Q: Canadian Business Franchise is celebrating its 20th anniversary. What have been the most significant changes in franchising during the past 20 years, in both business and legal terms?
The changes have been enormous, yet in many ways, the issues that prevailed 20 years ago are still much the same today. The legal complexities of franchising have certainly grown immensely, making the field a specialty of its own, requiring a vast array of franchise legislation knowledge for any lawyer to advise a prospective franchisor or franchisee effectively, without risking a potential liability claim.
Franchising 20 years ago
In the early to mid-1990s, franchising grew rapidly along with the fast-moving economy. Many new startups entered the field and foreign-based franchisors—primarily from the U.S.—sought Canadian franchising candidates and expanded into this country through master franchise arrangements and, to a lesser degree, area development agreements.
At the same time, well-established Canadian franchisors—like Boston Pizza, Shoppers Drug Mart, Mr. Submarine, Country Style Donuts, Tim Hortons, Pizza Pizza, Mr. Lube, Bulk Barn Foods, Mr. Transmission, M&M Meat Shops and Second Cup—continued to grow nationally, though very few ventured into international markets at all.
The legal issues of franchising at that time were not very complex. Only one province, Alberta, had already enacted franchise legislation.
That legislation required the filing of a prospectus or statement of material facts and registration of salesmen before a franchisor could franchise within Alberta. It did not deal with such concepts as fair dealing or the right to associate, although provincial regulators did review franchise agreements and often required changes to provisions considered excessively harsh to franchisees.
Franchise agreements and ancillary documents continued to become more one-sided in favour of franchisors. The courts were most frequently called upon to consider cases of default and termination. They applied general principles of contract law in reviewing issues of misrepresentation and breach and began to look closely at the effect of those clauses drafted in favour of franchisors.
Very few cases went beyond the supreme or superior courts of the provinces. Most were decided on their specific facts, with very little law being established in the context of franchising in general. The 1975 Supreme Court of Canada decision in Jirna v. Mr. Donut—which held the franchisor was not accountable to franchisees for rebates from suppliers, in view of the fact the franchise agreement disclosed rebates could be paid by suppliers to the franchisor—remained the seminal legal case in franchising. Without detailed disclosure of the nature or amount of rebates enjoyed by franchisors, franchisees continued to complain about such allowances not being shared with them, but few were successful in challenging the practice.