Articles 2020

Franchise agreements often contain non-competition provisions or other restrictive covenants to prevent departing franchisees from using the knowledge and expertise gained during the term of their agreements to compete against the franchisor once the relationship is over. However, depending on the facts of each case and the specific terms in the franchise agreement, these non-competes may not be enforceable.

This article provides a basic-level overview of the issues associated with disclosure documents and their impact on franchisors, pursuant to the Arthur Wishart Act (the “AWA”). Disclosure is at the heart of the AWA - as stated by the Ontario Court of Appeal: “The purpose of the legislation is to protect franchisees and the mechanism for so doing is the imposition of rigorous disclosure requirements and strict penalties for non-compliance.”

While many franchisors are aware that they have disclosure obligations when granting a franchise to a prospective franchisee, many forget that they have the same disclosure obligations where a franchisee is selling their franchise to another franchisee.

The Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (“AWA”) came into force on December 15, 2009. The AWA provides certain inalterable rights and duties in the relationship between a franchisor and franchisee. These duties have been the subject of considerable litigation. However, there has been little discussion around the circumstances in which the AWA will not apply.

In 2176693 Ontario Ltd. v. Cora Franchise Group Inc., the Ontario Court of Appeal addressed the issues of the enforceability of a franchise agreement clause which purported to require the franchisee to provide a general release to the franchisor and the application of the doctrine of severability in the context of the Arthur Wishart Act (“AWA”).

After much anticipation, the Quebec Court of Appeal released its decision in Dunkin’ Brands Ltd. c. Bertico inc., 2015 QCCA 624, on April 15, 2015.

The obligation to disclose does not end with the delivery of a disclosure document.

The decision of the Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71, which was released on November 13, 2014, deals with the common law duty to perform contracts honestly. It also provides a thorough and reasoned examination of the development of the good faith principle in Anglo-Canadian contract law and will likely be seen as a seminal decision in this area.

If a franchisee does not receive a disclosure document fourteen days prior to paying any money to a franchisor or signing a franchise agreement, it is entitled to rescind its franchise agreement under section 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000 c.3.

Despite a franchisor's best efforts, litigation may be unavoidable in the operation of a franchised system. This article discusses best practices in managing litigation resultant from operating a franchised system.