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Franchising An Increasingly High-Risk Venture For Franchisors

Written by on December 06, 2016. Posted in Franchising, News

Canada is frequently hyped as an idyllic place to launch a franchise business, but that’s not the case for many franchisors who face tougher obstacles than their counterparts in other countries, says London franchise lawyer Peter Dillon.

Compared to the U.S. and other jurisdictions, Canada’s legislative history in the area of franchise law makes it “one of the most difficult jurisdictions in the world” in which to franchise, he tells AdvocateDaily.com.

Franchising plays an important role in the Canadian economy, with roughly 40 per cent of retail spending alone flowing through franchise channels, Dillon points out.

“If franchising as a business model isn’t appealing and profitable to both sides, it won’t be around for long,” he says.

Several recent court decisions demonstrate an “unfair bias” towards franchisees that goes against the letter and spirit of franchise legislation, Dillon argues.

“In an effort to provide consumer protection legislation in an overly paternalistic system, recent decisions have essentially rendered franchising a high-risk business venture for franchisors,” he says.

The case of 1490664 Ontario Ltd. v. Dig this Garden Retailers Ltd., 2005 (CanLII), for example, establishes that courts will not look outside the disclosure document provided to the prospect, explains Dillon, a partner with Siskinds LLP.

“While it makes sense on one level, it seems to ignore the spirit of the Act, and is somewhat one-sided. After all, if the franchisee does, in fact, have the information in question, what does it matter where he obtained it?” he says.

The case also ignores the fact that the franchisee remained in possession and operation of the franchise for three and a half months after rescinding, Dillon adds.

“That would typically provide the defendant with an argument that the franchisee had reaffirmed the franchise agreement, but the court, once again, seemed reluctant to hold a franchisee responsible for any of its decisions or conduct,” he argues.

Dillon recently hosted a summit event on Franchise ROI — in partnership with IFX International Franchise Management of San Diego — that focused on how to produce high-performance franchisees and says, despite the success of some long-time chains, Canada is becoming an increasingly risky place to franchise for a few key reasons.

“Canada has an open-ended disclosure regime, unlike the U.S. and many other jurisdictions, which have a closed list of issues that must be disclosed. Another major issue is personal liability of officers and directors — people who sign the certificates of disclosure are personally liable for damages arising from any defective disclosure. That’s not the case in other places,” he explains, suggesting it isn’t fair to expect officers and directors to put their personal net worth on the line in franchise business ventures unless that individual transgresses a traditional cause of damages, such a fraudulent misrepresentation.

Dillon says  2189205 Ontario Inc. v. Springdale Pizza Depot Ltd., 2011 ONCA 467 (CanLII), further demonstrates the court’s l unfair bias towards franchisees when it determined that when a franchisee rescinds his franchise agreement, and the franchisor is required to compensate the franchisee for his losses, the franchisor is not entitled to set off the franchisee’s profits against his losses.

“In this case, the franchisee had run a profitable business, but the court did not require that the franchisee offset his losses with the amount of his profits. Where’s the equity in that?” Dillon says.

(Note: This article originally appeared on AdvocateDaily.com.)