Keeping Up with Franchise Law in Canada
Osler’s Franchise Group is featured in an “Editorial Gem” in an exciting new book, Great Canadian Franchise Stories, written by Dawn Mucci and Felicia Pizzonia. The title of our article is “Why Choosing the Right Law Firm Is Critical to Your Success in Franchising.” As we stated in our article, “[I]n view of the complexity of franchise and other laws which impact the establishment, growth and operation of franchise systems, almost certainly these and many other successful franchisors have relied on experienced franchise law firms to manoeuvre through the legal and business aspects of franchising by providing proactive, creative and practical advice incorporating best practices in the industry.” We strive to practise these principles in our everyday advice to, and relationship with, our clients. The challenge for us is to keep up with all the developments in the law – both statutes and cases – that directly and indirectly affect franchising throughout the country, and to incorporate these developments into the advice we give to, and the documents we prepare for, our clients.
Over the years we have worked with many franchisors that developed franchise systems and started franchising for the right reasons and in the right manner. However, we have unfortunately seen a number of franchisors start franchising for the wrong reasons and without proper preparation and advice. We have seen franchisors that have grown their systems utilizing the best practices in the industry; but, unfortunately, we have also seen franchisors that have grown their systems without proper planning or direction.
Two conclusions are absolutely clear from our experience. Franchising should not be undertaken as a means of raising capital or testing a business system. There are too many uncertainties, costs and personal commitments required to launch a successful franchise system to risk personal or corporate financial and operational resources and those of franchisees, not to mention risking the possibility of debilitating lawsuits.
As a specialty area, franchising is relatively new to the legal profession because most franchise legislation in Canada has been in force for less than 10 years. However, some law firms have been active in franchising for many more years (for Osler, over 35 years), advising franchisors in respect of their documents and practices before franchise legislation existed. Two of the most critical areas of concern to a franchisor in Canada are (1) What’s in your franchise agreement? and (2) Does your franchise disclosure document measure up?
Your Franchise Agreement
There are a number of questions that a prospective or existing franchisor should ask about a franchise agreement (and ancillary documents) before retaining or while working with a law firm:
Does the firm have knowledge and experience in structuring a franchise system?
Is the firm up to date with case law, current trends and best practices?
Is the firm ready, willing and able to deal with possible disputes as they arise?
Does the firm have expertise on a national basis to advise on all areas of law (not just franchise legislation) that apply to the franchise concept?
Does the firm have the experience necessary to understand the various business elements applicable in franchising in specific product or service segments? (Osler has advised over 400 franchise systems.)
Is the firm able to proactively consider risk versus reward in including certain types of provisions in franchise documents?
Your Franchise Disclosure Document
For many years, lawyers prepared Canadian franchise disclosure documents on a one-for-all basis, without considering the fact that franchise disclosure must be tailored to the individual franchise being offered. As unique situations developed with respect to specific franchises, Osler’s Franchise Group quickly recognized that franchise disclosure documents must be customized for initial sales, resales or transfers, renewals and sales of corporate units. By carefully considering comments made by the courts in reported decisions and unreported cases in which we have been involved, we became aware that the courts are looking for customized disclosure documents with complete disclosure of all material facts specific to the actual franchise being offered.
The two areas of major concern become even more complex for foreign-based franchisors that contemplate entering the Canadian market because their domestic documents and business practices need to be carefully reviewed and revised to comply with Canadian laws and practices – a task that only a national business law firm experienced in franchising and knowledgeable about all the related provincial and federal laws and business practices can undertake with confidence and certainty.
As we said in our commentary in Great Canadian Franchise Stories, “[N]o franchisor should voluntarily expose itself to the significant risk of rescission and statutory damages when the costs of obtaining experienced legal counsel are relatively insignificant compared to the potential costs of a long, protracted and disruptive legal claim or worse still, class action. Experienced and proactive legal counsel can help a franchisor turn what may otherwise be considered an expensive and cumbersome document into a valuable and positive sales tool.”
Partnering with the right law firm experienced in franchising will help a start-up or existing franchisor to develop, operate and expand its franchise system with a comprehensive understanding of how to use and adopt the best practices in franchising.