Franchising in Canada:
Reducing your risks when expanding into Canada
|Joseph Adler is a partner of the Toronto, Ontario, Canada law firm of Hoffer Adler LLP. He has assisted dozens of US franchise systems to expand into Canada. Joseph may be reached at 416-977-3444 or email@example.com.|
U.S. franchisors interested in expanding their systems into Canada should consider the legal, cultural and other nuances that distinguish U.S. domestic franchising practices from those applicable in Canada. To ignore these nuances would be ill-advised and perilous.
Canadian franchise disclosure legislation
Only the provinces of Ontario, Alberta and Prince Edward Island currently have franchise disclosure legislation in place. The province of New Brunswick is about to pass franchise legislation modeled largely on the Ontario statute. Other provinces may enact similar legislation in due course. The three franchise statutes are quite similar in substance and form though the province of Ontario has, comparatively speaking, passed the most stringent legislation of the three.
For those provinces having franchise legislation, a franchisor must provide a prospective franchisee with a disclosure document at least 14 days prior to the franchisor receiving any money and before having the prospect sign any agreement. Failure to abide by the 14 day rule provides the franchisee with a right of rescission and also a right of action for damages. This right of action exposes not only the franchisor, but also any affiliate of the franchisor and most significantly, the franchisor’s agent, broker and “every person who signed the disclosure document”. Finally, each of the franchise disclosure regimes in Canada imposes a duty of fair dealing on both the franchisor and the franchisee.
There are many differences between Canadian practices and those in many states:
• Franchisors do not have to register their UFOCs with any Canadian regulatory body.
• Apart from the duty of fair dealing and the franchisees’ right of association, there are no intrusive franchise relationship laws.
• If a franchisor makes unilateral changes to the franchise agreement before a franchisee signs, it must simply deliver the new version (and show the material changes) to the franchisee immediately prior to execution of the agreement, unlike the FTC’s revised franchise rule that requires at least seven days’ notice.
• The financial statements to be disclosed in Canadian disclosure documents need not be audited, as statements prepared on a review engagement basis may suffice.
• Consider the cultural, linguistic (in Quebec), the currency and tax related issues as well as the industry specific milieu before structuring any deal to sell any franchise rights in Canada.
• Retain Canadian franchise counsel to assist you to “Canadianize” the UFOC and U.S. franchise documents.
• Take steps to protect your intellectual property in Canada by filing Canadian trademark applications and protecting your .ca domain names, for example.
• Have Canadian accountants review the franchisor’s financial statements to ensure that they have been prepared in accordance with Canadian reporting requirements.