This post was originally published on this site
Understanding the Franchise Agreement: Non-Canadian agreements
http://www.azfranchising.com/understanding-the-franchise-agreement-non-canadian-agreements/
By Peter Snell
Over the next several issues of Canadian Business Franchise, this column will continue to explore different aspects of franchise agreements, to give you a better understanding of their basic elements. In this issue, instead of looking at one specific element of all franchise agreements, we will instead explore franchise agreements from countries outside Canada.
Please note it is extremely important for you to take the time to fully analyze and review any franchise agreement, disclosure document and respective attachments before you sign them. While the following information serves as a general overview, as always, you should also seek your own legal advice when reviewing a franchise agreement. Only then can you obtain specific information and recommendations relevant to your particular circumstances.
It’s not Canadian, eh?
While there are certainly many successful franchise systems that were founded and have grown here in Canada, more have experienced their genesis in other countries. The U.S., in particular, is the birthplace of many franchises that are well-known to Canadians. Others have expanded into Canada from abroad, whether they started in the U.K., France, Australia, Brazil, South Korea or elsewhere.
It has become a ‘best practice’ for franchisors from other parts of the world to have their franchise agreements ‘Canadianized’ for local prospective franchisees, but there are also many cases where this customization has not happened. This raises the question—what should a prospective franchisee in Canada do when he/she is presented with a non-Canadian franchise agreement, i.e. one that has not been specifically revised for use in Canada?
Many provisions in non-Canadian franchise agreements may be perfectly suited for use in Canada. The commercial terms, for example, are often very similar for franchise agreements used inside and outside Canada.
When you are reviewing any franchise agreement, however, it is important not only to consider which provisions are included in the agreement, but also what may have specifically been left out.
Many franchises developed in the U.S. are already well-known in the Canadian market.
Avoiding misinterpretation
Assuming your non-Canadian franchise agreement has at least been drafted in English or French, one of the first priorities is to determine whether or not the terminology it uses has a clear meaning in a Canadian legal context.
If the meaning of its provisions is not always clear, then there could be challenges if there is ever a dispute under the terms of the agreement, as such a dispute could hinge on the interpretation of a particular word or phrase. Such concerns may seem trivial at first, but ambiguity in the language of business contracts can lead to protracted legal disputes—and litigation is expensive.
A franchise agreement may provide one method of operation in the franchisor’s home country but another method in Canada, which can also create confusion. Misinterpretation is always more likely to occur when the franchisor has not specifically revised its franchise agreement for use within Canada.
Registering trademarks
Another area of particular concern will be trademarks and other intellectual property—which this column discussed in-depth in the December 2015 issue of Canadian Business Franchise—as these are typically protected on a country-by-country basis. References to U.S. trademarks, for example, may not be relevant in Canada.
If the franchisor has not proactively taken steps to register its trademarks within Canada, then its Canadian franchisees could face significant legal problems down the line. Any franchisor that fails to allocate enough time and resources to build a proper foundation for its business in Canada is putting its franchisees in jeopardy if issues and disputes arise over intellectual property ownership. This is the case with respect to matters as simple as registering ‘.ca’ website domain names.
So, if the references within a non-Canadian franchise agreement are to foreign trademarks that have no equivalent in Canada, the validity of such provisions is potentially negated. Typically, the franchisor will assert ‘common law’ trademark ownership before completing registration in Canada, but this scenario offers only a very limited level of protection to franchisees.
As such, any prospective franchisee should ask the franchisor to revise the provisions of its franchise agreement to provide proper representation of Canadian trademarks. Establishing and preserving the validity of licensed franchise trademarks in writing will benefit both the franchisor and the franchisee, as then the franchise system can legitimately grow and succeed in the Canadian market. If, on the other hand, the trademarks are challenged and the franchisor fails to show it has properly protected them, then all of its franchisees in Canada could end up losing the rights to use its trademarks and, thus, ceasing to represent its brand. This scenario would add the undue cost burden to the franchise system of having to rebrand itself in Canada.
In short, the value associated with a franchise system’s brand recognition—which a prospective franchisee reasonably expects to accrue—is eroded if the franchisor’s trademarks are not legally protected in Canada.
Other franchise systems have expanded into Canada from abroad, e.g. Aussie Pet Mobile from Australia. File Photo
Sourcing products
The franchise agreement will also typically regulate how the franchisee obtains supplies for the operation of the business. If the franchisor has not taken steps to establish suppliers of its products within Canada, however, then it may become problematic for the franchisee, as he/she may have to import the franchisor’s designated goods from other countries.
Importing goods can certainly increase the cost of business operations for the Canadian franchisee, thanks to shipping fees, insurance, import tariffs and duties. This can make it very difficult for franchisees to offer these products on to their customers at market-competitive prices.
Managing the ad fund
A franchise agreement will usually include provisions for an advertising or branding fund, which franchisees pay into for the purpose of broad-based campaigns. It is quite common for this type of scheme to be national in its advertising scope, but when the franchisor is based in another country, such a scope will not help the Canadian franchisee reach his/her customer base.
You should look for a reference to (a) a separate national ad fund for Canada or (b) a single international ad fund with sufficient scope to reach the Canadian market. It is very important to clarify such matters, as they will have a significant impact on how the individual franchisee’s contributions to the franchise system are spent.
Training the franchisee
The franchise agreement will also establish where and how franchisee training will occur. Some international franchise systems can conduct training within Canada, but others will require the franchisee to travel to the franchisor’s headquarters (HQ) in another country.
Travelling for training can involve significant time and cost for the franchisee, so it is important to understand the specifics of such clauses early on. It can also be an issue if provisions within the franchise agreement require retraining of the franchisee during the agreement’s term.
Paying tax
Taxation is another issue that needs to be addressed in the franchise agreement. Failing to adequately provide for provisions that relate to the Canadian tax regime can lead to problems for both the franchisor and the franchisee.
It is specifically important for the franchise agreement to deal with the issue of withholding tax. The initial franchise fees, ongoing royalties, interest and other funds paid to a non-Canadian franchisee will require a withholding of a certain designated percentage as payment to the Canada Revenue Agency (CRA), pursuant to the withholding tax provisions of Canada’s Income Tax Act.
The percentage of funds comprising the withholding tax will vary on a case-by-case basis, depending upon the country of origin, the structure of the franchisor and whether or not there is any income tax treaty in place between Canada and the franchisor’s home jurisdiction.
As unit franchisee and area franchisee, respectively, Don MacMullen and Dani DePetrello have adapted the Right at Home senior care franchise system for the Canadian market. File Photo
Respecting privacy
It is also important for franchise agreements to address privacy laws and how to abide by them. Privacy legislation in Canada is very different from other parts of the world. A non-Canadian franchise agreement should be revised to recognize these differences.
Canada’s anti-spam legislation (CASL), in particular, is one of the toughest privacy laws anywhere in the world. If a franchisor expects a Canadian franchisee to use e-mail for marketing purposes in a manner not compliant with CASL, then the franchisor’s failure to account for Canadian issues can lead to major problems with the franchisee.
Following other laws
Another area where Canada’s laws differ from other countries’ is in the use of contests and promotions to market a franchise. Canada has stricter laws and regulations that govern how franchise systems and other businesses conduct contests and promotions. So, a project that has legitimately succeeded in a non-Canadian jurisdiction may not be compliant in Canada.
This can become a problem when a franchisee is required to contribute to and participate in the franchisor’s broader contests and promotions. If these projects are not adapted to meet Canadian requirements, then the Canadian franchisees may lose out on the opportunity to take part.
Establishing a solid foundation
For all of these reasons, along with other potential issues with non-Canadianized franchise agreements, it is very important for a prospective franchisee in Canada to carefully review any franchise agreements from foreign-based franchisors—whether they are in the U.S. or on the other side of the planet—and check if any elements need to be updated and amended for legal use in Canada. If this review process reveals important differences, then it is only prudent for the prospective franchisee to ask the franchisor to consider Canadianizing the franchise agreement.
With this in mind, it is also important for the franchisor to establish a solid foundation for expansion into the Canadian market before signing up its first Canadian franchisees.
Peter Snell is a franchise lawyer and partner at the Vancouver office of Gowling WLG. For more information, contact him by e-mail at peter.snell@gowlingwlg.ca.
The post Understanding the Franchise Agreement: Non-Canadian agreements appeared first on AZ Franchising | Franchising dalla A alla Z.