14 | LEXPERT • June 2017 | www.lexpert.ca/usguide-corporate/
This could ultimately mean that a franchisor in that scenar-
io would be obligated to reimburse the franchisee for the total
quantum they paid to the franchisor, as well as to parties such
as contractors, and possibly, toward lease commitments. This
is in addition to losses the business incurred up to the period of
rescission. "It is very powerful, and there's no defense to it. It's
a strict liability."
How common are rescission suits? "They happen almost ev-
ery day," he says. However, many, if not most, settle before they
get to court, in part to keep it out of the public domain so other
franchisees don't necessarily find out and follow suit. Still, for US
companies, it can be an expensive lesson.
Blair Rebane, national leader of the franchise and distribution
group at Borden Ladner Gervais LLP in Vancouver, says many
US in-house counsel are caught by surprise at just how different
the climate is. Unlike in the US, where franchisors need to regis-
ter in some states, there is no registration process in Canada and
no federal franchise law. "I always get asked that question," says
Rebane. "None of that exists here."
The other main difference, assuming the franchisor is pre-
pared to make specific Canadian disclosure, he says, is it may
have to be tailored for each individual franchisee. "In Canada,"
he says, "because of where our case law has gone, you also have to
ask yourself whether there is site-specific information that needs
to be included in the disclosure document, information you
wouldn't really ask in the US."
Rebane uses the example of a franchisor that has already scoped
out locations, found a good one, entered into a lease for it and is
starting to develop the location on spec while looking for a fran-
chisee. Under that scenario, in Canada, the disclosure agreement
handed to the franchisee will have to contain a schedule with all
available site-specific information. The document would have to
contain "a copy of the head lease, a summary of the relevant provi-
sions, if you've entered into a construction agreement for that loca-
tion, likely a copy of that agreement and some details around it."
If it's a resale and the franchisor had sent five notices of default
to the selling franchisee in the past two months, you would also
have to disclose those notices of default, he says. In one case Re-
bane was involved in, the franchisor knew a street was going to
be shut down for a very long time while transit was being built
up, but didn't disclose it to the franchisee who was going to build
on that very street. "It's that type of site-specific information that
franchisors have to think about."
In Canada, the key is, when you hand over a disclosure docu-
ment, you've got to ask yourself every time whether it includes all
material information. In the US, it's "kind of like a tick list, and as
long as you tick all the boxes and have all that information, you're
okay. Here, we have that but you also have to include anything
material — and material is anything that could impact the fran-
chisee's decision to acquire the franchise. You can't use the same
disclosure document every time."
The issues in deciding whether to franchise in Canada aren't
confined to disclosure. The actions of one province are actually
sending out alarm bells, and it's Ontario, home to about a third
of Canada's population. As part of a sweeping review aimed at
modernizing its labor and employment laws, the Ontario govern-
ment is looking at making the franchisors joint employers with
its franchisees — a debate that's swirling in the US where the Na-
tional Labor Relations Board has been discussing it for years. If
the franchisor becomes a joint employer, it could mean liability
for a parent company for violations by franchisees, and it might
require the parent company to be involved in the bargaining with
unionized and unionizing workers.
"A lot of the things that have been said in the US, those same
arguments are now being made in Ontario," says Larry Wein-
berg, a partner at Cassels Brock & Blackwell LLP in Toronto.
He says the Ontario government has appointed special advisors
who have received the same submissions that were made in the
US, "just made by Canadian union groups. They took a lot of the
stuff from the US."
The special advisors are expected to issue their final report,
with recommendations, in 2017. Weinberg has met with them on
behalf of the Canadian Franchise Association. The report will
not be binding; the Ontario Ministry of Labour can determine
the way in which it proceeds.
Weinberg believes it would be a seismic miscalculation to make
franchisors joint employers. "It would be a huge disincentive for
anybody to expand into Ontario — and Canada — especially
from the US. Eight times out of 10, Ontario is where they come
first because of the population." He is telling US franchisors that
the industry "is being quite vigilant in letting the government
know its position, and I feel quite confident someone in the gov-
ernment of Ontario will … realize it will drive away business if
they pursue this course of action."
As if that weren't challenging enough, as of January 2017 On-
tario made it mandatory for chains with more than 20 outlets to
label the calorie content for each item and put it into the context
of what a normal person needs each day.
"There's been some concern among lawyers about whether the
franchisor could be held liable for the franchisee's failure to com-
ply," explains Bruno Floriani, a partner at Lapointe Rosenstein
Marchand Melançon, L.L.P. in Montréal. Floriani says, moreover,
"[Raibex v. ASWR] is a game-changer if it means franchisors can't deliver
disclosure documents before ... all material facts are known. [Until the
appeal court reviews the decision] the common practice of selecting a site
after the franchise agreement has been signed is not without risk."
Jennifer Dolman
Osler, Hoskin & Harcourt LLP
FRANCHISE LAW
