Underneath the Golden Boy - Robson Hall Faculty of Law
Underneath the Golden Boy - Robson Hall Faculty of Law Underneath the Golden Boy - Robson Hall Faculty of Law
286 Underneath the Golden Boy business opportunities, and to be reluctant to reveal sensitive information to their competitors. On the other hand, long established businesses can encounter financial difficulties, and it is arguable that all information relevant to the purchase of a franchise should be fully disclosed to prospective franchisees. Is the ability to exempt certain franchisors from the requirement to provide financial statements or to implement for other exemptions from the requirements of legislation or regulations appropriate 3. Franchise Relationship Regulation In addition to the disclosure requirements and franchisee remedies for nondisclosure, Canadian franchise legislation includes certain provisions that regulate the relationship between the parties to a franchise agreement. The provisions impose a duty of fair dealing on the parties to a franchise agreement and restrict the enforceability of certain terms that a franchisor might otherwise include in the agreement (for example, a franchisor cannot restrict the franchisee’s freedom to associate, and cannot enforce a clause under which a franchisee purports to waive his or her rights under the Act). Given the power imbalance between the parties to the franchise contract, the ‘take it or leave it’ nature of most agreements, and the ability of a franchisor under many agreements to unilaterally make fundamental changes to the operation of the franchise during the term of the contract and at its renewal, some jurisdictions place additional restrictions on the terms that a franchisor may include in an agreement or the changes that it may impose. 217 In the U.S., bills have been introduced in Congress, but not enacted, proposing additional regulation; for example: [T]he Small Business Franchise Act of 1999 (H.R. 3308), proposed, among other things, a comprehensive scheme for regulating the franchise relationship and included provisions on contract terminations, and transfers; encroachment; the purchase of goods or services from designated sources of supply; and franchisee’s rights to associate with other franchisees. 218 217 An Australian review of the efficacy of disclosure provisions in franchise regulation concluded that the long term nature of the franchise contract is inconsistent with the use of disclosure as the primary regulatory tool. Franchise contracts were analyzed in relation to goals such as balance of power, certainty and fairness of contract terms, and did not appear to be consistent with those goals: E.C. Spencer, “The Efficacy of Disclosure in the Regulation of the Franchise Sector in Australia” (Paper presented to the Third Meeting of the European Network on the Economics of the Firm (ENEF), September 7-9, 2006), online: (date accessed: May 12, 2007). 218 U.S. General Accounting Office, Federal Trade Commission: Enforcement of the Franchise Rule (Report to Congressional Requesters, July 2001) at 40, online:
Franchise Law Consultation Paper 2007 287 As well, several U.S. states have enacted laws addressing matters such as the termination, renewal and transfer of the franchise, territory encroachment, and requirements for the purchase of goods and services from designated sources. 219 Iowa’s legislation is recognized as being the most comprehensive, and among other things, prohibits franchisors from terminating or refusing to renew a franchise without good cause (or, in the case of renewal, unless certain circumstances exist, such as the franchisor’s withdrawal from that market). It also prohibits franchisors from requiring franchisees to purchase goods or services exclusively from the franchisor or designated sources when comparable goods and supplies are available from other sources. Franchisees also have a cause of action for damages if a franchisor allows encroachment that adversely affects the franchisee’s sales. 220 In Australia, the Franchising Code Review Committee recently recommended that consideration be given to prohibiting unilateral changes by franchisors and removing or modifying the right of a franchisor to unilaterally terminate a franchise agreement. The Committee added that if the right is maintained, adequate franchisee compensation should be required. 221 The ability of the franchisor to impose unilateral changes to business operations was also identified as a concern by the American Franchisee Association, which has advocated for federal franchise relationship provisions. 222 [A] prospective franchisee may do his or her due diligence, investigate the system, talk to franchisees, and be comfortable in signing the current franchise agreement. ...[but] some of the unilateral changes to franchise relationships involve issues that no franchisee could have anticipated upon the initial signing of the contract. In other words… a franchisee may be bound by changes to the relationship that, had they known, they never would have signed the agreement in the first place. 223 (date accessed: May 12, 2007). 219 Ibid. at 43-44. 220 Ibid. at 44; Iowa Code §§ 523H.1-523H.17. 221 The Australian Government has indicated that this recommendation will be addressed in the context of amendments to the Trade Practices Act, 1974: Hon. F. Bailey, Minister of Industry, Tourism and Resources, Reform of Franchising Code of Conduct (Media Release, February 6, 2007), online: (date accessed: May 12, 2007). 222 The American Franchisee Association proposed a Model Responsible Franchise Practices Act in 1996; see The American Franchisee Association, Who Are We, online: (date accessed: May 12, 2007). As well, the American Association of Franchisees and Dealers developed voluntary standards for fair franchising, which would enable franchisors to display a “Fair Franchising Seal”: see The American Association of Franchisees and Dealers, Fair Franchising Standards (revised August 2002), online: (date accessed: May 12, 2007). 223 U.S. General Accounting Office, supra note 9 at 70-71.
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286 <strong>Underneath</strong> <strong>the</strong> <strong>Golden</strong> <strong>Boy</strong><br />
business opportunities, and to be reluctant to reveal sensitive information to<br />
<strong>the</strong>ir competitors. On <strong>the</strong> o<strong>the</strong>r hand, long established businesses can encounter<br />
financial difficulties, and it is arguable that all information relevant to <strong>the</strong><br />
purchase <strong>of</strong> a franchise should be fully disclosed to prospective franchisees.<br />
Is <strong>the</strong> ability to exempt certain franchisors from <strong>the</strong> requirement to provide<br />
financial statements or to implement for o<strong>the</strong>r exemptions from <strong>the</strong><br />
requirements <strong>of</strong> legislation or regulations appropriate<br />
3. Franchise Relationship Regulation<br />
In addition to <strong>the</strong> disclosure requirements and franchisee remedies for nondisclosure,<br />
Canadian franchise legislation includes certain provisions that<br />
regulate <strong>the</strong> relationship between <strong>the</strong> parties to a franchise agreement. The<br />
provisions impose a duty <strong>of</strong> fair dealing on <strong>the</strong> parties to a franchise agreement<br />
and restrict <strong>the</strong> enforceability <strong>of</strong> certain terms that a franchisor might o<strong>the</strong>rwise<br />
include in <strong>the</strong> agreement (for example, a franchisor cannot restrict <strong>the</strong><br />
franchisee’s freedom to associate, and cannot enforce a clause under which a<br />
franchisee purports to waive his or her rights under <strong>the</strong> Act).<br />
Given <strong>the</strong> power imbalance between <strong>the</strong> parties to <strong>the</strong> franchise contract,<br />
<strong>the</strong> ‘take it or leave it’ nature <strong>of</strong> most agreements, and <strong>the</strong> ability <strong>of</strong> a franchisor<br />
under many agreements to unilaterally make fundamental changes to <strong>the</strong><br />
operation <strong>of</strong> <strong>the</strong> franchise during <strong>the</strong> term <strong>of</strong> <strong>the</strong> contract and at its renewal,<br />
some jurisdictions place additional restrictions on <strong>the</strong> terms that a franchisor<br />
may include in an agreement or <strong>the</strong> changes that it may impose. 217 In <strong>the</strong> U.S.,<br />
bills have been introduced in Congress, but not enacted, proposing additional<br />
regulation; for example:<br />
[T]he Small Business Franchise Act <strong>of</strong> 1999 (H.R. 3308), proposed, among o<strong>the</strong>r things,<br />
a comprehensive scheme for regulating <strong>the</strong> franchise relationship and included provisions<br />
on contract terminations, and transfers; encroachment; <strong>the</strong> purchase <strong>of</strong> goods or services<br />
from designated sources <strong>of</strong> supply; and franchisee’s rights to associate with o<strong>the</strong>r<br />
franchisees. 218<br />
217<br />
An Australian review <strong>of</strong> <strong>the</strong> efficacy <strong>of</strong> disclosure provisions in franchise regulation concluded<br />
that <strong>the</strong> long term nature <strong>of</strong> <strong>the</strong> franchise contract is inconsistent with <strong>the</strong> use <strong>of</strong> disclosure as<br />
<strong>the</strong> primary regulatory tool. Franchise contracts were analyzed in relation to goals such as<br />
balance <strong>of</strong> power, certainty and fairness <strong>of</strong> contract terms, and did not appear to be consistent<br />
with those goals: E.C. Spencer, “The Efficacy <strong>of</strong> Disclosure in <strong>the</strong> Regulation <strong>of</strong> <strong>the</strong> Franchise<br />
Sector in Australia” (Paper presented to <strong>the</strong> Third Meeting <strong>of</strong> <strong>the</strong> European Network on <strong>the</strong><br />
Economics <strong>of</strong> <strong>the</strong> Firm (ENEF), September 7-9, 2006), online:<br />
(date<br />
accessed: May 12, 2007).<br />
218<br />
U.S. General Accounting Office, Federal Trade Commission: Enforcement <strong>of</strong> <strong>the</strong> Franchise<br />
Rule (Report to Congressional Requesters, July 2001) at 40, online: