Canada is stone’s throw away, yet different climate
Philip F. Zeidman
In the early days of cross-border franchising, “international” for most U.S. franchisors was likely to mean a unit or two in Toronto. The picture today is, of course, far different with most well-known U.S. brands represented in one or more of the Canadian provinces.
But in recent years the growth of worldwide markets and the appeal of the exotic (the Middle East, China, India and other markets in the headlines) has led some franchisors to ignore this familiar country to the north.
That’s a shame. With 36 million people, most of them within range of U.S. television, it remains a ripe target with many advantages for U.S. franchisors. But first you need to know a bit about the climate you’ll encounter (and we don’t mean the weather).
A common-law system
Canada is a confederation of 100 provinces and three territories, with a federal government located in Canada’s capital, Ottawa. Legislative power is divided constitutionally between the federal and provincial/territorial governments on the basis of the subject matter at issue.
The federal government has legislative authority with respect to subject matters of national interest, defense and transportation; the Constitution gives the provinces/territories legislative power regarding matters of a local or private nature.
Franchise legislation is provincial in nature, where it exists. Five provinces have franchise legislation (Ontario, Alberta, New Brunswick, Prince Edward Island and Manitoba) and a fifth province, British Columbia, has pending legislation. For years a proposed national law has been circulating, but with the steady increase in provincial statutes its prospects are problematic.
With one exception, Canada’s legal system is based on common law coupled with statute law. The exception is Quebec, which operates under the Civil Code of Quebec. Although the code is not specifically directed to franchising, as a general law it does impact franchising.
Canada’s franchise legislation is viewed by the courts as having been enacted to protect franchisees. It is based on the premise that franchise agreements are contracts of adhesion, meaning the material terms are drafted by the franchisor and a franchisee has no ability to negotiate those terms.
Whether or not that is a fair reflection of reality, you need to be aware of the legislative mindset. A franchisor has the material information that a prospective franchisee requires in order to make an informed decision about entering into a franchise agreement. Accordingly, the hallmark of the legislation is the requirement of complete disclosure, at one time and in one document, generally in advance of any commitment or payment on the part of the prospective franchisee.
Disclosure of certain types of information is mandated by the legislation; disclosure of other types of information is covered by the concept of “material facts.” If there is a matter that a court considers would be important to a franchisee in making his or her decision, it has to be disclosed. Failure to make disclosure entitles a franchisee to avail itself of the remedy of rescission of the franchise agreement and can require payment to the franchisee of significant amounts.
Where there has been no disclosure, a franchisee has two years from the date of execution of the franchise agreement to seek this remedy. Where there has been incomplete disclosure, the franchisee has 60 days from signing the franchise agreement to seek rescission.
But, if the court considers the incompleteness of the disclosure to be significant, it may well declare that the incomplete disclosure was tantamount to no disclosure at all and thus afford the franchisee a two-year period within which to rescind.
Good faith and fair dealing
Disclosure is not the only feature of Canadian franchise legislation. The imposition of a duty of good faith and fair dealing in the implementation of the franchise agreement is common.
A franchisor’s ability to exercise its discretion is tempered by this duty which, as interpreted by the courts, requires a franchisor among other things to consider a franchisee’s legitimate business expectations and interests in making decisions even where the franchise agreement reserves absolute discretion to the franchisor. A franchisee is also subject to a statutory duty of good faith, but it should be borne in mind that Canadian courts’ interpretation of the legislation has been very franchisee-friendly.
Other provisions of Canadian franchise legislation that will be significant to a U.S. franchisor include the prohibitions against contracting out of the law of the province in which the particular franchise unit is to operate and against the selection of a venue for resolving statute-based disputes that excludes that province.
Additionally, there is a prohibition against restricting or threatening to restrict a franchisee’s right to associate with other franchisees, which has been interpreted as including the right to participate in class proceedings.
There is also a prohibition against contracting out of any of the rights afforded by the franchise legislation, which has been interpreted as prohibiting a contractual requirement that a franchisee execute a general release of the franchisor in order to obtain a renewal or extension of the franchise agreement.
In Canada there are also laws of general application of which a franchisor should be aware. Canada has two official languages: French and English. You will find that to have consequences for several facets of your operation, especially in Quebec.
Canada has a vigorous antitrust law regime and its own body of law respecting intellectual property. There is also legislation, federal or provincial, addressing social issues such as privacy and disability rights. These are only a few of the laws of general application with which a franchisor should familiarize itself before launching in Canada.
But the bottom line is this: Compared to most other international markets, Canadian provincial laws represent only a modest burden to franchisors accustomed to the U.S. regulatory requirement. No, it’s not “just another state,” but it’s eminently manageable.
Philip Zeidman, pictured top left, is a senior partner in the Washington, D.C., office of DLA Piper. Reach him at firstname.lastname@example.org.
Susan Friedman is a senior litigation lawyer in the Toronto office of DLA Piper. Reach her at email@example.com.