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'Special relationship' between franchisors and franchisees: could it give rise to a pre-contractual duty of good faith?Canada | 14 July 2020
Common law jurisdictions recognise that certain circumstances could arise that would lead contracting parties to have some type of pre-contractual good-faith obligation, including where they have a 'special relationship' – typically characterised by an imbalance of information. A franchise arrangement has been characterised as an example of such a special relationship that could fall within the narrow set of particular requirements for good faith in the pre-contractual context.
It is well known that franchisors have been facing increasing pressure to conduct themselves in accordance with the principles of good faith. A recent Ontario Superior Court case has led to questions with respect to a franchisor's duty to protect its franchisee's right to operate in circumstances where the franchisor is the gatekeeper of rights with respect to a third party. In its decision, the court navigated the duty of good faith owed in respect of the renewal of a head lease between a franchisor and a landlord.
While some franchised businesses have transitioned to working remotely and have ramped up their e-commerce business models in light of the COVID-19 pandemic, the vast majority of traditional franchised businesses are in a precarious state due to a drastic reduction in revenues and uncertain economic conditions for the foreseeable future. This article sets our practical tips and considerations for franchisors and franchisees with respect to navigating COVID-19.
Few areas of contract law have created as much confusion as the nebulous distinction between material breaches, substantial breaches and breaches going to the root of the contract. This distinction is important in a franchise context, where franchise agreements often provide that the franchisor has a right to terminate the franchise agreement for material breach by the franchisee, leaving what constitutes a 'material' breach open for interpretation.
In recent years, many Canadian provinces have adopted franchise-specific disclosure laws with a view to remedying the inequality of bargaining power between franchisors and franchisees. Subject to certain limited exemptions, franchisors must provide prospective franchisees with full and accurate information in respect of all material facts relating to the franchise business before entering into a franchise agreement, failing which franchisees can bring a claim for rescission and damages against the franchisor.
Franchising communities in Quebec and elsewhere in Canada have been eagerly awaiting a Supreme Court of Canada decision on whether an unincorporated franchisee operating a two-person cleaning services business in Quebec as part of a cleaning services franchise network qualified as an employee. While the court's ruling may be worrisome to franchisors in certain industries, there are several mitigating factors to consider.
The Supreme Court of Canada recently reiterated the fact that franchise agreements are relational contracts and are therefore subject to a heightened duty of good faith pursuant to Quebec civil law. This decision is in line with a series of recent Quebec civil law decisions that have broadly interpreted, and arguably extended, the duty of good faith owed by a franchisor to its franchisees.
Will a franchisee's rescission claim stay or will it go? Mandatory mediation may result in stay of proceedingsCanada | 18 December 2018
It has become common practice to include alternative dispute resolution (ADR) provisions in franchise agreements. A recent decision by the Ontario Court of Appeal serves as a stark reminder to franchisors to ensure that ADR provisions contained in a franchise agreement are properly drafted so that the commencement of disputes thereunder triggers the running of the applicable limitation period.
The issue of whether a franchisee is an employee or an independent contractor has been debated on numerous occasions and was once again raised in a recent Quebec Court of Appeal decision. In its decision, the court emphasised that when analysing whether a franchisee qualifies as an employee or an independent contractor, the courts should look beyond the terms of the agreement between the parties. While this decision may worry certain franchisors, there are a number of mitigating factors to consider.
Franchise arrangements often involve a three-way relationship whereby franchisors enter into commercial leases with landlords and then sublease the rented premises to franchisees. Such leases often contain an exclusivity clause limiting the landlord's ability to lease nearby commercial space to competitors of the franchise network. The Superior Court of Quebec recently confirmed that exclusivity clauses must be interpreted and applied restrictively so as not to unduly interfere with the parties' freedom of contract.
The Ontario courts have recently endeavoured to clarify the outer limits of the parameters within which a franchisee may exercise its right to rescind a franchise agreement. A long-awaited Ontario Court of Appeal decision sends a clear message to the lower courts that a franchisee's right to rescission is an exceptional measure that should not be granted lightly, and that the terms and conditions negotiated between a franchisor and its franchisee cannot be ignored.
The Ontario Court of Appeal overturned a lower court's finding that a deficient disclosure document may be forgiven if the franchisor has provided the franchisee with sufficient information to make an informed decision regarding the acquisition of the franchise. It also held that, where disclosure is insufficient, rescission may be granted regardless of whether the franchisee has read the contents of the franchise disclosure.
Renewal clauses are common in commercial contracts, particularly in the case of franchise agreements. The Supreme Court recently upheld the validity of a clause which had the effect of allowing a franchisee to renew a franchise agreement perpetually. In its landmark judgment, the court affirmed the lower courts' determination that a renewal clause which does not limit the number of times that a contract of affiliation may be renewed is legal pursuant to Quebec civil law.
Until recently, there was significant doubt as to the validity of fees payable by professional franchisees on the basis of professional revenue. However, two decisions in Quebec have established certain conditions for such fee payments to be considered valid, in particular that the fees are related to the fair market value of the goods or services provided to the professional.
A recent Quebec Court of Appeal decision reversed a Quebec Superior Court ruling which had granted authorisation of a proposed class action by consumers against a franchisor for alleged misrepresentations made by its franchisee with respect to the purchase of an extended warranty for consumer goods. The case illustrates the difficulties often faced by franchisors in relation to class action proceedings brought by consumers at the authorisation stage.
A recent Ontario Superior Court of Justice decision has created an unprecedented expansion of a franchisor's disclosure obligations, significantly affecting franchisors' disclosure practices when entering into franchise agreements before the franchise location is determined. This case is troubling for franchisors, for which it has been common practice to enter into franchise agreements before selecting a specific location for the franchise.
The Quebec Court of Appeal has recently addressed whether a franchise agreement may include a clause that would have the effect of renewing the agreement perpetually. This decision is a reminder of the importance of clear renewal conditions and processes in place in the context of franchise, affiliate and banner association agreements.
A recent decision confirms that franchisors may face resistance in enforcing non-compete covenants in circumstances where they are experiencing uncertainty as to their continued presence in a given market or contemplating downsizing their franchise network, as these factors may have a significant impact on what is considered to form part of the franchisor's legitimate interests as they relate to the non-compete covenants of franchisees.
Recent decisions of the US National Labour Relations Board may ultimately undermine certain advantages of franchising arrangements in the United States and could give rise to a willingness by decision-making authorities to blur the fundamental legal separation between franchisors and their franchisees. Now, certain developments relating to labour and employment law suggest that there may be an impending risk to franchisors in Canada.
In Dunkin' Brands the Quebec Court of Appeal ruled on the scope and extent of a franchisor's contractual obligations based on both explicit contractual terms and implicit principles established by law. The decision forms part of an interesting convergence between the duty for parties to conduct themselves in good faith under Quebec civil law and the duty of good faith in contractual performance in common law provinces.
The Quebec Court of Appeal has issued its eagerly awaited decision in the long-running Dunkin' Brands case. Throughout this saga, the Quebec courts have made significant determinations with respect to the scope and extent of a franchisor's contractual obligations based on explicit contractual terms and implicit principles that are established by law.
In a recent decision the Quebec Superior Court recognised that under Quebec civil law, there is a distinction between the concepts of best efforts and reasonable efforts pursuant to the terms of a contract. As a result, practitioners should proceed with caution when drafting franchising agreements to ensure that they properly reflect the parties' obligations and the efforts that a party is expected to use in fulfilling its contractual obligations.
The Ontario Superior Court of Justice recently found that a trademark licence agreement was not subject to the Arthur Wishart Act, Ontario's franchise disclosure law. The judgment provides informative guidelines for businesses that wish to avoid falling within the requirements of franchise disclosure legislation when licensing trademarks in Ontario.
The Ontario Superior Court of Justice recently found that certain disclosure deficiencies alleged by a franchisee were not tantamount to no disclosure at all and did not give rise to the franchisee's right to rescind the franchise agreement on that basis. This decision may constitute an important turning point in the interpretation of disclosure obligation incumbent upon franchisors under the Arthur Wishart Act.
The Ontario Superior Court of Justice recently sent a clear message that it will look past transparent and ill-advised methods of working around non-compete and non-solicitation covenants in franchising agreements. The court granted injunctive relief against the husband of the defendant franchisee's principal and his company, despite them not being a party to the franchise agreement.
A persistent concern in Quebec has been whether interest or late payment clauses could be considered abusive under civil law in the context of the rules of interpretation applicable to contracts of adhesion – as franchise agreements are normally considered – or by being re-characterised as penalty clauses that may be reduced by the court if considered abusive in any contract.
The courts in Ontario have recently had to interpret the statutory duty of fair dealing in the context of claims of breach of such duty by reason of a franchisor withholding critical information that influenced the franchisee's decision not to exercise a right of first refusal. The Quebec Court of Appeal also recently issued a decision of potentially significant import with respect to the duty to inform under the civil law of Quebec.
The Quebec Superior Court recently rejected a motion for a provisional injunction to prevent a former franchisee from operating another restaurant from the same premises where it had previously operated the franchised restaurant. The case will now go to trial on the merits; the court's analysis of the non-compete provision and the obligation to de-identify will be of great interest in the Canadian franchising community.
In Bertico Inc v Dunkin' Brands Canada Ltd the Quebec Superior Court ordered Dunkin' Brands Canada Ltd, the franchisor, to pay more than C$16 million in damages (the full amount of the claim) to 21 former franchisees for repeatedly failing to protect and enhance the Dunkin' Donuts brand in Quebec over the course of a decade. This landmark decision may be seen to impose a burdensome obligation on franchisors.
The Quebec Court of Appeal decision in Réal Martineau v Canadian Tire Corporation Ltd has surprised many in the Quebec franchising community. The court did not, as many had expected, intervene to protect the dealer from a seemingly abusive clause which permitted the supplier to build new stores in the same geographic area as the store operated by the dealer.
TA & K Enterprises Inc v Suncor Energy Products Inc concerned the application of the exemption in the Arthur Wishart Act whereby a franchisor is not required to deliver a disclosure document in circumstances if the franchise agreement is not valid for more than one year and does not involve the payment of a non-refundable franchise fee. The decision has now been confirmed on appeal.
A recent decision may have significant implications for franchisors whose franchisees become insolvent, as the Alberta Court of Appeal ruled that pursuant to the Bankruptcy and Insolvency Act of Canada, a franchise agreement may be assigned by a trustee in bankruptcy.
In a recent case the Ontario Superior Court of Justice offered further interpretation of the disclosure exemptions outlined in Section 5(7) of the Arthur Wishart Act. Adding to previous decisions on this matter, this latest judgment provides new insight into the transfer of franchises, as well as the events that may trigger a disclosure requirement on the part of franchisors.
A recent decision has shed new light on the application of one of the disclosure exemptions for franchisors under the Arthur Wishart Act. The court held that a disclosure document was not required as the agreement was not valid for longer than one year and did not involve the payment of a non-refundable franchise fee.
Bill 102, the Arthur Wishart Amendment Act (Franchise Disclosure) 2010, has passed the second of three readings before the Legislative Assembly of Ontario, Canada's largest province. This proposed amendment could change the existing franchise legislation by greatly increasing the quantity and scope of information that a franchisor would be required to communicate to prospective franchisees.
Manitoba's Entrepreneurship, Training and Trade Minister Peter Bjornson recently introduced for first reading by Parliament Government Bill 15 (The Franchises Act), which is Manitoba's draft franchise legislation. According to the explanatory note contained in the bill, the legislation, which is intended to be of public order, is modelled on the Uniform Franchises Act that was prepared by the Uniform Law Conference of Canada.
A recent decision has shed some light on the application of the obligation of good faith and loyalty in respect of exclusivity provisions in dealership relationships. In light of this decision, it is important that a franchise agreement clearly stipulate, in no uncertain terms, whether an exclusivity has been granted and each party's rights and obligations within an exclusive market.
In a recent case the franchisor, a fertilizer manufacturer, instituted injunctive proceedings against several of its former franchisees, requesting compliance with non-compete covenants contained in their franchise agreements with the franchisor. Given the similar fact patterns of each of the proceedings, the Superior Court of Quebec relied on the facts of one of the proceedings for the purposes of rendering its decision.
In a recent case the Ontario Court of Appeal overturned the trial judge's decision and held that material deficiencies in disclosure documentation amount to non-disclosure, thus permitting the franchisee to exercise its right of rescission of the franchisee agreement, without penalty or obligation, within two years (rather than 60 days) of its execution.
Thus far, four of the 10 Canadian provinces (Alberta, Ontario, Prince Edward Island and New Brunswick) have adopted franchise-specific legislation and other provinces are now considering following suit and enacting similar legislation. This update focuses on the status of franchise-specific legislation and proposed regulations pending in two Canadian provinces: Manitoba and New Brunswick.
A recent decision rendered by the Quebec Superior Court held that the restriction of use covenants contained in several servitudes or easements were personal obligations of the franchisee. Therefore, the court upheld their validity, despite invalidating the actual easements. The decision is interesting in light of the particularities of Quebec civil law, which differs from the common law applicable elsewhere in Canada.
Two recent Ontario Superior Court of Justice decisions have held that material deficiencies contained in disclosure documents that must be provided to prospective franchisees pursuant to the Arthur Wishart Act (Franchise Disclosure) 2000 (Ontario) amount to non-disclosure, giving rise to a franchisee's right to rescind the franchise agreement without penalty or obligation within two years of its execution.
In a recent Alberta Court of Appeal decision it was unanimously held that a franchisor’s failure to comply with a technical disclosure requirement gave way to rescission of the franchise agreement. The decision highlights the importance for franchisors of ensuring compliance with technical requirements under franchise legislation.
There are several different vehicles available to foreign franchisors that wish to carry on business in Canada, each of which has various fiscal and corporate consequences. This update looks at some of the key commercial considerations and regulations affecting franchising in Canada.
In 2007 the Supreme Court of Canada denied Automobiles Jalbert Inc leave to appeal the August 2006 decision of the Quebec Court of Appeal in the case of BMW Canada Inc v Automobiles Jalbert Inc . The decision means that parties to a franchise agreement will be held thereto and should not expect courts - at least those of common law jurisdictions - to alter agreed business terms.
The lease relating to the franchisee's premises is as important a document to the franchisee as the franchise agreement. The lease dictates the franchisee's costs, location and relationship with the landlord. However, there are various things that a franchisee should look out for when agreeing a lease.
It is common for a potential franchisee to request that a franchisor provide it with financial data in respect of the franchise. However, a franchisor should be cautious when delivering financial statements or budget forecasts to a potential franchisee, in order to avoid the possibility of the franchisee misinterpreting the information contained therein as a guarantee of profitability.
Actual and draft franchising legislation in several Canadian provinces imposes a duty of fair dealing on parties to a franchise agreement. Earlier this year the Ontario Superior Court of Justice had the opportunity to determine whether particular behaviour on the part of a franchisee amounted to a breach of that franchisee's duty of fair dealing.
Canada’s different provinces and territories have different franchise-related legislation. In particular, the province of Quebec has no specific legislation dealing with franchising. Instead, the Civil Code of Quebec contains provisions of general application that may give rise to obligations similar to those contained in the franchise-related legislation of the common law provinces.