With the new year effectively beginning this week, those of us in Canada’s franchise community will likely see the addition of one more province that regulates the Canadian franchise industry.
Prospective franchisees in Alberta, Ontario, New Brunswick and Prince Edward Island are already required by law to be given a franchise disclosure document, often called an FDD, that explains the nature of the franchise being offered; the full cost the franchisee is expected to pay to acquire the franchise; material facts relating to the financial and litigation history of the franchisor; copies of all agreements that the franchisee is expected to sign; current financial statements; and other information about the business opportunity as specified by the four provincial legislatures that have enacted franchise laws.
Manitoba recently released draft regulations under its franchise statute for public discussion. Although Manitoba’s statutory regime is largely based on the Uniform Law Conference of Canada’s model franchise law, like other Canadian provinces, there are differences between each province’s disclosure requirements.
One interesting difference between Manitoba’s draft regulations and the regulations in effect in other provinces is that franchisors will be permitted to provide the disclosure document in sequential parts, rather than in one document, as is required elsewhere in Canada where provincial law regulates the industry.
Thus, the required risk-warnings statements; information on the nature of the franchise being offered; bankruptcy and litigation information about the franchisor and its directors; and the franchisor’s financial statements will not have to be provided in one document. Instead, the franchisor may choose to provide the necessary disclosure in a series of documents, or, more accurately, in prescribed clusters of partial information.
This piecemeal approach could create problems for franchisors, especially with regard to the 14-day period that must be given to a franchisee to study the document and obtain legal advice before the franchise agreement can be executed by the franchisee, since this “cooling off period” commences once the franchisee receives the last part of the FDD.
But when is the last part delivered? This may create confusion in terms of the dates relied on by both the franchisee and the franchisor for certification of the FDD, leading to the possibility of inadvertent non-compliance by franchisors.
As with P.E.I. and New Brunswick, but not Ontario, franchisors may also deliver FDDs electronically, by fax or by e-mail, rather than by hand or by registered mail, provided the electronic document can be opened by the franchisee, the FDD does not contain hyperlinks to other content and the franchisee actually acknowledges receipt of the document.
Similar to Alberta, the Manitoba legislation provides that an FDD that is substantially complete will satisfy the requirement for delivery of an FDD, even if the document contains a technical mistake that does not affect the substance of the franchisor’s required disclosure.
Franchisors from other jurisdictions may use their FDDs in Manitoba in a manner known as a “wraparound,” whereby required Manitoba information is included within the non-Manitoba FDD.
Unlike Ontario, franchisors offering franchises in Manitoba will be able to require franchisees to pay a fully refundable deposit of up to 20 per cent of the franchisor’s initial franchisee fee, up to a maximum of $100,000, prior to the expiry of the 14-day cooling-off period.
As well, and again, unlike Ontario, location selection agreements and confidentiality/trade secrecy agreements can be executed within this period.
However, although confidentiality agreements that protect the franchisor’s trade secrets may be required prior to the expiry of the cooling-off period, franchisors cannot prohibit the disclosure of information to other franchisees in the franchise system or an organization of franchisees.
Manitoba published its draft franchise regulations in November, and invited public comment. The period for public comment expired on Dec. 15.
Assuming the draft regulations are not completely overhauled as a result of public input, they should be proclaimed in force early this year, bringing the number of franchise disclosure jurisdictions in Canada to five.
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.
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