In Moonable Right Ltd. et al v. Canadian Ice Cream Company Inc. et al., Justice Parghi granted the former franchisee of the defendants’ Marble Slab franchise system nearly half a million dollars in rescission damages after the franchisor failed to provide the plaintiffs with the franchisor’s current financial statements.

The Facts

In February 2021, the plaintiff was considering whether to invest in becoming a Marble Slab franchisee. The franchisor defendant provided the plaintiff with a financial disclosure document, as required by Ontario’s franchise legislation, the Arthur Wishart Act (the “Wishart Act”). As was also required by the Wishart Act, the disclosure document included the franchisor’s financial statements; however, the financial statements provided were for the franchisor’s fiscal year ending 2019 – more than two years old by the time the disclosure document was provided to the plaintiff.

The franchisee elected to become a Marble Slab franchisee and operated a Marble Slab franchise for less than a year, from June 2022 to January 2023. After operating the business at a continuous loss, the franchisee delivered a rescission notice and stopped operating the store in January 2023.

When the franchisor disputed the franchisee’s entitlement to rescind, the franchisee commenced a lawsuit to recover the franchisee’s rescission losses. In the meantime, the franchisee continued to service the small business loan it had obtained to finance its purchase of the franchise and continued to pay rent to its landlord for many months following the franchisee’s delivery of its rescission notice.

The franchisor eventually installed a new franchisee to take over the tenancy and operate as a new Marble Slab franchisee. With the franchisee’s cooperation, the franchisor bought the former franchisee’s equipment from that franchisee’s lender and sold that equipment to the new franchisee.

In the franchisee’s lawsuit, the franchisee sued the franchisor for a declaration that the franchisee’s rescission was valid and for rescission damages of nearly half a million dollars, including the franchisee’s losses incurred following its rescission. The franchisor countersued, claiming that the franchisee’s rescission was unlawful and that the franchisee had, instead, abandoned the franchise in breach of the franchise agreement.

The Decision

Justice Parghi agreed with the franchisee that it was entitled to have rescinded its franchise agreement up to two years from when it had entered into the franchise agreement. The Court held that the franchisee’s entitlement to rescind arose out of the fact that the financial statements it had been provided by the franchisor were older than what was permitted under the Wishart Act.

• Stale Financial Statements Are a Fatal Flaw in Disclosure

The Wishart Act requires of the franchisor to disclose financial statements for the franchisor’s most recently completed fiscal year (or, if a financial statement for the franchisor’s most recently completed fiscal year has not yet been prepared as of the date of disclosure and a “grace period” of 180 days has not yet passed, the franchisor may disclose financial statements for the year previous to the most recently completed fiscal year).

When the Marble Slab franchisor provided disclosure to the plaintiff franchisee in February 2021, the franchisor was therefore required to include in its disclosure document financial statements for its most recently completed fiscal year, being January 2021, or, if those were not yet available, then it was required to disclose financial statements for its fiscal year ending January 2020.

Instead, the franchisor disclosed financial statements for its fiscal year ending January 2019.

The Court followed previous appellate authority in recognizing that the disclosure of stale financial statements constitutes what has been described as a “fatal flaw” in the disclosure; a fatal flaw is a disclosure defect that is so material that, if present, is regarded by the courts as if no disclosure at all was provided to the franchisee.

Interestingly, Justice Parghi asked in obiter (rhetorically) whether a categorical separation of disclosure flaws into “fatal” and “non-fatal” ones can be “properly reconciled with the case-by-case approach” previously mandated by the Court of Appeal.

Her Honour nonetheless found that the stale financial statements disclosed by the Marble Slab franchisor were a fatal flaw that, in and of itself, entitled the franchisee to rescind; she went on to find, however, that even if the stale financial statements were not a fatal flaw, or if the categorical approach were not the correct one, she would nonetheless have found in favour of the plaintiff.

In reaching that conclusion, she relied on evidence that the franchisor’s financial statements for the fiscal year ending 2020, which had not been disclosed to the franchisee, demonstrated that Marble Slab’s financial situation had deteriorated significantly when compared with the financial situation depicted in the 2019 financial statements that had been disclosed. As the Court noted, the 2020 financial statements were already available to the franchisor by the time it provided disclosure to the franchisee in February 2021. The franchisor’s deteriorating financial condition meant that “the out-of-date financial statements provided to the plaintiffs prevented them from obtaining a complete, accurate, and current financial picture.”

The Court declared Marble Slab’s principal, Cameron Inglis, to be a “franchisor’s associate”, which is a person so closely connected to the franchisor that it becomes co-liable with the franchisor under the Wishart Act for the franchisee’s rescission claim.

• Damages

The Court awarded the franchisee $482,043 in damages, payable both by the Marble Slab franchisor and its principal. In its analysis of the franchisee’s damages, the Court made the significant finding that the franchisee’s damages incurred following rescission were properly recoverable, rejecting the franchisor’s argument that rescission damages crystallize as of the moment of rescission.

• The Court’s Rejection of the Franchisor’s Other Arguments

The Court rejected all of the franchisor’s arguments.

The franchisor had argued that the franchisee must have been content with the disclosure provided and could not have felt deceived by it, given that he built the restaurant, negotiated the lease, personally guaranteed the loan, and even indicated a wish to expand to a second location in August 2022.  In rejecting that argument, Justice Parghi reiterated the well-established proposition that the legal test concerning the sufficiency of the disclosure provided is an objective one that does not depend on the conduct of any franchisee, but that instead is concerned only with the adequacy of the disclosure itself.

Justice Parghi also rejected the franchisor’s argument that a franchisee is under an obligation to mitigate its rescission losses.

Finally, Justice Parghi also summarily dismissed the franchisor’s counterclaim, noting that such counterclaims are consistently dismissed when a franchisee’s rescission is upheld.

Key Takeaways

This decision serves as a sober reminder to franchisors that the disclosure of stale financial statements is a fatal flaw in a franchisor’s disclosure obligation, effectively entitling the franchisee to an automatic right of rescission up to two years from when the franchise agreement was entered into.

Franchisors should accordingly verify that the financial statement they are disclosing are sufficiently recent to comply with the legislative requirements. Franchisees should preserve a copy of the disclosure document provided to them and records of any payments and losses they incur in the operation of their business, including those incurred after delivery of a rescission notice.

Franchisors and franchisees who find themselves involved in a rescission claim – and their counsel – should appreciate that the Marble Slab decision has also expressly confirmed important principles concerning rescission damages that were previously only obliquely referred to in earlier court decisions:

• a franchisee’s post-rescission losses are recoverable; and
• franchisees are not under any duty to mitigate their rescission losses, unlike other plaintiffs seeking damages arising from the breach of non-franchise contracts.

Note: Idan Erez and Karine Bédard of Sotos LLP acted for the franchisee in this case.

How Sotos Can Help

Whether you are a franchisee concerned about the adequacy of the disclosure you received or a franchisor responding to a rescission claim, understanding your legal position is essential. Sotos LLP advises on franchise disclosure obligations and represents franchisors and franchisees in disputes involving rescission and related claims.

For advice on the sufficiency of a franchise disclosure document, potential rescission rights or liability arising from a rescission notice, contact Idan Erez at ierez@sotos.ca or 416-572-7314.

About the Author

Idan Erez is a partner at Sotos LLP whose litigation practice focuses on franchise and commercial disputes. Idan is currently serving as Chair of the Ontario Bar Association’s Franchise Law Section and is recognised by Best Lawyers in Canada for Franchise Law and by Franchise Times as a “Legal Eagle”.

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That gives Sotos more Chambers-ranked franchise lawyers than any other firm in Canada. Three of the six lawyers ranked in Band 1 are also members of the Sotos team.

Client feedback published by Chambers also speaks to the team’s understanding of the businesses it advises:

“The firm understands our business and has a sensible approach to incorporating risk into recommendations. The team is also timely in responses as well.”

“Sotos is amazing to work with and is responsive and detail-oriented.”

“Sotos has a good breadth of knowledge and expertise in the franchise space.”

Seven Sotos franchise lawyers recognized:

John Sotos, Senior Statespeople
Chambers highlights John’s work on franchise agreements and arbitration matters.

“John is top of the chain but is always accessible.”

Allan Dick, Band 1
Allan is recognized for his extensive experience in franchising and franchise disputes.

“Allan is extraordinarily intelligent and is very experienced in franchising. He is an incredible advocate for clients and very practical in advising to get the desired solution.”

“Allan has a lot of experience and does a lot of work for people getting into the franchise business.”

Debi Sutin, Band 1
Chambers recognizes Debi for advising franchise systems, including international brands establishing and developing their Canadian operations.

“Debi is a leader in the field.”

Peter Viitre, Band 1
Peter is recognized for work spanning master franchise agreements, Canadian expansion and complex franchise disputes.

“Peter has an ability to deal with a variety of matters. He also has a deep understanding of franchising and has advocated for the industry, so he is one of the pre-eminent thought leaders in the industry.”

Adrienne Boudreau, Band 3
Chambers highlights Adrienne’s work across sectors including hospitality and food and beverage, together with her experience in franchise litigation and related corporate matters.

John Yiokaris, Band 3
John is recognized for his work on transactions, master franchise agreements and contentious matters, with particular experience advising businesses in the automotive sector.

Ashley Caldwell, Associates to Watch
Chambers recognizes Ashley for her growing franchise practice, including work on franchise agreements and franchise disputes.

The recognition reflects the depth of a franchise practice built around helping franchise systems at every stage of their development, from establishing a franchise model and preparing agreements and disclosure documents to regulatory compliance, expansion, transactions and the disputes that can arise as a system grows.

For established brands, Sotos advises on the legal and commercial issues that come with operating and expanding a franchise network. For international systems entering Canada, the team helps navigate the Canadian legal framework and structure their expansion into the market.

Chambers specifically highlights Sotos’ work on franchise agreements and disclosure documents, regulatory compliance, expansion mandates, litigation and arbitration, as well as the firm’s experience across sectors including automotive, food and beverage and hospitality.

View the Chambers Canada 2027 Franchising rankings.

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This article is split into three parts and focuses on the mechanics and benefits of RWI in the franchise system M&A context. The first part presents a brief overview of the benefits and utility of RWI in general. The second part discusses the mechanics of a typical RWI policy. The third and final part sets out why franchise systems are an attractive investment, and discusses how RWI can facilitate more efficient and stress-free transactions.

What Is Representations and Warranties Insurance and Why It’s Beneficial?

In short, RWI shifts the risk of purchasing a business from the buyer to a third party insurer in exchange for a price, also known as an insurance premium.

In purchasing a business, the purchaser and seller each make certain representations and warranties (together, “Rep” or “Reps”) under the transaction agreement to induce the other party to enter into the transaction. Reps are set out in the purchase agreement and cover a wide range of concerns relating to the transaction, spanning matters like the financial valuation of the target entity, environmental concerns, tax liability, employment matters, material contracts, and beyond. To determine which party bears liability in the event of a breach or misrepresentation of a Rep, purchase agreements often contain at least one, or a combination, of the following risk allocation mechanisms:

• Purchase price holdbacks or escrow amounts, payable upon the fulfillment of certain conditions set out in the purchase agreement;
• Indemnification provisions, whereby the indemnifying party agrees to pay the damages or liabilities suffered by the party to the agreement who relied on a misrepresentation or breach of a Rep; and
• RWI, which is a policy that a party to the agreement (most often the purchaser) takes out from an insurance provider to cover claims of misrepresentation or breach of Reps made in the course of a transaction.

To buyers and sellers, RWI presents numerous benefits with respect to risk allocation.[1] From a buyer’s perspective where there is indemnity coverage in the purchase agreement, RWI mitigates the risk of the indemnifier failing or delaying to pay out claims after a breach or misrepresentation is proven. It also allows the purchaser to reduce the indemnification obligation of the seller in exchange for favourable terms in the purchase agreement such as broader limitation of liability clauses or longer Rep coverage terms. By reducing or eliminating the seller’s indemnification obligations, the purchaser minimizes the risk of becoming involved in costly and adversarial indemnification claims, while preserving a source of recovery through RWI.[2]

From a seller’s perspective, RWI reduces indemnification obligations and the potential liability under such a provision. It also minimizes the holdback or escrow amounts in the transaction, allowing the seller to receive more of the purchase price sooner. RWI further affords the seller a cleaner exit by minimizing post-closing obligations and reducing the risk of future indemnification claims.[3]

How Does RWI Work in a Franchise Acquisition?

Although common perceptions are that RWI is reserved for large market transactions (starting at valuations around $25 million or more[4]), that is not always the case. Middle to small market transactions, still benefit from the use of RWI.[5]

RWI policies typically have a duration of three to six years depending on the type and nature of the Rep in question (compared to twelve to eighteen months under a customary seller’s indemnity).[6] For instance, Reps more fundamental to the purchaser entering into the transaction, such as the financial valuation of the target entity, will often have a longer coverage term than general or less fundamental Reps. The coverage often offered for RWI is for ten percent of the purchase price,[7] but depending on the circumstances, up to one-hundred percent coverage can be obtained.[8]

Coverage exclusions from RWI policies range from the general to the deal specific. A general coverage exclusion may be where the buyer has actual knowledge of a breach of a Rep.[9] Insurers may also add exclusions if they are uncomfortable with the level of disclosure or the quality of diligence around a suspected area of risk.[10] Deal specific coverage exclusions are uniquely drafted for the particular transaction, and include issues discovered in the due diligence process of a deal.[11]

Franchise-Specific Considerations for RWI and Due Diligence

As benefits of franchise systems abound, so do the risks. In addition to RWI, having experienced counsel in franchise law is critical to understanding – and avoiding – the risks. Below are examples of Reps to look out for and consider while forming the RWI policy and due diligence process.

• Franchise Agreements in Good Standing. Purchasers should diligently examine the franchise agreements for each target franchise location (including any area development/master franchise agreements) and assess the terms for any inconsistent or troublesome provisions, as well as ensuring that such agreements have been fully executed and are in good standing. Notable terms in franchise agreements include franchise fees, royalty payments, termination obligations, non-competition clauses, and the exclusive territory given to the franchisee (if any). In addition to the franchise agreements, other material contracts common to franchise grants which should also be reviewed include general security agreements, personal guarantees, and leases. While proper diligence will help mitigate these risks for a purchaser, RWI provides additional certainty for the purchaser and seller alike.
• Franchise Disclosure Legislation Compliance. The mechanics, process, and timing of each franchise grant should also be reviewed to uncover any outstanding liabilities under Canada’s provincial franchise acts, including live rescission claims. Franchise legislation provides an extraordinary remedy for franchisees in the event they have not received adequate disclosure. A franchisee can rescind their franchise agreement, leave the franchise system, and be fully reimbursed for all investments made into such franchise, if a franchise disclosure document is not provided to the franchisee in the acceptable form and timeframe prescribed by applicable legislation. Potential purchasers of franchise systems should closely review the franchise disclosure documents of any franchise grant made within the last two years.

Franchises are regulated on a provincial basis in Canada. Currently, there are seven provinces which have legislated franchise law regimes: Ontario, Manitoba, Alberta, British Columbia, New Brunswick, Prince Edward Island, and Saskatchewan. The acceptability of the franchise agreement and ancillary documents (like the general security agreement, and guarantee) should be reviewed in each jurisdiction for potential liabilities.

• Unit Economics: Assessing the unit economics across the franchise system is critical. After parsing out the obligations of each franchisee under each respective franchise agreement, the flow of funds for the royalty streams, franchise fee, working capital needs, should be reviewed to see whether the financial mechanics of the franchise system work on a consistent and regular basis. It should be ensured that the Reps provided to the purchaser by the seller accurately reflect the on-the-ground performance of its units, barring which RWI may provide both parties with additional certainty in the event of an error or misrepresentation.

Though the benefits of purchasing a franchise system are substantial, so too are the risks if such a transaction is not carefully planned and executed. While expensive, the presence of RWI in a purchase transaction can soften the costs and discomfort caused by incorrect or inaccurate Reps made in a purchase of a franchise system. Where economically viable, RWI should be strongly considered by both the purchaser and seller of a franchise system as part of a transaction.

If you are considering the acquisition or sale of a franchise system in Canada, our team can advise on transaction structure, franchise-specific due diligence, purchase agreement risk allocation and the role RWI may play in the transaction.

About the authors

Jason Brisebois is a corporate and commercial lawyer whose practice focuses on mergers and acquisitions and franchise law. He advises franchisors, investors and privately held businesses on the acquisition and sale of franchise systems and other corporate transactions. Qualified to practise in Ontario and New York State, Jason has been recognized by the Canadian Legal LEXPERT Directory, Lexology Index: Canada and Best Lawyers in Canada, and received the 2024 Lexology Client Choice Award for Franchising in Canada.

Sam Fata is a corporate and commercial lawyer whose practice includes mergers and acquisitions, corporate finance and securities law. He advises businesses on acquisitions, dispositions and other corporate and commercial transactions across a range of industries.

The post Representations and Warranties Insurance in Franchise M&A: What Canadian Buyers and Sellers Need to Know appeared first on Sotos LLP.

Sotos partner Harold Geller recently spoke with Investment Executive about the guidance and what it could mean for advisors and the consumers who rely on their recommendations.

Drawing on his experience litigating investor loss claims, Harold focused in particular on the evidence advisors should have to support their recommendations.

KYC, needs analysis, KYP and suitability are, in Harold’s words, “a show-your-work exercise for advisors.”

Among other things, he said advisors should have a documented comparison of the reasonable range of alternative products available when making a recommendation.

Harold also addressed the requirement for a clearly documented needs analysis. While needs analysis has long been industry guidance, he told Investment Executive that, in his experience as a litigator, he has yet to see one in an advisor’s file.

He also questioned whether consumers receive enough information to properly assess the value of segregated fund guarantees and commented on chargeback structures and the need for meaningful advisor training.

The guidance, published by the Canadian Council of Insurance Regulators and the Canadian Insurance Services Regulatory Organizations, establishes national expectations for insurers and intermediaries involved in the design, sale and servicing of segregated funds.

Harold co-leads the Sotos Investor Protection Group, which represents investors, policyholders, beneficiaries and families in investment loss, unsuitable advice, financial advisor misconduct and life insurance disputes.

Read the full Investment Executive article: “Seg funds guidance targets insurance advisor competency, client need.”

The post Harold Geller Discusses Segregated Fund Guidance with Investment Executive appeared first on Sotos LLP.

The conversation examines what investors should consider both before retaining a financial advisor and after concerns arise about the advice they have received.

Matthew explains that an investment loss alone does not necessarily establish negligence. The strength of a legal claim will often depend on the available evidence, including whether the advisor properly understood the client, investigated the products being recommended and assessed whether those investments were suitable.

“There’s what people know, and there’s what people can prove,” Matthew says in the episode.

He identifies several circumstances that may warrant closer scrutiny, including:

• portfolios that do not reflect an investor’s individual circumstances;
• highly concentrated positions;
• unexplained or unauthorized trades;
• excessive transactions that appear to generate commissions;
• limited communication after an account has been opened;
• recommendations that are not reconsidered when the client’s financial or personal circumstances change; and
• a failure to distinguish between an investor’s willingness to accept risk and their actual financial capacity to withstand it.

Matthew also explains how Canadian courts determine whether an advisor owes fiduciary duties to a client. The analysis may include the client’s vulnerability, the degree of trust and reliance placed on the advisor, the discretion exercised by the advisor and any professional standards or representations that apply to the relationship.

A significant portion of the discussion addresses the growing availability of private investments to retail investors. Matthew examines the risks associated with these products, including complex ownership structures, layered fees, limited financial information, manager-determined valuations and restrictions on redemptions.

As Matthew notes, an investor may believe that money will be available when needed, only to discover that a private fund has suspended or restricted withdrawals. Advisors recommending these products should consider whether clients understand the liquidity risk and whether their financial plans can withstand delayed distributions or an extended lock-up.

Matthew expects the expansion of private assets into the retail market to produce more litigation. Unlike institutional investors, individual investors may not have access to sophisticated due diligence, detailed information or the same ability to absorb an illiquid or unsuccessful investment.

The episode also covers securities class actions, pension-fund oversight and the legal and regulatory challenges created by financial influencers. Matthew explains why investors should consider the source of online financial content, potential financial relationships and whether the content crosses the line from education into promotion or advice.

Listen to the full episode, “What to Know Before (and After) You Hire an Advisor,” on YouTube, Spotify or Apple Podcast.

Matthew W. Taylor co-leads Sotos Investor Protection Group, where he represents investors in disputes involving investment losses, unsuitable advice, professional negligence and financial misconduct.

If you have suffered investment losses and have questions about your legal rights, contact Harold Geller by email at hgeller@sotos.ca or by phone at 416.863.5603, or Matthew W. Taylor by email at mtaylor@sotos.ca or by phone at 416.572.7315.

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In a new opinion article published by Investment Executive and Advisor.ca, Harold examines how broad confidentiality provisions can affect investors, regulatory reporting and the ability of other potentially affected clients to learn about alleged wrongdoing or negligence.

Harold argues that non-disclosure agreements can serve a legitimate role in resolving disputes, particularly when protecting confidential settlement amounts. The concern, he writes, arises when NDAs extend much further and restrict investors from discussing the underlying facts, allegations or existence of a settlement.

When NDAs can become an investor-protection issue

Harold identifies several concerns with broadly drafted NDAs, including provisions that:

• are difficult for retail investors to understand;
• define confidential information so broadly that investors may believe they cannot discuss the circumstances underlying their claim;
• restrict communications about allegations already contained in legal pleadings; and
• use liquidated damages provisions that may discourage investors from speaking about their experience.

He also examines the implications for Canadian securities regulation. Complaints and information from investors can play an important role in regulatory investigations, and restrictions on disclosure may reduce the information available to regulators and other potentially affected clients.

Six proposed reforms

Harold proposes six steps for securities and insurance regulators to consider:

1. establish clear guidance on acceptable and unacceptable NDA provisions;
2. require standard exceptions allowing investors to communicate with regulators, law enforcement and professional advisers;
3. require agreements to be written in plain language;
4. treat improper use of NDAs as a compliance issue;
5. require firms to warn other potentially affected clients where public disclosure is restricted; and
6. encourage investors to obtain independent advice before signing an NDA.

His central argument is that confidentiality and investor protection do not need to be mutually exclusive. A more defined regulatory framework could preserve legitimate confidentiality while ensuring that settlement agreements do not unnecessarily restrict reporting, accountability or access to information.

Read Harold’s full article in Investment Executive or Advisor.ca.

Harold Geller is a partner at Sotos LLP and leads the Sotos Investor Protection Group, representing investors in disputes involving investment losses, financial advisers, dealers and other investment-related matters.

The post Harold Geller Calls for Reform of NDAs in Investment Dispute Settlements appeared first on Sotos LLP.

Misha advises clients on a range of corporate and commercial matters, including franchising, mergers and acquisitions, intellectual property, information technology and data privacy, and regulatory matters.

Misha first joined Sotos as a summer student and later returned to complete her articles with the firm.

Misha brings a distinctive background to her practice. Before entering law, she studied biology, psychology and nursing and worked as a neonatal intensive care nurse in Toronto. That experience complements her legal training and informs her work with businesses operating in regulated, scientific and technically complex environments.

We are pleased to have Misha continue her career with Sotos.

Learn more about Misha Nili and her practice.

The post Sotos Welcomes Misha Nili as an Associate appeared first on Sotos LLP.

Before entering into a franchise agreement, both franchisees and franchisors should carefully consider the terms governing the duration of their relationship as well as the circumstances which could lead to the termination of the agreement. Often, franchise agreements will automatically renew after a set period of time, so long as certain conditions are met. In those instances, if neither party breaches the agreement, and if there is no limit placed on the number of renewal terms granted by the franchise agreement, the relationship may continue indefinitely.

What Is an “Evergreen” Clause in a Franchise Agreement?

This brings us to a discussion of indefinite term contracts containing what are commonly referred to as “evergreen” clauses. An indefinite term contract is an agreement that does not have an “expiry date”. An “evergreen” clause entails the automatic renewal of the agreement year after year. What does this mean in practice? Well, in most cases, if both parties are acting in accordance with the terms of the agreement, the relationship may continue indefinitely. However, what if one party wants out in circumstances where there have been no events of default entitling the innocent party to terminate the agreement?

Can an Indefinite Franchise Agreement Be Terminated on Reasonable Notice?

In some instances, indefinite term contracts may be terminated on reasonable notice in the absence of any clause permitting such right. Courts have been willing, in some cases, to find an implied term which permits the termination of a contract without cause. The Ontario Court of Appeal has stated that when the term of a contract is not fixed and there is no provision for the termination of the contract on reasonable notice, a court may treat a contract as either perpetual in nature or as an indefinite term contract with an implied unilateral termination right on reasonable notice.[1] In the latter instance, either party to the agreement can terminate the contract if they give the other party reasonable notice. How the court determines what is ‘reasonable’ is largely dependent on the facts of each particular situation. In order to make this determination, the court must consider the following:

1. the relationship between the parties;
2. the specific terms of the contract; and
3. all surrounding circumstances.

Type of Relationship: Some types of contracts which depend upon mutual trust between the parties, like contracts of employment, partnership, or personal services, naturally give rise to an implied right to terminate upon reasonable notice.[2] Franchise agreements have also generally been found to be of a class of agreements that can be terminated upon reasonable notice without cause.[3] This is because franchise agreements are the type of contract that involve mutual trust, and each party should have the right to terminate the contract unilaterally on notice in the event there is a breakdown of that trust. In other words, trust between the parties is so important in this type of relationship that the absence of it is sufficient grounds for either party to end the contract.

Specific Terms: There may be specific terms within the franchise agreement which either point towards or away from an implied right to terminate without cause on reasonable notice. For example, if an agreement stipulates that it can only be terminated by mutual agreement or for a material breach of contract, then likely only in those two circumstances mentioned could the parties actually terminate the agreement. The courts in Ontario have also found that, given that franchise agreements are contracts of adhesion reflecting unequal bargaining power, they require the utmost good faith in their performance and the courts must carefully scrutinize their termination. In order to be appliable, a termination clause must be very clear, and its words will be read strictly.[4] When an agreement contains specific terms which set out when termination may occur, it is more difficult to establish an implied right to terminate on reasonable notice without cause. In the context of an agreement with numerous termination provisions, an additional implied right to terminate would arguably be inconsistent with the intention of the parties.

In addition to the existence and content of any termination provisions in the agreement, in order to determine whether or not a contract is perpetual in nature or an indefinite term contract capable of being terminated on reasonable notice, the existence in the contract of the express intention to be bound perpetually can provide a strong basis for a finding that the contract is actually perpetual.[5]

Where there are no specific terms governing the termination of a contract, then the courts have been much more likely to imply the right to terminate that contract on reasonable notice, especially in regard to contracts of a commercial character.[6]

Surrounding Circumstances: In addition to the nature of the relationship and specific terms in the contract, the surrounding circumstances help determine whether there is an implied right to terminate on reasonable notice. These factors include:

• the level of sophistication of the parties;
• whether the parties were strangers at the time they entered into the agreement;
• whether the parties had done prior business together;
• whether the relationship involved the need for trust, confidence, and satisfaction; and
• the amounts invested by each party pursuant to the agreement.

When Will a Court Find an Agreement to Be Perpetual?

The discussion above focuses mostly on circumstances in which a court may find an agreement to be terminable on reasonable notice, but this is only one possible outcome. A court may instead conclude that the agreement is perpetual. The Ontario Court of Appeal has confirmed that in fact, there is no presumption in favour of treating an indefinite term contract as terminable instead of perpetual. Rather, each situation is context-specific and depends on how the contract was constructed.^[7] In Conseil Scolaire Catholique Franco-Nord v Nipissing Ouest (Municipalité), the Ontario Court of Appeal considered whether an indefinite service agreement was perpetual or could be terminated on reasonable notice. The Court applied the three factors discussed above – the type of relationship, the specific terms of the contract, and the surrounding circumstances – and concluded that the agreement was perpetual. In reaching that conclusion, the Court noted that the agreement was not a strictly commercial arrangement and that the relationship did not depend on the type of mutual trust that might otherwise give rise to an implied right to terminate on reasonable notice.^[8]

What does all this mean in practice? Although courts may imply a right to terminate an agreement on reasonable notice in certain circumstances, they will also enforce perpetual obligations where the parties have clearly agreed to them, or where the nature of the relationship, the specific terms, and the surrounding circumstances indicate that the parties intended a perpetual agreement. While commercial agreements, including franchise agreements, may be more likely to be found terminable on reasonable notice, parties should still carefully consider these issues when drafting their agreements and clearly express their intentions regarding the duration and termination of the relationship.

What Have Canadian Courts Said About Perpetual Franchise Agreements?

The courts have considered the question of whether a termination clause could be implied into a franchise agreement with a purportedly “perpetual” term a few times, with varying results.

France v. Kumon

In France v. Kumon, 2014 ONSC 5890, the Ontario Superior Court of Justice considered whether an oral franchise agreement could be terminated upon reasonable notice. In this case, a franchisor purported to terminate a verbal franchise agreement when, after protracted negotiations and an 11-year hiatus, a franchisee refused to sign the franchisor’s new form of written franchise agreement. The franchisee argued that the franchisor had no right to terminate the franchise agreement because it was a perpetual contract. The Court held that where a franchise agreement does not contain a termination clause, a court has two options: (1) to imply a right of termination; or (2) to treat the agreement as perpetual. In this case, the Court found that there was no evidence that a perpetual contract was the parties’ intention, for a few reasons: (i) the franchisor, in all versions of its written franchise agreement, did not wish to have perpetual contracts with its franchisees; and (ii) the franchisee’s objections to the new written franchise agreement did not have anything to do with the length of its term or renewal provisions and so the court concluded that the franchisee was not concerned with the perpetuity of the agreement. Given that the verbal franchise agreement was not a perpetual contract, the Court held that it could be terminated on reasonable notice.

Petro-Lon Canada Ltd. v. Petrolon Distribution Inc.

Alternatively, in Petro-Lon Canada Ltd. v. Petrolon Distribution Inc., 1995 CanLII 7407, an arbitrator refused to imply a right to terminate on reasonable notice into a franchise agreement. The franchise agreement in this case was a written agreement which contained a defined initial term, and an unlimited number of automatic renewals thereafter (unless the franchisee provided notice that it did not want to renew). There were also termination provisions written into the franchise agreement which indicated that: (i) either party could terminate the agreement on notice if there was a material breach; (ii) the franchisee could terminate the franchise agreement without cause to the exclusion of the franchisor; and (iii) the franchisor could terminate the franchise agreement with cause. The franchisor tried to terminate the franchise agreement without cause by providing the franchisee with 11.5 months notice of its termination. The arbitrator held that given that: (i) the franchisee had made a substantial investment into the business in terms of money and time; (ii) the contract could be terminated for cause; (iii) the contract could be terminated by the franchisee on notice without cause; and (iv) the contract contained performance requirements only for the first year, no clause permitting termination on reasonable notice should be implied in favour of the franchisor. The arbitrator’s decision was upheld by the court on appeal.

What Should Franchisors and Franchisees Consider Before Signing?

What appears to be a long-term, endless relationship may not be forever. Both franchisors and franchisees should keep in mind that, although it is possible for a franchise agreement to be perpetual, the courts will only uphold such an agreement in certain circumstances.

Before moving forward with a franchise agreement, think about the kind of relationship you want to have with your franchisee or your franchisor. Are you prepared to offer your franchisees automatic renewals year after year? Are you prepared to enter into an agreement that allows your franchisor to terminate you without any cause on 60 days’ notice? What will happen to the franchisee’s investment if the agreement is terminated? No one expects a relationship to end on unhappy terms, but it happens, and it is better to contemplate termination scenarios at the beginning of the relationship, rather than at the end. In order to avoid any uncertainty and a potential battle in court, both franchisees and franchisors should be sure that their intention as to the length of the term and any renewal terms is very clearly expressed in the franchise agreement, that the franchise agreement contains express provisions as to how and when it may be terminated and that it may only be terminated in accordance with those express provisions, and that they both understand the circumstances under which each of them can terminate the relationship.

About the author

John Yiokaris

John Yiokaris is a partner at Sotos LLP, a full-service law firm based in Toronto.  He has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, Lexology, and Best Lawyers Canada as a leading Canadian franchise law practitioner.

John practices business law with a specific focus on franchising and disputes and he is trusted counsel to both franchisors and franchisees.  If you are negotiating, renewing or considering the termination of a franchise agreement, contact John to discuss the agreement and your options. He can be reached directly at 416.977.3998 or jyiokaris@sotos.ca.

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Since the opening salvo in the U.S.-Canada trade dispute in early 2025, the measures initially imposed on Canadian goods have been modified by exemptions for CUSMA-compliant goods and supplemented by sector-specific tariffs, including on steel, aluminum and automobiles. In February 2026, the U.S. Supreme Court held that the International Emergency Economic Powers Act did not authorize the broad tariffs imposed under that statute. That decision did not, however, bring the trade dispute to an end, as the U.S. has continued to rely on other statutory authorities to impose tariffs on certain Canadian goods.

Canada’s response has evolved as well. After imposing counter-tariffs beginning in March 2025, Canada removed most of those initial countermeasures effective September 1, 2025, while retaining measures affecting steel, aluminum and automobiles. The dispute has remained fluid, with further U.S. measures and Canadian countermeasures announced as recently as August 2026. The takeaway for businesses is that the tariff rates and products affected at any particular point in time should not be assumed to remain static.

The continuing use of U.S. tariffs and Canadian counter-tariffs has had widespread effects across various industries, including the franchise sector. Franchisors and franchisees must continue to prepare for the legal and business consequences of rising costs, disrupted supply chains and shifting market dynamics. The experience since March 2025 has also shown that tariff planning needs to account for changing rates, exemptions, product coverage and legal authorities.

SUPPLY-CHAIN ANALYSIS

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.

ADAPTION IS KEY

Predictable costs and strong unit economics are the hallmarks of a successful franchise system. While 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 & SHIFTS

While tariffs impose significant challenges for businesses of all stripes, they also provide opportunities to 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 impending 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.

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 U.S. 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.

LESSONS LEARNED IN THE FIRST EIGHTEEN MONTHS OF THE DISPUTE

The first eighteen months of the dispute have reinforced that managing tariff risk involves more than deciding whether to absorb an additional cost or pass it along. Tariffs have been introduced, modified, exempted and challenged, sometimes in relatively short order. For franchise systems, a few practical lessons have emerged:

Build flexibility into the supply chain: Domestic sourcing can help reduce exposure, but flexibility may be even more important. Having alternative approved suppliers, products or specifications can give a franchise system more room to respond when tariffs change. It is also important to understand where key inputs actually originate and how they are classified for tariff purposes. Buying from a Canadian supplier, for example, does not necessarily mean that the underlying goods are of Canadian-origin or insulated from tariffs.

Understand who bears the tariff risk: Supplier, distribution and franchise arrangements should make clear who ultimately bears tariff-related cost increases. Just as importantly, the parties should understand what happens if a tariff is later reduced, removed or refunded. The successful legal challenges to certain U.S. tariffs have shown that tariff costs may not always be permanent. This makes provisions dealing with tariff pass-throughs, refunds, rebates and changes in law worth another look.

Disclose volatility rather than try to predict it: The pace of change over the past eighteen months has also demonstrated how difficult it is to predict where tariffs will be months—or even weeks—into the future. Rather than trying to forecast a particular outcome, franchisors should ensure that their disclosure appropriately addresses material exposure to tariffs and other trade measures, particularly where those risks could affect initial investment estimates or financial information.

Look for available relief: Tariffs do not always have to be treated simply as an unavoidable cost of doing business. Government remission, financing and other tariff-relief programs may be available in appropriate circumstances. Where a franchise system has centralized purchasing arrangements, it is worth considering whether the franchisor, supplier, distributor or franchisee is best positioned to pursue that relief before the additional cost is passed through the system.

Plan for more than one outcome: Perhaps the clearest lesson is that tariff planning should not depend on a single prediction about the future of Canada-U.S. trade. Measures have been imposed, modified, exempted, challenged and replaced over a relatively short period. Franchise systems will be better positioned if they test their supply chains and unit economics against a range of tariff, sourcing and pricing scenarios and leave themselves enough flexibility to respond when circumstances change.

How Sotos Can Help

Tariffs can affect much more than the cost of imported goods. For franchise systems, they can also create issues around supplier arrangements, pricing, franchise disclosure, franchise agreements and the allocation of increased costs between the parties.

Sotos LLP advises franchisors and other businesses on the legal and commercial issues that can arise when market conditions change. Our work can include reviewing franchise agreements and disclosure documents, assessing supplier and distribution arrangements, reviewing how tariff-related costs are allocated, and advising on sourcing and pricing issues.

We can also assist businesses with advertising and marketing issues, including the use of “Made in Canada” and “Product of Canada” claims.

If tariffs or other trade measures are affecting your franchise system or commercial arrangements, please contact Jason Brisebois at 416.572.7323 or jbrisebois@sotos.ca, Peter Viitre at 416.977.7754 or pviitre@sotos.ca, or Nicole Perez at 416.977.3674 or nperez@sotos.ca.

About the Authors

Jason Brisebois is a partner at Sotos LLP whose practice includes franchise law, mergers and acquisitions, commercial leasing, privacy and data protection, and advertising and marketing law. He also advises clients on commercial agreements and Canada-U.S. cross-border business matters.

Peter Viitre is a partner at Sotos LLP whose practice focuses on franchise law. He advises franchise systems on franchise agreements, disclosure obligations and other legal and commercial issues affecting their businesses.

Nicole Perez is an associate at Sotos LLP who advises clients on franchise and commercial matters, including legal issues affecting franchisors and businesses operating within franchise systems.

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Harold Geller recently spoke with The Globe and Mail about that question following reports of a second TD Direct Investing customer alleging significant losses from unauthorized trades involving a volatile stock.

According to The Globe and Mail, the investor alleges that scammers gained access to his account, sold approximately $234,000 of his existing investments and purchased nearly $355,000 in shares of a little-known Chinese company. The investor says he was left with a loss of approximately $93,000.

The report follows an earlier case involving another TD Direct Investing customer who alleges that unauthorized transactions were used to purchase more than $5 million of the same security, resulting in losses of approximately $4.5 million. TD has denied liability in that proceeding, and the allegations have not been tested in court.

When should an investment dealer intervene?

For investors, unauthorized trading in an investment account can raise questions that go beyond how access to the account was obtained. Depending on the circumstances, questions may also arise about unusual transaction activity, verification of trading instructions and the steps taken by an investment dealer after suspicious activity is identified.

Speaking with The Globe and Mail, Harold noted that investment dealers often have authority to delay trades to verify the legitimacy of an investor’s instructions. At the same time, delaying a transaction can create its own risks in a rapidly moving market.

Harold also noted that current regulations provide little guidance about when a financial institution should reasonably be expected to pause an unusual trade to protect an investor’s account from fraud.

What should investors do if they discover unauthorized trades?

An investor who discovers potentially unauthorized activity should contact their investment dealer or financial institution promptly and document what has occurred. Account statements, transaction records, communications with the dealer and records relating to access to the account should be preserved.

Where unauthorized trading has resulted in a significant financial loss, an investor may also wish to obtain legal advice about the circumstances of the transactions and their rights.

About Harold Geller

Harold Geller is a Partner at Sotos LLP and leads the Sotos Investor Protection Group. He has assisted more than 1,500 investors and represents individuals who have suffered significant financial losses.

Sotos Investor Protection Group represents investors in disputes involving investment dealers, financial institutions and investment advisors, including matters involving unsuitable investments, complex or high-risk investment strategies, liquidity restrictions and other circumstances resulting in significant investment losses.

Read the full article in The Globe and Mail: “Second TD investor alleges fraudulent trades involving obscure Chinese stock.”

If you have suffered significant investment losses and have questions about your legal rights, contact Harold Geller at hgeller@sotos.ca or 416.863.5603, or Matthew W. Taylor at mtaylor@sotos.ca or 416.572.7315.

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