When expanding its franchise network into another Canadian province or internationally, can a franchisor use the same model agreement or must it have a new one drafted for each province or country?
Before answering this question, it is important to know that :
- The legal regime based on “Common Law” of the other Canadian provinces is different from the “Civil Waw” of Québec;
- Many terms (especially legal and financial terms) used in a Québec franchise agreement may also be different in other Canadian provinces (and vice versa) and, even more so, in other countries. For example, the term “movable hypothec” recognized in Québec civil law is not used elsewhere in North America;
- Certain legal principles (particularly in relation to leases and securities) are also different in the other Canadian provinces and, even more so, in other countries. For example, penalty clauses that are allowed in Québec law may be deemed illegal in other jurisdictions where they may, however, often be replaced by liquidated damages clauses that achieve similar objectives;
- Finally, in provinces, states and countries where there are franchise laws and/or regulations, agreements may require the inclusion of certain mandatory terms and may also have to take into account certain restrictions imposed by such laws and regulations.
Notwithstanding the above, it is still possible for a franchisor to use its model agreement for its international development.
To do so, however, the franchisor will need to carefully complete the following three steps with the assistance of expert franchise attorneys:
1. Translating It
For all locations where the primary language of business is not the one in which the initial franchise agreement has been drafted, the agreement will first have to be translated into the language in which it is to be used.
It is generally preferable that this translation be done first, and locally, which, in our experience, is less expensive and allows the franchisor to have a copy of its domestic franchise agreement in that new language.
Also, a franchise agreement already translated will facilitate the adaptation work that will have to be done in the target province or country, thus saving time and costs for the franchisor.
Given the importance of having a good franchise agreement in the target province or country, this translation must be done by an experienced legal translator. This implies a relatively important investment, but much less than the use of a poorly translated agreement whose consequences can be disastrous for the franchisor and his network.
2. Adapting It
Once the franchise agreement has been translated, the second step is to adapt it to the province or country in which the franchisor wants to use it.
The objectives of this adaptation are to ensure that :
In order to achieve these objectives, it is generally preferable that this adaptation be made by a lawyer who is an expert in franchising in the jurisdiction concerned. However, since the legal regime is very similar among the Canadian provinces (with the exception of Québec), it is often possible to have this review done by a single law firm for all Canadian provinces other than Québec.
- The words, terms and phrases used in the agreement are appropriate for that location or, if not, replaced with appropriate words, terms and phrases;
- The terms and conditions of the agreement are legal and enforceable in that jurisdiction or, if not, replaced with terms and conditions that best protect the interests of the franchisor;
- If available, additional clauses recognized in that jurisdiction to adequately protect the interests of a franchisor, and those necessary to comply with applicable laws and regulations, are added to the agreement.
3. Reviewing It
Once the franchise agreement has been translated and adapted, it will be necessary for the franchisor, along with its expert franchise lawyer, to review the final product before the agreement is signed by a first franchisee in another province or country.
This review is important to ensure that the agreement meets the franchisor’s needs, protects the franchisor’s interests and, most importantly, reflects the franchisor’s and its network’s mode of operation in the new market (which may be different from the franchisor’s mode of operation in its home market).
Here are four practical tips regarding the agreement used by a franchisor in another province or country:
A. Involve your franchise lawyer
Some franchisors, in the belief that they are saving money by doing so, themselves find and select a lawyer in the new province or country in which they wish to develop their network and then deal directly with that lawyer without involving their expert franchise lawyer in their primary market.
Experience has shown that this approach creates a number of problems and delays, including (i) because the lawyer in the new market will likely raise a number of legal issues and difficulties which the franchisor will have difficulty addressing and may underestimate the importance and risks of, (ii) because it gives the new lawyer greater latitude and fewer guidelines as to the scope of services to be provided, which may increase the cost to the franchisor, and (iii) because, as noted above, it is important that the franchisor and its expert franchise counsel review the final agreement prepared for another province or country.
Also, the expert franchise lawyer will be able to assist the franchisor greatly in the search for and selection of an appropriate law firm in the new province or country.
B. Consider having a new model agreement drafted that is more appropriate to the country chosen
Generally speaking, and although there are exceptions, franchise agreements used in Canada and the United States are largely similar, making it easier for a franchisor to use its model franchise agreement in all Canadian provinces and American states after some adaptation.
On the other hand, many other countries have a different approach to drafting agreements than North America.
Thus, while it is still possible to use a franchisor’s model franchise agreement with a number of changes, this is not always the best solution.
Even when adapted, the franchise agreement may not resemble those used in the new country, which may make it more difficult to negotiate and, if necessary, to enforce in court or before an arbitrator.
In some cases, the cost of adapting the agreement may equal or even exceed the cost of drafting a new agreement appropriate for that country.
With the assistance of its expert franchise lawyers (both in its local market and in the new country), before undertaking the work of adapting its model franchise agreement, a franchisor should verify whether it would not be preferable for it to use, in that new country, a new franchise agreement drafted according to the methods recognized in that country.
C. Make sure you understand the agreement used in another country
Whether it is a translated and adapted agreement or a new agreement, it is always necessary for the franchisor’s management team to ensure that it understands the franchise agreement used in another jurisdiction.
In the event that the agreement is in a language that the franchisor’s managers do not fully understand, it may be necessary to have the final version of the agreement translated back into a language that the franchisor’s managers can read and understand.
This will allow the franchisor to ensure both the quality of the translation and the fact that the agreement meets its objectives and reflects the operating procedures of the new country.
It is always perilous to sign an agreement with franchisees anywhere that the franchisor’s management does not fully understand themselves.
D. Provide for a mediation clause and an arbitration clause in case of a dispute
In order to avoid ending up in a foreign court in the event of a dispute with a franchisee, if the franchisor’s franchise agreement does not already contain such provisions, it is important to add a mediation clause and, in the event that mediation is not sufficient to resolve the dispute, a mandatory arbitration clause before an internationally recognized arbitrator or arbitration organization.
By virtue of an international convention (the “The New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards”), arbitral awards can be recognized and enforced quickly in most industrialized countries.
Also, today, many arbitrators and arbitration organizations allow online arbitration, which avoids significant travel costs.
The drafting of a mediation clause and an arbitration clause in a franchise agreement must, however, be done by a lawyer who is an expert in these fields since it must be complete and well adapted to the needs and resources of the franchisor. Indeed, such a clause must cover a certain number of somewhat technical topics (such as, for example, the seat of the mediation or arbitration, the applicable law, the language(s) used, the qualifications and method of selection of the mediator or arbitrator, the mediation or arbitration rules used, the time limits and deadlines, etc.).
