British Columbia may be one step closer towards franchise legislation of the type already in effect in the 'disclosure provinces' of Alberta, Ontario, Manitoba, New Brunswick and PEI.
The B.C. Ministry of Justice is seeking stakeholder and public comment on a proposed B.C. Franchises Act. The proposed legislation is based on the Uniform Franchises Act, developed by the Uniform Law Conference of Canada, and the recommendations of the British Columbia Law Institute in its "Report on a Franchise Act for British Columbia," which includes a draft "Franchises Act" for B.C.
To be clear, no legislation has been introduced into the B.C. legislature. The Civil Policy and Legislation Office of the Ministry of Justice simply wants further input from franchisors, franchisees and other stakeholders in the franchise industry as to why B.C. should or shouldn't have the kind of legal protections that are available to franchisees in five disclosure provinces, and throughout the United States.
The proposed B.C. legislation would contain provisions very similar to those of the five disclosure provinces (and indeed, the disclosure requirements applicable under U.S.law). In particular, there would be a requirement for pre-contractual disclosure of all material facts related to the franchise opportunity through a franchise disclosure document (FDD) that would be provided to prospective franchisees before any agreement is in place. The FDD would include matters such 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 full costs to establish the franchised business.
- Facts related to the advertising fund, rebates and proximity to neighbouring franchisees.
- Names and addresses of current and former franchisees
- Unless specially exempted, Franchisors would also be required to attach audited or review engagement-based financial statements in all FDDs, as they do other disclosure provinces
Just like in Ontario, Alberta and other disclosure jurisdictions in the Canada and the U.S., 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. This is to enable the prospective franchisee to get financial and legal advice so it isn't rushed into a deal.
In terms of remedies, if the disclosure document fails to properly disclose a material facts required to be disclosed– or if there is no disclosure at all – then the franchisee may rescind the franchise agreement within a specific time period to obtain a full refund of its investment. A duty of fair dealing is imposed on the franchisor and the franchisee in the performance and the enforcement of the agreement.
Canadian and U.S. franchisors won't find anything in the proposed B.C. legislation that is surprising, problematic or financially onerous. Canadian and U.S. franchisors operating in the disclosure provinces are used to the franchise regulatory environment, and will simply add anything related to B.C. in their existing disclosure documents. So it won't be any more complicated, onerous or expensive than disclosure is now across Canada.
As I have argued before on these pages, the proposed legislation is not only pro-business – it's pro-small business. Let me explain why: Franchisees are small businessmen and women 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, and to try make a good living at it. They are often husbands and wives who go into a small franchised business together. Many of these franchise owners are hard-working new Canadians. Franchise legislation is important for the protection of these small business persons because there is nothing (other than the common law of contract) to protect them from unscrupulous or undercapitalized franchisors, or franchisors that might be taking unfair advantage of them.
B.C. franchisees do not currently receive the same legal protections offered in the other Canadian disclosure provinces in circumstances where the franchisee has been misled, making B.C. franchisees second-class citizens in Canada. 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 faraway 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.
On that point, one of the most helpful provisions under a B.C. Franchise Act would be to require all legal disputes to be resolved in British Columbia under British Columbia law. This would prevent the current scenario where franchisors from outside B.C. require all litigation to be held in, and under the laws of a faraway and inconvenient jurisdiction. Whether that's New York or Florida, it's often too far away and too expensive for many franchisees, so they give up and walk away. The proposed B.C. franchise legislation would prescribe – like other disclosure provinces do – that all court actions (or arbitrations) will be held in B.C. under B.C. law.
If you're interested in providing input to the B.C. government with respect to a possible franchise act, perhaps because you're currently a franchisee, you were once a franchisee or you're a franchisor, submissions must be received by no later than Dec. 10, 2014. Further information is available here.
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.