Canada still scores as franchise destination

It’s a rare Canadian main street without at least one U.S. store, restaurant or coffee chain, a testament to the lure of franchise operations in a country that Americans often view as “international light.”

And the U.S.-to-Canada franchise race remains on track, despite a still murky legal environment in many provinces, as well as possible changes to Ontario’s labour law and a high-profile Quebec ruling that may increase the costs to franchisors in the French-speaking province. The concerns highlight the need for comprehensive legal advice for both sides of the operation: the franchisors and the franchisees. But they have not stopped the steady growth in franchising.

“I have clients from all over the world who see Canada as a wonderful, politically, financially, culturally stable jurisdiction to develop their markets,” says Stéphane Teasdale, co-head of the corporate and commercial law group at Dentons Canada LLP in Montreal and chairman of the international law firm’s global franchise and distribution law group. “I had calls this week with three international clients looking at Canada to develop their stores and develop their

e-commerce platform. They see Canada as being a relatively easy and not so expensive place to do business, with 30-million-plus people to buy their goods and services.”

Larry Weinberg, who specializes in franchise law at Cassels Brock & Blackwell LLP and who chairs the Legal & Legislative Affairs Committee at the Canadian Franchise Association, sees Canada as the No. 1 destination for U.S. brands. “We are not really full-blown international to them,” he says. “We’re a simpler place to go.”

Canada’s advantages for U.S. firms include the sheer proximity of the two markets, as well as a shared language, with the exception of Quebec, and many similar cultural elements. Canadians are familiar with U.S. brands, but they’re also often ready to experiment with something new. Purchasing power remains strong, despite economic weakness in places like Alberta, and the U.S. dollar goes further here.

Yet only five provinces have legislation that specifically addresses franchise businesses, with British Columbia set to follow suit once regulations there come into force. It’s a patchwork of provincial laws that
differentiates Canada from other jurisdictions, which tend to have centralized laws on the issue and which often have less draconian rules on disclosure. The different laws, and lack of laws, present an extra complication for someone looking to expand into several provinces. But it’s not a deal breaker.

“It’s unusual. As far as I know, Canada is the only country in the world where part of the country has a franchise law and part of it doesn’t,” says Weinberg. “Does that alone stop someone from starting a franchise or grow their business? No.”

In Ontario, the relationship between franchisor and franchisee is governed by the Arthur Wishart Act (Franchise Disclosure) of 2000, which sets guidelines on the information that must be made available, both at the start of a partnership and if there’s a material change. “It is akin to consumer protection legislation in that it is intended to protect the prospective franchisee, and the notion is that because franchises are typically longer term and require a significant investment, that a franchisee needs to be duly informed before they make that commitment,” says Jennifer Dolman, a litigation partner at Osler Hoskin & Harcourt LLP. “The legislation is designed in such a way to protect the franchisee and to try to address what is a power imbalance between franchisor and franchisee.”

But Dolman says that can lead to a heavy burden on franchisors, as the franchisees’ legal representatives “push the envelope” in their submissions before the courts.

“There is still a lot of uncertainty regarding what must be disclosed, and regarding some other issues in terms of franchise liability,” she says, noting that rulings have sometimes been contradictory, and the arguments from franchisees can “create too many difficulties and burdens” for franchisors. “We’ve had 15 years of Ontario legislation and there are still questions that are not being answered, and you get these decisions that in many instances people are not expecting at all when you look at what the actual language in the statute says . . .

“It just creates a lot of additional risk and uncertainty if you are coming into Canada. Even the lawyers cannot guarantee that you’ve got the perfect document that’s foolproof because there are still questions that we don’t have answered.”

Dolman notes that Osler, which represents franchisors rather than franchisees, has developed a disclosure document that can be used in all provinces, including those without specific franchise legislation. But a lot of work is still needed to customize each document for individual circumstances.

Cases that are helping to clarify Ontario’s franchising legislation include a pro-franchisor Superior Court ruling that a decision to wind down GM dealerships did not call for a new set of disclosure documents (Trillium Motor World Inc. v. General Motors of Canada Limited), and a second case involving the auto giant (Addison Chevrolet Buick GMC Ltd. v. General Motors of Canada Ltd), where courts have declined to dismiss an argument from franchisees that GM’s U.S. parent company should share liability.

That sort of shared liability, if the case ends up with defeat for GM, could be a concern for larger companies seeking to do business in Canada, given that a non-Canadian parent is not even a party to franchise disclosure documents.

But perhaps more worrying than the legal challenges, to franchisors and franchisees alike, is the possibility that Ontario could change its labour rules and make franchisors joint employers with their franchisees. The idea, a favourite with trade unions, made it into an interim report on a review of Ontario’s changing workplaces, a document that was released in July. It’s a concept that’s also under discussion in the United States, where the National Labor Relations Board is asking for a court ruling on whether hamburger chain McDonald’s is a “joint employer” for the purposes of U.S. labour legislation.

The Canadian Franchise Association is pushing hard against any change.

A new law in Ontario does not necessarily mean that other provinces will follow suit, but it could have a major impact on the franchise business in Canada’s biggest market.

“The fear is this is going to be a snowball going down the hill, and unstoppable at some point. It would really be a sea change,” Weinberg says. Noting that big companies could simply stop franchising if the changes went ahead, adopting a corporate model instead, he adds: “Ontario risks making itself the most unfriendly jurisdiction in the world for franchising.”

Allan Dick, a partner with Sotos LLP, says the arguments about the joint employer issue are political rather than legal and he remains optimistic that Ontario will not change its labour rules in a way that puts the franchise sector at risk.

“The intention is certainly for there not to be joint employment on both the franchisor and the franchisee side, and given that the two sides are fairly aligned on that . . . I think it should be fairly clear that franchisees employ their staff,” he says. “Franchisors have almost no day-to-day contacts with franchisees’ employees and for them to have responsibility for them on a legal basis to me just doesn’t seem good business or what anybody would expect in the marketplace.”

Another concern, particularly in Quebec, centres on the obligations of franchisors highlighted in the Dunkin’ Brands Canada Ltd. v. Bertico Inc. case, which ruled that Dunkin’ Donuts’ Canadian operations had not done enough to promote the brand as Tim Hortons ate away at their share of the Quebec market. The Superior Court awarded almost $18 million to the franchisees, including interest and legal costs.

Lawyers are not too worried that the ruling will have a major impact on franchise businesses outside Quebec, given the differences between Quebec’s civil law-based legal system and the common law system in the rest of Canada. But they are still watching the situation carefully.

“It is a compelling case for the rest of Canada because it’s an assessment of how a franchisor exercises their business

judgment,” says Dick. “If the courts do not like what franchisors do in situations that might require a system change . . . then Dunkin’ Donuts might have applicability. Courts can consider that franchisors can’t necessarily leave franchisees in the lurch, in certain circumstances.”

Quebec-based Teasdale says the Dunkin’ case raised issues about franchisors’ obligations and how they protect their brand. But it was a specific, fact-driven case that may not be applicable elsewhere.

“The Dunkin case is just a reminder, a pretty violent reminder because of the award, that they have to be on their toes and they have to be alert and vigilant. And that’s how they are going to remain relevant and remain successful,” he says.