Franchising in Canada: putting fair dealing into practice

Turning an existing business into a franchise changes the reach of everyday decisions. A new procedure or IT requirement no longer affects only your own outlets: it also affects independent business owners. Before welcoming your first franchisees, establish a process for exercising your contractual powers fairly. This discipline helps build a lasting franchise network.

Understand the duty beyond the contract

In Canada, franchising is regulated at provincial level. In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 imposes a duty of fair dealing on each party in the performance of the franchise agreement. This duty includes acting in good faith and in accordance with reasonable commercial standards. One party may claim damages if the other breaches that duty.

In Manitoba, The Franchises Act also provides for a mutual duty of fair dealing, including good faith and reasonable commercial standards. In British Columbia, the provincial franchise legislation specifies that this duty extends to the exercise of rights under the agreement.

These rules therefore concern more than the initial sale of a franchise. They continue to apply throughout the relationship after signing. A clause authorising you to make a decision does not remove the need to consider how you exercise that power.

Quebec has no franchise-specific legislation. The general rules of the Civil Code of Québec, particularly those concerning good faith in the exercise of rights and in contractual relationships, remain relevant. Seek advice on the requirements that apply where the franchised businesses operate, rather than relying solely on the location of your head office.

Establish a process before the first outlets open

In a company-owned business, the founder can change a practice quickly. In a franchise network, that habit should give way to a clear process, particularly where a decision imposes costs or changes how work is organised.

Create an internal decision record for significant decisions. It should answer five questions:

• What problem are we trying to solve? Describe a verifiable need rather than a personal preference.
• Which provision are we relying on? Identify the relevant contractual power and its limits.
• Who will be affected? Distinguish between outlets according to their equipment, size or local constraints.
• What alternatives have we considered? Record less costly options or more gradual approaches.
• How will we support implementation? Specify the notice period, the explanations to be given and the person responsible.

This record is a management tool, not a guarantee of legal compliance. It does, however, help prevent sensitive decisions from resting solely on an informal conversation. Also identify who is authorised to approve changes: not everyone on your team should be able to commit the network to a new requirement.

Test the fairness of a specific decision

Suppose you want to replace the point-of-sale software used in your outlets. The agreement gives you certain powers over IT systems. Before requiring franchisees to make the change, check the precise scope of that clause with your legal adviser.

Then assess the practical consequences: hardware purchases, data migration, training, possible disruption to sales and recurring fees. A system that performs well in your original outlet may be difficult to roll out elsewhere.

A prudent approach is to test the software, document any difficulties and explain the reasons for the change. Gather information about the constraints facing affected franchisees before finalising the timetable. Consultation does not necessarily give them a right of veto, but it may reveal an obstacle your team had not anticipated.

Fair dealing does not always mean applying the same deadline to everyone. An outlet that has recently invested in equipment may be in a different position. If you grant an extension, record the objective criteria that justify it. Avoid exceptions based on personal relationships or decisions intended to punish criticism.

Train your team and keep useful records

The duty of fair dealing must be reflected in your team's communications with franchisees. Train managers to distinguish between a contractual requirement, a recommendation and a proposal still under consideration. Contradictory messages can create expectations that are impossible to meet.

For each significant decision, retain the commercial rationale, available analyses, feedback received and your response. Then communicate a clear explanation: the objective, who is affected, the timetable and the support available. Do not announce a consultation if no changes are genuinely open for consideration.

Finally, plan a review after implementation. If costs or difficulties exceed your initial assumptions, look for possible adjustments rather than ignoring the results. Seek legal review of decisions that are particularly burdensome or disputed.

Key takeaway: before franchising your business, introduce a decision record and an approval process. Contractual powers should be exercised systematically, for reasons you can explain and with due regard for their practical effects on franchisees.