Franchising in Canada: have the wheels fallen off?

Written by on June 14, 2017.

(Note: This article was also published on AdvocateDaily.com)

Introduction

Last year was relatively quiet in terms of major (i.e. Court of Appeal) decisions or legislative changes.

One interesting, and important, development is the increasing willingness of the courts to decide matters based on summary judgment motions, following the directive of the Supreme Court in Hryniak v. Mauldin. The Obsidian case is a prime example of this trend. Notwithstanding significant issues of credibility, the motions judge was prepared to make findings of fact that resulted in an award of damages exceeding $1 million.

Another continuing theme, with the introduction of British Columbia’s franchise regulation, is the checkerboard of disclosure obligations across the country. While the differences with the B.C. regulation are subtle, they are nonetheless numerous, material and potentially ruinous, given the willingness of the courts to seize upon fairly insignificant matters to deem a disclosure document was no disclosure at all. Caution continues to be the watchword of practitioners in this area.

There were also a spate of cases seemingly supportive of a more purposive contractual interpretation and application, including Hanewich (typographical errors in the signature block of a document did not give rise to a right of rescission); Mr. Lube (percentage rent was disclosed; failure to read the disclosure document would not give rise to a non est factum claim); Dairy Queen (the mere fact that the cancellation and release was entered into between a franchisor and a franchisee does not make it inherently suspicious, or presumptively cast doubt on the voluntariness of the franchisee’s signature); and Blossoms Fresh Fruit (intention of parties and wording of agreement to create a licence agreement given effect, in face of other aspects of the arrangement that would establish a finding that a franchise existed).

In the Courts

Presale disclosure now mandatory in British Columbia

For those franchisors offering, or planning to offer, franchises in British Columbia, please take note that effective Feb. 1, 2017, you must now provide a B.C.-compliant disclosure document to all franchise prospects at least 14 days before signing any agreement or accepting any payments.

Although B.C.’s franchise regulation is similar to other provinces, your existing disclosure document must be amended to account for a number of provisions.

Some B.C.-specific provisions include:

  1. The term “officer” applies not only to those appointed by resolution, but also to any individual who performs duties like those of an officer appointed by resolution;
  2. Franchisors who are exempt from financial disclosure must include a statement to that effect;
  3. Your disclosure relative to alternative dispute resolution must include a discussion of the venue in which the ADR will occur;
  4. With respect to the cost of establishing a new franchise, you must disclose any formula used to calculate fees;
  5. You must disclose whether earnings projections are based on actual results and if so, the locations, areas, territories or markets from which the results are obtained;
  6. If no earnings projection is provided, a statement to that effect must be included;
  7. The location of training must be revealed;
  8. The table of contents of each manual provided to the franchisee must be disclosed;
  9. If no manuals are available, a statement to that effect must be included;
  10. B.C. uses the phrase “franchisors affiliate,” which is potentially much wider than the term “franchisor’s associate,” which is used in most other provinces;
  11. Disclosure of the franchisor’s policies and practices regarding rebates is required;
  12. With respect to disclosure about legal compliance, B.C. requires a statement that the franchisee may be required under other laws to obtain additional licences and that the franchisee should make due inquiry;
  13. A description of the extent to which the franchisee will be required to participate in the ongoing operation of the franchise must be included;
  14. If territorial rights are granted, a description of the franchisee’s rights to the territory is required;
  15. A description of the way the franchisee’s territorial rights are determined must be included; and identification of the person who will make this determination is also required;
  16. Disclosure of any reservation of rights to market goods or services of the same kind, whether under the same or a different trademark, is mandatory;
  17. Disclosure of any reservation of rights to distribute goods or services by Internet sales, telephone sales, catalogue sales or otherwise, is compulsory;
  18. If no territorial rights are granted, a statement to that effect is required;
  19. If the franchisor listed franchisees from a foreign jurisdiction in its list of operating locations, then it must include closures that have occurred within those jurisdictions; and,
  20. If the franchisor or its affiliates have less than 20 franchise locations operating in Canada, the locations operated by the franchisor or its affiliates in any foreign jurisdiction must be disclosed.

Electronic Delivery in Ontario

In 2016, Ontario finally joined the digital age by allowing electronic delivery of disclosure documents. The electronic documents must:

  1. be delivered in a form that enables the recipient to view, store, retrieve and print it;
  2. not contain links to external documents or content;
  3. contain an index for each separate electronic file, if any, of which the document consists, where each index sets out,
    1. the file name, and
    2. if the file name is not sufficiently descriptive of the subject matter, a statement of that subject matter.

The franchisor must get written acknowledgment of receipt from the prospective franchisee.

The regulation also permits delivery of disclosure documents by courier, provided the franchisor pays the cost of delivery.

All provinces, except Ontario, now allow disclosure documents to be delivered electronically. The formatting requirements originate with the North American Securities Administrators Association, which pioneered formatting requirements for electronic disclosure in the 1990s.

This regulation contains a good example of problems that can arise from inconsistencies between provinces. In particular, the Prince Edward Island regulation (Section 2) requires an electronic disclosure document be “delivered as a single, integrated, document or file.”

By contrast, Ontario permits the disclosure document to be delivered as a series of separate electronic files, provided that an index of the documents is provided. The index itself must meet requirements of detail and specificity.

Accordingly, a franchisor might comply with the electronic disclosure requirements of Ontario, but fail to meet the requirements of Prince Edward Island. Various cases have held that failure to deliver a disclosure document as a single document may amount to a material defect of compliance (see for example 1490664 Ontario Ltd. v. Dig this Garden Retailers Ltd., 2005 CanLII 25181). To avoid this, a practitioner or franchisor should compile the entire disclosure package into a single electronic document for use in all provinces.

Since various courts of appeal (see for example 6792341 Canada Inc. v. Dollar It Limited, 2009 ONCA 385) have concluded that failure to provide a dated certificate of disclosure signed by two officers or directors of the franchisor can amount to material nondisclosure, it is recommended that franchisors or their counsel scan in the appropriate signature block to the electronic document prior to distributing the document.

Section 6(3) of the Act deals with the contents of a notice of rescission and provides for delivery personally, by registered mail, by fax, or by any other prescribed method. The regulation was amended in 2016 to allow any notice of rescission delivered under subsection 6(3) of the Act to be delivered by prepaid courier to the franchisor’s address. The notice is deemed delivered to the franchisor on the second day after the courier delivers it.

Delivery of a notice of rescission by electronic means is not provided for. One assumes this is because of the inability to verify receipt of the notice by the franchisor. Since delivery of a disclosure document by a franchisor is permitted — provided that a receipt for the disclosure document from the franchisee is received — one wonders why delivery of a notice of rescission, where the franchisor acknowledges receipt, would be any less effective. This argument is bolstered by Section 5 of the Electronic Commerce Act, 2000 S.O. 2000, c. 17, which states that a legal requirement that information or documentation be in writing is satisfied if it’s in electronic form. Similarly, Section 6 says a legal requirement to provide information or documentation in writing is satisfied by electronic form if the information is accessible by the other person, used for subsequent reference, and capable of being retained. Section 11 states that a legal requirement that a document be signed or endorsed is satisfied by an electronic signature or endorsement.

Ontario’s Changing Workplaces Review

First, the good news: there were concerns that the final report would call for expanding the situations where franchisors would be considered the employers of a franchisee’s employees under Ontario’s Employment Standards Act, 2000 (ESA). The panel chose not to recommend any substantive changes to the “related employer” provisions of either the ESA or the Labour Relations Act, 1995 (LRA) that would specifically affect franchisor/franchisee relationships.

The final report does propose significant modifications to how franchisees will collectively bargain in the event they are unionized. While this may seem innocuous at first, it could have significant ramifications for franchisors.

Normally, the Ontario Labour Relations Board (OLRB) treats franchised locations as independent employers; each must be separately organized by unions and, if successful, each location must then independently negotiate a collective agreement between the franchisee (as the employer) and the unionized employees. This has made it difficult for unions to gain traction in the franchise sector. As the final report notes, the unionization rate in Ontario’s private sector is below seven per cent in workplaces with fewer than 20 employees because “organizing and bargaining individual contracts in thousands of small locations is inefficient, expensive and impractical.”

To make it easier for individual franchised locations to unionize, the report suggests a system where franchisees of the same brand/franchisor could be made subject to one centrally bargained “master” collective agreement. That central agreement could be negotiated by the union and an “employer bargaining agency” (as often happens in the construction and hospital sector). Alternatively, the OLRB could take a model agreement (i.e. the first agreement negotiated with a specific franchisee) and then apply it, perhaps with modifications, to franchise locations that are subsequently unionized.

If these proposed changes are passed into law, we expect that trade unions will quickly look to unionize specific franchised locations to gain a foothold for a broader presence across the franchise system. Accordingly, franchisors will want to ensure that their franchisees know their rights and obligations under the LRA if they become aware of a unionization drive in their workplace.

Conclusion

Considering the relatively benign case law over the past year (except for what one hopes is an aberrant result in Raibex), one might wonder why I would choose such a morbid title.

The answer is that, while 2016 was a fairly benign year for judicial interpretation and pronouncements, the pendulum remains jammed so far to the left that only legislative amendment is likely to remedy the imbalance in this area and ensure that franchising remains a valid, valued and viable means of distributing goods and services. Imbalance continues to be marked by:

  • an overly technical approach to the legislation, where form often trumps substance;
  • repeated judicial pronouncements that, in effect, only protect the interests of franchises (where a lack of balance has resulted in many of the one-sided decisions currently plaguing the sector);
  • a regime where site-specific disclosure is still required, which is unique in the world and was, I submit, never contemplated by the legislature;
  • the continuation of an open-ended list of disclosure that perpetuates an unreasonable degree of uncertainty in terms of a franchisor’s obligations of disclosure; and
  • a willingness of the courts to disregard the clear wording of the Act, relative to:
    • the interpretation of what constitutes a material fact;
    • the imposition of personal liability for rescission damages, when Section 6 is clearly worded to include only liability for those damages to the franchisor; and,
    • the introduction of the notion of premature disclosure (Raibex), which relates back to the notion of an open-ended list of disclosure items.

Hope springs eternal. The creation by the current administration of the Business Law Advisory Council, whose mandate is to recommend changes to the province’s corporate and commercial laws (including the Arthur Wishart Act) to “strengthen Ontario’s competitive advantage in the global economy,” creates hope that there is a desire to reintroduce balance into this important industry segment.

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