P.E.I. and New Brunswick on Board with Franchise-Specific Legislation

Alberta was Canada’s first province to introduce franchise-specific legislation with the enactment of its Franchises Act in 1972. That statute was  overhauled in 1995 (the Alberta Act).  Ontario  introduced the Arthur Wishart Act (Franchise Disclosure), 2000 (the Ontario Act) in 2000.

At its annual meeting in August 2004, the Uniform Law Conference of Canada (ULCC) approved an interim draft of template franchise legislation intended to serve as a model for all provinces and territories. It adopted its final version of the Uniform Franchises Act (ULCC Act) at its annual meeting in August 2005.

The ULCC’s draft legislation was largely reflected in Prince Edward Island’s Bill 43 which received first reading in the province’s legislative assembly on May 12, 2005. The province’s Franchises Act received royal assent on June 7, 2005 (the PEI Act). Certain substantive provisions of  PEI Act (i.e., good faith, freedom of franchisees to associate, etc.) came into effect on July 1, 2006. Other procedural provisions (i.e., the disclosure obligations) will come into effect on January 1, 2007.

On December 7, 2005, New Brunswick’s Bill 6 – the Franchises Act – received first reading (the New Brunswick Bill). The province has since referred the New Brunswick Bill to its Law Amendments Committee, and is seeking public submissions until July 31, 2006.

The New Brunswick Bill, the PEI Act and the ULCC Act are all substantially similar to the Ontario Act in terms of format and content; however, there are a few significant differences which  impact on how franchisors conduct business in those provinces. The format of the Alberta Act is significantly different from that of the Ontario Act, but the two acts cover most of the same concepts.

Fair Dealing

The Ontario Act and the Alberta Act both deem that a franchise agreement imposes on each party a duty of fair dealing in the performance and enforcement of the agreement. Whether a party exercising a right is required to do so in accordance with the duty of fair dealing is not settled.

The New Brunswick Bill, PEI Act and ULCC Act each provide that  the performance and enforcement of an agreement includes the exercise of a right under the agreement. Accordingly, franchisors must consider their obligations under the duty of good faith, even if exercising a right or an option granted by the franchise agreement.

This addition, combined with both the retroactive application of the duty of fair dealing provided for in all of the provincial franchise legislation and the right of action for a breach of the duty, could be problematic for some franchisors. A franchisor that, in the past, relied on the position that an exercise of a right is not subject to the duty of fair dealing may be faced with any number of actions from its franchisees.

Wraparound or Addendum

A question commonly asked by U.S. franchisors that are considering expanding their franchise systems into Canada is whether the obligation to provide a disclosure document can be satisfied by the provision of a Uniform Franchise Offering Circular (UFOC), or a similar disclosure document in another jurisdiction, with a province-specific addendum or wraparound.

The regulation under the Alberta Act specifies that a franchisor may use a document authorized under the franchise law of a jurisdiction outside Alberta as its disclosure document, provided that the franchisor prepares a supplemental addendum with the additional information required by the Alberta regulation.  Likewise, the regulation under the PEI Act also expressly authorizes a franchisor to use a document prepared under the franchise law of another jurisdiction as its disclosure document, if the franchisor provides supplemental information, as necessary, to comply with the PEI disclosure requirements.

The Ontario Act  does not provide for any “wraparound” provision similar to that found in the Alberta Act (and now the PEI Act). Accordingly, franchisors should prepare a specific Ontario disclosure document for use in that province, and prepare an Alberta and PEI wraparound or addendum based on the Ontario document.

As no regulations have been issued under the New Brunswick Bill, it is uncertain whether use of a wraparound or addendum will be authorized in that province. Neither the ULCC Act nor the regulations to it contain an express provision for the use of a wraparound or addendum.

Financial Statements

The regulations made under the Ontario Act, the Alberta Act, the PEI Act and the ULCC Act all require that a franchisor include financial statements in its disclosure document. The requirement is fairly consistent across the country.

All jurisdictions require an audited financial statement for the most recently completed fiscal year of the franchisor’s operations, prepared in accordance with generally accepted auditing standards that are at least equivalent to those set out in the Canadian Institute of Chartered Accountants Handbook. Alternatively, they require a financial statement for the most recently completed fiscal year of the franchisor’s operations, prepared in accordance with generally accepted accounting principles that are at least equivalent to the review and reporting standards applicable to review engagements set out in the Canadian Institute of Chartered Accountants Handbook.

The equivalency standard allows U.S. and foreign franchisors to use financial statements prepared in their home jurisdiction as long as they are satisfied that the standards of preparation are at least equal to the Canadian Institute of Chartered Accountants Handbook standards.

Exemption

The Ontario, Alberta and PEI legislation include certain exemptions from the requirement to provide financial statements in a disclosure document, based on a self-assessment process. If a franchisor decides that it qualifies for the exemption, it need not notify or apply to any government agency for an exemption order. However, if such exemption were challenged, the onus would be on the franchisor to show that it qualified for the exemption.  As  the criteria applicable for the exemption varies from province to province, each province’s legislation must be reviewed before a franchisor may rely on the exemption.

Court of Appeal

The Ontario Court of Appeal has been very active in hearing important franchise cases.  Three of its recent  decisions illustrate the shifting attitude of the courts.

In Personal Service Coffee Corporation v. Stanley Beer, the franchisee received incomplete disclosure and sought rescission of the franchise agreement days before expiration of the two-year limitation period. The franchisee immediately set up a competing business. The Court stated that while the franchisee had an absolute right to rescission under the Ontario Act, the franchisor had a separate right at common law for an accounting of profits for improper appropriation of its business and use of its know-how.

In 1490664 Ontario Limited v. Dig This Garden Retailers Ltd., the franchisees sought both to rescind a franchise agreement and damages. The franchisor provided much of the pre-sale disclosure information required in a piecemeal fashion and in several different documents. The Court concluded that the franchisor did not provide the required disclosure document, as it was “perfectly clear from the Act that disclosure was to be made in one disclosure document.” 

The Court rejected the franchisor’s argument that, by carrying on business for 3-1/2 months after rescission, its franchisee had affirmed the agreement and became disentitled to rescission. The Court stated, “… it is preferable for a franchisee to make reasonable efforts for an orderly winding down of the business and to minimize its losses where possible.”

In Country Style Food Services v. 1304271 Ontario Limited, the franchisor had shown the franchisee the landlord’s original site plan; later, the landlord redesigned the mall.   The Court concluded that the landlord had made a negligent misrepresentation and that the franchisor had innocently misrepresented the mall development to the franchisee. It also concluded that the franchisor breached its duty of fair dealing because it “turned its back on the franchisee when the latter needed it most.”

Significance

These cases show that Ontario’s highest court will interpret the Ontario Act very broadly in favour of franchisees. They also demonstrate that the courts will not condone behaviour by a franchisor which does not meet the threshold of reasonable commercial standards.