The Canadian Franchise Agreement

• Author: Darrell Jarvis and Edith Dover
• Pages: 151-204

The Canadian Franchise Agreement

CHAPTER 5

Darrell Jarvis and Edith Dover

Contents

151

I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 53

A. Term and Renewal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 55

B. Territory and Reservation of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

C. Non-competition Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161

D. Initial Fees and Royalty Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

E. Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168

F. Location, Design and Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

G. Pricing Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171

1. Unfair Business Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2

H. Training and Operating Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . 173

I. Advertising Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174

1. Establishment of Advertising Funds . . . . . . . . . . . . . . . . . . . . . . . 174

2. Advertising Provisions in the Franchise Agreement . . . . . . . . . . 176

J. Intellectual Property Protection and Confidentiality . . . . . . . . . . . . . . 179

K. License to Use Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 1

L. Accounting Records, Audits and Inspections . . . . . . . . . . . . . . . . . . . 18 4

M. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

1. Liability Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 85

2. Property Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186

N. Assignment, Transfer and Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186

O. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 89

1. Franchisee’s Obligations upon Termination or Expiration . . . . . 191

2. Franchisor’s Rights and Obligations upon Termination . . . . . . .1 92

P. Guarantor’s Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 92

Q. Security to Franchisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 94

R. Boilerplate Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195

1. Canadian Spelling and Language Issues . . . . . . . . . . . . . . . . . . . . 195

2. Currency Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197

3. Penalty Clauses and Equitable Remedies . . . . . . . . . . . . . . . . . . .1 97

4. Waiver of Jury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 99

152 Chapter 5

5. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

6. Entire Agreement Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

7. Governing Law and Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . 20 1

8. Mediation and Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202

II. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .204

The Canadian Franchise Agreement 153

153

I. Introduction

With a large majority of Canada’s population living close to the border of the

United States and given the two countries’ similar cultural backgrounds, it is not

surprising that Canada is frequently a popular destination for American-based

franchise systems. Being part of the North American marketplace also makes

Canada an attractive location for franchise systems that have their roots in other

parts of the world.

There are a number of differences between the Canadian and the United

States marketplace, and a franchisor looking to start up or expand into Canada

cannot assume that what works elsewhere will also work in Canada. For ex-

ample, Canada’s population base tends to be spread out, impacting distribution

costs. Tax laws are different, and the supply of products can be affected by

marketing boards in Canada for such things as poultry and dairy. With this in

mind, a franchisor commencing business in Canada must approach expansion

with a careful eye to what is unique about Canada.

The backbone of any franchise relationship, wherever the franchise system

is located, is the franchise agreement. Franchisors from outside of Canada, as

well as franchisors starting up systems in Canada, need to focus attention on the

franchise agreement they intend to use in Canada. In preparing for expansion in

or to Canada, the franchisor should address some unique issues relating to the

laws and practices of franchising in Canada. Whether it is because of the Cana-

dian legal system or simply due to the evolution of different conventions, the

reality is that franchise agreements used in Canada differ in some ways from

those used in the United States. No matter where the franchise system origi-

nated, a franchisor needs to be careful not to adopt, in a wholesale fashion for

use in Canada, a franchise agreement drafted for use in the United States or

other parts of the world without first considering what changes are necessary or

recommended. The advantages of these recommended changes will be weighed

against the franchisor’s desire to use a standard uniform agreement wherever

they franchise. Many franchisors, as they gain in experience in international

franchising, learn the dangers of trying to adopt a worldwide precedent fran-

chise agreement. Accordingly, it will always be the case that a foreign franchisor

entering the Canadian marketplace should first consider what unique

“Canadianization” of the agreement is recommended.

A franchise relationship is often referred to as being similar to a marriage.

As in marriage, many unforeseen challenges can arise. Any good franchise agree-

ment will anticipate major events in the relationship and provide solutions in

advance to prevent problems from becoming relationship-ending issues.

Franchisors want to see their franchisees succeed and flourish. The success of