An extract from The Franchise Law Review, 7th Edition

Franchise law

i Legislation

The regulation of franchising falls within the provincial jurisdiction. To date, six Canadian provinces have enacted franchise statutes: Alberta, British Columbia, Manitoba, New Brunswick, Ontario and Prince Edward Island (the Disclosure Provinces). The respective franchises acts (collectively, the Franchises Acts) of the Disclosure Provinces are fairly harmonised, but not identical.

Provincial franchise statutes focus on pre-contractual disclosure obligations and exemptions, the duty of fair dealing, the franchisees' right to associate, statutory right of damages, rescission rights and the jurisdiction of provincial laws and courts.

The Province of Quebec decided not to adopt franchise-specific legislation. Franchises in Quebec are governed by the Civil Code of Quebec, which imposes rules on many aspects of the franchise relationship, including in relation to pre-contractual disclosure, duty of good faith, franchise agreements, securities interests, leases, etc.

Quebec courts recognised that franchisors are subject to certain implicit obligations that flow from the franchise agreements, including an obligation to use reasonable efforts to 'protect and enhance the brand' (Dunkin' Brands Canada Ltd v. Bertico Inc, 2015 QCCA 624 (Dunkin' Donuts)). The Dunkin' Donuts ruling may also have implications for franchising beyond Quebec's borders.

ii Pre-contractual disclosure

In the Disclosure Provinces, a franchisor must provide a disclosure document to a prospective franchisee at least 14 days prior to entering into a franchise agreement or payment of a franchise fee. Although provincial franchise statutes in the Disclosure Provinces were based in part on franchise rules developed in the United States by the Federal Trade Commission and the states, Canadian franchise laws differ from the United States in one significant aspect. In the Disclosure Provinces, in addition to the prescribed information, franchisors must disclose all material facts that can impact the decision to buy a franchise.

Initially, franchisors often overlooked the requirement to disclose material facts. However, courts tend to give considerable weight to this requirement. As a result, failure to disclose material facts may have grave consequences for a franchisor, including rescission of the franchise agreement, refund of franchise fees, compensation of franchisees' losses or damages. This is particularly true in Ontario, where the Arthur Wishart Act (Franchise Disclosure) 2000 does not contain a 'substantial compliance' provision that may excuse a technical or minor non-compliance.

Information disclosed must be complete and accurate as of the date of the disclosure document (except for certain information, such as financial statements, which must be current as of the end of the most recent completed fiscal year).

Failure to provide disclosure, or delivery of incomplete or inaccurate disclosure gives the franchisee the right to rescind the franchise agreement, demand the return of its investment and claim damages. The rescission period for incomplete disclosure is 60 days, and two years from the date of the franchise agreement if no disclosure was provided or the disclosure was so deficient as to amount to no disclosure at all.

The Civil Code of Quebec imposes a duty of good faith on contracting parties. Courts have established that the duty of good faith under the Code requires a franchisor to inform the franchisee of any relevant information that might have a decisive impact on the prospective franchisee's decision to buy in. Failure to provide information to a prospect in Quebec may result in the reduction of certain obligations, rescission of the franchise agreement and a damages award.

iii Registration

There is no requirement to register the franchisor or the disclosure document in any province. Provincial corporate statutes require out-of-province corporations to register in the province when the foreign corporation starts to 'carry on business' in the province.

iv Mandatory clauses

There are no prescribed clauses that must be included in the franchise agreements.

v Guarantees and protection

Franchisors in Canada routinely require shareholders and directors or officers of the franchisee entity to personally guarantee the obligations of the franchisee under the franchise agreement.

Alberta's Guarantees Acknowledgement Act renders personal guarantees unenforceable unless the individual guarantor signs the guarantee before a lawyer.

The Civil Code of Quebec contains certain unique provisions applicable to guarantees, which will require revision of a common law standard guarantee agreement for use in Quebec.