When Manitoba enacts its franchise regulations some time this year, there will be five provinces in Canada with laws that require the preparation and delivery of disclosure documents to prospective franchisees.
Prospective franchisees in Alberta, Ontario, New Brunswick and Prince Edward Island are already required by law to be given a franchise disclosure document (often referred to as an FDD) that explains the nature of the franchise being offered, the cost the franchisee is expected to pay to acquire it, material facts relating to the financial and litigation history of the franchisor, copies of all agreements the franchisee is expected to sign, current financial statements, and a plethora of other information mandated by the four provincial legislatures that have enacted franchise statutes.
But do these laws really protect franchisees? Yes.
As someone who practises in British Columbia, where there are no franchise laws – leading an American colleague to comment that “B.C. was a jurisdiction where franchisors could rape and pillage to their hearts’ content” – I have represented more than my fair share of mom-and-pops over the past 25 years that have been taken advantage of by franchisors, and the owners have lost their life’s savings in the process.
The common law of contract inadequately protects franchisees from unscrupulous, incompetent or undercapitalized franchisors, especially when combined with the phenomenally high cost of engaging lawyers to help aggrieved franchisees go to court to get their money back.
In Ontario, Alberta, P.E.I. and New Brunswick, aggrieved franchisees have statutory remedies if the FDD they received did not disclose a material fact that should have been disclosed, or if there was no disclosure at all, or if an act by the franchisor breached the respective franchise statute. So any law that gives franchisees a legal leg-up in circumstances where they have been misrepresented or mistreated is better than no law at all.
Given that these laws are in force all over the United States and other parts of the world, one has to wonder why B.C., Saskatchewan, Nova Scotia and other non-disclosure provinces aren’t stepping into the arena.
It’s important to recognize that these laws also protect franchisors. Lawyers are paid quite handsomely to craft a client’s FDD to comply with these laws so that the FDDs are tight as a drum. It might not protect clients from being sued by an aggrieved franchisee, but it should protect them from being sued successfully. But this inevitably adds to the length and the complexity of the FDD because everyone, including the lawyers, are trying to legally protect themselves.
And sometimes we must turn a sow’s ear into a silk purse in circumstances where there is something untoward in the franchisor’s history or background – such as a lawsuit by other franchisees in the system – that must be explained in the FDD. There is an element of spin-doctoring to portraying the worst of circumstances in the best of lights without, of course, misrepresenting facts.
There is a certain inequality across Canada because B.C., Saskatchewan, Quebec, Nova Scotia and other jurisdictions have no legislation governing franchising. There are franchisors who refuse to give their Ontario/Alberta/PEI/New Brunswick FDDs out to prospects in other provinces because no law requires them to do so. Your uncle might receive a comprehensive FDD in Lloydminster, Alta., but you don’t because you’re in Lloydminster, Sask. – the border runs though the centre of town.
A typical Canadian problem is that all four – soon to be five – provincial legislative regimes are different. Although some franchisors choose to do one FDD for each province, most do a combined one for all four jurisdictions, and it often leads to long and complicated documentation. The same information might be disclosed in a number of different ways because regulations in one province call for different wording than another, or disclosure on a different matter than is required in the other provinces.
Calling for the federal government to step in and establish a national regime for franchising may well be met with the same level of success as a national securities registry: it makes sense at one level, but few are prepared to give Ottawa that power.
Earlier in the decade, the Uniform Law Conference of Canada (ULCC), an organization that recommends harmonization of laws, enacted a model franchise law with the idea that provinces would adopt it and Canada would have a degree of uniformity.
Yet, given the opportunity, in typical Canadian fashion, P.E.I., New Brunswick and Manitoba deviated from the model law rather than embracing it without amendment. As a result, it’s expected that FDDs will get longer and more cumbersome when Manitoba enacts its regulations because, although they’re not out yet for review, they’ll no doubt be slightly different than those of the other provinces.
Special to The Globe and Mail
Tony Wilson practices franchising, licensing and intellectual property law at Boughton Law Corp. in Vancouver, and he is an adjunct professor at Simon Fraser University. His newest book, Manage Your Online Reputation, was recently published. His column appears every other Tuesday on the Report on Small Business website.
Join The Globe’s Small Business LinkedIn group to network with other entrepreneurs and to discuss topical issues: http://linkd.in/jWWdzT