Proceed with caution when changing the franchise system
As a general guideline, any change to the economic relationship between the franchisor and franchisee, or any attempt to impose additional financial burdens on the franchisees, should be considered a material change to the franchise relationship. Unless the franchise agreement explicitly contemplates these types of economic changes, the franchisor may well have to formally amend its agreements with all of its franchisees.
Proceeding without an amendment carries several risks for the franchisor. The first is that the franchisee may simply refuse to accept the change to the relationship. If even one franchisee is able to successfully dispute the enforceability of the change, the franchisor faces a possible wider rebellion and, at the very least, risks losing credibility with other franchisees.
A greater risk is that a franchisee will bring an action against the franchisor for breach of the agreement and damages. There are at least two potential franchise class actions underway that we are aware of at this time concerning franchise system changes. Others will surely follow if either of these two cases is allowed to move forward as a class action. In this era of increasing class actions by franchisees, the issue of whether or not a franchisor has improperly imposed additional charges on its franchisees is ripe for litigation.
It is also important to consider whether the proposed change to the agreement imposes a duty on the franchisor to deliver a fresh disclosure document or statement of material change to the franchisee under the Arthur Wishart Act (Franchise Disclosure), 2000. Such a duty may seem surprising at first since the duty to provide a disclosure document typically arises when the franchisee first purchases a franchise or when a franchise is being renewed after there has been a material change to the franchise system. Nevertheless, an argument could be made that the duty to provide a formal disclosure document is also triggered by an amendment to the franchise agreement which arises during the course of the franchise term. This argument has yet to be tested, but it is safe to assume that the courts will one day be asked to rule on it.
Determining when a change to the franchise system imposes a duty to amend the franchise agreement is rarely a clear-cut question. In cases where the only change is to the operational aspects of the franchise system, it may not be necessary to formally amend the agreement – such changes can usually be effected through the Operations Manual. But whenever the franchisees’ financial interests are materially impacted by a change to the franchise system, prudence would dictate that a formal amendment to the franchise agreement is required. Franchisors can be sure that if the changes are unfavourable, a franchisee will seek legal counsel and the outcome may be a bitter one for the franchisor.