On February 21, 2008 the Canadian Payments Association (CPA) approved major amendments to Rule H1 (the Rule), which applies to preauthorized debit (PAD) agreements (i.e. the Canadian version of an ACH Authorization). The Rule came into force On February 28, 2010. Franchisors that rely on PAD agreements to collect accounts receivables, such as royalty and advertising fees, should ensure that their PAD agreements comply with the new rules, otherwise the franchisors may find that they are unable to collect the amounts owed.

Fortunately, PAD agreements that were already in operation prior to February 21, 2010 were “grandfathered” and do not need to be updated to comply with the revised Rule. However, grandfathering of pre-existing PAD agreements only applies to the extent that the existing provisions of a PAD agreement do not conflict with the revised Rule.

All PAD agreements that are entered into after February 28, 2010 must comply with the Rule. The revised Rule introduces many items that must now be disclosed (and previously did not have to be disclosed), requires pre-debit authorization or notification in some instances and requires that each Sponsoring Member (i.e. the payee’s financial institution) have the payee (i.e. franchisor) sign a Payee Letter of Undertaking in respect of all PADs which will be issued.

The Rule applies to all Business PADs, Cash Management PADs (i.e., PADs between affiliated businesses), Funds Transfer PADs (i.e., where the payor and payee are the same) and Personal PADs. For the purpose of this article we have only focused on how the rule impacts Business PADs, specifically, the payment of goods or services related to a business, and includes payments between franchisees and franchisors.

Required Disclosure

The Rule requires that Business PAD agreements include the following prescribed disclosure items:

  1. The date and signature of the payor;
  2. Clear and unambiguous authority to debit the account;
  3. The PAD category (i.e. business, cash management, funds transfer or personal);
  4. The amount (i.e. fixed or variable), the timing (weekly, monthly, etc.) and how the PAD is triggered (i.e. by an act, event or other criteria or whether the PAD is sporadic);
  5. A prescribed statement regarding the payor’s right to cancel the agreement;
  6. The payee’s contact information; and
  7. A prescribed statement regarding recourse/reimbursement for unauthorized PADs or those made in error.

In addition, where the PAD at issue is a Sporadic PAD (i.e., not at set intervals), the PAD agreement must specify that the payee is required to obtain authorization prior to every PAD (discussed below in the notification section). Where a payee intends to use a third party to administer a PAD agreement, this must be disclosed to the payor.

There is also supplementary disclosure that the payee may elect to include in the PAD agreement.

Authorization, Notification and Waiver of Notification

For Sporadic PADs; the payee must obtain an authorization from the payor for each and every PAD. This preauthorization requirement cannot be waived. The preauthorization requirement does not apply to PADs which occur at Set Intervals.

For Set Interval PADs; such as monthly royalty fees or advertising contributions, the payee is required to notify the payor of the amount to be debited and the date of such debiting at least 10 days prior to the PAD for both fixed and variable amount PADs. In addition, for fixed amount PADs, the payor is also required to give at least 10 days notice before any change in the amount of a PAD or any change in the payment date.

Despite the above, notification requirements can be waived if the PAD agreement includes a waiver of the requirements in a prescribed form or if an appropriate standalone waiver is executed.

Payee Letter of Undertaking

The Rule requires that the payee’s financial institution have the payee enter into a Payee Letter of Undertaking, which outlines the payee’s obligations as an issuer of PADs. As such, issuers of PADs should expect that their financial institutions will be requesting that a Payee Letter of Undertaking be executed prior to exchanging any further PADs for the payee’s account.


The grandfathering of existing PADs means that payees, including franchisors, will not be required to have a new PAD agreement executed by each payee (franchisee) in order to comply with the new Rule. However, all PAD agreements that are entered into after February 28, 2010 must comply with the Rule or else the franchisor may be unable to debit the franchisee’s account. The result is that PAD agreements entered into after February 28, 2010 will be longer and include more fulsome disclosure than was often the case under the old rule. We recommend that franchisors check their existing PAD agreements or relevant provisions in their franchise agreements and update them to comply with the new requirements. Franchisors should also prepare current forms for new franchisees.