Who’s Who Legal brings together Stephen Giles of Norton Rose Fulbright, John Pratt of Hamilton Pratt, Peter Snell of Gowling Lafleur Henderson and Jennifer Dolman of Osler Hoskin Harcourt to discuss pressing issues facing franchises today, noteworthy court decisions and the effect of technology on franchising.
Stephen Giles: The biggest change has been the substantial changes to the Australian Franchising Code of Conduct, which took effect on 1 January 2015. Transitional provisions have enabled many franchise systems to defer updating until 31 October 2015, but most will complete their updating in the next couple of months.
John Pratt: If I am allowed to cheat I am going to mention two issues. The first is the extent to which the English courts will imply a duty of good faith into franchise agreements – this is dealt with subsequently; the second is the introduction of class actions into competition (antitrust) law disputes.
In relation to the second issue, it has been relatively uncommon for franchisees to bring claims against franchisors that their franchise agreements or extra contractual restrictions breach competition laws. One of the principal reasons for that is the cost of bringing such actions which generally require an economic analysis of the relevant market. Franchisees simply do not have the wherewithal to bring such claims. That is about to change. The Consumer Rights Act which received Royal Assent in March 2015 gives the Competition Appeal Tribunal from October 2015 the power to hear opt-out collective actions. The new system contains, in the view of many experts, all the features of the US class action system.
As a result of further rule changes the Competition Appeal Tribunal will be able to issue injunctions without ordering any undertaking for damages. This would allow parties to obtain an injunction without the need to compensate the other party for any loss if the injunction is later found to have been issued wrongly.
The combination of allowing class actions and the changes in procedure will allow small businesses such as franchisees to bring claims.
Peter Snell: I would say that the issue of employer liability and vicarious liability has been at the forefront of concerns as some of the developments south of the border in the United States appear to be spreading into Canada. Hard to say yet how this will play out, but this has been flagged by many as being a significant concern for franchise systems operating in Canada.
Another pressing issue is the proposed expansion of jurisdictions in Canada with franchise legislation, as British Columbia is considering adopting its own franchise laws. Franchise disclosure laws are under the jurisdiction of the provinces in Canada (there are 10 provinces and three territories in Canada), and not the federal government. As a result, there is a patchwork of franchise legislation, with five of the 10 provinces so far having implemented franchise laws. As Canada does not have franchise registration requirements or governmental review of disclosure documents, it has been left up to the courts to interpret the provincial legislation and its application to disclosure documents and franchise agreements. The results at times have been inconsistent and often controversial.
With potentially a sixth province bringing in new franchise laws, there is increased pressure to have the provinces adopt legislation that is consistent with the other jurisdictions. This would make it easier for franchise systems to comply with the franchise disclosure laws across Canada.
The most pressing issue has been the case law developments in the Bertico v Dunkin’ Donuts case and the Bhasin v Hrynew case.
Jennifer Dolman: I agree with Peter that the co-employment issue is of interest to franchisors in Canada, but to date it is not nearly as pressing as it is in the United States.
As for other pressing issues in Canada, there is currently a movement in Ontario – one of five Canadian provinces that presently has franchise legislation – towards reforming the Arthur Wishart Act (Franchise Disclosure), 2000 (the Wishart Act). The need is stemming in large part from the uncertainties created by the wording of the legislation and court decisions interpreting the legislation to require broad disclosure of “all other material facts”. As such, it is becoming increasingly challenging to comply with the Wishart Act and be confident that a franchise disclosure document is compliant. The Wishart Act is one of the business statutes that a panel struck by Ontario’s Ministry of Government and Consumer Services has recommended be reformed.
Another important issue impacting franchising in Canada relates to Canada’s anti-spam legislation (CASL), which came into effect in July 2014. CASL prescribes very proscriptive consent requirements for e-mail and other electronic communications but the legislation is more than just anti-spam. It also covers anti spyware, and prohibits the installation of computer programs (including upgrades and updates) on another person’s computer without consent. Enhanced consent is required if the computer program performs certain “invasive” functions. As a practical matter, this can create challenges and potential liability in any franchise system where the franchisor remotely manages franchisees’ software.
Another issue of concern to franchisors with operations in the province of Quebec relates to the impact of the Charter of the French Language and its regulations to the use of English trademarks on public signage. In June 2015, the Minister of Culture and Communications and Minister responsible for the Protection and Promotion of the French Language announced that the Regulation respecting the language of commerce and business would be modified further for a more visible presence of the French language in trademarks on public signage. The bill is to be published in the Gazette officielle du Quebec as soon as autumn 2015 and should enter into force at the beginning of 2016. The bill should give businesses several options such as adding a generic or descriptive term or a slogan.
Stephen Giles: The franchise relationship is relatively well defined in most markets in Asia-Pacific, with decided cases essentially amplifying existing law rather than setting new legal boundaries. However this could be the calm before the storm of future years, with the new franchising legisation in Australia including good faith, and the federal government proposing legislation to prohibit unfair contract terms in standard form small-business contracts.
John Pratt: Until recently the English courts have taken a very strong position that they do not recognise a general duty to act in “good faith”. The 2013 High Court decision in Yam Seng Pte Limited v International Trade Corporation Limited changed all that. In that case the judge acknowledged that while it would be unlikely that a duty of good faith would be implied in every commercial contract, elements may be implied in contracts involving a long-term relationship between parties who have made a substantial commitment. The judge stated that these “relational” contracts:
may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangement.
The judge indicated that franchise agreements were “relational” contracts.
After that decision there have been a number of cases including the franchise case, Carewatch Care Services Limited v Focus Caring Services, Anthony J Grace, Elaine Grace  EWHC 2313 (Ch) in which the courts have had to consider whether to imply a duty of good faith. In several cases – including, curiously, the Carewatch decision – judges have refused to imply a duty of good faith creating uncertainty for franchisors and their legal advisers.
A new approach has been adopted in a 2015 decision – D&G Cars Limited v Essex Police Authority – in which the judge had to analyse what he termed as a relational contract par excellence in which the judge implied a duty to act with honesty and integrity. It may well be that going forward franchisors may have to comply with a much less onerous duty to act with integrity and honesty and not with good faith.
Stephen Giles: John’s comments on good faith are interesting, as UK law influences quite a bit of global jurisprudence. In Australia the good faith issue was already largely settled even before the introduction of the new requirement for “each party to a franchise agreement” to “act towards another party in good faith, within the meaining of the unwritten law from time to time”. As the UK courts seem to have done, the Australian courts indicated that a franchise agreement, being a long-term agreement, was exactly the type of agreement into which the duty of good faith would typically be implied (see Far Horizons Pty Ltd v McDonalds Australia Pty Ltd). Of course, the legislators seem to love to add complications – in Australia the new duty in the Franchising Code of Conduct is expressed to apply beyond the contractual provisions to acting in good faith in relation to the legislation itself, “to any dealing or dispute” and to “the negotiation of the proposed agreement”. A statutory fine of up to $54,000 applies to breach of the duty. So, old good faith, with a bit of a facelift and new teeth!
Peter Snell: Interesting to see the developments in “good faith” law in the English Courts and in Australian legislation. In Canada, the Supreme Court of Canada released its decision in November 2014 in Bhasin v Hrynew, which recognised for the first time a “general organising principle” of good faith and a duty of honesty in contractual relations in common-law Canada.
The Court concluded that by recognising a general duty to perform contracts honestly, contractual relations would be more certain and coherent, consistent with reasonable commercial expectations. The Court also recognised that the decision brings the common law closer to that of the civil law in the province of Québec, which has long recognised a duty of good faith including the requirement of honesty in the performance of contracts.
The general organising principle is, in the words of the Court, simply that “parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrary.” As the Court explained, this organising principle is “not a free-standing rule, but rather a standard that underpins and is manifested in more specific legal doctrine and may be given different weight in different situations”.
Having elucidated the general organising principle of good faith performance, the Court introduced a new “general duty of honesty in contractual performance” as a manifestation of that principle. The Court explained the nature of the new duty is “a simple requirement not to lie or mislead the other party about one’s contractual performance”.
The scope of the duty of honest performance in practice is difficult to predict. The Court recognises that “the precise content of honest performance will vary with context and the parties should be free in some contexts to relax the requirements of the doctrine so long as they respect its minimum core requirements”, although these “minimum core requirements” are not identified. It is hard to say in what contexts the Court foresees parties relaxing the doctrine.
Another really interesting decision came out of the Quebec Appeal Court in Bertico v Dunkin’ Brands Canada Ltd. This case involved a claim brought by 21 Quebec Dunkin’ Donuts franchisees (the franchisees) for the purpose of seeking formal termination of their leases and franchise agreements, plus damages for breach of the franchise agreement. Starting in 1996, the franchisees began to alert Dunkin’ Donuts to the progressive increase in the fast-food coffee and donut market share being absorbed by Tim Hortons. (Tim Hortons is a coffee, donut, breakfast and lunch fast-food chain in Canada, and is the largest franchise system in Canada.)
The lower court found that the most important obligation Dunkin’ Donuts had assigned to itself under its franchise agreements was the promise to protect and enhance the Dunkin’ Donuts brand. Brand protection was stated to be an ongoing, continuing and “successive” obligation. Dunkin’ Donuts was found to be in breach of its fundamental responsibilities to the franchisees. At trial, the franchisees were awarded C$16,407,143 for lost profits and lost investments.
The Quebec Appeal Court rejected Dunkin’ Donuts’ argument that the trial judge had imposed a new unintended obligation to protect and enhance the brand, outperform the competition and maintain indefinitely market share. Damages were reduced to C$10.9 million.
It is important to note that Quebec is a civil law jurisdication and it is unclear how much weight this decision will be given in the Common Law courts in the rest of Canada.
Jennifer Dolman: There has been a lot of buzz about the Bhasin v Hrynew decision, which – importantly – is not a franchise case. Franchise relationships are already subject at common law to the duty of good faith, and the statutory duty of fair dealing in the five provincial franchise statutes is merely a codification of the common law. One interesting finding in Bhasin was that the common law duty of honesty in the performance of contractual agreements “does not impose a duty… of disclosure” and that “the duty of honest performance... should not be confused with a duty of disclosure”. Whether that finding can be extended to franchise relationships remains uncertain. In the recent 1250264 Ontario Inc v Pet Valu decision, the judge distinguished Bhasin on the basis that it wasn’t a franchise case, and found that on the facts of that case the statutory duty of fair dealing under section 3 of the Wishart Act imposed on the franchisor a duty to disclose certain material facts to its franchisees and that the franchisor had breached its duty. The decision is under appeal.
I agree with Peter that Dunkin’ Donuts is a significant case affecting franchise relationships but I think the decision will have limited application outside of Quebec. The decision is based on concepts contained in the Civil Code of Quebec that are not mirrored in the law of other Canadian provinces, and in any event, is not binding on courts outside of Quebec. At the core of the Court of Appeal’s decision is article 1434 of the Civil Code of Quebec which provides that “a contract validly formed binds the parties who have entered into it not only as to what they have expressed in it but also as to what is incident to it according to its nature and in conformity with usage, equity or law”. Pursuant to this provision, which is unique to Quebec law, courts in Quebec are empowered to read into contracts obligations based on the nature of the contract in question, in the absence of evidence that the parties intended to exclude such implicit obligations.
I also don’t think that Dunkin’ Donuts has increased the duties incumbent upon franchisors in Quebec because the Quebec Court of Appeal has previously applied article 1434 to a franchise case – the 1997 Provigo decision. At most, Dunkin’ Donuts has clarified that the implicit duties are general in nature and can be invoked in franchise contexts other than than the particular fact pattern in Provigo, which was one of direct competition by a franchisor with its own franchisees.
Another significant Canadian franchise decision worth mentioning is 1146845 Ontario Inc v Pillar to Post Inc. The Ontario Superior Court of Justice stayed a class action on the basis of an arbitration agreement notwithstanding the statutory right to associate in section 4 of the Wishart Act which has previously been found by the Ontario Court of Appeal to be a right to a collective action, and in particular a class action. Justice Perell held that the statutory right to associate does not equal a right to bring a class action in the face of an arbitration provision and that where franchisors and franchisees mutually agree to arbitrate their disputes, effect will be given to their agreement. The case is under appeal.
Stephen Giles: With domestic growth fairly flat in mature markets such as the US, Australia and the UK we have seen a lot of focus on international expansion. Popular jurisdictions for our all of clients are the emerging markets in Asia and the Middle East, and the US for Australian systems. We are also seeing increased interest in Australia from US brands, and from Asian investors keen to acquire established Australian networks and take them into Asia.
John Pratt: While the UK economy is currently one of the fastest-growing economies in the developed world, there has not been a substantial increase in international franchising activity. That is not to say that activity is not taking place. The Middle East is increasing in importance with Middle East parties targeting less well known brands to introduce to the Middle East market.
A relatively new trend is the increased interest in India. A number of concepts have expanded both from the UK to India and vice versa. A recent example is a well-known TV personality/chef’s chain of Italian restaurants entering the Indian market through a master franchise to capitalise on the growing Indian middle classes.
Peter Snell: Canada’s economy is relatively flat at the moment, with the resource sectors slowing with lower oil and natural resources prices. This has led to the Canadian dollar declining substantially against the US dollar. This has resulted in an increase in US franchise systems doing business in Canada and seeking to expand their brands. We have also seen a number of systems from Australia and Europe exploring expansion to Canada.
For our Canadian clients, markets in the Middle East are still seen as an atractive destination for franchise systems. The US market is a very desirable one for Canadian brands, and a number of Canadian systems have increased their focus on US expansion.
Jennifer Dolman: We continue to represent franchisors in the US, the UK and Australia who are expanding into Canada. Very few of our Canadian clients have plans to expand outside of Canada. In a recent media release (27th July 2015) on the Canadian Franchise Association website (cfa.ca), CFA member Alair Homes announced its plans to bring its residential and commercial construction services to 10 states in the US next year. Many of our clients have plans for significant growth domestically; in many instances, this is being driven by private equity firms who have taken a more aggressive interest in franchising and invested heavily in franchisors.
Stephen Giles: Most clients would say that technology will be the key to their competitive advantage over the next five years. Some clients have nailed it, but to be frank I feel most clients are still struggling – they feel the need to be doing something online or with technology, but they are not clear exactly what to do, or they know what they would like to do but are wary about upsetting the existing franchise network. Clients need more sophisticated advice these days about channel conflict, and how to implement change in a franchise network without being sued. As a firm we are moving to cut costs for client through the use of technology. Lawyers need to embrace providing the most efficient legal solution, not just continue to follow the traditional legal paradigm.
John Pratt: Of course the digital revolution is affecting all aspects of franchising. Franchisors not only have to have an effective and cutting-edge website but are also developing sophisticated social media policies. Recruitment of franchisees is increasingly being undertaken through social media and the internet, with a proportionately lesser amount of recruitment being undertaken through the classic channels of exhibitions and magazine advertising.
In terms of areas of advice franchisors do seek advice on data protection legislation, notices on their websites and electronic terms and conditions of sale, consumer protection legislation in relation to distance selling, social media policies and how to deal with unfair internet “attacks”.
Peter Snell: Canada’s anti-spam legislation (CASL) came into force on 1 July 2014. It has changed how we advise clients, and how clients communicate digitally. It has been described as being one of the toughest anti-spam laws in the world.
On 5 March 2015, the Canadian Radio-television and Telecommunications Commission (CRTC) issued the first notice of violation under CASL seeking a penalty of C$1.1 million from a Quebec based company, Compu-Finder, for alleged violations of the law.
The CRTC has stated that a number of additional investigations are under way. It is not known what industry sectors are under investigation, so it is unknown if franchise systems are being investigated. All organisations that send commercial electronic messages, including e-mail and text messages, in or into Canada, should review their marketing programmes to ensure they are compliant with the law. While CASL has been in force for more than a year, the CRTC has now started to flex its enforcement muscle by seeking to impose serious monetary penalties. Violations of CASL are potentially subject to a fine of up to C$10 million.
While Canada may be ahead of the game in some respects, in others, we lag behind. Electronic delivery of franchise disclosure documents in the Province of Ontario is still not a permitted method of delivery. This is increasingly irksome to franchise systems doing business in Ontario where only personal delivery and “registered mail” are permits methods of delivery.
As a firm we have evolved to provide new ways of delivery services. We have launched Gowlings Practical, which is a browser-based software that allows us to collaborate across all of our offices for seamless task management.
Jennifer Dolman: I referred to Canada’s anti-spam legislation (CASL) in my answer to the first question. CASL is not just anti-spam legislation, it also covers anti-spyware and prohibits the installation of computer programmes on another person’s computer without their consent. Peter mentions that the CRTC is currently enforcing CASL. However, this will not always be the case, as in July 2017 there will be a private right of action that will allow any individual to sue for any contravention of the legislation and to claim actual and statutory damages. These statutory damages, combined with the potential for class proceedings, create an enormous incentive for compliance.
As for e-disclosure, some of our clients have started to get comfortable with it in provinces outside Ontario, where it is either expressly permitted (PEI, New Brunswick and Manitoba), silent (Alberta) or not regulated.