Canada is a popular destination for companies looking to expand internationally. A growing economy and long borderline with the U.S. make the idea of “Franchising” appealing for companies both from U.S. and overseas countries.
There are approximately 1,300 franchise brands and more than 70.000 units operating in almost 50 different sectors all over the country. As a result, franchised businesses contribute to the economy in the amount of $96 billion annually. However, there are important facts and considerations to be aware of when dealing with franchises in Canada. In the following paragraphs, we will briefly look into obligations that both franchisors and franchisees need to comply with when dealing with sale of franchise.
Sale of Franchise
In Canada, Franchising is regulated at the provincial level; and there is no federal legislation that will be enforced in the entire country. The sale of franchise business is subject to general contract law principles and—if/when applicable—statutes that apply in a particular province.
There are total of six provinces, including Ontario, Alberta, and British Columbia that have enacted laws on the offer and sale of franchise businesses (“franchise legislation”). Even though these are different provinces, and these laws are independent of each other, despite many similarities, they do have minor differences; what constitutes a franchise is consistent within all six provinces.
Pre-sale Disclosure
In the legislated six provinces, the main focus of the legislation has been the “Pre-sale disclosure obligation”. The purpose of the disclosure obligation is to let franchisees be able to make an investment with all the material information about the business being available to them. Disclosure of information about a business is done by way of disclosure document: Franchise Disclosure Document (“FDD”).
· A disclosure document needs to be certified as complete disclosure of the business.
· This document must be provided by the franchisor to a potential franchisee at least 14 days before the signing of the franchise agreement, or any agreement related to the franchise, or any payment done by the potential franchisee as consideration.
· If any changes occur before the signing of the agreement, franchisee must be informed.
· After the agreement is signed, the FDD needs to be updated regularly. Since an FDD covers all the material facts about the business, if there are any changes made in regard to the operation of the business, this needs to be reflected in the document.
If the provided disclosure document fails to comply with disclosure requirements, a franchisee may avoid the agreement without any obligation or penalty. Prospective franchisee may ask the franchisor to cover its losses, including refund of all monies paid by the franchisee to the franchisor, the price of all purchased inventory or equipment, and any other loss incurred by the franchisee for the purpose of the operation of the business.
There are two time periods regarding rescinding of franchise agreement: (i) No later than 60 days after the receiving of the disclosure document if the disclosure document does not meet the requirements; or (ii) no later than two years after the entering into the agreement if the disclosure document was never provided.
Other matters to keep in mind
· The sale of a franchise needs to be reasonable when compared to commercial standards. Even though courts mostly view the obligation of good faith and fair dealing as franchisor’s obligation to enforce the agreement in a way that won’t harm the interests of the franchisee, both parties should comply with fair dealing and act in good faith.
· Franchise laws in all provinces give franchisees the right to associate with other franchisees and they may form or join an organization without any penalty. This right and other entitlements given by the legislation cannot be waived or restricted by the parties to a franchise agreement.
There is, of course, much more to this topic. Reach out to us if you have any questions.
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