Franchising in Canada: checking termination clauses

Buying a franchise means joining a network with obligations on both sides. But what happens if the franchisor believes you are not complying with the agreement? Before signing, examine the termination clauses: they determine when your right to operate may end before the agreed term expires. The aim is not simply to identify penalties, but to assess whether you have a realistic chance of preventing termination.

1. Identify the events that can trigger termination

Do not limit your reading to the section headed ‘termination’. Events that could end the relationship may also appear in provisions covering payments, operations or other agreements connected with the franchise.

With a lawyer who is independent of the franchisor, draw up a list of contractual breaches. Depending on the agreement, these might include a late payment, failure to meet an operating standard, an unauthorised closure or an inaccurate statement made during the application process. These are examples to look for, not grounds that automatically apply to every franchise.

For each event, ask three questions:

• Is the breach defined precisely enough?
• Must the franchisor give notice before taking action?
• Do you have an opportunity to remedy the situation?

Look out for cross-default clauses too: a breach of a related agreement could, if the wording provides for it, trigger a default under the franchise agreement. Ask your lawyer to map these links rather than review each document in isolation.

2. Check whether the time allowed to remedy a breach is realistic

A right to remedy a breach is only useful if the conditions give you a genuine opportunity to act. For each breach that can be remedied, note when the time limit starts, how long you have and what evidence is required to show that the breach has been remedied.

Does the agreement count calendar days or working days? Is notice deemed to have been received when it is sent, when it is delivered or under some other rule? Which address will it be sent to? These details can significantly reduce the time you have to respond.

Then test the clauses against practical scenarios. A missed payment can sometimes be put right quickly. A repair that depends on a technician or a spare part may take longer. Ask what happens if you begin taking action immediately but completion depends on a third party.

Also examine how repeated breaches are treated. Some agreements may allow termination after several breaches, even if they have been remedied. Check the period over which breaches are counted and whether different types of breach can be added together.

Before buying, have ambiguous wording clarified and discuss any necessary changes. Do not assume that a lenient approach in practice will override the written terms.

3. Distinguish contractual terms from legal protections

In Canada, the legal framework depends in particular on the province where the franchise will operate. A review of the agreement should therefore be accompanied by a check of the applicable provincial law.

In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 requires, subject to specified exceptions, a disclosure document to be provided at least 14 days before the relevant signing or payment. Among other things, this document must set out the conditions for termination and include the proposed agreements. Compare this information with the clauses you will be asked to sign.

In Manitoba, The Franchises Act and its regulation also require disclosure of the conditions for termination. The Act imposes a duty of fair dealing on the parties in performing the agreement, including good faith and compliance with reasonable commercial standards. This protection does not, however, guarantee that the agreement cannot be terminated.

In Quebec, there is no franchise-specific legislation: the general provisions of the Civil Code of Québec, particularly those relating to contracts and good faith, apply.

Finally, distinguish termination for breach from the statutory right that may allow a franchisee to rescind the agreement because of a failure to comply with disclosure requirements. The legal grounds, conditions and time limits are not the same.

4. Assess the consequences of early termination

Ask your lawyer to review the obligations that would survive the end of the agreement. Depending on the documents, you might have to stop using the brand, return confidential materials, remove branding and pay certain outstanding amounts.

With your accountant, estimate the immediate costs of closing the business and any commitments that might continue. Do not assume that the end of the franchise automatically ends agreements with third parties.

Finally, prepare a table showing the grounds for termination, notice required, whether a remedy is possible, the time allowed and the financial consequences. Key takeaway: before signing, you need to know not only what could cause you to lose the franchise, but also how to prevent that outcome and what it would cost you.