowest price to other customers?
Generally, yes. The parties are free to establish their agreed terms of sale in their agreement, including pricing preferences, subject to certain restrictions such as price discrimination which significantly lessens competition.
Are there restrictions on a seller’s ability to charge different prices to different customers, based on location, type of customer, quantities purchased, or otherwise?
Price discrimination and promotional allowances (whether through discounts, rebates, allowances, price concessions or other advantages) are reviewable trade practices under the Competition Act but would generally only be problematic if they significantly lessen competition.Geographic and customer restrictions
May a supplier restrict the geographic areas or categories of customers to which its distribution partner resells? Are exclusive territories permitted? Is there a distinction between active sales efforts and passive sales that are not actively solicited, and how are those terms defined?
Providing for an exclusive territory or other market restrictions in a distribution or agency agreement would not be prohibited, but would be subject to oversight by competition authorities. Unless the restrictions substantially lessen competition, they would not be enjoined.
The distinction between active and passive sales efforts, as it is understood in Europe, is generally not applicable under Canadian law.
If geographic and customer restrictions are prohibited, how is this enforced?
Geographic and customer restrictions would not be prohibited unless they substantially lessen competition, in which case the reviewable trade practice would be subject to the sanctions and penalties enforced by the Competition Tribunal.
May a supplier restrict or prohibit e-commerce sales by its distribution partners?
As is the case with reselling generally, restricting or prohibiting e-commerce sales altogether or in respect of an exclusive territory in a distribution or agency agreement would not be prohibited, subject to restrictions implemented by the Competition Act. The anticompetitive restraints provided by the Act are applicable to both online and brick-and-mortar retailers. Therefore, territorial restrictions on e-commerce sales would not be prohibited unless they substantially lessen competition.
Accordingly, a supplier may entirely prohibit or otherwise limit e-commerce sales by its distribution partners to a given territory or otherwise, so long as these restrictions do not adversely affect competition. Subject only to the foregoing anticompetitive concerns, the parties are free to establish reporting obligations, and the consequences of any failure to comply with (or deviations from) the contractually established territorial rights, that comply with legal principles applicable in the relevant province.
May a distributor or agent restrict a supplier’s sales through e-commerce intermediaries into the distribution partner’s territory? May it require the supplier to obtain reports of such sales by territory and a payment of ‘invasion fees’ or similar amounts to the distribution partner?
As in the case of restrictions on e-commerce sales by distributors, parties to a distribution agreement are also free to establish territorial restrictions on e-commerce sales by the supplier party, as well as impose reporting obligations and consequences in the event of non-compliance (including the payment of ‘invasion fees’ or other compensation), provided that the restrictions do not adversely affect competition.Refusal to deal
Under what circumstances may a supplier refuse to deal with particular customers? May a supplier restrict its distributor’s ability to deal with particular customers?
Refusal to deal is a reviewable trade practice under the Competition Act and would give rise to enforcement only where the practice substantially lessens competition. A supplier is otherwise free to decide who it chooses to do business with. Restrictions on a distributor’s resale rights are generally permissible.Competition concerns
Under what circumstances might a distribution or agency agreement be deemed a reportable transaction under merger control rules and require clearance by the competition authority? What standards would be used to evaluate such a transaction?
In practice, without significant market power or concentration, it is unlikely that a typical distribution arrangement would trigger oversight of this nature.
Mergers and other transactions may be subject to review where they ‘prevent or lessen competition substantially’ within a given industry. Indicators for reaching this threshold include considering whether an entity holds a significant market share, whether there are significant barriers to entry in a given market, the availability of acceptable substitutes, the status of effective remaining competition and the extent of foreign competition. Competition authorities also consider whether the operation generates efficiencies that offset the anticompetitive effect to ascertain the overall effect on competition.
Certain types of joint ventures or strategic alliances may be subject to review if they are likely to substantially lessen or prevent competition. Vertical arrangements between suppliers and their customers are assessed on the same basis.
Do your jurisdiction’s antitrust or competition laws constrain the relationship between suppliers and their distribution partners in any other ways? How are any such laws enforced and by which agencies? Can private parties bring actions under antitrust or competition laws? What remedies are available?
In addition to the restrictions on prices, territory, customers and e-commerce sales, exclusive dealing is a reviewable trade practice under the Competition Act, but conduct of this nature would not generally be subject to sanctions unless requiring a distributor to purchase its products exclusively from a given supplier is likely to have a significant adverse impact on competition.Parallel imports
Are there ways in which a distributor or agent can prevent parallel or ‘grey market’ imports into its territory of the supplier’s products?
The sale of grey market products will not generally constitute trademark infringement under Canadian law. However, where a Canadian company is the registered owner of a Canadian trademark, and is distinct from its international supplier or manufacturer, it would be in a position to rely on the provisions of the Trademarks Act to contest parallel imports and the distribution of grey goods.
A distributor or agent would not have any recourse where the trademark is owned by a foreign entity from which the legitimately imported grey market goods and the goods destined to be sold by the distributor or agent originate. A passing-off action may occasionally be successful where the grey market goods do not meet Canadian safety or labelling requirements.
As a practical matter, suppliers who sell goods to a wholly owned subsidiary or other affiliate for distribution in Canada should ensure that the local subsidiary or affiliate is the owner of the trademark in Canada. Ensuring that the product is specifically designed and labelled for the Canadian market will also facilitate the preservation of rights against parallel imports.
Holders of a copyright (eg, in a brand logo) are also afforded a certain level of protection against parallel imports under the Copyright Act. To qualify for this supplemental protection, it is recommended that the Canadian distributor be assigned the copyright in Canada rather than be given an exclusive licence to use it. If the distributor is not an affiliate of the supplier, it may be preferable to allow for the copyright assignment to be reversed at the end of the contract.Advertising
What restrictions exist on the ability of a supplier or distributor to advertise and market the products it sells? May a supplier pass all or part of its cost of advertising on to its distribution partners or require them to share in its cost of advertising?
In Canada, the federal government generally regulates advertisement through the Competition Act, which prohibits any advertisement that is false or misleading in a material respect. The materiality of the representation is considered in light of whether it may influence a consumer to buy or use the product or service advertised based on the general impression conveyed by an advertisement, in addition to its literal meaning.
Advertising Standards Canada administers the Canadian Code of Advertising Standards, which sets out criteria for acceptable advertising and guidance on inaccurate, deceptive or otherwise misleading claims, statements or representations, as well as price claims, comparative advertising and testimonials.
Most Canadian provinces also have legislation regarding consumer protection and business practices, many of which include prohibitions on false, misleading or deceptive representations made to consumers. Certain legislation also contains specific prohibitions, such as restrictions on using representations that products confer any particular benefit or standard of quality, and restrictions on inaccurately advertising price advantages. Certain provincial legislation provides for more serious protections with respect to the unfair practice of making unconscionable representations.
As for the responsibility for marketing and advertising in a distribution or agency relationship, the supplier and its contractual counterpart may determine their respective contributions by contract.Intellectual property
How may a supplier safeguard its intellectual property from infringement by its distribution partners and by third parties? Are technology transfer agreements common?
The types of protections available depend largely on the nature of the intellectual property rights in question, but most types of intellectual property benefit from the same types of safeguards as are commonly recognised internationally, and may be exercised by a supplier against both distribution partners and third parties.Trademarks
Trademarks are protected under the Trademarks Act. Distinctiveness is central to the definition, and a trademark need not be registered to be valid, or even licensed, in Canada. Registration with the Canadian Intellectual Property Office has the advantage of providing nationwide protection of the registered trademark, as opposed to limited protection in geographical areas where a common law mark (ie, an unregistered mark) is known.
In the distribution and agency context, remedies available to a supplier in respect of its distribution partner (eg, following a breach of exclusive use clauses or the use of a confusing trademark) range from injunctive remedies to passing-off actions. These remedies are also available for infringement and other recognised violations by third parties.Patents
Innovations that are new, useful and inventive can be protected under the Patent Act. Patented innovations must be registered with the Canadian Intellectual Property Office to be afforded protection.
Unless otherwise contractually stipulated, the Patent Act provides that a person who infringes a patent is liable to the patentee and to all persons claiming under the patentee for acts of infringement. Injunctive relief and damage claims would be available and may be instituted against distribution partners and third parties who engage in prohibited practices in respect of patented concepts.Copyright
Copyright is protected under the Copyright Act. Protection is extended, irrespective of registration, for all original works produced in any country that is a signatory of the Berne Convention. However, registration with the Canadian Intellectual Property Office is possible.
Remedies for copyright infringement under the Copyright Act include damages, lost profits and injunctions prohibiting distribution or ordering the destruction of infringing goods. Actions can be brought by the copyright owner against distribution partners or any third parties.Know-how and trade secrets
There is no statutory protection of know-how or trade secrets in Canada.
Common law affords protection to trade secrets that are known by only a few people within a given business and are treated as such within the business. Parties must also rely on common law tort and contractual undertakings to protect know-how from unauthorised disclosure or use.
Accordingly, the nature of the confidential information that a supplier wishes to protect, as well as the legal consequences arising as a result of its dissemination, should be clearly identified by the contracting parties in their agreement. In the event that this tort occurs, injunctive relief and damages may be sought by a supplier against a distributor or any third party before the provincial courts with competent authority.Technology transfer agreements
Technology transfer agreements are not generally used in the distribution and agency context.Consumer protection
What consumer protection laws are relevant to a supplier or distributor?
In addition to the advertising rules provided in the Competition Act and the requirements of the Consumer Product Safety Act, most Canadian provinces have legislation regarding consumer protection or business practices, or both.
Additionally, rules relating to warranties and vendor liability may be relevant in the consumer context.
Of importance with respect to online sales, certain provinces in Canada impose specific formalities in respect of distance (or remote) contracts, where a consumer contracts without being in the physical presence of a merchant.Product recalls
Briefly describe any legal requirements regarding recalls of distributed products. May the distribution agreement delineate which party is responsible for carrying out and bearing the cost of a recall?
The Canada Consumer Product Safety Act (CCPSA) grants Health Canada, the federal ministry charged with public health matters, sweeping powers to issue mandatory product recalls and require product safety tests. The CCPSA applies where products are usually obtained by an individual for non-commercial purposes and imposes a general threshold of ‘danger to human health and safety’, which is evaluated on the basis of whether an existing or potential hazard is posed by a product during its normal use and can cause death or have an adverse effect on an individual’s health in the short or long term.
In case of an incident, a manufacturer or distributor can either voluntarily issue a product recall, or the recall may be ordered by Health Canada. Incidents include the following: occurrences that caused or could have caused death or injury; situations where a dangerous defect is noticed; situations where an incorrect, insufficient or non-existent label creates a risk of death or injury; and situations where another domestic or foreign public body initiates a recall. If a product is subject to a recall, the manufacturer (or, if the manufacturer is foreign, the importer) must provide Health Canada with information regarding the incident and file a mandatory incident report.
Specific risks relating to particular classes of products, such as candles, glass items, mattresses, children’s jewellery and sleepwear, toys, food, drugs, cosmetics, medical devices, tyres, carriages and strollers, cribs, cradles and bassinets, playpens, helmets, car seats, residential smoke detectors, firearms and ammunition, are further dealt with in detailed regulations.
The parties to a distribution or agency arrangement may determine contractually who is responsible for the costs associated with recalls and for carrying out any applicable formalities. However, Health Canada also has the power to initiate a recall under the CCPSA; therefore, the allocation of responsibility established by the parties may be overridden in practice, though contractual indemnities would still apply between the parties.Warranties
To what extent may a supplier limit the warranties it provides to its distribution partners and to what extent can both limit the warranties provided to their downstream customers?
The supplier and distributor may contractually allocate among themselves the risks relating to products, including with respect to warranties. Products may usually be sold by a supplier to a distributor without any warranty at all. However, the extent to which implied warranties may be disclaimed varies by province, and certain exceptions apply. For example, in Quebec, a seller may not be able to disclaim damages if it has knowledge pertaining to deficiencies relating to the quality of its products, if it commits gross fault or negligence, or where bodily or moral harm occur. In addition, downstream customers other than a first-hand purchaser could have recourse against the manufacturer and other members of the distribution chain if a product suffers from a safety defect.
With respect to consumer warranties, most Canadian provinces have ‘sales of goods’ legislation that regulate them and prohibit limiting consumer warranties contractually. In Quebec, strict liability applies to product defects under consumer protection law, and neither the distributor nor the supplier may limit consumer warranties; moreover, the benefit of a consumer warranty cannot be waived by a consumer.Data transfers
Are there restrictions on the exchange of information between a supplier and its distribution partners about the customers and end users of their products? Who owns such information and what data protection or privacy regulations are applicable?
The federal Personal Information Protection and Electronic Documents Act (PIPEDA) contains significant protections for individuals whose personal information may be collected, used and shared by people or entities with which they have dealings. PIPEDA requires that individuals provide informed consent before their personal information is processed and shared, and the individual concerned must be informed of the projected uses of the data in advance. The law also requires disclosure where data may be processed or stored in other countries or by entities other than the one collecting the data, whether domestically or abroad, even if the processing or storage is done on behalf of the entity collecting the data. Additionally, in light of recent amendments to PIPEDA, organisations subject thereto may, in certain circumstances, be required to report and maintain records of security breaches involving personal information under their control.
One of the purposes of PIPEDA’s adoption was to align Canadian legislation with the European Union’s strict privacy requirements. However, the federal government has since passed the Anti-terrorism Act 2015, which grants the government broad access to personal information for national security reasons. As such, in the aftermath of the Maximillian Schrems v Data Commissioner (C-362/14, 2015) decision, it may be unwise to assume that Canadian legislation continues to satisfy the EU’s highly protective privacy standards, and that the transfer of data between the EU and Canada remains unaffected, especially in light of the enactment of the EU General Data Protection Regulation in 2018. The same attitude should be adopted in light of the new Privacy Shield regime between the EU and the United States. While Canadian privacy legislation has not been directly affected by its implementation, Canadian businesses that store or process personal information about EU citizens should be mindful of how the principles in the Privacy Shield agreement may affect their practices.
The provinces of Quebec, Alberta and British Columbia have enacted privacy legislation that extends similar protections to individuals and applies to private sector entities under provincial jurisdiction. Under Quebec law, persons who collect personal information must refrain from transferring this information to jurisdictions where it would not be afforded the same protections as those required under Quebec privacy law.
The parties to a distribution or agency agreement may determine who ‘owns’ the information collected from customers and end users (although Canadian privacy law does not consider that data is owned by those who collect, transmit or use it), but the restrictions described above will apply to all of those who collect, use, share and store such information.
What requirements apply to suppliers and their distribution partners with respect to protecting the security of customer data they hold?
Suppliers and their distribution partners are responsible for complying with the federal and provincial privacy legislation applicable to the customer data held. This would include collecting, processing and disclosing personal information only for the purposes for which consent has been obtained from the customers to whom such information relates.
Given that distributors are client-facing, it is usually the distributor’s responsibility to ensure that adequate consent is obtained from customers to enable the distributor to legally disclose any personal information collected from customers to the supplier, including the transfer of the personal information to a supplier outside the province in which the customer is located. Suppliers must therefore ensure that its distributors contractually agree to comply with all applicable privacy laws and obtain sufficient consent from customers for them to be in a position to legally utilise the customer information collected for its own purposes.Employment issues
May a supplier approve or reject the individuals who manage the distribution partner’s business, or terminate the relationship if not satisfied with the management?
In general, the parties are free to govern their relationship by contract, including granting the supplier approval rights over the individuals who manage the distribution partner’s business or termination rights as a result of reasonably objective management failures to comply with the stated objectives or obligations of the distribution relationship. However, this may not be the case with distribution arrangements subject to Franchise Acts or in industries that are subject to certain specific regulations and legislation, such as aviation, collections, engineering, farming, fisheries, banking, trusts and loans, securities, broadcasting, telecommunications, insurance, liquor sales, cannabis and industries that involve the exploitation of Canada’s natural resources.
Without specific contractual provisions producing the desired effect, a supplier’s dissatisfaction with the distributor’s management would generally not be considered sufficient cause to terminate a distribution relationship without notice.
Are there circumstances under which a distributor or agent, or its employees, would be treated as an employee of the supplier, and what are the consequences of such treatment? How can a supplier protect against responsibility for potential violations of labour and employment laws by its distribution partners?
Each Canadian province has enacted its own health and safety, employment standards and labour relations legislation. Accordingly, provincial laws and regulations govern most matters relating to labour law.
Depending on the nature of the relationship, there is a risk that a distributor or agent may be considered an employee, in which case the supplier would be subject to mandatory rules applicable to minimum wage rates, overtime wages, vacation and leave compensation, hours of work, severance and notice periods, as well as union certification and collective bargaining laws, all of which vary greatly by province and industry.
To mitigate these risks, the parties may specify by contract that they are independent contractors and cannot be responsible for each other’s actions, including in connection with labour and employment matters.
To avoid any unintended characterisations, care must be taken to ensure that each distribution partner operates as a distinct and truly independent entity from a supplier (ie, no common control or direction emanating from the supplier that is greater than that typically characterising the distribution or principal–agent relationship) to be considered a separate employer for labour union certification and collective bargaining purposes.Commission payments
Is the payment of commission to a commercial agent regulated?
The parties are generally free to establish the agent’s compensation by contract. To the extent that commissions attract withholding tax, the agent will be responsible for withholding the applicable amounts and remitting them to the tax authorities in Canada on behalf of the principal.Good faith and fair dealing
What good faith and fair dealing requirements apply to distribution relationships?
The Supreme Court of Canada has found that there is an inherent duty for parties to honestly perform their contractual obligations, and many common law courts have held that an implicit obligation of good faith exists in contractual dealings. A perhaps more fulsome obligation exists under articles 6, 7 and 1375 of the Civil Code of Quebec, which imposes a duty on all parties to conduct themselves in good faith in all contractual dealings, including at the precontractual stage.
Additionally, the Franchise Acts, which may apply to certain types of distribution agreements, include an explicit duty of good faith and fair dealing during the term of the contractual relationship.Registration of agreements
Are there laws requiring that distribution agreements or intellectual property licence agreements be registered with or approved by any government agency?
No legislation directly governs international distribution agreements or expressly requires the registration of a distribution agreement with a foreign national with any authorities in Canada, subject to certain restrictions, such as those arising from the Franchise Acts.
There is no requirement to register a trademark licence, and there is no clear adverse effect of failing to do so in a timely manner.
Under the Copyright Act, a copyright licence must be granted in writing and must be signed by the owner of the right in respect of which the licence is granted or by its duly authorised agent. The grant of a copyright licence may be registered, and the rights of any registered licensee will take priority, without notice, over any prior unregistered licenseesAnti-corruption rules
To what extent are anti-bribery or anti-corruption laws applicable to relationships between suppliers and their distribution partners?
Bribery and corruption of public officials are crimes in Canada under the Criminal Code for both the corruptor and the corrupted official. In addition, the Corruption of Foreign Public Officials Act applies to acts of corruption or bribery committed by Canadian persons outside Canada. Charges may also extend to those who aid or abet offenders.Prohibited and mandatory contractual provisions
Are there any other restrictions on provisions in distribution contracts or limitations on their enforceability? Are there any mandatory provisions? Are there any provisions that local law will deem included even if absent?
Restrictions and prohibited practices in respect of distribution and agency relationships include, among others, restrictions by federal or provincial law on certain industries viewed as having particular importance or significance (eg, aviation, collections, engineering, farming, fisheries, banking, trusts and loans, securities, broadcasting, telecommunications, insurance, liquor sales, cannabis and industries that involve the exploitation of Canada’s natural resources), and restrictions arising from the Franchise Acts and competition laws.
There are no mandatory provisions or automatic inclusions in contracts and the parties are generally free to set out the terms of their agreement by contract.
In certain cases, courts enforcing an agreement in Canada will be required to apply mandatory provisions of local law. Overriding a contract by reason of mandatory local law would generally apply only where either the contract or the parties’ conduct is inconsistent with public policy, for which the threshold is no lower in Canada than in other jurisdictions with sophisticated legal systems. Rules that could be considered mandatory in Canada include limitations on restrictive covenants, competition issues, limitations of liability, privacy laws and criminal matters.
Governing law and choice of forumChoice of law
Are there restrictions on the parties’ contractual choice of a country’s law to govern a distribution contract?
The parties are free to choose the laws that will govern their relationship. All Canadian provinces permit the selection of a foreign governing law as long as doing so is not considered to be in breach of the domestic law, subject to the application of laws or provisions of public order in Canada.
Canada is party to numerous international treaties such as the Vienna Convention on the International Sale of Goods. Where the selected or applicable law is that of Canada, the foregoing Convention applies automatically unless expressly set aside by the parties in their contract.Choice of forum
Are there restrictions on the parties’ contractual choice of courts or arbitration tribunals, whether within or outside your jurisdiction, to resolve contractual disputes?
The parties may elect to submit to the courts or arbitration tribunals of any jurisdiction, subject to the certain limitations. All Canadian provinces permit the selection of a foreign governing law as long as doing so is not considered to be in breach of the domestic law, subject to the application of laws or provisions of public policy in Canada.
Canada is party to numerous international treaties such as the Vienna Convention on the International Sale of Goods. Where the selected or applicable law is that of Canada, the foregoing Convention applies automatically unless expressly set aside by the parties in their contract.
Choice of forum clauses are generally enforced by Canadian courts, thus making it possible for the parties to select a non-Canadian court to resolve disputes or claims arising from their agreement, even where they are related to occurrences in Canada. In addition, mediation and arbitration are viable and recognised mechanisms of dispute resolution across Canada.
A final monetary and conclusive judgment on the merits from a foreign court is usually enforced by Canadian courts. Certain provinces, such as British Columbia and Ontario, have enacted legislation that provides a simplified procedure for registering and enforcing foreign judgments and arbitration awards. Arbitration awards are readily recognised throughout the country as Canada is party to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
What courts, procedures and remedies are available to suppliers and distribution partners to resolve disputes? Are foreign businesses restricted in their ability to make use of these courts and procedures? Can they expect fair treatment? To what extent can a litigant require disclosure of documents or testimony from an adverse party? What are the advantages and disadvantages to a foreign business of resolving disputes in your country’s courts?
In civil matters, provincial courts generally have jurisdiction except for those matters that are specifically reserved to the federal judiciary (such as intellectual property, bankruptcy, trade and commerce). Injunctive relief is available in all provinces and may be granted on an interim, interlocutory or permanent basis. The right to seek this relief is always within the discretion of the court and cannot be waived.
There is no legal discrimination or heightened level of legal requirements for foreign businesses to adjudicate disputes before courts in Canada. Nevertheless, foreign businesses may be subject to different mandatory costs than would domestic businesses.
The discovery process is an integral part of litigation in Canada and is subject to comprehensive rules of procedure that generally require disclosure of documents and provide for compulsory verbal testimony, each to the extent required to establish the allegations and defences put forth in a given case. There are certain exceptions, such as documents or other information that are subject to attorney–client privilege; however, judicial authorities tend to otherwise allow and encourage submissions and fulsome disclosures with a view to seeking transparency and avoiding any loss of rights to the parties involved in a dispute.Alternative dispute resolution
Will an agreement to mediate or arbitrate disputes be enforced in your jurisdiction? Are there any limitations on the terms of an agreement to arbitrate? What are the advantages and disadvantages for a foreign business of resolving disputes by arbitration in a dispute with a business partner in your country?
The parties may expressly and contractually agree to arbitrate their disputes in the venue and in the language of their choosing to the exclusion of Canadian courts. Even in the presence of an unequivocal arbitration clause, certain remedies (such as injunctive relief and other extraordinary recourses) may nonetheless be sought before the courts.
The principal advantages and disadvantages of arbitration for foreign suppliers in Canada are essentially the same as for local suppliers. Arbitration has the main advantage of being confidential. Disputes between suppliers and distributors, or agents, do not become a matter of public record as would be the case with litigation in the judicial system. In addition, arbitration gives the parties a level of control that they may not otherwise have over some aspects of the dispute, such as choice of venue and forum and the selection of an arbitrator with expertise in distribution and agency issues or the relevant technical or specialised fields. Arbitration agreements are final, reliable and not open to appeal; Canadian courts have generally refrained from intervening in such decisions. Finally, arbitration tends to be faster and cheaper than litigation, at least in theory.
As for its disadvantages, arbitration, like litigation, can encounter procedural delays, diminishing the cost and time savings that often motivate its use. The lack of ability to appeal heightens the risk for parties that have no recourse against an unfavourable decision. Some also argue that arbitration clauses that preclude access to the judicial system will prevent the use of proceedings such as injunctive or other equitable relief that can be obtained quickly to effectively end a breach of contract.
Update and trendsKey developments
Are there any proposals for new legislation or regulation, or to revise existing legislation or regulation? Are there any other current developments or trends that should be noted?
On 4 April 2019, the All-Party Parliamentary Group to End Modern Slavery and Human Trafficking announced the completion of a draft Transparency in Supply Chains Act, which is set to be tabled shortly by the Senate. The proposed legislation would impose reporting and compliance obligations on Canadian businesses in an attempt to combat modern slavery, including the use of forced labour, child labour and human trafficking in their overseas supply chains. The legislation would include:
- imposing reporting requirements on businesses meeting an annual turnover threshold;
- creating a duty of care to take reasonable steps to prevent the use of modern slavery in overseas operations;
- creating an ombudsperson and compliance committee; and
- implementing a system for receiving and investigating complaints of modern slavery from whistle-blowers.
As this legislation moves towards royal assent, businesses with dealings in Canada should act prudently by implementing appropriate contractual measures with respect to their operations and supply chains in regions presenting risks regarding these matters, including in developing countries.
If this legislation is enacted, it will bring Canada in line with many of its trading partners who have already implemented modern slavery and supply chain transparency legislation, including the United Kingdom, California and Australia.
Law stated dateCorrect as of
Give the date on which the information above is accurate.
1 December 2019