Franchise systems typically derive much of their value from information—the systems, processes, data, know-how and relationships that distinguish them in the marketplace. This blog series explores how Canadian law protects those intangible business interests, where the limits of that protection lie, and what franchisors can do—proactively and reactively—to safeguard them.

When Sotos LLP assists franchisors in designing or refining their franchise systems, we offer a tailored audit of their intellectual property to ensure it’s properly protected. This proactive service helps identify potential vulnerabilities and establish safeguards, supporting the long-term value and success of our clients’ systems.

Why Confidential Information Matters

For many franchise systems, confidential information constitutes the core of the business. Operation manuals, pricing strategies, supplier terms, customer data, marketing plans, technical data, and proprietary systems and know-how are often what make a brand scalable, defensible, and valuable.

Yet confidential information is also uniquely vulnerable. Unlike physical assets, it can be copied instantly, transmitted invisibly, and misused long after a relationship ends. Canadian law does protect confidential information, but that protection is not always automatic. It can depend on how the information was created and controlled.

Protecting confidential information is important not only because of its value to the franchisor’s business, but also because the consequences of a breach may extend beyond the immediate actor. In some circumstances, a franchisee’s improper disclosure of customer or system information may expose the franchisor itself to legal and/or reputational risk.

This first post in the series provides a foundational overview: what counts as confidential information, how does the law protect it, and what should franchisors be thinking about now to reduce risk later.

What Is Confidential Information?

At a high level, confidential information is information that courts have described as having a “quality of confidence about it”. To determine whether information possesses this quality, consider the following non-exhaustive list of factors:

• The extent to which the information is known outside the franchisor’s business;
• The extent to which it is known by corporate employees and/or franchisees and others involved in the franchisor’s business;
• The extent of measures taken by the franchisor to guard the secrecy of the information;
• The value of the information to the franchisor and its competitors;
• The amount of money or effort expended by the franchisor in developing the information; and
• The ease or difficulty with which the information could be properly acquired or duplicated by others (e. by their independent endeavours).

Against that backdrop, and speaking generally, the more resources and skill expended to create the information, the greater the market value of the information, and the more comprehensive a franchisor’s efforts to safeguard the information, the more likely that information will be considered to be confidential, and thus capable of protection.

How Does the Law Protect Confidential Information

Unlike statutory protections for intellectual property such as trademarks or patents, confidential information is primarily safeguarded through the common law in Canada. There is no comprehensive legislative framework for the protection of confidential information. Instead, remedies for misuse are developed through established common law principles.

When a franchisor’s confidential information is misappropriated, the law offers several avenues for redress, often including requests for urgent injunctive relief to prevent further damage. Common legal claims for the protection of confidential information include:

• Breach of Confidence. A franchisor may bring a claim for breach of confidence when it can demonstrate that the information in question is confidential in nature, was disclosed in circumstances where an obligation of confidentiality existed, and has been improperly used or disclosed. In the franchise context, this commonly arises where a franchisee or former employee seeks to use proprietary information—such as trade secrets, operations manuals, supplier lists, or customer lists—to benefit a new or competing venture.
• Breach of Contract. A franchisor may also pursue a breach of contract claim if the defendant has violated a specific confidentiality provision agreed upon in a contract. For example, franchise agreements often include clauses that impose an explicit duty of confidentiality on franchisees. A breach occurs when the defendant improperly discloses, uses, or misappropriates confidential information contrary to the terms of its contractual obligations. Given the nature of franchise relationships, this often arises when a franchisee uses confidential system information to create or help others create a competing business.
• Breach of Fiduciary Duty. In certain business relationships, a fiduciary obligation may exist, such as between a senior executive and a franchisor. A breach of fiduciary duty claim arises when a fiduciary misuses confidential information entrusted to them in a manner that undermines the interests of the beneficiary. For example, if a senior executive leaves a franchise system to join or start a competitor, and in doing so improperly utilizes or discloses confidential information gained during their tenure, this constitutes a breach of their fiduciary duty. The franchisor may seek damages or injunctive relief to prevent further misuse of the confidential information.
• Unjust Enrichment. Where a party has improperly benefited from the misuse of confidential information, a claim for unjust enrichment may be available. This claim seeks to prevent the party from retaining the illicit benefits derived from the misappropriation. In the context of a franchise system, unjust enrichment claims may be brought if a former franchisee uses proprietary business methods, marketing strategies, or customer information to establish a competing business and gain a financial advantage at the franchisor’s expense. The court may order the return of any unjust profits or impose equitable remedies to remedy the wrongful benefit.
• Copyright Infringement. There is often an overlap between confidential information and information protected by copyright. Copyright protection arises automatically when an original work is created and fixed in a tangible form. Where a confidential work is also subject to copyright, the unauthorized reproduction, use, or distribution of that work may give rise to statutory claims for copyright infringement, in addition to any common law remedies available for misuse of confidential information. For example, a third party that copies or adapts a franchisor’s operations manual for use in a competing franchise system may be liable for copyright infringement.
• Potential Criminal Liability. The Criminal Code also provides for criminal sanctions in cases of the improper disclosure of trade secrets under sections 391(1) and (2). While criminal charges are infrequently pursued in the context of confidential information breaches, they remain an option where the conduct crosses the threshold of dishonesty or fraud.

How Can Franchisors Protect Their Confidential Information?

While later posts in this series will address specific risk areas, several high-level principles apply universally.

• Identify What Matters. Not all information warrants the same level of protection. Franchisors should clearly identify what information is confidential, who needs access and who does not, and whether sufficient systems are in place to protect information from inadvertent or improper disclosure.
• Use Clear, Enforceable Agreements. Contracts remain a primary, preventative line of defence to breaches. These may include confidentiality and non-disclosure agreements, employment and contractor agreements, and franchise agreements with robust information-protection provisions.
• Limit and Control Access. Access should be need-to-know, supported by passwords and access controls. Clear policies governing use and disclosure should also be in place.
• Act Consistently With Confidentiality. How a franchisor behaves matters. Marking documents as confidential, training staff, and responding promptly to breaches all signal that the information is confidential in nature and deserving of protection.
• Prepare for Exit Events. Departures, whether by franchisees, executives, or employees are high-risk moments. Advanced planning is essential.

How We Can Help

If you have questions about protecting your confidential information or would like assistance assessing your current protective framework, Sotos LLP regularly advises franchisors on these issues and would be pleased to assist.

About the Author

Daniel Hamson, Sotos LLP

Daniel is a partner in the Litigation Department at Sotos LLP. His practice focuses on complex commercial, corporate, and franchise disputes.

Daniel has been recognized for his litigation work and industry expertise. He is listed as “Ones to Watch” in Best Lawyers in Canada and has been named a “Lawyer to Watch” in the Canadian Legal LEXPERT Directory, as well as in the LEXPERT Canada’s Leading Litigation Lawyers. He is also recognized as “Recommended” in Lexology Index: Canada (formerly Who’s Who Legal).

Daniel can be reached directly at 416.572.7303 or dhamson@sotos.ca.

The post Protecting the Information Behind the Brand appeared first on Sotos LLP.

Background

In 2021, Mr. Zagros Management Inc., a restaurant franchisor, leased a premises from Yulee Developments Inc. In turn, Mr. Zagros sublet the premises to its franchisee, 11254316 Canada Inc. Under the lease, notices from the landlord to Mr. Zagros were required to be delivered to the premises.

Throughout the operation of the franchise, as a matter of course, the franchisee paid rent directly to the landlord. In March 2024, however, the franchisee failed to pay rent, which resulted in a demand issued by the landlord to the franchisee. Neither party informed Mr. Zagros of the situation.

The arrears remained uncured into April. In response, on April 3, the landlord delivered a notice of default to the premises addressed solely to the attention of the franchisee’s principal. The landlord also emailed a copy of the notice to the principal, but not to Mr. Zagros. The notice provided for a five-day window to pay the arrears.  Despite being informed the next day by the franchisee’s lawyer that his client had not forwarded the notice to Mr. Zagros, the landlord waited until the cure period expired on April 9 before taking steps to actually bring the notice to Mr. Zagros’ attention.

After Mr. Zagros learned of the arrears on April 9, its principal contacted the franchisee’s principal and, believing that the latter would rectify the arrears, left the matter with her. In the meantime, the franchisee’s principal began negotiating with the landlord. The negotiation included a proposal that the franchisee’s principal pay the arrears, albeit once the lease was terminated and a new lease was entered into directly with her. The parties did not disclose these negotiations to Mr. Zagros.

Shortly thereafter, with the arrears still outstanding, the landlord purported to terminate the lease by issuing a notice of termination addressed solely to the franchisee. The landlord and a newly incorporated company controlled by the franchisee’s principal then signed a new lease for the premises. The franchisee’s principal proceeded to open a restaurant competitive with her former franchise from that location.

The Application

Mr. Zagros commenced an application against the landlord, the franchisee, its principal and her newly incorporated company seeking, among other things, a declaration that the default and termination notices were not delivered in accordance with the lease and were therefore void. According to Mr. Zagros, the notices were non-compliant because, as a matter of contractual interpretation, the notice provision required that notices delivered thereunder, at a minimum, not be addressed to the wrong party.

The landlord defended the application on the principal basis that, irrespective of who the default and termination notices were addressed to or the practical consequences of this error, it complied with the strict wording of the notice provision by simply delivering the notices to the premises.

In two endorsements, the application judge accepted Mr. Zagros’ submission:

[T]he notice of termination is deficient. It was not addressed to Mr. Zagros but rather to 112. 112 was not the tenant. I am of the view that the notice of termination had a fatal defect as it was not addressed to Mr. Zagros Management Inc. and did not accord with the provisions of the lease…

…

In my January 2025 Endorsement, I held that the notice of termination was deficient. I did not explicitly address the notice of default dated April 3, 2024. However, that notice is also deficient as I find it was not properly served upon the Applicant.

The Appeal

The landlord unsuccessfully appealed from that judgment to the Ontario Court of Appeal. In its brief reasons, the Court agreed with and elaborated on the application judge’s analysis:

We see no error in the application judge’s findings that the Default Notice and the Termination Notice were deficient because they had not been properly served on Mr. Zagros. The application judge accepted Yulee’s submission that notices were to be delivered to the Leased Premises. However, they did not comply with the requirements of s. 17.11 of the Lease because they were improperly addressed. The Notice of Termination was addressed to 112, rather than to Mr. Zagros, and the Default Notice was addressed to the attention of Ms. Zamani, again as opposed to Mr. Zagros. Accordingly, as the court advised the parties at the oral hearing of the appeal, Yulee’s appeal was dismissed.

Key Takeaways for Landlords and Franchisor Sublandlords

This case provides a clear lesson: Notices under a lease are more than formalities. Properly addressed and delivered notices are essential to protect both landlords (and franchisors acting as sublandlords). Missteps in this process can leave a landlord or sublandlord unable to rely on the notice — a costly mistake that can be avoided with careful attention to the lease.

Remember:

1. Follow the lease to the letter. Default and termination notices must be addressed to the legal tenant. Even a technically minor misaddressing may invalidate the notice.
2. Monitor communications. Franchisors acting as head tenants must ensure that they receive all communications from the landlord. Notice provisions will often provide for the opportunity to amend the address for service. As a best practice, franchisors should consider adding the franchisor’s head office as an additional required address for service under the lease.
3. Establish a disciplined lease administration framework. Beyond staffing or systems, franchisors acting as head tenants or sublandlords should proactively structure their leasing arrangements to ensure visibility and control over defaults and enforcement steps. This may include evaluating whether a tripartite agreement or rent-flow arrangement are appropriate for the system. Thoughtful lease architecture at the outset can materially reduce the risk that critical notices are misdirected, delayed, or leveraged to the franchisor’s detriment.

Daniel Hamson and his team at Sotos LLP acted as counsel to Mr. Zagros on the application and appeal in Mr. Zagros Management Inc. v. Yulee Developments Inc.

Sotos LLP regularly advises franchisors on leasing strategy and structure, including with respect to head leases, subleases, and tripartite arrangements, to ensure franchisors maintain control over premises and minimize enforcement risks across their franchise systems.

About the Author

Daniel Hamson, Sotos LLP

Daniel is a partner in the Litigation Department at Sotos LLP. His practice focuses on complex commercial, corporate, and franchise disputes.

Daniel has been recognised for his litigation work and industry expertise. He is listed as “Ones to Watch” in Best Lawyers in Canada and has been named a “Lawyer to Watch” in the Canadian Legal LEXPERT Directory, as well as in the LEXPERT Canada’s Leading Litigation Lawyers. He is also recognised as “Recommended” in Lexology Index: Canada (formerly Who’s Who Legal).

Daniel can be reached directly at 416.572.7303 or dhamson@sotos.ca

The post Wrong Addressee, Right Outcome: Why Your Lease Notice Might Not Count appeared first on Sotos LLP.

When it comes to protecting intellectual property in franchising, trademarks tend to dominate the conversation, largely because the franchise system’s name and logo are often the key drivers of brand recognition and success. However, one of the assets in franchised businesses that is often overlooked are copyrighted materials.

What does copyright protect?

In Canada, copyright arises automatically, without formal registration, upon the creation of an original work in a tangible form. Copyright protects the expression, but not the underlying idea. Under Section 3(1) of the Copyright Act, R.S.C., 1985, c. C-42 (the “Act”), copyright grants the owner the exclusive rights to produce, reproduce, publish, perform, communicate, or adapt an original work.[1] This includes the right to authorize others, for example franchisees, to use the work or  material under certain conditions.

Works that are protected by copyright include:

• Literary works (e.g. computer programs, compilation of literary works);
• Dramatic works (e.g. choreographic work, mime, scenic arrangement, cinematographic work, compilation of dramatic works);
• Musical works (e.g. music or musical composition with or without words, compilation of musical works); and
• Artistic works (e.g. paintings, drawings, maps, charts, plans, photographs, sculptures, works of artistic craftsmanship, architectural works, compilation of artistic works).[2]

While copyright arises automatically, there are benefits to registering copyright with the Canadian Intellectual Property Office (“CIPO”). Once the application is submitted and the application fee is paid, a registration certificate and registration number will be issued to the applicant within seven business days.[3] The certificate is deemed presumptive evidence that the registered owner owns the copyright.  It can be beneficial in litigation proceedings and in warranting ownership of the copyright to prospective licensees of a work.

How does copyright apply in the context of franchising?

Although registration is not required, registering copyright can be useful in the franchising context. One of the basic premises of the franchise model is that, in return for ongoing payments, the franchisee receives the right to use some of the franchisor’s intellectual property, subject to certain conditions. This includes everything from training manuals, advertising and promotional materials, website content, proprietary software, computer software, menus, newsletters to employees or customers, and operations manuals.[4] Obtaining a copyright registration for these materials helps to ensure that there is no unauthorized use of the materials including by terminated franchisees.  It also allows the franchisor to enforce its rights more effectively and to ensure that it has the exclusive right to commercially benefit from the use of the materials.

Canadian franchise law does not specifically regulate copyright. However, the disclosure requirements under the provincial franchise legislation can be interpreted as requiring franchisors to describe all intellectual property licensed to the franchisee.[5] Franchisors should ensure that their franchise disclosure document clearly articulates who owns the copyright. For example, if a third party contractor has been hired to create the materials (such as the training materials, software, or brochures), the contractor, as the author, owns the copyright and not the franchisor. To avoid any future disputes, the franchisor should ensure that it obtains a fully executed assignment of the ownership of the materials or an exclusive licence to use the materials.[6]

What is the importance and benefit of copyright protection for franchisors?

There are compelling reasons for franchisors to register a copyright in their materials. Copyright registration serves as strong evidence of ownership and ultimately provides a creation date, which is invaluable in the event of a future dispute. It also strengthens enforcement efforts, making it easier for franchisors to stop the unauthorized use of the materials and to pursue infringement claims more effectively. This helps to prevent any misuse of the brand’s materials and intellectual property which could damage the brand’s reputation or result in a financial loss. Additionally, it is important to include clear copyright provisions in franchise agreements by defining ownership and the permitted uses allowed by the franchisee. This can help to lower the risk of disputes or litigation arising from the improper or unauthorised use of materials.

Beyond the legal and financial advantages, effective copyright registration and protection supports the foundation of a successful franchise – brand consistency. Franchisors require that all of their locations are uniform in appearance and presentation so that customers receive the same experience, regardless of where they interact with the brand. One of the primary ways to achieve this uniformity and consistency is by franchisors allowing franchisees to use their intellectual property, and specifically the franchisor’s copyrighted material. The distribution of proprietary characters, music, logos, marketing materials, training materials, digital content, uniforms, menus, and even store layouts contributes to maintaining that uniformity. Protecting these assets not only maintains specific quality and standards but also fosters customer trust and loyalty, which helps to reinforce brand reputation and contributes directly to the franchise system’s growth.

Copyright protection can provide franchisors with a competitive advantage and provide an additional revenue stream through licensing the proprietary materials in certain circumstances. A well-protected copyright portfolio can enhance the marketability of the franchise system itself, making it more attractive to prospective franchisees, investors, and partners, all of whom value a well-protected and unique brand. Safeguarding copyright is not just about compliance, but is essential for protecting reputation, deterring infringement, and securing long-term success.

Conclusion

For Canadian franchisors, effective copyright management is essential to protecting some of the core elements of its franchise system. These are assets of their business that require protection, and copyright should therefore be part of the discussion when establishing their franchise system and drafting their franchise agreement and disclosure documents.

At Sotos LLP, our intellectual property team provides full-service, practical support across all aspects of IP protection. We can assist not only with registering your copyright, but also with developing and implementing copyright and trade mark strategies, conducting IP audits, preparing and negotiating licensing and data-sharing arrangements, and enforcing your rights through opposition, infringement, counterfeit, and other litigation proceedings, so that your brand and proprietary materials are properly protected as your franchise system grows.

About the authors

Anna Thompson-Amadei is an associate at Sotos LLP whose practice includes advising clients on trademark and other intellectual property protection, aligning practical brand protection strategies with the growth and day to day needs of their business.

Bailee Kleinhandler is an associate at Sotos LLP in the corporate and commercial group and is building a diverse practice in corporate and franchise law.

[1] Copyright Act, RSC, 1985, c C-43 at s 3(1).

[2] Ibid at s 2 and 5(1).

[3] Government of Canada, Canadian Intellectual Property Office, How your application for registration of a copyright is processed (August 7, 2022). https://ised-isde.canada.ca/site/canadian-intellectual-property-office/en/copyright/how-your-application-registration-copyright-processed.

[4] Valerie Brennan, “Copyright Protetion for the Franchised Business” (2024) 43:4 Franchise L.J. at 32.

[5] Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3 at s 5(4).

[6] Copyright Act, RSC, 1985, c C-43 at s 13(4).

The post Why Copyright Protection Matters in Franchising appeared first on Sotos LLP.

On March 3, 2025, the Trump administration confirmed that the United States would proceed with imposing blanket tariffs on imports from Canada and Mexico, and increases to existing tariffs on China, effective March 4, 2025. These tariffs include a 25% tariff on all imports from Canada and Mexico, with the exception of Canadian energy resources and minerals, which face a reduced 10% tariff. The tariffs were initially planned to take effect on February 4, 2025, but were delayed by the Trump administration pursuant to ongoing negotiations with Canada and Mexico. The White House has also announced the imposition of 25% U.S. tariffs on all steel and aluminum imports with an expected effective date for imposition of March 12, 2025.

On March 4, 2025, the Government of Canada announced that, in response to U.S. tariffs, the Government of Canada would move forward with 25% tariffs on $155 billion worth of imported U.S. goods, beginning immediately with a first tranche covering $30 billion worth of goods. The scope of the Canadian counter tariffs will be increased to $155 billion if the current U.S. tariffs are maintained, and may also be increased if new U.S. tariffs are imposed. Beyond the federal government’s response, several Canadian provinces have implemented their own retaliatory measures. These include restricting government procurement opportunities for U.S. suppliers, terminating existing contracts and disqualifying future bids from U.S. companies, and removing American alcoholic products from provincially-controlled liquor stores. Ontario Premier Doug Ford has also indicated that he is considering imposing an export tax on Ontario-produced energy, and even halting energy and certain mineral resource exports altogether.

The implementation of U.S. tariffs and Canadian counter tariffs on imported goods will have widespread effects across various industries, including the franchise sector. Franchisors and franchisees must understand and prepare contingencies on how to navigate the legal and business consequences posed by the rising costs, disrupted supply chains and shifting market dynamics associated with these tariffs.

Supply Chain Analysis: Key Considerations for the Franchisor-Franchisee Relationship

Franchisees that depend on imported goods—whether for equipment, supplies, or inventory—may face substantial cost increases due to tariffs. For instance, tariffs on raw materials, such as steel and aluminum, as well as finished products, will likely drive up operational expenses and delay deliveries, potentially disrupting the system’s supply chain. This will impose increased costs on franchisees, which will necessitate a difficult decision between absorbing such costs, passing them on to customers, or a combination of both. Many franchise agreements also require the use of specific materials and equipment to maintain consistency throughout the system, which may limit (absent franchisor intervention) the ability of franchisees to easily adapt to changing economic circumstances.

Maintaining a strong franchisor-franchisee relationship is key in navigating these changing market conditions. Below are certain key considerations for franchisors in navigating this relationship:

• Initial Investment: Franchisors must consider whether they should make changes to their initial investment expectations and requirements for franchisees. If tariffs increase the cost of equipment, supplies, or inventory, franchisors should consider reviewing and revising the initial investment estimates to reflect these higher costs. Failure to do so may mislead potential franchisees about their expected expenses. Moreover, failing to account for such changes may be setting franchisees up for failure before they even begin operating.
• Ongoing Expenses and Unit Economics: Franchisors should evaluate how tariff-induced cost increases affect their unit economics, including per-location profitability, break-even points, and overall financial sustainability. Clearly presenting this data can help franchisees make informed investment decisions. If tariffs impact ongoing costs, such as supply procurement or vendor agreements, these changes should be disclosed. Franchisees should be made aware of potential cost fluctuations. Franchisors should assess franchisee costs on a market-by-market basis, and prepare to be flexible on procurement where necessary to ensure that franchisees’ unit level economics remain viable in light of this volatility.
• Supply Chain and Sourcing Restrictions: If a franchise system mandates specific suppliers affected by tariffs, these restrictions should be transparently disclosed. Franchisors may also explore whether allowing some flexibility in supplier selection can help mitigate disputes, and actively work with franchisees to assess whether domestic alternatives exist that will (while perhaps not entirely consistent with brand standards applicable in the U.S.) allow the franchisee to continue operating without further hardship than is necessary.
• Financial Performance Representations: Franchisors should monitor profit margins and other financial metrics due to tariff-related cost increases and assess whether tariff-related cost increases are a development that impacts financial performance representations. Providing outdated or overly optimistic projections could expose franchisors to legal claims and otherwise adversely impact the franchisor-franchisee relationship.

Consumer Price Sensitivity

Franchisors should also consider whether to authorize or encourage price increases for goods and services. However, price-sensitive consumers may reduce their spending or seek alternatives, particularly in highly competitive industries such as quick-service restaurants, retail, and hospitality. It is critical that franchisors consider balancing necessary price adjustments with consumer expectations in order to maintain brand reputation and profitability. In light of these challenges, franchisors should consider which obligations currently imposed on franchisees are crucial to maintaining brand standards, and which others may be more flexible.

Adapting to Tariffs for Growth and Expansion

Predictable costs and strong unit economics are the hallmarks of a successful franchise system. While tariffs imposed by the U.S. and Canada’s counter tariffs may create new cost pressures, they also present opportunities for Canadian brands to emphasize domestic production and sourcing, which can resonate with consumers and differentiate them in the market. Similarly, U.S. brands entering Canada may still find opportunities to expand, particularly when the favourable exchange rate helps offset tariff impacts, allowing cost-competitive pricing in the Canadian market. Franchisors and businesses that adapt their supply chains, pricing strategies, and brand positioning to these evolving dynamics can still find opportunities for growth and expansion despite the shifting trade landscape.

Opportunities and Competitive Shifts

While tariffs impose significant challenges for businesses of all stripes, they also provide opportunities for savvy and opportunistic businesses. For example, Canadian franchise systems with predominantly domestic supply chains may reap the benefits of changing consumer preferences towards Canadian-made products, while products previously bound for the U.S. may be sold domestically at the same or lower prices. Franchisors can also re-evaluate global sourcing strategies to mitigate tariff exposure.

To address ongoing challenges, franchisors should consider the following actions:

• Supply Chain Diversification: The tariffs should prompt franchisors to carefully re-evaluate suppliers and explore domestic alternatives where feasible.
• Negotiating Terms: Franchisors and franchisees should also work with suppliers to share or reduce tariff-related cost burdens.
• Efficiency Measures: Franchisors and franchisees should invest in technology or streamline operations to offset increased expenses.
• Franchise Disclosure and Agreement Revisions: It is critical that franchisors assess whether franchise disclosure documents and franchise agreements need adjustments to address unforeseen consequences arising from the tariffs.

Advertising Considerations: Made in Canada

While not the primary focus of this article, businesses should keep in mind that promoting products as “Made in Canada” or “Product of Canada”, or highlighting Canadian ownership, can be a valuable strategy for brands seeking to reduce the impact of tariffs between Canada and the United States. However, businesses must ensure that such claims comply with Canadian law, including the Competition Act, the Consumer Packaging and Labelling Act, and the Textile Labelling Act. These acts prohibit false or misleading representations, and restrict how and when such claims can be used. Businesses that choose to make “Made in Canada” or “Product of Canada” claims must ensure their claims meet the appropriate guidelines and thresholds. Our firm works closely with companies to develop compliant, strategic branding approaches that not only highlight Canadian origins, but also help navigate cross-border trade challenges.

Conclusion

U.S. tariffs present significant challenges for the franchise industry, with potential legal and financial implications for franchisors and franchisees alike. If you have any concerns as to how these tariffs will affect your system, and how to navigate these challenges, Sotos LLP can help. At Sotos LLP, we have acted for hundreds of clients in every aspect of the franchising process for over forty years. We have extensive knowledge of the regulatory issues that may arise from the introduction of tariffs and regularly assist with supply chain evaluations, contract revisions, and strategic planning to mitigate risks and seize opportunities in this complex regulatory environment. Our firm can assist in developing tailored strategies to mitigate the impact of tariffs, whether through supply chain restructuring, trade compliance planning, or leveraging available exemptions We can also assist in reviewing disclosure requirements in light of the tariffs.

Please contact Peter Viitre at 416.977.7754 or pviitre@sotos.ca, Jason Brisebois at 416.572.7323 or jbrisebois@sotos.ca, or Nicole Perez at 416.977.3674 or nperez@sotos.ca to see how we can help your franchised business adapt to ever-changing economic conditions.

The post Legal Update: The Impact of U.S. Tariffs and Canadian Counter Tariffs on the Franchise Industry appeared first on Sotos LLP.

The Ontario Court of Appeal’s recent decision in Aroma Franchise Company, Inc. v Aroma Espresso Bar Canada Inc. (the “Aroma Decision”)[1] explored the grounds of arbitrator impartiality and disclosure obligations under the UNCITRAL Model Law on International Arbitration (the “Model Law”), adopted in the International Commercial Arbitration Act, 2017, S.O. 2017, c. 2, Sched. 5.

The Model Law contains provisions that promote arbitral impartiality. Article 12(1) imposes a duty on an arbitrator to disclose – before appointment and as the arbitration proceeds – any circumstance likely to give rise to justifiable doubts about the arbitrator’s impartiality. Article 12(2) permits a challenge to the arbitrator or the award that was made if circumstances exist that give rise to justifiable doubts about the arbitrator’s impartiality, as long as the person making the challenge was unaware of the circumstances when they participated in the arbitrator’s appointment. Justifiable doubts about impartiality is an equivalent phrase to reasonable apprehension of bias.^[2]

So, What Happened?

The franchisor, Aroma Franchise Company Inc. (the “Franchisor”) and its affiliates alleged that their Canadian master franchisee, Aroma Espresso Bar Canada Inc. (the “Franchisee”) breached an exclusive coffee supply arrangement. As a result of the breach, in May of 2019, the Franchisor sent a notice to the Franchisee terminating the Master Franchise Agreement (“MFA”). The Franchisee, in turn, argued the termination was unlawful. Following a lengthy arbitration over the termination of the MFA, substantial damages were awarded to the Franchisee. After the arbitration had concluded, the Franchisor discovered the arbitrator had accepted another arbitration appointment on an unrelated matter from counsel for the Franchisee during the proceedings. The arbitrator did not disclose this to the Franchisor, arguing the two cases had no overlapping parties or issues.

This non-disclosure led to claims of bias, prompting the Franchisor to successfully have the award set aside by the Ontario Superior Court of Justice. The decision was rooted in a finding of reasonable apprehension of bias, due to the arbitrator’s silence regarding his other engagement. However, the Court of Appeal disagreed, restored the award relating to this issue, and clarified the threshold for bias in arbitration.

The Appeal

The Court of Appeal corrected the lower court judge’s fundamental error in failing to address the fact that the arbitrator was not made aware (and deliberately so by Franchisor’s counsel) of the communications between counsel for the parties which predated counsel’s approach to the arbitrator. The Court of Appeal found that the arbitrator could not have known of any potential concerns which the Franchisor had about other relationships with the arbitrator because Franchisor’s counsel deliberately chose not to so inform the arbitrator.

The Court of Appeal confirmed that the threshold for disclosure under Article 12(1) of the Model Law is an objective one and relied on the objective test for reasonable apprehension of bias – what would a fair-minded and informed observer think?

1. Disclosure ≠ Determinative

The Court acknowledged that while arbitrators must disclose any circumstances that are likely to raise justifiable doubts about impartiality, failure to disclose does not automatically indicate bias. In this case, the Court emphasized that the two arbitrations were entirely unrelated, involving different parties, industries, and issues. This lack of a meaningful connection diminished the likelihood that the arbitrator’s impartiality could reasonably be called into question, ultimately tipping the scales in favour of upholding the award.

2. International Decisions

The Court leaned heavily on UK precedent, including Halliburton Company v Chubb Bermuda Insurance Ltd., (“Halliburton”)[3] and Aiteo Eastern E & P Company Ltd. v Shell Western Supply and Trading Ltd., & Ors (“Aiteo”)[4] emphasizing that disclosure obligations in international arbitrations are context-specific and guided by the Model Law. These cases underscored the principle that multiple appointments by the same counsel does not inherently give rise to bias.

3. Objective Test Prevails

A fair-minded observer, the Court concluded, would not find the arbitrator’s undisclosed second appointment sufficient to displace the presumption of impartiality. The decision underscored that Canadian courts apply a strong presumption of arbitrator impartiality, even when disclosure lapses occur.

Key Takeaways for Coffee (and Arbitration) Enthusiasts:

• Disclosure Duties Are Not Black and White

While the Model Law sets a high standard for disclosure, it’s not a free pass to challenge awards where an arbitrator does not disclose something. Context matters and parties must assess the potential overlap of issues and parties objectively.

• Precedent Percolates Across Borders

Canadian courts are aligning their approach with international best practices, as seen in Halliburton and Aiteo. Practitioners should familiarize themselves with these decisions to better anticipate disclosure risks.

• “Reasonable Apprehension of Bias” Is Not a Catch-All

Bias remains a high bar to prove. Parties seeking to challenge arbitrators must go beyond subjective discomfort and belief and demonstrate objectively justifiable doubts about impartiality.

• Toward a Global Trend

This decision hints toward greater alignment in how arbitrator disclosure and disqualification are approached globally. While it does not supplant the International Bar Association Guidelines on Conflicts of Interest in International Arbitration (the “IBA Guidelines”), it signals a move toward consistency for cases where the IBA Guidelines are not adopted. This could help standardize outcomes and strengthen confidence in arbitration as a fair and predictable dispute resolution method.

Final Sip…

The Aroma Decision reaffirms the importance of maintaining impartiality in arbitration while recognizing that non-disclosure alone does not automatically indicate bias. By emphasizing the objective standard of a fair-minded and informed observer, the Court of Appeal clarified that disclosure obligations must be assessed in each specific context. This ruling aligns Canadian arbitration practices with international standards and reinforces the principle that arbitration should balance transparency with practicality, to preserve its integrity and efficiency. Additionally, its influence may extend beyond Canada, contributing to greater global consistency in arbitrator disclosure and disqualification approaches.

NOTE: Allan D.J. Dick and his team at Sotos LLP acted as counsel to the Franchisee in the arbitration and in the court proceedings and, with co-counsel, Alison FitzGerald, on the appeal.

[1] 2024 ONCA 839.
[2] Ibid, para 2.
[3] [2020] UKSC 48, [2021] 2 All E.R. 1175.
[4] [2024] EWHC 1993 (Comm).

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The Ontario Court of Appeal recently released its decision in Spina v. Shoppers Drug Mart, 2024 ONCA 642, an appeal in a class action brought by franchisees of Shoppers’ Drug Mart. In the underlying summary judgment motion decision, the franchisees were successful in establishing that Shoppers had breached a franchise agreement when it failed to remit $955 million in professional fees to franchisees. The Court of Appeal found that Shoppers breached the duty of good faith by misallocating certain professional fees, and increased the amount awarded to the franchisees by approximately $129 million.

Summary Judgment Motion Decision

A summary by Adil Abdulla of the underlying motion decision can be found here. In that decision, the franchisees claimed that Shoppers breached its contracts and the duty of good faith in various ways.

The franchisees succeeded in their claim that Shoppers breached a  2002 franchise agreement by retaining professional allowances that should have been distributed to franchisees. Professional allowances are provided to pharmacy operators by certain generic drug producers for the provision of direct patient care. This includes running clinic days, education days and private counselling within pharmacies. The professional allowances regime was introduced in 2006 when the Ontario government enacted the Transparent Drug System for Patients Act.

The motion judge found that Shoppers had breached a 2002 franchise agreement, drafted before the introduction of the professional allowances regime, and the franchisees who had signed this agreement were entitled to receive payment of professional allowances. The motion judge found that Shoppers had not breached a separate 2010 franchise agreement, and the franchisees who had signed this agreement were not entitled to receive professional allowances.

The 2002 agreement franchisees were awarded $955 million in respect of professional allowances that Shoppers had retained.

Appeal Decision

The central issue in the appeal decision was how much Shoppers had received in professional allowances. The franchisees claimed that the motion judge understated the amount of professional allowances that Shoppers received, and they should have been entitled to recover $1.084 billion, instead of $955 million.

The motion judge found that, given the direct patient services that Shoppers and the franchisees performed, Shoppers would have been eligible to receive $1.084 billion in professional allowances. However, Shoppers only invoiced drug manufacturers for $955 million and treated the balance of payments received as rebates attributable to non-Ontario stores where rebates were allowed, and which it was entitled to retain under the 2002 franchise agreement.

The Court of Appeal found that Shoppers had a statutory duty under the Wishart Act to deal fairly and in good faith, and a common law duty of honest performance to not knowingly mislead franchisees about performance of the franchise agreement. Shoppers had discretion under the contract to allocate money it received from drug manufacturers between professional allowances and rebates, but it had an obligation to do so in good faith. Instead, it allocated revenue obtained from generic drug purchases made in Ontario to rebates for non-Ontario stores, thus removing the payment from revenue it had to share with franchisees. The court found that this was not fair dealing in accordance with the Wishart Act or honest performance of the agreement under common law.

The Court therefore found that the motion judge had understated the professional allowances that Shoppers received by about $129 million.

Key Takeaways

The appeal again highlights the importance of good faith in contractual performance. Parties cannot lie or knowingly mislead one another. As the court notes, “’knowingly misleading’ is not confined to direct lies – it can also include ‘half-truths, omissions, and even silence depending on the circumstances’” (at para. 166).

Where parties have discretion under a contract, they may be tempted to act opportunistically. Instead, they should be careful to exercise discretion in a way that is consistent with the reason the discretion was granted. If they fail to do so, they may find themselves on the hook for a large damages award.

Adrienne Boudreau, Sotos LLP

Adrienne is a partner at Sotos LLP. She has earned recognition as a leading Canadian lawyer from numerous prestigious publications, including Chambers Canada, Best Lawyers in Canada, and the Best Lawyers Global Business Edition. Adrienne is consistently recommended in the Canadian Legal LEXPERT Directory and has been acknowledged by Who’s Who Legal Canada and the Who’s Who Legal Global Guide. Additionally, she is listed as a Leading Litigation Lawyer in the LEXPERT Special Edition – Canada’s Leading Litigation Lawyers. Adrienne can be reached directly at 416.572.7321 or aboudreau@sotos.ca.

Evan Brander, Sotos LLP

Evan is an associate at Sotos LLP. He can be reached directly at 416.572.7310 or ebrander@sotos.ca.

The post A Prescription for Good Faith: The Court of Appeal’s Decision in Spina v. Shoppers Drug Mart appeared first on Sotos LLP.

In its recent decision, Edmonton (City) v AW Holdings Corp, 2024 ABCA 92, Alberta’s top court has upheld a decision by the province’s Land and Property Rights Tribunal (LPRT), which dealt with the issue of whether a franchisor who neither owns title to, nor leases land, can be an owner through possession or occupation of that land, or have an interest in it, under provincial expropriation legislation.

The key point here was that the LPRT held, based on a very fact-specific analysis, that the franchisor’s interest in the business operated by its franchisee on land leased by the franchisor’s leasing corporation, pursuant to the franchise agreement was different and separate from an interest as a franchisee and as a sublessor. Based on its interest as a franchisor under its franchise agreement, the franchisor was entitled to control over the business activities of the franchisee and to income for the use of the franchise system, which was based on a right for compensation for expropriation of that land.

The case is novel, as it indirectly, and in the limited context of expropriation under the Expropriation Act, RSA 2000, c E-13 (“Act”), recognizes and affirms the party’s interests within a franchise relationship. The case recognizes that, for brick-and-mortar locations, where there is a sublease relationship, the franchisor (and not just the franchisor’s leasing company) may have an interest in the land. The overreaching implications of this case may be limited, as the court’s analysis is highly fact-dependent and dependent on the specifics of the Act. However, a takeaway for Canadian franchise counsel may be to balance the protective intent of having a separate leasing company with having some nexus between the franchisor and the premises. Counsel may find it a good idea to review their current forms of sublease to consider these issues.

Facts

As is common in franchise systems, the Booster Juice franchise system ( “System”) includes a franchisor corporation, AW Holding Corp (“Franchisor”), which owns the Booster Juice franchise and enters into franchise agreements with franchisees and includes a leasing corporation, Booster Juice Inc. (“LeasingCo”), which acquires, leases and sublets premises for the Booster Juice System.

Starting in 2001, LeasingCo entered into a lease agreement (the “Head Lease”) with Sun Life Assurance Company of Canada (“Landlord”) for Unit 11838-104 Avenue, Edmonton (the “Land”) and in turn sublet the Land (“Sublease”) to 1154264 Alberta Ltd ( “Franchisee”).

The Headlease contained a standard clause giving the Landlord control over the form of any sublease, however, this clause was crossed out.

This change in the lease enabled Franchisor to dictate the form of sublease Franchisee would have to execute with LeasingCo for the premises under its Unit Franchise Agreement (“Franchise Agreement”) between Franchisor and Franchisee. This section of the Franchise Agreement stated:

“4(a) If Franchisor or any corporation or Person linked with the Booster Juice System (including Booster Juice Inc.) enters into the lease for the Premises, Franchisee shall execute a sublease with Franchisor or such other corporation or person in Franchisor’s standard form attached hereto as “Schedule 3” concurrently with the execution of this Agreement.”

Clause 1.6 of the Franchise Agreement provided additional discretion to Franchisor, stating that the provisions of the Franchise Agreement must be read in priority to and must supersede the provisions of any sublease.

The Land subsequently became the subject of a proposed expropriation by the City of Edmonton (the “City”) to facilitate the construction of an LRT line and the City acquired LeasingCo’s sublease under an agreement with Franchisee in 2020 (the “Consent Agreement”), pursuant to section 30 of the Act which stipulates that, “the owner [of expropriated land] may consent to the acquisition of land by an expropriating authority subject to the condition that compensation for the land shall be determined by the [LPRT]”.

Franchisor, who was not a party to the Lease or Sublease, signed the Consent Agreement following the wording: “Booster Juice hereby consents to the conveyance of the Leasehold interest from [the Franchisor] to the City pursuant to the terms and conditions of this Agreement”.

The land was left vacant by the city from March 2020 until it was demolished in June 2022, resulting in Franchisor losing royalty income at that location.

The City acknowledged that Landlord, LeasingCo, and Franchisee were all “owners” and proper claimants under the Act, but disputed that Franchisor had the same status.

In August 2021, Franchisor, LeasingCo and the City submitted a joint written application to the LPRT for a determination regarding Franchisor’s status. The LPRT determined that Franchisor was a proper claimant for compensation by virtue of having both “possession” of, and an “interest” in, the Land.

Issue

The City appealed this decision submitting that the LPRT erred in its interpretation and application of the terms “possession […] of the land” under s. 1(k)(iii) of the Act, and “interest” or “interest in the land” under s. 1(k)(iv) of the Act.

Analysis

First Instance

The LPRT based its analysis on the wording of the Act and in particular on whether the Franchisor qualified as an “owner” such that they were entitled to compensation under the Act.

• Possession

Section 1(k)(iii) of the Act defines “owner” as: any other person who is in possession or occupation of the land. If a person can show possession or occupation of the land, they are an owner. In this case, the LPRT found the powers Franchisor reserved to itself under the Franchise Agreement gave it (i) control over the Land, because it could and did, dictate the terms of the sublease on the Land, and (ii) the right to possession of the Land if certain circumstances under the Franchise Agreement arose.

This finding is novel in that it confirms the context of expropriation contemplates relationships that could give rise to possession or occupation other than those through the chain of legal ownership of property. The LPRT found possession in the broadest sense is sufficient. The Franchise Agreement gives the Franchisor a degree of control over the Land, distinct from the legal ownership of freehold owner or the legal interests of the lessee or sublessee.

• Interest

Section 1(k)(iv) defines “owner” as: any other person who is known by the expropriating authority [here the City] to have an interest in the Land. It is clear. Under this section, if a person, who is known to the expropriating authority, has an interest in the Land that is different from the interests of freehold or lease hold, they are an owner for the purposes of the Act.

The Franchisor argued that the powers it reserved to itself under the Franchise Agreement gives it control over the business operations of Franchisee, and through control of the System, control over the use of the Land by Franchisee under the terms of the Franchise Agreement. In effect, Franchisor’s interest under the Franchise Agreement gives it participation in the business of the Franchisee located on the Land.

The LPRT agreed the Franchisor had a business interest in the franchised business and had significant control of the operation of the franchised business located on the Land.

Appeal

The LPRT’s decision was reviewed on a reasonableness standard in light of its underlying rationale and as a whole to determine whether it exhibited (i) justification, (ii) transparency, and (iii) intelligibility. The Court of Appeal of Alberta (“Court”) reviewed the LPRT’s analysis of the Franchise Agreement grounding “possession” of the Land for the Franchisor under section 1(k)(iii) of the Act, and upheld their decision. Having upheld the decision on the first analysis, the court did not consider whether the Franchisor had an “interest” under Section 1(k)(iv) of the Act.

The Court held that Sections 1(k)(iii) and (iv) must be interpreted broadly and strictly construed in favour of claimants. It reasoned that the terms “possession” and “interest” in those provisions have broader meanings in the expropriation context than the same terms used in the context of property law, citing Edmonton (City) v Business Care Corp, 2019 ABQB 724.

The Court affirmed the LPRT determination that the Franchisor was a party “in possession or occupation of the land”, pursuant to section1(k)(iii) based on a number of factors.

• Control Over the Sublease – Franchisor maintained control over the land by dictating the terms of the sublease in the Franchise Agreement. Part of the bundle of rights initially held by Landlord was the ability to dictate the terms of any sublease by LeasingCo. By deleting Landlord’s standard clause from the Headlease, Landlord had expressly given up its right to control the sublease terms on which the Franchisee would use the subject premises. Franchisor exercised that control through its Franchise Agreement with the Franchisee which dictated with whom the Franchisee could enter into a sublease and the use of Franchisor’s mandatory form of sublease for the subject premises.
• Control over the operation of the business on the Land – Franchisor had possession of the land by virtue of the non-exclusive rights of the Franchisee to use Franchisor’s day-to-day business operations system in the operation of the franchise outlet and the control exercised by Franchisor over that system.
• Signing the Consent Agreement – Franchisor signed the Section 30 Agreement pursuant to the Franchise Agreement with the Franchisee, thereby consenting to the City’s acquisition of the Franchisee’s sublease interest. Both parties acknowledged that there was sparse information as to how and why Franchisor came to sign the Section 30 Agreement, however the Court concluded that it was not unreasonable for the LPRT to infer from it that the Franchisee deemed it was at least prudent if not necessary, and sufficient, to obtain Franchisor’s consent to the Section 30 Agreement. It was not unreasonable for the LPRT to conclude that Franchisor’s signature was therefore another indicia of control.

Obiter Dicta

The City raised the concern with the Court that the LPRT decision creates a dangerous precedent by allowing the Franchisor, which was not on the Headlease or Sublease, to claim possession of the Land. The court commented that the LPRT did not espouse any novel principles of general application relating to the law of “possession” in the expropriation context, but rather clearly decided the matter based on the very particular facts before it.

Adrienne Boudreau, Sotos LLP

Adrienne is a partner at Sotos LLP, Canada’s leading franchise law firm. She has earned recognition as a leading Canadian franchise law practitioner from numerous prestigious publications, including Chambers Canada, Best Lawyers in Canada, and the Best Lawyers Global Business Edition. Adrienne is consistently recommended in the Canadian Legal LEXPERT Directory and has been acknowledged by Who’s Who Legal Canada and the Who’s Who Legal Global Guide. Additionally, she is listed as a Leading Litigation Lawyer in the LEXPERT Special Edition – Canada’s Leading Litigation Lawyers. Adrienne can be reached directly at 416.572.7321 or aboudreau@sotos.ca.

The post A Boost to Franchisor Entitlements under Alberta’s Expropriation Act appeared first on Sotos LLP.

Read the original article for ‘What does a franchise litigation lawyer do?‘ over on the Lexpert website.

Daniel Hamson, Sotos LLP

Daniel is a senior associate with Sotos LLP in Toronto, Canada’s leading franchise law firm. He has received multiple legal accolades, including being named as a “Lawyer to Watch” by the Canadian Legal LEXPERT Directory in the franchise law category, as well as in the LEXPERT Special Edition – Canada’s Leading Litigation Lawyers. Daniel can be reached directly at 416.572.7303 and dhamson@sotos.ca.

The post Daniel Hamson provides insights into the role of a franchise litigation lawyer appeared first on Sotos LLP.

Nearly seven years after it began, the “Paramount Trilogy” has now concluded.

The trial[1] and appeal[2] decisions have significantly advanced the law with respect to statutory rescission under Section 6(2) of the Wishart Act.[3]  This article attempts to identify the most important aspects of these decisions and to identify, where applicable, new developments in the law in this area.

Brief facts

Three “Paramount Fine Foods” franchisees delivered notices of rescission in the fall of 2017.  The franchisor rejected the validity of the rescissions, and otherwise relied on several exemptions for its position that it need not have provided disclosure to the franchisees.

The three actions were heard together in a trial that began in late 2021.  Vermette J. (the “Trial Judge”) found one of the three rescissions valid, and granted the franchisor parties’ counterclaims for breach of contract in the other two cases.

All parties appealed nearly every aspect of the Trial Judge’s decision in three appeals and three cross-appeals.  The appeals were heard by the Court of Appeal for Ontario in June, 2024.  In the result, the Court of Appeal dismissed all appeals and cross-appeals, and affirmed all aspects of the Trial Judge’s decision.

Lessons Learned

1. The time to rescind runs from the time the franchise agreement was entered into by the franchisee

At the relevant time, the franchisor had a practice of requiring franchisees to enter into a “generic” franchise agreement.  The franchisor’s witness described this document as a “placeholder” agreement.  Its purpose was to evidence and affirm a party’s commitment to later becoming a franchisee.

The franchisor’s form of franchise grant was tied to location:  its grant gave franchisees the right “to establish and operate the Franchised Business solely at the Premises which Premises should be solely situated in the Territory.”  The generic franchise agreement failed to identify the actual “Premises” or “Territory”.

The parties that signed the “generic” franchise agreement later entered into an entirely new franchise agreement.  This agreement was not an amendment of the “generic” agreement, but a fresh and separate document that did not refer to the earlier “generic” agreement.

The franchisor later argued that the time to rescind ran from the date that the “generic” franchise agreement was entered into by the parties, and that the franchisee was therefore out of time to rescind.

The Trial Judge rejected the franchisor’s argument.[4]  She found that the franchisor’s form of grant required the premises and territory to be defined.  She found that the failure to identify a “Premises” and “Territory” made the grant of franchise incomplete and ineffective.  The parties were not granted a legally enforceable right to operate a franchise.  Accordingly, she found the generic franchise agreement was not a “franchise agreement” within the meaning of the Wishart Act, and did not effect a grant of franchise.  The franchisee’s time to rescind therefore ran from the time it entered into the second (effective) franchise agreement.

While heavily dependent on the facts of this case, franchisors should be mindful of the language of their form of grant.  Purported grants that are tied to defined terms that as yet have no meaning (for instance, “Premises” that do not exist and “Territories” that are not defined) may result in no grant, at all.  The parties should consider when a grant of franchise is complete and perfected, as this will be the date from which a franchisee’s potential right of rescission will run.

2. A franchisee can rescind post-termination

NEW:  the Court of Appeal for Ontario has now expressly confirmed that where a franchisor exercises a contractual right of termination under a franchise agreement, the franchisee may later exercise a statutory right of rescission under the Wishart Act.[5]  A franchisor cannot prevent rescission by terminating a franchise agreement.

The Trial Judge relied on the non-waiver provisions of the Wishart Act (Section 11) to conclude that the exercise of a contractual right (termination) cannot unilaterally deprive a franchisee of a statutory right (rescission).[6]  Citing the Midas[7] case, she found that if contractual termination could pre-empt access to the rescission remedy this would run afoul of the purpose of the Wishart Act, which is to protect franchisees.

The franchisor parties argued on appeal that a terminated contract “ceases to exist” and therefore cannot be rescinded.  The Court of Appeal rejected this argument.[8]  It confirmed that termination does not render a contract voib ab initio but rather absolves the non-breaching party from performing future obligations.  The Court of Appeal generally agreed with the reasoning of the Trial Judge on this point, and confirmed that the Wishart Act does not make statutory rescission conditional on non-termination, even in circumstances where the franchisee is in breach of the franchise agreement.

This outcome will likely come as no surprise to the majority of franchise practitioners.  Notably, several recent rescission cases have proceeded in the Ontario courts notwithstanding  the franchisor had earlier purported to exercise contractual termination rights.[9]  However, the issue of whether the rescission right could be exercised, notwithstanding the earlier termination, was not raised or considered by the Court in these earlier cases.

3. Exemptions

The franchisor relied on three different exemptions to advance its argument that it need not have provided a “disclosure document” to the franchisees in these cases.  All three of these arguments were rejected by the Trial Judge.  Prior to this case, certain of these exemptions had never previously received direct judicial consideration.

In all instances, the Court of Appeal agreed with the Trial Judge’s analyses and conclusions on the franchisor’s exemption defences.[10]

• 5(7)(h) – the “large investment” exemption

NEW: in considering this exemption, each grant of franchise must be considered on its own and cannot be combined with other grants of franchise; the time to assess the quantum of the franchisee’s prospective investment is at the time of the grant.

This is the first case to consider this exemption.

At the time of the grants in these cases,[11] franchisors did not need to provide disclosure to prospective franchisees who were investing in the acquisition and operation of a franchise, over a one year period, in an amount grater than $5MIL.

In these cases, the franchisor advanced two arguments:  1) the three grants made to the three franchisees should be considered a single “grant” for the purposes of the exemption, and; 2) the franchisees, collectively, invested over $5MIL in the acquisition and operation of the three restaurants in the course of their subsequent operations.

The Trial Judge rejected these arguments.[12]

The foundation of her conclusions rest on the definition of “grant” and “franchise”.  She found, as fact, that three separate grants of franchise had occurred.  She found there was no basis to combine these grants or consider them collectively for the purposes of this exemption.

She also found that the relevant time to assess the quantum of the franchisees’ investments is at the time of the grant.  In so doing, she confirmed that the expected, prospective costs of acquisition and investment are determinative for the purposes of this exemption.  The expenses actually incurred by the franchisees during their operations do not retroactively affect whether or not the franchisor had to provide disclosure to the franchisee.

• 5(7)(c) – the “additional franchise” exemption

NEW: distinct corporate franchisees that operate some aspects of their franchised businesses on a collective basis, or that have overlapping or similar shareholders, will not be considered the “same” franchisee for the purposes of this exemption; a franchisee must already be operating the franchised business for the exemption to apply.

This is the first case to directly consider the application of this exemption.[13]

The Wishart Act states that disclosure need not be provided for “the grant of an additional franchise to an existing franchisee if that additional franchise is substantially the same as the existing franchise that the franchisee is operating and if there has been no material change since the existing franchise agreement or latest renewal or extension of the existing franchise agreement was entered into.”

The franchisor argued this exemption applied to it on the basis that the corporate franchisees did not observe separate corporate personality in their operations, and had some common shareholders as among them.  In its submissions, the franchisees were therefore “the same”.

The Trial Judge rejected these arguments.[14]

She found that relevant franchisee was not an “existing franchisee” as it was only ever granted a single franchise.

The Trial Judge then went on to consider whether an “existing franchisee” could be a new corporation with principals who are involved in another corporate franchisee of the same system.  She concluded it could not.  In relying on the wording of the exemption, she found that the qualifying words “substantially the same” described the relationship between the “existing franchise” and “additional franchise.”  These words did not apply to the franchisee.  In other words, she found that the existing and additional franchise could be substantially similar, but that the franchisee had to be “the same.”

The Trial Judge also noted that a plain interpretation of s. 5(7)(c) requires an existing franchisee to be “operating” a franchise for the exemption to apply. The “operation” requirement will not be satisfied if the franchisee has only signed the franchise agreement, or is in the midst of building out/constructing the franchise, and has never actually operated the business that is the subject of the grant.  She found that none of the franchisees were operating any franchised business at the time the relevant franchisee signed its franchise agreement. In arriving at this conclusion, the Trial Judge confirmed the underlying policy rationale for this requirement, namely, that disclosure has little utility if the prospective franchisee is already familiar with the operations of the franchise system and for whom the risk of making a further investment of funds is low.

• 5(7)(a)(iv) – the “franchisee transfer” or “resale” exemption

The Trial Judge found the franchisor could not rely on the resale exemption.  The Trial Judge’s decision[15] follows a long line of case law in which this exemption has been narrowly determined by the courts.[16]

The basis of the Trial Judge’s decision is factual.  First, she found there was no grant of a franchise by a franchisee on the facts.  She found that the previous operator’s franchise agreement was terminated, and the relevant parties entered into fresh agreements.

Second, and in any event, she found that the franchisor “was directly involved and an active participant” in the relevant grant.  Among her findings, she found that the franchisor directed the franchisee to the existing operator, was involved in negotiations between the franchisee and the prior operator, had input on relevant documents, and was involved in discussions about purchase price, and otherwise acted as an intermediary  She also found that the franchisor and the franchisee met at the franchisor’s head office in the absence of the former operator.  Her decision on this defence is generally consistent with prior case law on this exemption.

4. Piecemeal disclosure remains a fatal flaw

The franchisee that validly rescinded, Premium Host Inc., did so on the basis that the Franchisor provided it with material information outside of a “disclosure document”.  In upholding the Trial Judge’s decision, the Court of Appeal confirmed a very long line of cases confirming that disclosure must be provided to a franchisee “as one document, at one time,” and that piecemeal disclosure provides a franchisee with valid grounds to rescind.[17]

Although not directly addressed, this decision also confirms a related line of case law that financial information relating to the operation of the subject unit under a previous operator will generally be “material” within the meaning of the Wishart Act.[18]

5. A franchisee bears the burden of proving a valid rescission and its entitlement to statutory compensation

NEW:  the Court of Appeal for Ontario has now expressly confirmed that a franchisee bears the burden of proving that it rescinded on valid grounds.[19]  Accordingly, a franchisee must prove:  1) what it received from the franchisor; and 2) that the purported “disclosure document” contained a defect that is so material as to render the disclosure document no disclosure at all.

On appeal, the franchisees argued that the franchisee need not prove it received materially deficient disclosure.  They took the position that upon delivery of a notice of rescission in accordance with the Wishart Act, a franchisor could defeat a statutory rescission by demonstrating that it fulfilled its disclosure obligations under the Wishart Act by providing compliant disclosure document to the (then-prospective) franchisee.

In rejecting this argument, the Court of Appeal cited its earlier decision in Raibex, in which the Court (arguably in obiter) stated:  “the Franchisee must not only demonstrate that the FDD was deficient, but also show that it was so deficient that the Franchisor effectively ‘never provided [a] disclosure document.’”[20]

In the result, the Paramount Trilogy cases are somewhat unusual in that the Trial Judge found that no purported “disclosure document” relied on by any party at trial had actually been provided to any franchisee but, notwithstanding, two of the franchisees were not entitled to rescission.  Arguably, this result is at odds with the Court of Appeal’s decision in MAA Diners, in which the Court of Appeal confirmed the lower Court’s decision that a franchisee had validly rescinded its franchise agreement in the absence of any evidence that a disclosure document was provided to that franchisee.[21]

6. Provided the franchisee proves that the expenses it claims were actually incurred in connection with the franchised business, a court may reclassify expenses as between subsections 6(6)(a)-(d)

NEW:  the Trial Judge expressly confirmed that compensation claimed by franchisees under various subsections of 6(6) could be reclassified and recovered under subsections 6(6)(a)-(d).[22]  While various earlier decisions have permitted the recharacterization of amounts claimed,[23] this is the first case to expressly address whether this practice is permissible.

At trial, the franchisor parties argued that the franchisees should not be permitted to reclassify any portion of their statutory compensation claim.  For instance, they argued that amounts originally characterized by the franchisees under 6(6)(a), 6(6)(b), and 6(6)(c) should not be permitted to be reclassified and claimed under 6(6)(d).  The need for reclassification in these cases arose largely as a result of the Trial Judge’s findings about which franchisor parties were and were not “franchisor’s associates” within the meaning of the Wishart Act.

The Trial Judge rejected these arguments and permitted the recharacterization of certain elements of the franchisees’ compensation claim.[24]

7. An employee of the franchisor may be found to be a “franchisor’s associate” on the basis that they were involved in reviewing or approving the grant of franchise

NEW:  The Court of Appeal upheld the Trial Judge’s finding that a non-director/non-officer employee of a franchisor can be “involved in reviewing or approving the grant of a franchise” for purposes of satisfying the second element of the definition of a “franchisor’s associate” under section 1(1) of the Wishart Act.

At trial, the franchisees submitted that the franchisor’s Manager of Franchising was a franchisor’s associate because the individual was controlled by the franchisor (this fact was admitted at trial by the franchisor parties) and because the individual was involved in reviewing or approving the grants of franchise.

The Trial Judge accepted this submission. In so doing, the Trial Judge relied on the fact that the individual’s role included: (a) vetting new franchisees for the initial phase of the recruitment process; (b) reviewing and evaluating franchise applications; (c) advising the franchisor’s principal about the results of this review; (d) initially meeting with prospective franchisees; and (e) advising the franchisor’s principal about these meetings.[25] In addition to performing these duties in the context of these cases, the Trial Judge also noted that the individual was in “constant communication” with the prospective franchisees, including to discuss the progress of their transactions to purchase the franchises.

On appeal, the franchisor parties submitted that the individual should not be found liable as a franchisor’s associate on policy grounds.  They took the position that insofar as individuals are concerned, the definition of a franchisor’s associate should be read to only apply to directors and officers of the franchisor. They argued that failing to do so would create potential liability for all clerical and junior employees that perform rote functions in the grant process.

The Court of Appeal rejected the franchisor parties’ proposed interpretation of the Wishart Act.[26] Moreover, while the individual was not a director or officer of the franchisor, “neither was she a clerical or junior employee”. She performed a significant role in the process of reviewing the franchisees’ applications, exercising professional judgment, and advising the ultimate decision-makers.

Sotos LLP was trial and appellate counsel to the franchisees.

Adrienne Boudreau, Sotos LLP

Adrienne is a partner at Sotos LLP, Canada’s leading franchise law firm. She has earned recognition as a leading Canadian franchise law practitioner from numerous prestigious publications, including Chambers Canada, Best Lawyers in Canada, and the Best Lawyers Global Business Edition. Adrienne is consistently recommended in the Canadian Legal LEXPERT Directory and has been acknowledged by Who’s Who Legal Canada and the Who’s Who Legal Global Guide. Additionally, she is listed as a Leading Litigation Lawyer in the LEXPERT Special Edition – Canada’s Leading Litigation Lawyers. Adrienne can be reached directly at 416.572.7321 or aboudreau@sotos.ca.

Daniel Hamson, Sotos LLP

Daniel is a senior associate with Sotos LLP in Toronto, Canada’s leading franchise law firm. He has received multiple legal accolades, including being named as a “Lawyer to Watch” by the Canadian Legal LEXPERT Directory in the franchise law category, as well as in the LEXPERT Special Edition – Canada’s Leading Litigation Lawyers. Daniel can be reached directly at 416.572.7303 and dhamson@sotos.ca.

[1] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507.
[2] Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577.
[3] Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3.
[4] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at paras 354-361.
[5] Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577 at para 11.
[6] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at para 368.
[7] 405341 Ontario Limited v Midas Canada Inc, 2010 ONCA 478.
[8] Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577 at para 11.
[9] See 2352392 Ontario v MSI, 2019 ONSC 4055 at para 6, overturned on other grounds 2352392 Ontario Inc v Msi, 2020 ONCA 237, and 2364562 Ontario Ltd v Yogurtworld Enterprises Inc, 2021 ONSC 5112.
[10] Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577 at para 10.
[11] We note that the language of this exemption has subsequently been amended, and now exempts a franchisor from disclosure in circumstances where a franchisee’s total initial investment is in excess of $3MIL.
[12] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at paras 326-334.
[13] Bark & Fitz Inc v 2139138 Ontario Inc, 2010 ONSC 1793 at para 26 briefly touches on whether this exemption can be relied upon where the principals of two different corporate franchisees are the same.  However, this discussion occurs in the context of evaluating whether there is a “serious issue to be tried” in an injunction hearing.  Karakatsanis J., as she then was, does not decide the matter.  3574423 Canada Inc v Baton Rouge Restaurants Inc, 2011 ONSC 6697, aff’d 3574423 Canada Inc v Baton Rouge Restaurants Inc, 2013 ONCA 39 discusses this issue in obiter, starting at para. 290.  The discussion relates primarily to whether the franchisee to whom a franchise is granted had to have previously received compliant disclosure from the franchisor to rely on this exemption.
[14] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at paras 335-342.
[15] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at paras 343-352.
[16] See, for example, 2189205 Ontario Inc v Springdale Pizza Depot Ltd, 2011 ONCA 467 at para 32.
[17] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at para 421; Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577 at para 12.
[18] See, for example, 2212886 Ontario v Obsidian Group, 2017 ONSC 1643 at paras 46-53, overturned on other grounds 2212886 Ontario Inc v Obsidian Group Inc, 2018 ONCA 670, leave to the SCC denied at 2212886 Ontario Inc, et al v Obsidian Group Inc, et al, 2019 CanLII 16450. In the within case, the franchisor provided Premium Host Inc. with the weekly gross margin statements of the previous operator, which showed the business’ remaining revenue after subtraction of direct costs.  The Trial Judge’s findings that this information was “material” can be found at Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at para 421.
[19] Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577 at para 4.
[20] Raibex Canada Ltd v ASWR Franchising Corp, 2018 ONCA 62 at para 40.
[21] MAA Diners Inc v 3 for 1 Pizza & Wings (Canada) Inc, [2003] OJ No 430 (Sup Ct J), aff’d Maa Diners Inc v 3 for 1 Pizza & Wings, 2004 CanLII 19240 (Ont CA).
[22] The franchisor parties pursued this matter on appeal.  In upholding the Trial Judge’s decision relating to the validity of the Premium Host Inc. rescission, the Court of Appeal by implication also affirmed the Trial Judge’s reasoning on this point, although it did not specifically comment on this matter in its Reasons for Decision.
[23] See, for example, 2122994 Ontario Inc v Lettieri, 2016 ONSC 6209 at paras 76-77, aff’d 2122994 Ontario Inc v Lettieri, 2017 ONCA 830, and 2483038 Ontario Inc v 2082100 Ontario Inc, 2020 ONSC 475 at paras 72-76.
[24] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at paras 461-465.
[25] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at para 458.
[26] Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577 at para 13.

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The Province of Saskatchewan may soon become the seventh province in Canada to enact franchise disclosure and relationship legislation. The Legislative Assembly of Saskatchewan introduced Bill 149, The Franchise Disclosure Act (the “Act”), for first reading on November 9, 2023.  If the legislature passes the bill, it will be the province’s first comprehensive franchise legislation, and represent a significant step towards uniformity in franchise laws across Canada, as Saskatchewan would join British Columbia, Alberta, Manitoba, Ontario, New Brunswick, and Prince Edward Island in having legislated protections in place for franchisees.

The Act was introduced after public consultation on the need for franchise legislation within the province. The framework of the consultation was based on the Uniform Law Conference of Canada’s Uniform Franchise Act (which Sotos LLP co-chaired). In response, the Canadian Franchise Association and Sotos LLP, among other parties, submitted a number of recommendations, including urging the province to follow the most recently enacted provincial franchise legislation, British Columbia’s Franchises Act, which came into force in 2017.

Having undergone its first and second readings in November 2023, the Act is anticipated to be enacted in 2024. Absent franchise disclosure and relationship legislation having been previously adopted in the province, franchise (and related) agreements are primarily subject to the common law of contracts, in addition to standard consumer protection regulations and rules that may apply.

If enacted, the Act will constitute a major change to the Saskatchewan franchise industry and its dealings, as it will place significant new disclosure obligations on franchisors, and offer new statutory remedies to franchisees that operate in the province.

Contents of the Act

The main features of the proposed Act include, but are not limited to, the following:

1. Duty of Fair Dealing. Every franchise agreement will impose on each party a duty of fair dealing in the performance and enforcement of the franchise agreement. Further, each party will have a right of action for damages should the other party breach the duty of fair dealing.  The duty of fair dealing includes the duty to act in good faith and in accordance with reasonable commercial standards.
2. No waiver of rights under the Act. Franchisees will not be able to waive any rights granted to them under the Act.
3. Franchisee Rights to Associate and Form Associations. Franchisees will be permitted to form or join franchisee organizations and associations.
4. Franchise Disclosure. Franchisors will be required to provide prospective franchisees with a disclosure document (containing certain prescribed information, as well as all material facts). Note that franchisors will need to update their existing disclosure documents to ensure that they can be safely and effectively used in the Province of Saskatchewan, once the legislation is effective. Franchisors should proactively work with legal counsel to ensure that such updates are in place prior to the effective date of the legislation, to ensure that franchise sales are not delayed or affected.
5. Franchisee’s Right of Rescission. A franchisee will have the right to rescind a franchise agreement within 60 days after receiving the disclosure document if the contents of the disclosure document do not meet the requirements of the Act. The bill also provides that a franchisee may rescind the franchise agreement within two years after entering into the franchise agreement if the franchisor fails to provide the disclosure document within those two years.
6. Damages. If a franchisee suffers a loss because of a misrepresentation contained in the disclosure document, the franchisee will have a right of action for damages against the franchisor.

When compared to other existing franchise legislation in Canada, specifically, Ontario’s franchise legislation, the Arthur Wishart Act (Franchise Disclosure) (the “AWA”), there are two notable differences with the Act:

1. The Act provides that a franchisee may rescind the franchise agreement within two years after entering into the franchise agreement if the franchisor fails to provide the disclosure document “within those two years”. The reference to providing a disclosure document “within two years” is not contained in any of the other six existing franchise acts in Canada. This provision seems to suggest that if a disclosure document is not received by a franchisee prior to the execution of a franchise agreement, the franchisor can still meet its disclosure obligations within two years after the franchisee enters into the franchise agreement.

2. One of the criteria to meet the definition of a “franchise” in the AWA is that the franchisor (or franchisor’s associate) has a right to exercise significant control or has a right to provide significant assistance (among other criteria). By contrast, the Act defines “franchise” as circumstances where the franchisor (or franchisor’s associate) exercises significant control over, or provides significant assistance in, the franchisee’s method of operation. As such, the Act requires that the franchisor take actual steps to exert control over the franchisee. Simply having the contractual right to do so does not appear to meet the proposed threshold.

Benefits of the Act

As stated above, should the Province of Saskatchewan proceed to enact franchise legislation, this would align it with the regimes of all western provinces, as well as Ontario, New Brunswick and Prince Edward Island.

In addition to making a positive stride towards uniformity across the provinces, the introduction of franchise legislation would also help protect consumers by allowing them to make informed investment decisions when purchasing a franchised business.

At Sotos LLP, we are committed to guiding franchisors through the evolving franchising landscape. The new Franchise Disclosure Act introduced in Saskatchewan brings substantial changes and new obligations that all involved parties must be aware of. Our team is proficient in both the new legislation and the established franchise laws across Canada. We provide a full range of legal services, including the drafting and reviewing franchise agreements, ensuring compliance with disclosure requirements, and representing clients in franchise-related disputes. Contact us today to align your franchise operations with the latest legal standards and safeguard your business interests in this dynamic sector.

Jason Brisebois, Sotos LLP

Jason Brisebois is a partner in Sotos LLP’s corporate and franchise law groups. He has received multiple legal accolades, including being named in the “Ones to Watch” category by Best Lawyers in Canada. Additionally, he won the Lexology 2024 Client Choice Award for Franchising in Canada and was recognized as a “Legal Eagle” by Franchise Times Magazine. Jason can be reached directly at 416.572.7323 or jbrisebois@sotos.ca.

Anna Thompson-Amadei, Sotos LLP

Anna is an associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. She has been recognized as a “Legal Eagle” by the Franchise Times Magazine. Anna can be reached directly at 416.572.7322 or athompson-amadei@sotos.ca.

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