British Columbia is about to join Alberta, Manitoba, Ontario, PEI and New Brunswick and become the sixth province to regulate the franchise industry.
Bill 38, The Franchises Act, was introduced into the B.C. legislature on Oct. 5 and is arguably one of the more business-friendly franchise statutes in Canada in terms of franchisor compliance. More importantly, it goes a long way to protect B.C.'s large and growing number of small-business operators – many of whom are new Canadians – who choose to assume the risks in hope of reaping the rewards of owning and operating a franchised business, but who were not entitled to any of the legal benefits and remedies available to franchisees in the other five provinces which regulate franchsising.
Unlike in the United States, where franchise laws have been part of the business landscape since the 1970s, and where the industry is highly regulated (particularly at the state level), there is no "securities commission" or analogous government agency that regulates franchising in the five Canadian provinces which have franchise-specific laws. Instead, franchisors must provide to prospective franchisees a franchise disclosure document (called an "FDD") outlining all material facts relating to the franchised business. Each province requires certain other items of disclosure specified in its regulations.
These include (but are not limited to) a description of the business opportunity itself, a list of all fees and costs a franchisee must pay to acquire and operate the business, details of any litigation involving the franchisor or its associates, and a list of existing and former franchisees for prospects to contact for more information.
Audited or reviewed financial statements must also be a part of the disclosure package, together with copies of all agreements the prospective franchisee is expected to sign.
In the "disclosure province,s" the franchise agreement cannot be executed until at least two weeks after the FDD has been delivered to the prospect, giving him or her time to "cool off" and obtain independent legal and financial advice before signing the franchise agreement.
In the event there has been a material misrepresentation or a failure to disclose a material fact that the franchisor ought to have disclosed in its FDD, or a failure to provide an FDD at all, franchisees in the Canadian disclosure provinces have legal remedies available including – and depending on the circumstances – rescission of the entire franchise contract, entitling the franchisee to all of its money back, plus its losses.
Moreover, in each of the disclosure provinces, litigation by or against a franchisee must be carried out in the jurisdiction and under the laws where the franchisee is situated. This, for example, prevents a Texas franchisor from dragging a Canadian franchisee to Dallas to sue or be sued under Texas law, at monumental expense to the Canadian franchisee.
While mirroring the disclosure model used in the other five provinces, the B.C. act is largely based on the Uniform Franchise Act developed by the Uniform Law Conference of Canada to encourage uniformity of franchise laws throughout Canada.
The proposed B.C. legislation is a vast improvement over Ontario's Arthur Wishart Act. For example, franchisors in B.C. will be able to accept refundable deposits and can require prospective franchisees to execute confidentiality agreements prior to the FDD being delivered to the prospect and waiting for the 14-day cooling off period to expire, just as they can in Alberta.
Contrast that with Ontario, where no agreement of any kind can be entered into and no deposit can be taken prior to disclosure (and the expiry of the 14-day cooling-off period). And unlike Ontario's law, the B.C. legislation would allow for FDDs to be delivered electronically. Canadian franchisors will also be relieved to know an FDD in B.C. will not be invalidated by a technical error or defect in the FDD that doesn't affect the substance of the disclosure obligations. Thus, (and unlike Ontario), an FDD that is substantially compliant will be compliant for the purposes of the act.
What does the legislation mean for franchisors who are already franchising in Canada's five other disclosure provinces? Little, if anything. There will be minor adjustments to their existing FDDs, but on the whole, they'll be happy they will be able to deliver their FDDs electronically in B.C., take refundable deposits and enter confidentiality agreements before providing the FDD to a prospect.
They'll also be happy about the "substantial compliance" threshold for disclosure in B.C.; something that might prevent the type of groundless litigation that franchisors must deal with under Ontario's franchise statute, where franchisees can and do bring actions for insignificant reasons.
As for the B.C. franchisor community, it will be business as usual for many because they are already franchising in Alberta, Manitoba and Ontario and are already complying with those laws. They'll simply make minor adjustments to their already existing FDDs and do what they do in the other disclosure provinces.
But the legislation will force franchisors who franchise only in B.C. to comply with the new laws, and this will level the playing field and raise the bar for franchising in B.C. Additionally, it will require U.S. franchisors who aren't franchising in the other provinces to comply with B.C.'s legislation.
For franchisees in B.C., it will finally mean they will now have access to information that franchisees in most of Canada are entitled to receive. They will also have the legal remedies that are available to franchisees in the disclosure provinces in the event there has been a material misrepresentation in the FDD (or no disclosure at all). This is particularly important for "Ma and Pa" small businesses.
And as the B.C. Franchises Act would require all litigation relating to the franchise to be undertaken in B.C. under B.C. law, this will prevent an out-of-province franchisor from taking advantage of a vulnerable B.C. franchisee and forcing it to go to Texas or Toronto to have its days in court. To me, this may be one of the more important benefits to the B.C. franchisee community. It will go a long way to protect B.C. franchisees from being strategically disadvantaged by non-B.C. governing law and forum clauses in their agreements.
As for the argument that franchise legislation "doesn't help franchisees" or is "anti-business" or that franchisees "don't need legislation to protect them," all I can says is this: After having practised in this legal area for almost 30 years, there are still small, undercapitalized, and dare I say disreputable franchisors who will say anything to entice a wide-eyed prospect – dreaming about "owning their own small business and becoming their own boss"– into buying a franchise that often fails within a year or two. And there are also large non-B.C. based franchisors who have used their size and clout to the disadvantage of B.C. based franchisees because there has been no legislation that would otherwise protect them, as there is in the other disclosure provinces.
Over my career, I've seen far too many shirts lost, homes forfeited and indeed, marriages ruined because a small-business operator in B.C. did not have the legal information and the legal remedies that they would have had if they'd bought their franchise in Alberta or Ontario.
If anything, this legislation will go a long way to protect an important segment of B.C.'s economy; B.C.'s small-businesspersons who choose to own and operate their small businesses through franchising.
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 and Thompson Rivers University Law School, and 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 or any other organization.