On March 31, the British Columbia Law Institute (BCLI) released its long-awaited formal report on a potential B.C. Franchise Act.
Franchising is regulated in Ontario, Alberta, Manitoba, New Brunswick and Prince Edward Island, but there is no legislation governing the sale of franchises in Canada's third largest province. A full copy of the report, and draft statute, is available here.
The B.C. Franchise Act project was initiated in October, 2012, and a consultation paper was circulated to stakeholders in the industry in April, 2013, giving interested parties until October of that year to provide input.
As many expected, the BCLI recommended that B.C. join the other "franchise disclosure provinces" and enact franchise legislation. "Given the prevalence of franchised businesses in B.C., and their importance to the provincial economy, it is surprising that B.C. has no franchising legislation," said Jim Emmerton, executive director of the BCLI. "The enactment of franchise legislation in B.C. along the lines set out in this report would give appropriate and needed protection to B.C. franchise owners. It would also benefit franchisors by contributing to the establishment of consistent standards across the country."
Based on the Uniform Franchises Act developed under the Uniform Law Conference of Canada, the proposed B.C. legislation would contain provisions very similar to those of other provinces:
- A requirement for pre-contractual disclosure of all facts related to the franchise through a “franchise disclosure document” (FDD) that would be provided to prospective franchisees before any agreement is in place. It would cover such matters as the history of the franchisor and its principals.
- Whether the franchisor or its principals have been involved in any litigation, administrative proceedings or bankruptcy proceedings.
- The costs to establish the franchised business.
- Facts related to the advertising fund, rebates and proximity to neighbouring franchisees.
- Other items similar to what all U.S. and Canadian franchisors must disclose if they are selling franchises in Ontario, Alberta, Manitoba, PEI or New Brunswick.
Unless they are specially exempted, audited or review engagement-based financial statements would have to be included in all FDDs, as they are in other disclosure provinces. And like those locations, there would be a two-week "cooling-off period" between the time the disclosure document is received by the prospect and a franchise agreement is executed or money paid – although there would be an exception for a fully refundable deposit.
In terms of remedies, if the disclosure document is deficient – or if there is no disclosure at all – the franchisee may rescind the franchise agreement within a specific time period. A duty of fair dealing is imposed on the franchisor and the franchisee in the performance and the enforcement of the agreement.
Litigation or arbitration under the Act must be held in British Columbia under the law of the province, which would prevent a situation where franchisees must travel to New York or Ontario to litigate or arbitrate because "that's what the agreement says."
Unlike Ontario's Arthur Wishart Act, delivery of FDDs could be made by e-mail or in a DVD. Wraparound disclosure documents would be permitted to avoid the need to reformat them for different jurisdictions.
The important take away for anyone involved in franchising in Canada is this: the proposed statute is not anti business, it is pro business.
Canadian franchisors won't find anything in the report, or the proposed legislation, that is surprising, problematic or financially onerous. Canadian and U.S. franchisors operating in the disclosure provinces will simply amend their disclosure documents to include B.C. Items for disclosure are similar if not identical to those in the other disclosure provinces, so it won't be any more complicated, onerous or expensive than disclosure is now.
Franchisors in both countries should welcome the proposed B.C. act because one of the most important recommendations involves the standard of compliance. It is recommended B.C. franchise legislation should provide – as it does in Alberta, Manitoba and PEI – that disclosure documents are valid if they are in substantial compliance with the legislation and regulations.
Minor defects that do not influence a prospective franchisee's investment decision should not lead to the drastic consequence of non-compliance, namely the rescission of the franchise agreement by the franchisee, triggering repurchase and compensation.
For those in the franchise industry familiar with the Arthur Wishart Act – essentially requiring full compliance with the legislation and regulations – this may prevent a lot of spurious rescission actions based on fallacious or unfounded grounds, launched by poor franchise operators using "full compliance" as an excuse to get out of their franchise agreements.
There's another reason the proposed franchise act is pro business. Legislators and policymakers in B.C. should appreciate that every franchisee is in business: the majority of franchisees are small-business people who have decided to risk their savings, their financial future and possibly their homes to own and operate under a franchisor's trademark and system.
Hopefully for a profit. And many of these owners are new Canadians.
But I can tell you, after practicing franchise law for more than 27 years, there are a few unscrupulous franchisors out there who will tell prospective franchisees almost anything to sell a franchise, knowing it's an expensive and uphill battle to take legal action against a franchisor for misrepresentation.
And when a B.C.-based franchisee fails because the pro-forma financial statements provided to the franchisee (if any) were misleading, or the franchisor was dangerously undercapitalized, or there was no obligation to disclose material facts relating to the franchise (such as lawsuits against the franchisor by other franchisees), there is no remedy other than the common law of contract in a court or arbitration, which might, by the contract terms, be required to be heard in far away Ontario or New York.
By then, many franchisees may well have lost everything and be unable to afford the legal fees necessary to get the remedy they deserve.
B.C. franchisees do not currently receive the same legal protection offered in the other Canadian disclosure provinces in circumstances where the franchisee has been misled, making B.C. franchisees second-class citizens in Canada. An act protecting those franchisees may well push less-than-honourable franchisors out of the market.
One would hope a pro business provincial government would see the importance of protecting and enhancing this very important component of the provincial economy.
Tony Wilson is a franchising, licensing and intellectual property lawyer at Boughton Law Corp. in Vancouver, he is an adjunct professor at Simon Fraser University (SFU), and he is the author of two books: Manage Your Online Reputation, and Buying a Franchise in Canada. His opinions do not reflect those of the Law Society of British Columbia, SFU or any other organization.