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.
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.