From the desk of:

David Kornhauser

From the desk of:

David Kornhauser

The Lawyer-Client Relationship for Lawyers Practising Franchise Law

Lawyers at times engage in areas of practice for which they do not have sufficient expertise or knowledge.  If, as a result of that lack of expertise or knowledge their client suffers damages, the lawyer may be found negligent and thus liable for the damages suffered.  In certain practice areas, such as real estate and civil litigation, the underlying issue supporting a claim for negligence against a lawyer, may be resolvable.  In certain other areas of law, including franchise–related matters, the issue giving rise to a negligence claim is less able to be rectified and the lawyer or their insurer may be responsible for the payout of damages to the client.  Over the past number of years, the number of claims against lawyers arising in franchise-related matters made to LawPro, the lawyers’ insurer in Ontario, has been significant and the payout on these claims has been substantial.   Regrettably, based on what I am seeing in my law practice, this trend seems to be continuing.

Lawyers must be familiar with the rules of professional conduct, particularly as they relate to the lawyer’s obligation to be competent in the legal services which the lawyer is being asked to provide.  The Rules of Professional Conduct of the Law Society of Upper Canada were amended based upon the Federation of Law Societies Model Code of Professional Conduct adopted which became effective October 1, 2014.

A significant amendment was the inclusion of the word “knowledge” in the definition of “competent lawyer”.  Rule 3.1-2 provides that lawyer shall perform any legal services undertaken on a client’s behalf to the standard of a competent lawyer.  The commentary to this Rule, set out below, emphasizes that a lawyer has an obligation to be knowledgeable in area of law in which he/she practices and that the lawyer keep abreast of developments in these areas:

Competence is founded upon both ethical and legal principles. This rule addresses the ethical principles. Competence involves more than an understanding of legal principles; it involves an adequate knowledge of the practice and procedures by which such principles can be effectively applied. To accomplish this, the lawyer should keep abreast of developments in all areas of law in which the lawyer practises.

[3] In deciding whether the lawyer has employed the requisite degree of knowledge and skill in a particular matter, relevant factors will include:

(a) the complexity and specialized nature of the matter;

(b) the lawyer’s general experience;

(c) the lawyer’s training and experience in the field;

(d) the preparation and study the lawyer is able to give the matter; and

(e) whether it is appropriate or feasible to refer the matter to, or associate or consult with, a licensee of established competence in the field in question.

[4] In some circumstances, expertise in a particular field of law may be required; often the necessary degree of proficiency will be that of the general practitioner.

[5] A lawyer should not undertake a matter without honestly feeling competent to handle it, or being able to become competent without undue delay, risk, or expense to the client. This is an ethical consideration and is distinct from the standard of care that a tribunal would invoke for purposes of determining negligence.

Franchise law is a specialized area of practice, stemming from a number of factors including that there is franchise-specific legislation, currently in 5 provinces (soon to be 6 with the addition of BC) in Canada (“Franchise Legislation”)[1].  Given the remedies available to a franchisee under Franchise Legislation and the obligations imposed upon a franchisor[2] arising from a franchisor’s failure to comply with Franchise Legislation, lawyers acting for franchise clients, must be intimately familiar with Franchise Legislation and also with the case law interpreting the rights and obligations under Franchise Legislation or at common law.  In addition, since the franchisor-franchisee relationship is a unique one involving areas of interdependence and areas of independence, a lawyer must have an understanding of those aspects of the franchisor-franchisee relationship which are inter-dependent and those aspects of the relationship which are independent.

The consequences of not properly advising a franchise client of its respective rights and obligations under Franchise Legislation could result in a finding of negligence against the lawyer and the payout of substantial damages.  Most often when the lawyer finds out that his/her advice to a franchise client was negligent, the damages have already been suffered and cannot be rectified.  These payouts on lawyer’s negligence claims have historically arisen as a result of a franchisee’s entitlement to post-rescission damages under Franchise Legislation, and can occur in the following circumstances:

  • The lawyer did not advise its franchisor client of its obligation under Franchise Legislation to provide a franchise disclosure document (the “FDD”) to a prospective franchisee and the franchisee subsequently rescinds its franchise agreement pursuant to Franchise Legislation as a result of the franchisor’s failure to deliver and FDD and claims rescission damages from the franchisor resulting in the franchisor making a claim against its (former) lawyer for negligence and indemnification for the post-rescission damages claim.
  • The lawyer prepared an FDD for its franchisor client that failed to comply with the requirements of the Franchise Legislation. Similar to the scenario above, the franchisee who received the deficient FDD rescinds its franchise agreement pursuant to the Franchise Legislation and claims rescission damages from the franchisor who claims against the lawyer for negligence and indemnification for the post-rescission damages claim.
  • The lawyer acts for a franchisee who has either not received an FDD or has received a non-compliant FDD and fails to advise the franchisee of its rights arising under the Franchise Legislation resulting in the franchisee missing the opportunity to rescind its franchise agreement within the time provided under Franchise Legislation. In this circumstance, the lawyer may be directly liable for the post-rescission damages that it would otherwise have been able to claim against the franchisor.

Lawyers are cautioned against dabbling in areas of law for which they do not have sufficient expertise.  Given the damage claims that can arise against lawyers for negligence, this is all the more true for lawyers practicing Franchise Law.

[1] Although Ontario is governed by the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Wishart Act”) very often a lawyer is asked to prepare, or review, a franchise Disclosure Document that is prepared on a ‘national basis’ that is to comply with franchise legislation in other provinces across Canada.  As such, I have used the term “Franchise Legislation” to refer to, and include, all of the provincial franchise legislation.
[2] In certain circumstances liability also attaches to a host of other persons who have some legal relationship with the franchisor as set forth in section 7 of the Wishart Act, and the equivalent provisions of other Franchise Legislation.

This article is not intended to serve as a comprehensive treatment of the topic and is not legal advice. All legal matters are dealt with pursuant to their specific facts and circumstance. Nothing replaces retaining a qualified, competent lawyer.