This article gives a general description of franchise law within the Province of Ontario, Canada. It is to be noted that when examining franchises outside of Ontario, Canada, consideration must be given to the laws in force in that jurisdiction. For example, when examining franchises in the Province of Alberta, one must bear in mind that province's Franchises Act.

The information contained in this article is of a general nature only and is not intended to cover the entire area of law relating to franchises. Furthermore, this information is not directed toward a particular factual situation, and does not constitute legal advice. If you have any questions of a legal nature, or of how the law applies in a particular situation, please consult with a lawyer.

Franchising has had a profound impact on Canadian business, and many franchisors, franchisees and consumers have benefited greatly from it.

For many franchisors, franchising has provided a relatively inexpensive way of growing the business quickly, and of achieving market penetration, without the corresponding capital cost, time and risk of having to establish and finance each business location single-handedly.

For many franchisees, franchising has provided a formalized business structure, within which the franchisee hopes to benefit from the franchisors' experience, know-how, business structure, procedures, trade-marks, goodwill, trade secrets, advertising, and promotion.

Consumers have also benefited greatly from franchising. Consumers expect, and generally speaking, receive, consistent products and services at a particular franchise, whether that franchise is located in one city, or the next.

Consumers also benefit from the market penetration which has been achieved by some franchises, which allows those franchises to honor discounts, or warranties, or promotions, nationwide.

Despite the possible benefits, franchising is not for everyone, and it is certainly not without serious risks. Prospective franchisees, who will want to rely heavily on a wide range of "hoped-for" benefits from the franchisor, should conduct thorough research in relation to any potential franchise, and the franchisor, before taking any steps with respect to that franchise. Franchisors, on the other hand, put the goodwill and viability of their franchising business at risk each time they enter into a franchise agreement, and should conduct thorough research in relation to a prospective franchisee before any steps are taken with respect to that prospective franchisee. It is essential that all parties involved in franchising conduct thorough investigations and consult with a lawyer before any steps are taken in relation to a prospective franchise.

FRANCHISING

Franchising is simply a method of distributing goods or services. Typically it involves the franchisor, who, for a fee (or fees), licences to one or more franchisees, a complete business structure or format, which may include the business' name, trade-marks, appearance, trade secrets, patents, copyright, designs, procedures, techniques, business manuals, accounting systems, employee uniforms, etc. The franchisee agrees to implement and follow this structure, consistently and without deviation.

That is, it is normally the franchisor's wish to establish a franchise network, in which each franchise in the network is a clone of other franchises in the network.

Franchisors and franchisees enter into a FRANCHISE AGREEMENT, in which the relationship and agreement between the franchisor and franchisee is described in detail.

FRANCHISE AGREEMENT

A franchise agreement is a contract which is entered into between the franchisor, and the franchisee (and any guarantors, or others) in which the relationship between the franchisor and franchisee (and others) is described, in detail.

Typically, franchise agreements will describe, (in legal language, of course):

the parties to the agreement (the name, address and other details of the franchisor and the franchisee, and any other parties to the agreement);

the business structure or format being licensed to the franchisee, including, for example, the business' name, trade-marks, appearance, trade secrets, patents, copyright, designs, procedures, techniques, business and operating manuals, accounting systems, employee uniforms, etc. and the wares, and/or services which are the subject of the franchise;

the duration of the franchise (that is, the length of time during which the franchise will continue, and any renewals or options to renew the franchise at the end of the term);

the fee or fees payable by the franchisee to the franchisor, some of which may be one-time fees (for example, a payment of an initial franchise fee), and some of which may be ongoing fees (for example, a monthly payment of a percentage of the gross monthly sales of the franchise);

any territorial limitations on the franchise;

any training and/or re-training requirements;

the obligations on the franchisee to abide by the franchisor's business structure and standards (and the consequences of failing to do so);

any obligations on the franchisee to modify the business structure and standards at the request of the franchisor;

any obligations on the franchisee to introduce the franchisor's new products and services into the franchise, and any obligations to cease selling particular products and services in the franchise;

any obligations on the franchisee to purchase products or services from the franchisor or from approved suppliers, and the price at which these products or services will be purchased;

any obligations on the franchisee relating to the hours and days of operation of the franchise;

any obligations on the franchisee to advertise or promote the franchise, or to contribute to the franchisor's advertising or promotional program;

any obligations on the franchisee to participate in special promotions (for example, to redeem promotional coupons);

any obligations on the franchisee regarding the maintenance of financial records, and any obligations on the franchisee to make these records available to the franchisor;

any obligations on the franchisee relating to insurance policies;

any restrictions on the sale of the franchise by the franchisee;

the method or methods by which a franchise may be terminated by the franchisor;

any continuing (post-franchise) obligations on a former franchisee;

Note: The above list is not exhaustive, but is for illustrative purposes only. Furthermore, leases, subleases, confidentiality agreements, security agreements and other documents may also form part of the franchise relationship, although these documents may be physically separate from the Franchise Agreement.

Copyright: A form of "intellectual property" which protects original literary, artistic, musical and dramatic works, by giving the owner of copyright various rights, including the exclusive right to reproduce the work, in whole, or in substantial part, in any material form whatever. A partial list of works which are protected by copyright in Canada, includes: books, newspapers, dictionaries, magazines, computer software, paintings, drawings, sculptures, architectural works, engravings, dramatic works, photographs, films, videos, maps, and musical works  (click here to return to text).

Franchisor: Typically, the franchisor is the organization which has established a business structure or format, which it licenses to a franchisee for a fee (or fees). The franchisor may or may not be carrying on its own business using the business structure. (click here to return to text)

Franchisee: Typically, the franchisee operates a business using the business structure or format of the franchisor, and pays to the franchisor one or more fees for the right to use the business structure or format. (click here to return to text)

License: A "license" is an arrangement in which the giver of the license (the giver of the license is often called a "licenser" or "licensor") gives to the recipient of the license (the "licensee"), the right to do certain things. For example, the owner of a trade-mark (the licenser in this example) may give a manufacturer (the licensee in this example) the right to use a particular trade-mark on the manufacturers' products. For example, a local pop bottler may enter into a license with a nationally advertised cola company, to make and sell cola in the local bottler's district, using the cola company's nationally advertised trade-mark. (click here to return to text)

Patent: A form of "intellectual property" which relates to inventions, which gives the owner of the patent, the exclusive right to make, use and sell the invention claimed in the patent , in Canada, for the duration of the patent. (click here to return to text)

Trade-mark: A trade-mark (or "trademark") is typically one or more words, or numbers, or a design, (or any combination of these) which one business uses to distinguish its goods or services from the goods or services of another business. For example, the Coca Cola Company uses the COKE trade-mark to distinguish its brand of cola from PEPSI cola, and the other colas in the marketplace. Similarly, McDonald's Restaurants uses the MCDONALD'S trade-mark to distinguish its restaurant services from BURGER KING restaurant services. (click here to return to text)

Philip B. Kerr is an Ontario lawyer whose law practice is restricted to patent, trade-mark, copyright and computer law. He was called to the Ontario bar in 1986.

His law firm is located at 901 Somerset Street West, Ottawa, Ontario, CANADA. His telephone number is (613) 238-2002, and his facsimile number is (613)569-4652.