While indemnification clauses are ubiquitous in the franchise industry, compensation is a legal concept that few franchisees, franchisors, and even franchise lawyers truly understand. This is unfortunate, as it leads many franchisees to assume legal responsibility for liabilities that are far beyond their control, and it prevents many franchisors from negotiating reasonable concessions that would be a no-brainer if they understood the terms of their own franchise agreements. Although you are the face of your franchise and as a franchisee you are the owner of your own independent business, there are still many circumstances in which your franchisor should be responsible for lawsuits against your franchise. Here are some of the most common examples: The recent decision in Pet Valu Canada Inc v. Rodger, 2018 ONSC 3353 („Pet Valu“) is a good reminder of the importance of well-worded and robust indemnification clauses for legal fees. In the Valu case, the defendant successfully defended a class action lawsuit filed on behalf of various franchisees and received costs of more than $1.7 million. The plaintiff`s representative, 1250264 Ontario Inc. („125″), failed to pay the cost surtax, so Pet Valu personally filed a lawsuit against the plaintiff`s sole shareholder. Justice Sandra Nishikawa agreed that the shareholder, Mr. Rodger, was personally liable for the surtax of more than $1.7 million. A general indemnification clause in the franchise agreement and a personal guarantee signed by Mr.
Rodger meant that Pet Valu had the contractual right to apply its cost surcharge against both the franchisee and its sole shareholder personally, and there was no reason for the court to refuse to assert that right in this case simply because the proceeding was a class action. Some of the most common examples include: in the compensation language mentioned above, the franchisee would not only be directly liable for a third-party action; But if someone sues the franchisor, the franchisee would also be obliged to compensate the franchisor. In a typical franchise agreement, the set-off clause is something like this: This section shows the royalties described elsewhere in the agreement. Fees include initial franchise fees, all fees paid to the franchisor prior to opening, all fees paid by the franchisor during the term of the franchise, all advertising fees, etc. While each franchise agreement differs in style, language and content, all franchise agreements contain agreements that each describe a promise, right or obligation that the franchisee owes to the other or that benefits the franchisor or franchisee. All franchise agreements contain recitations of franchise violations that are treated as a criminal offense. These offences may be divided into offences entailing the immediate termination of the franchise agreement for which no remedy is granted and in the case of a criminal offence for which compensation is provided. As the name suggests, franchisors meet the franchisee`s specific quality control requirements. This is a strong and necessary franchise to ensure that goods and services throughout the system meet the franchisor`s minimum requirements.
The indemnification provision in this case required the plaintiff to „indemnify the franchisor for defense costs (including legal and customer fees and any administrative costs related to the preparation and transfer of such defense) incurred by the franchisor in connection with the franchisee`s „claims or actions“ „in connection with documents and/or other matters.“ In this section, the franchisor must repeat the franchisee`s advertising obligations under point 11 of the franchise agreement (and the costs for which it is listed in points 5, 6, 7, 8 and 11, if applicable). As indicated in the Franchise Grant section, the franchisor issues a temporary licence to the franchisee only. Most franchisors will enforce this agreement by adding specific language that identifies each element that represents its proprietary, confidential, and business information, and then specifies the restrictions placed on the franchisee`s right to use that information. This is an important protection for the franchisor and is usually not a contract that is missing from the franchise agreement. Although you are the face of your franchise and as a franchisee you are the owner of your own independent business, there are still many circumstances in which your franchisor should be responsible for monitoring your franchise. The court also found that it was not unfair or overly burdensome to enforce Pet Valu`s contractual cost in this case. Justice Nishikawa recognized that contractual rights to compensation are not automatically enforceable against a party. .