The Key to Successful Franchising in Canada
06 Jul 2021 - We speak with Joanne Gilbert-Wiens, Lawyer at KMB Law, about the legal obstacles faced by Canadian franchisors.She discusses the hurdles that new business owners must overcome and how they can best set themselves up for success.
What crucial regulations must Canadian franchisors ensure they understand?
In Canada, franchising is governed provincially. British Columbia, Alberta, Manitoba, New Brunswick, Ontario and Prince Edward Island have each enacted franchise legislation which aims to, among other things, level the playing field between franchisors and franchisees. This allows franchisees to make informed decisions regarding the purchase and operation of franchised businesses in those provinces.
The most significant obligation of franchisors is the duty to disclose. Franchisors must provide prospective franchisees with a franchise disclosure document (FDD) containing certain prescribed information about the franchisor, its executive team, as well as copies of its franchise agreements. This FDD must be delivered at least 14 days before the signing of any franchise agreement or the making of any payment related to the franchise, whichever is earlier. Certain limited exceptions exist for the payment of deposits and the execution of deposit agreements. Failure to adhere to this cooling-off period gives the franchisee the right to rescind the franchise agreement within 60 days of receipt of the FDD. Only in specific, limited circumstances is a franchisor exempt from this requirement.
Understanding the disclosure obligation is vital to the success of any Canadian franchise system, as failure to provide proper disclosure can result in significant financial losses to a franchise system. Franchisees have a statutory right to rescind a franchise agreement and walk away from the business for up to two years after signing the franchise agreement if an FDD is not provided. If the FDD is provided but does not outline the information as prescribed in the regulations, the franchisee can rescind within 60 days of receipt of the FDD. This does not mean that it is safe to simply provide a deficient FDD and assume the risk of a 60-day rescission. Canadian courts have found that certain deficiencies in an FDD are “fatal”, leaving the franchisee in the position as if they had never received an FDD (and thus providing a two-year rescission period).
The most significant obligation of franchisors is the duty to disclose.
In addition to financial losses, franchisors can suffer damage to its brand by its failure to comply with franchise requirements.
Franchise legislation also imposes upon franchisors and franchisees a positive duty of good faith and fair dealing in the enforcement of franchise agreements and operation of franchised businesses. Franchisors and franchisees in those provinces that have not enacted franchise legislation are also bound by a similar duty of good faith, which the Supreme Court of Canada has imposed on all commercial relationships.
How are franchise agreements enforced?
In all provinces, franchise agreements are enforced privately through the civil litigation process. There is no regulatory oversight or enforcement bodies. Many franchise systems opt for mandatory arbitration proceedings to deal with any disputes relating to the franchise system.
Why is it important for Franchise Disclosure Documents (FDDs) to be continually maintained and updated?
It is vitally important that franchisors maintain and update their FDDs. The risk and cost associated with failing to provide compliant and timely disclosure is high. Therefore, the FDD must be a living document as much of the information provided to prospective franchisees changes over time. In addition to information prescribed in the legislation, franchisors must provide franchisees with “all material facts” about the brand and system that may inform their purchasing decision. As materiality can be subjective, much of the litigation in this area relates to whether a fact is or is not material.
Additionally, as franchise systems evolve the FDD must be updated to reflect new information about the brand and system. For example, COVID-19 has been such a change for franchises. Costs have increased due to new safety protocols and lockdowns and forced closures have had significant negative impacts on certain industries while others have thrived.
What is the Canadian Franchise Association (CFA) and what assistance does it offer to franchisors?
The Canadian Franchise Association (CFA) is a national, not-for-profit association that represents the interests of the franchise industry and franchise owners in Canada through advocacy work and education, as well as networking and lead generation for its members. Members of the CFA include franchisors, franchisees, and services providers within the industry. Membership in the CFA adds a level of legitimacy to a franchise system as it denotes professionalism and credibility. Additionally, in order to be a member of the CFA a franchise system must have prepared an FDD that is compliant with the regulations in the jurisdictions in which it intends to operate.
What can you tell us about your journey into franchise law?
My journey into franchise law was really a matter of developing my interests and seeing where they led me over time. I always had an interest in studying law and knew that law school would open up opportunities for me, but it was not until I had started law school that I started to envision myself becoming a lawyer. It was as a summer student at KMB Law that I discovered my interest in corporate law. I was fortunate to work for a firm that encouraged me to reflect on what I really wanted for my career and my practice. It was during articling at KMB Law that I discovered my passion for franchise law. I was given the unique opportunity to focus on this niche from the beginning of my career, which has served me well in building my practice and best serving my franchisor and franchisee clients.
How does working with franchise systems differ from other fields of corporate law?
I have always found the practice of franchise law to be rewarding and been truly excited to watch my clients grow in the franchise industry, whether as franchisors or multi-unit franchisees. In my practice, I get to assist new and emerging franchisors with the initial development of their franchise systems, the Canadianisation of US brands, and the growth of their system throughout Canada. Franchise law has also allowed me to assist franchisees to become business owners for the first time, when they might not otherwise have the opportunity or ability to do so. It is a unique and truly exciting experience entering into a relationship with your clients knowing that you are a part of their growth strategy and seeing them accomplish their goals.
What are you most looking forward to for the remaining half of the year?
As we begin putting COVID-19 behind us, I look forward to a return to normalcy. I am eager to meet with my clients face-to-face and have the opportunity to engage with their businesses in a meaningful way. I also look forward to spending time with my colleagues in the franchise industry and continuing to learn and grow in my practice for the benefit of my current (and future) clients.
Joanne Gilbert-Wiens, Lawyer