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Costumers line up at the Tim Hortons coffee shop inside New York's Penn Station, Monday, July 13, 2009. Canadian doughnut and coffee chain Tim Hortons Inc. said it is opening 12 new locations in New York City, with three more planned for August. (AP Photo/Mary Altaffer) (Mary Altaffer/Mary Altaffer/AP)
Costumers line up at the Tim Hortons coffee shop inside New York's Penn Station, Monday, July 13, 2009. Canadian doughnut and coffee chain Tim Hortons Inc. said it is opening 12 new locations in New York City, with three more planned for August. (AP Photo/Mary Altaffer) (Mary Altaffer/Mary Altaffer/AP)

Grow: Tony Wilson

Legal advice on starting a franchise Add to ...

Most of my recent columns have been directed at prospective franchisees, who want to “buy into” a brand and business system.

Here's some advice for prospective franchisors, who want to start and build their own system as opposed to buying into someone else's.

Start-up franchisors make a lot of mistakes, but one of them, believe it or not, is listening to their lawyers … a little too much. Now that I have the attention of all the lawyers who practise in this area, and a few of their clients, let me explain.

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Lawyers are trained to anticipate problems that might arise during the life of a contract, such as a franchise agreement. It's what we're supposed to do. We draft for these possibilities to protect our clients, who are always the franchisors. Franchisors pay their lawyers boatloads of money to be “on top of the law,” and to draft franchise and related agreements so they are legally bulletproof, in the sense that if there's a legal problem, it's almost always anticipated in the franchise agreement and resolved in favour of the franchisor.

These days, when I review franchise agreements on behalf of franchisees, I'm amazed at how long and complicated they are becoming. A 50- to 60-page franchise agreement isn't unusual. With subleases, trademark licence agreements, general security agreements, guarantees, and other agreements that come as part of the package, 100 pages isn't out of the ordinary. And that doesn't include a disclosure document that the law requires be provided to prospective franchisees in Ontario, Alberta and PEI.

In fairness, the length and complexity of these agreements is largely because my colleagues are doing their legal jobs; they're protecting the interests of their franchisor clients by drafting tight, complete, iron clad and bullet-proof franchise agreements. No lawyer wants to be sued for not putting in the essential clause that would have won the case and saved the day.

In my experience, long and complex franchise agreements are even more common across the 49th parallel, and I see these U.S. agreements all the time when an American franchisor is expanding into Canada and awarding franchisees to Canadians using its U.S. contract, which may or may not have been modified to reflect the fact Canada is another country.

But what happens when a start-up franchisor with one or two corporate outlets wants to expand the brand and the business system through franchising? What should the franchise agreement contain and what shouldn't it contain? Should it have the “kitchen sink” so the franchisor is contractually “protected” from everything that could go wrong?

I suppose, but I can assure you, the start-up franchisor is going to discover many prospective franchisees will be intimidated by a 60-page franchise agreement (not to mention the 40 pages of ancillary contracts) and walk away, figuring the legal overkill isn't justified because the new franchisor isn't Tim Hortons.

Well, I have a Tim Hortons franchise agreement. Its only 26 pages long.

I'd say Tim's and other established franchisors have recognized that you don't always need painfully long, over complicated and wordy franchise agreements filled with legal jargon to adequately protect your interests. Some day-to-day operational matters that franchisors put in their agreements unnecessarily add to the agreement's length and can make it more intimidating to prospects. Operational matters belong in the franchisor's manual, not in the agreement.

Long, complicated and wordy franchise agreements filled with legal jargon may well help a franchisor in court when there's a dispute with a franchisee, but if the franchisor has no franchisees because he can't sell the agreement in the market, all the legal protection in the world is pointless. These agreements don't take into account the problems with marketability. In other words, if you're a start-up without much of a track record, a long, complicated agreement will scare the willies out of the prospects you hope to sign up.

A few years ago a client of mine acquired the master franchise rights to a U.S. concept that was expanding into Canada. This meant that my client was, for all intents and purposes, the “franchisor” in Canada of this system and the party with whom all franchisees in Canada would contract with. My client was required to use the U.S. form of Unit Franchise Agreement for all Canadian Franchisees, with minor changes to reflect Canadian law and terminology. But it was still, at the end of the day, 70 pages long.

My client couldn't sell the agreement in the marketplace. I'm sure it was the career-making masterpiece of the lawyer who drafted it in California. But he drafted for every possibly contingency except one: prospective franchisees were so intimidated by its length, its complexity, and its one-sidedness, they walked away in droves.

When my client realized the 70-page agreement was sinking the business in Canada, he asked me to re-do it. Without the kitchen sink.

When I did, everything that should have been in the agreement was in it, and everything that was onerous or over the top was out. The new agreement was shorter, used a friendly “we-us-you” drafting style rather that a more formal style full of legalese, and it was more balanced. And you know what? He started selling franchises.

But micromanaging the franchisee through the contract and having agreements that are too controlling can also backfire in other ways, such as in circumstances where worker compensation boards and other government or quasi-government agencies believe the control of the franchisee is so onerous under the franchise agreement that the franchisee (and its workers) are “employees” of the franchisor for certain purposes, and not independent contractors.

A recent B.C. case involving Petro Canada and the BC Workers Compensation Board determined that so much control was exerted under Petro Canada's Retail Licence Agreement, that Petro Canada was vicariously liable and ought to have ensured the health and safety of the operator's employees under certain legislation.

The message seems clear: Franchisors don't need the kitchen sink in their contracts, and in fact, the kitchen sink approach to drafting may sink the franchisor in some cases.

Special to the Globe and Mail

Vancouver franchise lawyer Tony Wilson is the author of Buying A Franchise In Canada – Understanding and Negotiating Your Franchise Agreement and he is ranked as a leading Canadian franchise lawyer by LEXPERT. He is head of the Franchise Law Group at Boughton Law Corporation in Vancouver and acts for both franchisors and franchisees across Canada, many of whom are in the food services and hospitality industry. He is a registered Trademark Agent, an Adjunct Professor at Simon Fraser University and he also writes for Bartalk and Canadian Lawyer magazines.

 

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