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Justice Parghi agreed with the franchisee that it was entitled to have rescinded its franchise agreement up to two years from when it had entered into the franchise agreement.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”.

The post Ontario Court Affirms That Faulty Financial Disclosure is a “Fatal Flaw”, Entitling the Franchisee to Rescind appeared first on Sotos LLP.

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.

The post Matthew W. Taylor Discusses Financial Advisor Negligence, Private Investments and Investor Protection on Rational Reminder appeared first on Sotos LLP.

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.

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.

The post TARIFF TURMOIL: U.S. tariffs and Canadian counter tariffs will have an impact on the franchise industry appeared first on Sotos LLP.

There are a variety of programs and grants offered by the federal and provincial governments that provide funding to subsidize the costs of trademark searches, analysis and filings. We have included information on three such programs below.

What government funding is available for trademark and IP protection in Canada?

What is Intellectual Property Ontario (“IPON”)?

The IPON program offers IP support to enterprises at various stages of growth. They provide clients with access to expert IP advice, services, and resources to better understand how to:

• maximize the value of IP;
• strengthen business capacity to grow;
• compete in the global market; and
• enhance research and commercialization outcomes.

The IPON program provides a variety of services: IP funding, IP benchmarking, IP education, IP coaching, and IP insurance.

IP Funding

IPON clients are eligible for funding to support IP protection and commercialization, with IPON covering up to 80% of expenses based on an approved scope of work. Clients are required to contribute at least 20% of the service costs and provide a plan to ensure future IP sustainability. Funding may be applied to IP-related agreements (such as non-disclosure agreements, licences) or contracts with high IP impact (master service agreements or partnership agreements). Certain expenses, such as administrative costs, litigation costs, taxes and subscriptions are not eligible for funding. IPON also does not cover costs for past work. Additionally, all IPON-funded services must be delivered by licensed IP lawyers or registered IP agents in Ontario. Clients may use their own providers or choose from IPON’s approved list of IP service providers.

IPON Benchmark

IPON offers a benchmarking tool that provides a comprehensive assessment of clients’ IP awareness by conducting a review of their IP strategy, assets and processes. These results help to tailor IP strategies and actions.

IP Education

Clients are able to participate in online workshops where IP experts facilitate class discussion and provide practical guidance. Clients are also provided with module-based e-learning courses on topics tailored to advance clients’ IP knowledge. A micro-credential is awarded to clients to showcase their learning milestones.

IP Coaching

IPON clients will have access to one-on-one coaching from IP coaches at no additional cost. These sessions will be tailored to clients’ specific needs and assist clients in developing and strengthening their IP position.

IP Events

IPON clients will have access to exclusive events geared towards networking, education, and growth. Events include keynote speeches, panels, and workshops delivered in collaboration with IPON experts.

IP Insurance

IPON clients that are eligible for funding will also receive IP insurance with a base coverage of $1 million. This insurance applies collectively to defense costs and enforcement actions.

Who is eligible for IPIN funding?

IPON’s Eligibility Criteria consist of a number of requirements.  Specifically, applicants must:

1. Be an Ontario-based small or medium sized enterprise (i.e. with fewer than 500 employees);
2. Be managed by a team that includes one or more Canadians;
3. Have a physical address in Ontario for substantive operations;
4. Operate in Ontario and intend to grow their business in Ontario long term;
5. Own IP or IP rights that it intends to commercialize or monetize in Ontario;
6. Operate in one of the following sectors:
   • health technology;
   • life sciences;
   • artificial intelligence;
   • vehicle technology;
   • mining technology;
   • agriculture;
   • food technology;
   • cleantech; and
   • advanced manufacturing (if the technology relates to any of the aforementioned sectors);
7. Demonstrate potential to realize societal or economic benefit to Ontario;
8. Demonstrate financial capacity to advance the protection and commercialization of IP and IP rights that may be supported by IPON Client Services;
9. Have an immediate IP need suited for IPON services and IP funding; and
10. Be a Canadian-controlled entity:
    • Private for-profit entity whose majority of the direct and indirect beneficial ownership is under the control of individual(s) resident of Canada and incorporated under the laws of Canada or any of its provinces or territories with a head office located in Canada; or
    • Public for-profit entity where over 20% of the direct and indirect ownership is under the control of individual(s) who are residents of Canada.

What is ElevateIP at Communitech?

ElevateIP is a federally-funded project designed to provide assistance to Canadian startups with regard to the development and protection of their intellectual property. The program is delivered through Communitech and Invest Ottawa in Ontario.

Who qualifies for ElevateIP funding?

ElevateIP’s Eligibility Criteria consists of certain requirements. Applicants must:

1. Be a Canadian-Controlled Private Corporation (“CCPC”);
2. Have fewer than 500 full time employees, globally;
3. Have exclusive rights to the IP; and
4. Be headquartered in Ontario, Manitoba or Saskatchewan.

Applicants may be required to submit additional information and attend an assessment meeting with an IP advisor to finalize the application process.

What is CanExport SMEs?

The CanExport SMEs program aims to support Canadian companies that produce goods and services or play a key role in exporting Canadian products to other international markets. The program funds projects that have the potential to significantly boost Canada’s economic growth and offers up to $50,000 to Canadian small and medium sized enterprises (“SMEs”) for international business development activities including expenses related to the protection of IP in target markets.

Who qualifies for CanExport SMEs?

To be eligible, your company must satisfy the following criteria:

1. Be for-profit;
2. Be an incorporated legal entity, limited liability partnership or cooperative in Canada;
3. Have an active Canada Revenue Agency business number;
4. Have between 3 and 500 full-time equivalent employees; and
5. Have between $300,000 and $100 million in annual revenue declared in Canada during its last complete tax reporting year (or during the last 12 months for monthly and quarterly filers).

Funding is provided in the form of cost-sharing between the recipient and CanExport. The applicant may apply for funding with a minimum budget of $20,000 and up to $100,000 per project.

The program funds up to 50% of eligible costs from $10,000 to $50,000 in funding per project. The applicant is responsible for the remaining 50% (in-kind contributions are not permitted).

With regard to IP, eligible expenses include:

• Filing a patent or industrial design application;
• Filing an application for the registration of a trademark or copyright; and
• IP professional services from a consultant and/or legal firm, which can include: the development of an international IP strategy, database search, drafting of formal IP documentation, and filing of IP documentation.

Brand owners should consider whether (1) they are eligible for these (or other) programs, and (2) whether it would be advantageous to their business to participate therein.

Sotos LLP provides Canadian and international businesses with a full range of IP-related legal and business services including trademark registration, IP protection and commercialization across a range of industries including technology, health, manufacturing, food service and hospitality, retail, consumer products and food and beverage. We can help businesses assess their IP needs, develop an IP strategy, protect trademarks and other IP rights, and determine whether government funding may be available to offset eligible IP costs.

If your business is considering trademark registration or other IP protection in Canada or internationally, contact our Intellectual Property team to discuss your options.

About the Authors

Anna Thompson-Amadei is a senior associate at Sotos LLP whose practice includes advising clients on trademark registration and other intellectual property protection. She helps businesses develop practical brand protection strategies that align with their growth and day-to-day business needs. Contact Anna at 416.572.7322 or athompson-amadei@sotos.ca.

Nicole Perez is an associate at Sotos LLP who advises clients on franchise and commercial matters. Contact Nicole at 416.977.3674 or nperez@sotos.ca.

The post Government Funding for Intellectual Property and Trademark Protection in Canada appeared first on Sotos LLP.

Canadian privacy laws regulate the collection, use, and disclosure of “personal information,” meaning information about an identifiable individual. Importantly, an individual does not need to be directly identified – information may still qualify as personal information where there is a serious possibility that the individual could be identified from that information. British Columbia,^[1] Alberta,^[2] and Quebec^[3] have generally applicable private-sector privacy laws that have been declared substantially similar to the federal Personal Information Protection and Electronic Documents Act (“PIPEDA”).^[4] In those provinces, the provincial legislation may apply instead of PIPEDA, while the remaining provinces are subject to PIPEDA. As a principles-based statute, PIPEDA establishes broad privacy obligations rather than bright-line rules.

The franchise model creates unique challenges related to privacy compliance because personal information is often shared among franchisors, franchisees, and third-party service providers. Determining who is responsible for protecting that information, maintaining compliance with privacy legislation, and responding to data breaches can be complicated. The following are some of the key privacy risks facing franchise systems and steps that franchisors and franchisees can take to mitigate them.

Key Privacy Risks & Considerations

Uncertainty Regarding Control and Responsibility for Customer Data

One of the main challenges in franchise privacy compliance is deceptively simple: whose data is it? Under the private sector privacy laws, organizations remain accountable for personal information within their control. Typically, an organization will be considered in control of personal information when it has the authority to determine how the information is collected, used, disclosed, retained, and disposed of. An organization remains accountable for personal information transferred to a third-party for processing on its behalf and must use contractual or other means to provide a comparable level of protection. Where information is instead disclosed to an independently operating franchisee or other organization for that organization’s own purposes, the parties’ respective responsibilities will depend on the circumstances, including who determines the purposes and means of collection, use, disclosure, retention, and disposal.

It is common for both franchisors and franchisees to collect and distribute personal information across their respective networks, as well as to third-party service providers. This data may be distributed for a number of reasons, including for marketing campaigns, sales reporting, and loyalty programs. For example, a franchisor may obtain identifiable sales data from a franchisee, and a franchisee may share customer information with a food delivery platform or other vendor. This complex and frequent exchange of information can make it difficult to determine who controls the data where clear roles and responsibilities have not been established. Accountability over the information becomes even more challenging when franchisees within the same franchise system employ inconsistent methods of data collection and consent practices. Because privacy legislation imposes obligations on organizations that control personal information, ambiguity surrounding who has that control can make it harder to comply with the law.

Increased Exposure to Cyber Attacks and Data Breaches

Another major area of concern for franchisors and franchisees alike is the risk of cyber attacks. Franchise systems are attractive targets for hackers because they often rely on shared POS and IT systems to store large volumes of customer information across numerous locations. As a result, a data breach at a single franchise location may have consequences for multiple franchisees and the franchisor itself. Although shared technological systems can increase efficiency for the franchise network as a whole, they may also increase the potential impact of a security incident. Beyond the immediate disruption to business, a data breach can expose a franchise system to reputational harm, the disclosure of confidential business information, regulatory investigations, audits, complaints, and potential civil liability.

For these reasons, it is important that franchisors and franchisees keep their privacy-related obligations in mind, in order to avoid accidental non-compliance with the law as well as to protect the franchise system.

The following is a list of best practices that can help mitigate privacy risks and strengthen compliance across the franchise network.

Best Practices for Franchise Privacy Compliance

Clearly Define Control Over Customer Data

Because information frequently moves between franchisors, franchisees, and third-party vendors, clearly defining responsibility for that information is one of the most important steps a franchise system can take to strengthen privacy compliance. Under PIPEDA, organizations are obligated to protect transferred personal information via “contractual means”.^[5] Where the information is passed between franchisor and franchisee, the parties should address the control and use of any customer information in the franchise agreement, an ancillary agreement, or the franchisor’s operations manual. Where a third-party service provider is involved, the franchisor or franchisee should ensure any contract between the parties includes an adequate data protection agreement or data protection provisions in the service agreement.

Before entering these contracts, franchisors and franchisees should consider what personal information is being exchanged, whether the information is necessary for the services provided, and how consent can be adequately obtained from customers. Any agreement should also specify which party is responsible for obtaining consent and for safeguarding the data. When contracting with third-parties, franchisors and franchisees should ensure the agreement allows them to maintain adequate control and protection over the use of the information by the service provider.

Implement Consistent Privacy and Consent Practices Across the Franchise System

Consistency across the franchise network is also critical in privacy compliance. As discussed above, franchise systems often involve numerous franchisees collecting and processing customer information in various ways. Without standardized privacy and consent practices, franchisors may find it difficult to ensure compliance with privacy laws across the system and may face increased regulatory risk. Franchisors should therefore implement uniform standards across the system when it comes to obtaining customer consent and handling customer data. Privacy policies and consent practices should also be updated on a regular basis to ensure they remain current and accurately reflect how customer information is being collected, stored, and used by the organization. Each organization subject to applicable privacy legislation should designate an individual responsible for its compliance. A franchisor may also appoint a privacy lead to coordinate standards and oversight across the franchise system.

Adopt a Data-Minimization Approach

Limiting the amount of personal information collected in the first place can help reduce privacy risk and makes compliance with privacy legislation easier. Under PIPEDA, the collection of personal information must be limited to what is necessary for purposes identified by the organization, and those purposes must be ones that a reasonable person would consider appropriate in the circumstances.^[6] Franchisors and franchisees should therefore carefully evaluate what information is truly required for their business operations and avoid collecting unnecessary data.

A data minimization approach also has the added benefit of reducing the organization’s obligations to manage, secure, and retain the information appropriately. Collecting only what is necessary reduces the amount of data that the organization is responsible for and can lessen the potential impact of a cyber attack or data breach. Organizations should not ordinarily make access to a product or service conditional on consent to collection, use, or disclosure that is unnecessary for that product or service. Secondary uses such as marketing should be clearly explained and supported by an appropriate form of consent, subject to any applicable statutory exceptions.

Strengthen Cybersecurity Practices

Franchisors should also take steps to strengthen their technology and cybersecurity practices across the franchise system. Operations manuals should set out cybersecurity standards and include clear IT hardware and software requirements for franchisees. Cybersecurity threats are constantly evolving, and a system that was once considered safe several years ago may no longer offer sufficient protection today. Franchisors should therefore regularly review and update their technology standards to ensure they can adequately respond to emerging risks. Franchise agreements and operations manuals should also clearly outline who is responsible for managing the aftermath of a breach.

In addition, franchisors should provide ongoing training and guidance to their franchisees on the collection, storage, and protection of customer information, including how to recognize and respond to phishing attempts. Finally, given the high rate of employee turnover in the retail and food service industries, franchisees should periodically update passwords and maintain security measures to reduce the risk of unauthorized access to sensitive information.

Prepare for Data Breaches Before They Occur

Because franchise systems are particularly attractive targets for cyber attacks, franchisors should prepare for a breach before one occurs. A comprehensive crisis plan can help reduce operational disruptions, ensure compliance with privacy legislation, and minimize harm to customers and the franchise brand. The plan should clearly identify who is responsible for managing each aspect of the response and require franchisees to cooperate with the franchisor throughout the process. Additionally, organizations are subject to reporting and record-keeping obligations under PIPEDA in the event of a breach. For example, organizations subject to PIPEDA must maintain records of all breaches of security safeguards involving personal information under their control. Where it is reasonable to believe that a breach creates a real risk of significant harm to an individual, the organization must also report the breach to the Office of the Privacy Commissioner of Canada and notify affected individuals.

Conclusion

Privacy compliance is not only a legal issue but an operational and reputational concern as well that affects the entire franchise system. The interconnected nature of franchise relationships can make it difficult to determine responsibility for customer information and can increase exposure to cybersecurity risks. By implementing clear and consistent privacy practices across the entire franchise system, minimizing data collection, and adequately preparing for cybersecurity threats, franchisors can better protect both customer information and the franchise as a whole.

How Sotos Can Help Franchise Systems with Privacy Compliance

Privacy compliance in a franchise system often sits at the intersection of franchise agreements, operations, technology, cybersecurity, and third-party relationships. Sotos LLP can help franchisors assess how personal information moves through their systems, clarify responsibilities between franchisors, franchisees, and service providers, review privacy and data-protection provisions in franchise and vendor agreements, and develop practical privacy policies and incident-response protocols.

If you have questions about privacy compliance in your franchise system, contact Jason Brisebois by email at jbrisebois@sotos.ca or by phone at 416.572.7323 to discuss how these issues may apply to your system.

About the authors:

Jason Brisebois advises franchisors and other businesses on privacy and data protection, including privacy compliance, commercial agreements involving data, and privacy considerations in franchise and technology arrangements. He received the 2024 Lexology Client Choice Award and has been recognized by the Canadian Legal LEXPERT Directory, Lexology Index: Canada, and Best Lawyers in Canada.

Chrisoula Angelis is a 2026 summer student at Sotos LLP and contributed to the research and preparation of this article.

The post Who Controls Customer Data in Franchise Systems? Key Privacy Risks and Best Practices appeared first on Sotos LLP.

While the Strategy presents significant policy aspirations, many underlying questions and specifics concerning the Strategy remain unanswered. Perhaps most importantly, whether this Strategy sufficiently addresses the underlying barriers that limit competition in Canada’s grocery industry and contribute to higher grocery costs, remains at the forefront of small and medium sized industry participants’ minds.

The Rationale for the Strategy:

Food affordability, accessibility, and domestic food production continue to be pressing concerns for Canadians. Previous market studies have revealed that there are five major grocers that dominate nearly all of the retail food market, with Loblaws controlling 17% of the market, Sobeys controlling 14% of the market, Metro controlling 6% of the market, Costco controlling 15% of the market, and Walmart controlling 13% of the market. That leaves only (approximately) 35% of the market open to other players in the industry. Because the grocery market is highly concentrated at the distribution and retail levels, there is little room for emerging and established true independent grocers to compete, as most rely on the major retailers for some or all of their inventory, the cost of which is mandated.

The Strategy:

To address these challenges, the Government of Canada has committed to invest more than three billion dollars over the next decade to strengthen Canada’s food system. As described below, the Strategy aims to increase competition, expand domestic food production, improve food distribution, build infrastructure, and reduce regulatory barriers that contribute to higher food costs.[3]

Food Terminals and Food Hubs:

A central component of the Strategy is a one billion dollar investment through the new Food Link Fund to expand food terminals and food hubs across Canada.[4] The investment is intended to help farmers and businesses grow more efficiently, enable independent grocers to purchase more competitively priced products and establish more independent supply chains.[5] By expanding food terminals, independent retailers will gain greater access to locally produced food without needing to rely exclusively on supply chains controlled by dominant grocery retailers, in turn fostering a degree of competition and price stabilization.[6] The Strategy anticipates that stronger local distribution networks will reduce transportation and distribution costs and allow independent grocers greater access to more affordable products, without relying on larger retail chains.[7]

Where food terminals are not feasible nor practical, the Strategy proposes the establishment of commercial food hubs operated by independent retailers and cooperatives.[8] These hubs will serve as regional distribution centres by facilitating the collection, storage, and delivery of locally produced food to retailers, restaurants, institutions and consumers.[9] Food hubs are intended to consolidate supply and lower costs (including costs related to logistics and distributions) by delivering competitively priced products. The Government expects to establish up to 40 food hubs, creating additional alternatives to major grocery supply chains, where food terminals are not feasible.[10]

Strengthening Competition Enforcement:

The Strategy will also provide ongoing funding of $12.9 million annually to strengthen the capacity of the Competition Bureau and the Competition Tribunal.[11] The additional funding is intended to increase the Bureau’s enforcement capacity as well as promote competition throughout the agriculture and agri-food supply chain. The increased enforcement capacity of the Bureau will attempt to create greater consumer savings through increased investigations and dedicated enforcement of anti-competitive behaviour.

The Government’s Proposed Timeline:

The Government has established measurable targets, including:

• Reaching an agreement with the Province of Ontario by the end of 2026 to expand the Ontario Food Terminals;
• Beginning construction of two additional food terminals by the end of 2028;
• Establishing or expanding 10 additional food hubs by the end of 2028;
• Increasing by 15% the number of independent grocers who purchase food from food terminals or food hubs by 2030; and
• Increasing local food sales by small and medium sized food producers by 25% by 2030; and
• Increasing Competition Bureau investigations by 10%, resulting in consumer savings of approximately $350 million annually.[12]

Farm Credit Canada (“FCC”) is supporting the Government’s Strategy through a new $1 billion Agri-food Project Finance Fund.[13] Such fund aims to finance eligible agri-food infrastructure and food processing projects, including projects that have previously struggled to receive funding..[14] The Agri-food project Finance Fund will complement FCC’s existing commitment to invest two billion dollars into food and agriculture innovation by 2030.[15] Together, these funds will assist in financing capital intensive agrifood infrastructure and processing projects.

Increasing Local Food Production:

The Strategy proposes substantial investments to expand Canada’s food production and processing capacity. The funding commitments include:

• Up to $350 million in funding, made available through the Strategic Response Fund (“SRF”), for eligible agri-food projects with new contributions up to $50 million.[16] The Government calls on industry leaders inviting them to put forward proposals for projects that will improve the self-sufficiency of food processing. Proposals should focus on building new infrastructure, modernizing existing capacity and strengthening support infrastructure;[17];
• $150 million in existing SRF funding to support food-related innovation ecosystems;[18]
• $150 million through new funding to the Regional Economic Growth through Innovation program for agri-food projects;[19]
• $150 million in new funding for the Food Security Fund to expand domestic processing, storage, distribution, and delivery capacity;[20]
• $100 million in new funding for Canada’s Collaborative Food Innovation Fund. This Funding will help companies commercialize IP, increase demand for Canadian value-added ingredients and food production, and expand the scope of production; and[21]
• $750 million over the next seven years to increase year round production of fruits and vegetables, through building more greenhouses and other controlled growing environments.[22] $650 million of the $750 million will be dedicated to support producers as they incorporate technology to reduce operating costs. The remaining $100 million will be dedicated to expand local food production in rural and northern communities.

Collectively, these investments, as well as other funds promised by the Government are intended to strengthen Canada’s domestic food supply and reduce reliance on imported goods and services, including foreign processing capacity.

Regulatory Reform and Internal Trade:

The Government commits to reduce regulatory barriers that increase costs in the food supply chain. These barriers are generally believed to increase costs, discourage investment, and limit growth throughout Canada’s food system. On June 18, 2026, Parliament enacted Bill C-30, which amended the Canadian Food Inspection Agency Act and Pest Control Products Act to require greater consideration of food security and affordability.[23] These amendments aim to provide growers and livestock producers with greater access to lower-cost production inputs (including seeds, feed, and fertilizers), by reducing regulatory delays and approval backlogs.[24]

To improve interprovincial trade, another goal of this Strategy, the Government will provide provincially licensed food establishments with further guidance to help them satisfy federal food requirements. To achieve this goal, the Government will be giving abattoirs a time-limited exemption from the Safe Food for Canadians Regulations. By doing so, local famers and rural Canadians will be able to make meat more accessible, given the regional shortages of slaughter capacity. This is said to reduce the federal administrative burden by leveraging provincial and territorial food rules. In turn, the Government expects these measures to improve market access for Canadian procedures, including the purchasing of domestically-produced foods.[25] This initiative is supported by a $12 million investment over three years, followed by an additional $3 million annually on an ongoing basis.[26]

Do These Initiatives Improve Competition in Canada?

The Strategy acknowledges that Canadians continue to face serious food affordability challenges. Through these initiatives, the Government expects to strengthen competition and expand domestic food production. However, despite the more than $3 billion commitment over the next ten years, the Strategy lacks focus and adopts an extremely broad approach that distributes funds over many initiatives, rather than concentrating on certain targeted priorities. The Strategy provides approximately $320 CAD million annually, or roughly $7.80 CAD per Canadian each year.[27] By comparison, the United States Farm Bill invests an estimated $75 USD to $120 USD per person annually toward comparable objectives, which is substantially higher per capital support for these initiatives.[28]

Commentators have also noted that Canada’s food security challenges do not revolve around availability, but rather affordability driven by, among other factors, limited competition and increased consolidation.[29] Rather, Canada’s primary issue relates to insufficient competition within the grocery sector, where a small number of dominant retailers continue to control most of the market.[30] This results in a market where food prices remain high and unaffordable, with little pressure to find meaningful solutions to lower costs and produce locally.

In addition, this Strategy gives relatively little attention to Canada’s supply management system. Dairy, poultry, and egg production account for approximately one-fifth of Canada’s farm cash receipts.[31] Yet, the Strategy contains few substantive proposals addressing this crucial sector of the market. Similarly, the Strategy does not adequately engage with the issue of restrictive property controls, which continue to prevent independent grocery retailers from entering many local markets.[32] The Competition Bureau’s 2023 Grocery Market Study identified restrictive property controls as a significant barrier to competition.[33] The Competition Bureau consequently launched an investigation into this matter on March 1, 2024. Despite these findings, Manitoba remains the only province to have prohibited this practice thus far.[34]

Recommended Action:

While the Strategy contains several promising initiatives, additional reforms are needed to meaningfully increase competition within Canada’s grocery sector. The $12.9 million ongoing funding towards strengthening the capacity of the Competition Bureau is only a drop in the ocean and is unlikely to make a substantive difference. Rather than adopting a broad, system-wide approach, a more targeted investigation of each stage of the food supply chain should be undertaken. Addressing unique competitive barriers affecting food production, processing, distribution, and retail would likely produce more effective and lasting improvements than the Strategy’s current high level approach. In our view, the following items are necessary:

1. Give stronger power to the Competition Bureau to challenge anti-competitive mergers and conduct;
2. Prohibit practices that exclude competitors, including stronger prohibitions on restrictive property controls and exclusivity clauses;
3. Support financially independent wholesalers and buying groups, such as co-operatives;
4. Provide funding to independents to upgrade technology; and
5. Eliminate Interprovincial trade barriers.

The Competition Bureau is accepting public feedback through this online form on the barriers to competition in the grocery industry until July 31, 2026.[35]

Sotos LLP advises independent grocers, suppliers, distributors and other food-sector businesses on competition, regulatory and commercial matters. We can help businesses understand how the Strategy, its funding programs and developments in competition law enforcement may affect their operations and growth. Contact our team to discuss what these developments could mean for your business.

About the authors:

John Sotos and Jason Brisebois lead Sotos LLP’s grocery practice.

John is widely regarded as the dean of franchising, licensing and distribution bar. He has been recognized by Chambers Canada, the Canadian Legal LEXPERT Directory, Lexology Index: Canada, and Best Lawyers in Canada. John can be reached at 416.977.9806 or jsotos@sotos.ca.

Jason Brisebois advises clients on franchising, distribution and commercial matters, with a particular focus on the grocery sector. He received the 2024 Lexology Client Choice Award and has been recognized by the Canadian Legal LEXPERT Directory, Lexology Index: Canada, and Best Lawyers in Canada. Jason can be reached at 416.572.7323 or jbrisebois@sotos.ca.

Aly Weiss is a 2026 summer student at Sotos LLP and contributed to the research and preparation of this article.

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