Due to its proximity to the United States, expanding operations into Canada is a natural progression for many companies, particularly those based out of northern states. Despite its physical proximity, businesses expanding into Canada still face the challenges of conducting an international business. One such challenge is knowing and ensuring compliance with foreign laws; consulting with an attorney is always recommended if you want to move past our northern border.
Franchising comes naturally
One of the ways that U.S. businesses frequently expand into Canada is through franchising: taking a business that has worked in the U.S. and contracting with Canadians to run that business under a comprehensive set of guiding rules and procedures. Companies making this move should be aware that Canada has franchise legislation that provides significant protections for franchisees, usually at the franchisor’s expense. However, the rules also provide franchisors a measure of predictability and, ultimately, opportunity to easily expand into relevant Canadian provinces.
Currently, five Canadian provinces – Alberta, Ontario, New Brunswick, Prince Edward Island, and Manitoba - have enacted franchise disclosure legislation. Their requirements are substantially similar; moreover, their aims are the same: regulate the franchise marketplace and ensure fairness in franchise agreements.
The Disclosure Obligation
In the provinces with franchise disclosure rules, a franchisor must provide a franchise disclosure document to a prospective franchisee. The disclosure document must contain certain statutorily enumerated information as well as all other “material facts.” Material facts are those facts that a reasonable person would consider relevant to a prospective franchisee’s decision to acquire the franchise. For example, “material facts” may include the makeup of the business’s core clientele, the company’s operating capital, or the identities of the business’s controlling shareholders. In addition, the disclosure document must contain either review-engagement or audited financial statements.
The franchisor must also certify that the disclosure document is complete and complies with the applicable provincial statute. Failure to provide the certification can result in a determination that the franchisor did not provide anydisclosure. In addition, the franchisor must ensure that two officers or directors (one if there is only one) sign the certification in their personal capacity (and not on behalf of the franchisor).
Remedies for Breach of Disclosure Obligation
Franchisees have two possible remedies when the franchisor fails to provide disclosure: rescind the contract or file a claim for misrepresentation. The franchisee may rescind the franchise agreement when the franchisor fails to properly disclose information. If the franchisee proves successful, the franchisor must essentially put the franchisee back into the position she had been in prior to the agreement; this can require that the franchisor repay all monies, purchase all inventory, and compensate the franchisee for all losses incurred to operate the franchised business.
Alternatively, franchisees may bring a claim for damages for “misrepresentations” made in the disclosure document or if the franchisor fails to comply with the disclosure requirements. “Misrepresentation” is defined broadly and includes omissions of material facts. Material facts are those facts that a reasonable person would consider relevant to a prospective franchisee’s decision to acquire the franchise. Claims for misrepresentation may be made against not only the franchisor, but also others in their personal capacity, including any director or officer of the franchisor who signed the certificate of disclosure.
Duty of Fair Dealing
In addition to disclosure requirements, Canadian franchise legislation requires that both parties to a franchise agreement deal fairly; this duty of fair dealing requires that both parties act in good faith and act according to reasonable commercial standards. Either the franchisor or franchisee can claim a breach of the duty of fair dealing; the non-breaching party is entitled to the damages caused by the breach.
The Right of Association
Franchisors must also allow franchisees to associate with other franchisees and form an organization of franchisees without interference from the franchisor. A court will find as void any provision in a franchise agreement that restricts the franchisee’s right to associate. In practice, franchisees typically use this right to participate in class actions.
Franchise disclosure laws are just one of the many unique obligations that companies doing business in Canada must be aware of and comply with.