This blog was written with the assistance of Matthew Douglas, summer law student.
Have you ever wondered how a family or member of your community can own a piece of a national — or even an international — brand? The answer is franchising.
A franchise is a business formation that involves a localized group, the franchisee, conducting a commercial operation as an agent for a centralized company, the franchisor.
The franchisor provides business knowledge, trademarks, processes and the business name to the franchisee. In return, the franchisee complies with certain conditions and pays certain franchise fees. These fees likely include significant start-up costs and royalties, which typically consist of a portion of revenue.
There are numerous advantages associated with this type of business formation. Franchisees who want to start a new business gain access to a recognized brand and established trademarks, while franchisors benefit from a low-cost way of expanding. Franchising is prevalent in Saskatchewan, spanning a wide range of industries such as the retail and restaurant sectors.
Addressing the Power Imbalance
Forming a franchise requires a franchisor and franchisee to sign a franchise agreement. An issue that arises with franchises is the power imbalance in favour of franchisors. This typically results in the franchisor dictating the terms of the agreement, as opposed to negotiating with the franchisee.
Franchising is regulated at the provincial level in Canada. Currently, six provinces have legislation in place to address this power imbalance: Alberta, Manitoba, British Columbia, Ontario, New Brunswick and Prince Edward Island. The legislation in each of these provinces varies slightly; however, the overarching principles are: (i) the imposition of disclosure obligations for the franchisor; (ii) the imposition on both parties of a duty to deal in good faith; (iii) the right and freedom for franchisees to associate or form associations with each other; and (iv) statutory remedies available to the franchisee.
In line with offsetting the power imbalance in franchisor-franchisee relationships, franchise regulation legislation cannot be contracted out of and will supersede any agreement between the parties.
No Franchise Regulation Legislation in Saskatchewan
Saskatchewan does not have franchise legislation. Therefore, parties to a franchise agreement —particularly franchisees — are well advised to pay close attention to the following aspects of the agreement:
- royalty fees;
- renewal and termination fees;
- term length and termination conditions;
- renovations and supply conditions;
- renovation and design conditions; and
- insurance requirements.
Because Saskatchewan does not have franchise legislation, disputes are governed by common law principles, predominantly arising from contract law.
On a number of occasions, the Supreme Court of Canada has rejected the idea that a fiduciary duty exists between a franchisor and franchisee (see Bhasin v Hrynew, 2014 SCC 71; 1688782 Ontario Inc v Maple Leaf Foods Inc, 2020 SCC 35). The Saskatchewan Court of Queen’s Bench rejected the existence of a fiduciary duty when a franchisee sought damages for the restructuring of a lease agreement that ultimately benefitted the franchisor (see First Aberdeen Properties Ltd v First Aberdeen Properties Ltd, 2019 SKQB 101).
However, there is a duty of good faith in Canadian contract law. This was further defined by the Supreme Court’s recent decision in CM Callow Inc v Zollinger, 2020 SCC 45. Further, it has been recognized that the duty of good faith is not static, but subject to the specific circumstances of each situation and business relationship. This includes the power imbalance apparent in the franchisor-franchisee relationship, resulting in a higher duty of good faith. Ultimately, determining exactly what level of good faith is required in these relationships requires sophisticated legal analysis.
Don’t Go It Alone
The franchise lawyers at MLT Aikins are happy to help franchisors navigate the unique landscape in Saskatchewan and elsewhere in Western Canada, including drafting agreements and litigating disputes, so you can focus on the success of expanding your franchise. Contact Aziz Aboudheir, Conrad Hadubiak, Q.C., or a member of our Litigation group to learn more.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.