Franchise Law in Canada - Key Considerations
Canada, with its robust economy and proximity to the United States, is a prime location for U.S. and international franchises looking to expand. The country hosts approximately 1,300 franchise brands and over 75,000 franchise units spanning almost 50 different sectors, including retail, hospitality, healthcare, automotive, and business-to-business services. Franchising contributes over $120 billion annually to the Canadian economy and creates nearly two million jobs. In fact, franchised businesses account for one out of every five consumer dollars spent on goods and services in Canada, adding roughly $96 billion to the country's GDP.
Although Canada offers an attractive market for international expansion, franchisors must comply with franchise-specific laws, which are currently in place in six provinces.
Franchise Disclosure Legislation
1. Overview of Franchise Disclosure Legislation
Six provinces—British Columbia, Alberta, Manitoba, New Brunswick, Ontario, and Prince Edward Island—have implemented franchise disclosure laws. These laws are designed to regulate the franchise market and provide protections to prospective and current franchisees. The legislation aims to address the power imbalance between franchisors and franchisees by introducing key principles, such as:
The obligation for franchisors to provide full disclosure.
The duty of good faith and fair dealing for both parties.
The right of franchisees to associate with other franchisees.
Failure to comply with these principles can lead to significant remedies for franchisees. Additionally, franchisees cannot waive these rights or exempt franchisors from their obligations under the legislation.
The laws also invalidate any clause in a franchise agreement that restricts the application of provincial law or requires legal actions to be pursued outside the province.
2. Disclosure Obligations
Franchisors planning to offer franchises in any of the six disclosure provinces must provide a potential franchisee with a disclosure document at least 14 days before either party signs a franchise agreement or the franchisee makes any financial commitment. This requirement does not apply to agreements that:
Require confidentiality.
Prohibit the use of shared information.
Designate a location or territory for the franchise.
The disclosure document must include all relevant financial information about the franchisor and any "material facts" that would influence the franchisee's decision. Some larger franchisors may be exempt from providing financial statements if they meet specific criteria.
a. Material Facts
A "material fact" is broadly defined as any information about the franchisor's business, operations, capital, or control that could affect the value or price of the franchise. Failure to disclose such information has led to several notable court decisions, which underscore the importance of customizing disclosure documents.
b. Certification
Disclosure documents must be certified by the franchisor’s officers or directors, confirming that the document provides complete and accurate information. An improperly signed certificate renders the entire disclosure void, allowing the franchisee to claim no disclosure was provided.
c. Remedies
Franchise legislation ensures that franchisees are provided with enough information to make informed investment decisions. If a franchisor fails to provide a proper disclosure document, the franchisee can rescind the franchise agreement. This essentially cancels the agreement and obliges the franchisor to refund all payments, repurchase inventory, and compensate the franchisee for any losses.
Franchisees have two windows for rescission:
Within 60 days of receiving an insufficient disclosure document.
Within two years if no disclosure document was provided.
Franchisees may also claim damages for misrepresentation in a disclosure document, with claims potentially extending to directors, officers, and other individuals involved in the franchise offer.
3. Duty of Fair Dealing
All parties to a franchise agreement must act in good faith and adhere to reasonable commercial standards. The duty of fair dealing requires franchisors to consider the interests of the franchisee when enforcing the agreement. Breaching this duty allows the non-breaching party to claim damages.
4. Right of Association
Franchisees have the right to associate with other franchisees and join franchise organizations without interference from the franchisor. Any contract term that restricts this right is void.
5. Non-Waivable Rights
Franchise legislation explicitly states that franchisees cannot waive the rights provided under the law, and franchisors cannot be exempted from their obligations. However, courts may uphold releases of known claims in negotiated settlements of disputes.
6. Saskatchewan
In 2024, Saskatchewan became the seventh province to enact franchise legislation. The Saskatchewan Franchise Disclosure Act mirrors laws in other provinces by:
Requiring pre-sale disclosure.
Imposing a duty of good faith.
Confirming the right of association.
Providing franchisees with the right of rescission and the ability to sue for misrepresentation.
7. Québec
While Québec does not have franchise-specific legislation, its Civil Code and Charter of the French Language affect franchising.
The Civil Code governs contracts of adhesion, which include franchise agreements. If any terms of the contract were unknown to the franchisee at the time of signing, they may be unenforceable. The Civil Code also imposes a duty of good faith during negotiations and performance of agreements, which is broader than similar duties under other provincial laws.
The Charter of the French Language mandates that all business communications, including contracts, advertising, and signage, must be in French. Bill 96, enacted in 2022, has strengthened these requirements by mandating that contracts be in French, with exceptions only if the parties agree to sign in another language after receiving the French version. Starting in 2025, common law trademarks must also be translated into French for public use, unless they are registered trademarks.
Franchisors operating in Québec must take extra care to comply with these language laws, allowing time to translate franchise agreements and update signage before the new rules take effect.
Conclusion
Canada's franchise market offers great opportunities, but franchisors must carefully navigate the country’s varying franchise disclosure laws. Strict adherence to provincial requirements and proper disclosure are essential for a successful franchise relationship, and failure to comply can lead to significant legal and financial repercussions.