A franchise relationship is created when the franchisee and the franchisor agree to be bound by the terms of a franchise contract. If a dispute arises between the franchisee and franchisor, it will not always be important to identify the date from which the franchise relationship began.
Sometimes, however, the date from which the relationship began will be a central issue in the dispute; for instance, franchise disclosure legislation (with the exception of Alberta’s Franchises Act) provides that a franchisee seeking to exercise its statutory right of rescission must do so no later than two years after “entering into the franchise agreement”.
If a franchisee attempts to rescind its franchise agreement near that two-year mark, the franchisor may respond by alleging that the franchisee is out of time to do so because more than two years have elapsed since the franchise agreement was “entered into”.
In those circumstances, it becomes necessary to consider the question of when the franchise agreement was mutually agreed upon. The ingredients necessary for there to be an enforceable contract are mutual agreement as to the essential terms of the agreement and mutual “consideration”, meaning an exchange of promises to be performed under the contract.
In many cases, the exercise of identifying when a franchise agreement was “entered into” will be straightforward because the parties will have signed a franchise contract evidencing their mutual agreement to enter into a franchise relationship and what obligations they promise one another to perform under the contract. Typically, the parties will have signed the franchise agreement on a specific date, or on dates that are sufficiently close together such that there is little doubt as to when the franchise relationship began.
But complications do arise when there is disputed evidence about the parties’ agreement or the contents of their mutual promises. The following are some examples of such complications:
- No signed agreement, or only partly signed one: Occasionally, a franchisor will inadvertently neglect to obtain its franchisees’ signatures on its franchise agreements, yet the parties operate in accordance with the terms of the franchise agreement as if they were fully signed. In those circumstances, it can be challenging to identify the date upon which the parties had entered into the franchise agreement.
The challenge can be particularly vexing if there was a long gap between when the franchisee paid its initial consideration (the initial franchise fee, or a rent deposit) and when the franchisee began operating the franchised business – a not uncommon occurrence as a consequence of the COVID-19 pandemic.
The stronger argument would seem to be that the franchise agreement was entered into when the franchisee made its first payment of consideration to its franchisor, because as of that date, all of the elements of a binding contract will have
been in place; but what if an important term of the unsigned agreement changed after the payment of the initial fee? The answer becomes more elusive.
Sometimes the parties sign a lease agreement concerning the premises out of which the franchised business operates without first (or ever) signing a franchise
agreement; in that example, can the franchise agreement be said to have been
entered into upon the signing of the lease agreement even where no franchise agreement was ultimately signed? Again, the answer is unclear.
- Multiple versions of the franchise agreement: Sometimes the parties may enter into successive franchise agreements. In Ontario, at least, there is appellate authority that the two-year rescission window runs from the date of the second agreement, not the first, in circumstances when it was the franchisor requiring the second agreement and the two agreements were substantially similar.
- Verbal franchise agreements: Though uncommon, a franchisor may enter into an oral franchise agreement with a franchisee, and in such case, it may be difficult to determine the effective date of the agreement; however, in a relationship or arrangement arising out of an oral agreement “where there is no writing which evidences any material term or aspect of the relationship or arrangement”, such a franchisor would be exempt from the application of the franchise disclosure legislation in each of the franchise disclosure jurisdictions except for Alberta, so a rescission claim on this basis would not be an issue.
- No grant of a specific territory: It is not uncommon for franchisors and franchisees to sign franchise agreements that, whether by design or inadvertence, fail to define the specific territory or premises that are the subject of the grant. Recent, an Ontario court decided (in a decision presently under appeal) that such a generic franchise agreement was not a “franchise agreement” at all within the meaning of the statute, because the agreement did not define the specific territory within which the franchisee would be licensed to operate; therefore, the generic agreement cannot be said to have granted a franchise.
Key Takeaways: To avoid future disputes, franchisors and franchisees alike are well-advised to ensure that their franchise agreements are memorialized in writing, clearly dated, and signed. The parties should also take steps to avoid significant delays between execution of franchise agreements and any performance under them.
A modified version of this article was originally published in the Canadian Franchise Association’s Franchise Voice.
 See, for instance, the Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3 at s.6(2). Alberta’s statute requires a rescinding franchisee to do so within two years “after the franchisee is granted the franchise”: Franchises Act, RSA 2000, c F-23, s.13(b).
 But note that in the older decision, 287975 Canada Inc. v. Imvescor Restaurants Inc. 2009 ONCA 308, the Court of Appeal agreed with the lower court that the payment of a franchisee of an initial fee prior to the delivery by the franchisor of a disclosure document did not, in and of itself, create a franchise agreement: see para 33.
 Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3 at s 2(3)7.
Hoffer Adler LLP provides practical and cost-effective legal assistance to both franchisors and franchisees about all aspects of the franchising relationship. If you have any questions about a franchising matter, we would like to hear from you.