Author(s):
Dominic Mochrie
May 2014
On March 31, 2014, the British Columbia Law Institute (BCLI), a law reform research organization, published its Report on a Franchise Act for British Columbia (the Report).1 The Report was divided into two parts: Part one examined whether British Columbia should enact franchise legislation to regulate franchising by looking at the legal nature of a franchise, exploring the dynamics of the franchisor-franchisee relationship and reviewing current franchise legislation in force in Canada as well as legislation adopted abroad. Part two contained suggested draft legislation based on the Uniform Franchises Act (described below).
The Report is the culmination of several years of work by the BCLI, and follows a proposal for franchise legislation featured prominently in “An Agenda for Justice,” a report released by the British Columbia Branch of the Canadian Bar Association on February 5, 2013. The CBA report presented a series of judicial and legislative reforms and recommendations aimed at improving access to justice for all British Columbians. This was not the first such suggestion. In the fall of 2012, the BCLI announced the commencement of a project to examine whether there is a need for franchise legislation in British Columbia and, if so, what provisions any such legislation should have in order to provide legal protection for franchisees operating in British Columbia. The project was finalized and the Consultation Paper on a Franchise Act for British Columbia (the Consultation Paper) was made public on April 2, 2013.
In its April 2013 Consultation Paper, the BCLI had clearly stated its recommendation that British Columbia adopt franchise legislation. It emphasized that this need arises from the popularity of franchising as a business model and its use by a wide variety of vendors in both the business and retail sector. Expressing similar concerns as the CBA, the BCLI noted that a franchisee is often required to make significant investment and commitment in the franchise business, but it is typically the franchisor who has the disproportionate balance of power and information that the franchisee does not have access to, and imposes non-negotiable standard-form franchise agreements. The BCLI echoed these views in its April 2014 Report.
According to the BCLI, the first and most significant concern for franchisors is whether the legislation in B.C. should follow the Uniform Franchises Act. This template harmonized franchise legislation, developed and adopted by the Uniform Law Conference of Canada (ULCC) in 2005, creates a model regulatory regime for the operation of franchises in Canada to address the need for uniform legislation across Canada. The ULCC’s franchise law project was commenced to make recommendations for the adoption of uniform franchise legislation at a time when only Alberta and Ontario had legislation in force to directly regulate franchising. The template legislationis based in part on Ontario and Alberta’s franchise legislation and includes key provisions dealing with disclosure, the duty of fair dealing, rescission rights, damages for misrepresentation and dispute resolution. Prince Edward Island, New Brunswick and Manitoba enacted franchise legislation, substantially modeled on the uniform act, in 2005, 2007, and 2012 respectively.
The BCLI recognizes that imposing unusual, unique or inconsistent requirements compared to other provinces will impose obligations and barriers to entry to the province, saying that harmonized legislation “minimizes the regulatory burden for franchisors.” However, none of the provinces that adopted the Uniform Franchises Act to date adopted it wholesale; each province has made some changes. Manitoba’s recently enacted franchise legislation is the biggest outlier with provisions that deviate from the model act in certain respects, mainly in relation to the delivery of a disclosure document.
The Report
In its April 2014 Report, the principal recommendation of the BCLI was that the province enact franchise legislation based generally on the Uniform Franchises Act. Its rationale was that this would protect franchisees based in British Columbia in a manner equivalent to those of the other five provinces. This would also contribute to the already significant degree of harmonization of Canadian franchise laws as well as the federal-provincial Agreement on Internal Trade. Many reputable franchisors in British Columbia already follow the disclosure requirements in the legislated provinces as they conduct their business throughout the country. The adoption of a harmonized legislation would minimize the regulatory burden for franchisors, particularly national ones.
It is important to note that while the BCLI proposed that British Columbia follow the lead of the Uniform Franchises Act, it did not recommend the implementation of pre- and post-litigation mediation of franchise disputes (a requirement which only New Brunswick requires in its franchise legislation). The reason for this is the BCLI’s view that pre- and post-litigation mediation were primarily intended for jurisdictions that do not incorporate mediation into their general civil procedure. Since British Columbia already makes mediation available to parties to a civil action (and also has excellent resources for voluntary mediation), the BCLI did not deem it necessary to reproduce such obligations in franchise legislation.
In keeping with its view that British Columbia enact legislation based generally on the Uniform Franchises Act, the BCLI provided the following recommendations:
- Substantial compliance of disclosure documents. The BCLI recommended that disclosure documents be considered valid if they are in substantial compliance with legislation and regulations, thereby ensuring that a minor defect in the documents (one that does not influence the prospective franchisee’s investment decision) does not lead to non-compliance consequences such as rescission of the franchise agreement. Alberta, Manitoba and Prince Edward Island currently follow this approach.
- Territorial rights. The BCLI suggested that a franchisor be required to state in its disclosure document whether an exclusive territory will be granted under the franchise being offered to the franchisee. Manitoba currently follows this approach.
- Electronic delivery. The BCLI recommended that delivery of disclosure documents by way of electronic means in machine-readable form, such as DVD disks or e-mail, be expressly permitted. British Columbia’s Electronic Transactions Act likely allows electronic delivery in any event.
- Wrap-around disclosure requirements. The BCLI recommended in its Report that the use of “wrap-around” documents be permissible in British Columbia; that is, allowing disclosure documents prepared in one jurisdiction to comply with that of other jurisdictions as long as they include additional information needed to comply with their own legislation and regulations.
- Statutory right of action for misrepresentation. The BCLI took the position that a franchisee’s statutory right to sue for misrepresentation should extend to misleading statements regarding financial projections supplied by the franchisor when enticing a franchisee to sign a franchise agreement. However, if the projections contain cautionary language that state that they are based on assumptions about the future and that actual results may vary, such a right to sue would not have to extend to the aforementioned financial projections.
- Direct distribution rights disclosure. Should the franchisor wish to reserve the right to sell goods and services directly and in competition with its franchisees, the BCLI strongly encouraged that this intention be declared in the disclosure document.
- Section 11 (governing law) of the Uniform Franchises Act concerns. A concern raised by the BCLI was with reference to Section 11 of the Uniform Franchises Act. Under this provision, it is not possible for the terms of a franchise agreement to make the Act inapplicable to a claim “enforceable under the Act” by specifying that another jurisdiction’s law applies, by requiring that a claim be decided in another jurisdiction or by declaring that courts in a specific venue will have exclusive jurisdiction to decide the claim. The words “enforceable under the Act” may lead to different interpretations, resulting in, for example, a party to a franchise agreement litigating non-statutory aspects of the same dispute in two separate jurisdictions. Forcing a party to split its case may operate oppressively. Section 11 would also potentially affect arbitration clauses in franchise agreements. Generally, arbitration clauses in standard form agreements require that arbitration takes place in the home jurisdiction of the party whose standard terms are being used; this party is typically the franchisor. The BCLI took the position that this kind of clause may also operate oppressively from the viewpoint of the locally based party as meaning that it is an exclusive venue for court proceedings. The BCLI recommended that a provision in British Columbia corresponding to Section 11 be worded to apply not only to claims “enforceable under the Act,” but also to those “arising from a franchise agreement.” It is unclear if this section applies to arbitrations and court proceedings, and a corresponding provision when the legislation is enacted should make this clear.
- Concurrent exercise of statutory right of rescission and contention for claims for damages. The exercise of the statutory right of rescission in franchise legislation in British Columbia should not bar the franchisee from also pursuing a statutory right to damages, as long as double recovery does not occur.The BCLI suggested that this would have to be clarified through judicial interpretation.
- Waiver or release of statutory claim post-dispute settlement. Franchise legislation in British Columbia should have an express provision stating that a statutory bar to waiving or releasing a right under the legislation does not prevent a waiver or release that would take place as part of a post-dispute settlement. This also would have to be clarified through judicial interpretation.
- Presumption of reliance on misrepresentation in a disclosure document. Under the Uniform Franchises Act, a franchisee is deemed to have relied on a misrepresentation in a disclosure document unless the franchisee was aware, prior to entering the franchise agreement, that the misrepresentation was inaccurate. In order to give effect to the purpose of this statutory presumption deeming reliance (which is to encourage compliance with disclosure requirements as well as to help overcome evidentiary difficulties a plaintiff may face in proving that a particular statement was misleading), the BCLI recommended that British Columbia franchise legislation clarify this presumption. The clarification would entail stating that the statutory presumption should operate conclusively and not be open to a franchisor to assert that the franchisee would have entered into the franchise agreement even if the franchisee had been aware of the true facts. The exception to this would of course be if the franchisee had actual knowledge of the inaccuracy of the misrepresentation prior to entering into the franchise agreement.
- Fully refundable deposit. Under the Uniform Franchises Act, a prospective franchisee must receive complete disclosure prior to the franchisor receiving any payment or other consideration; however, some provinces have allowed franchisors to obtain a fully refundable deposit up to a certain amount before disclosure is made. In these cases, the deposit must be refundable in the event that the franchisee does not execute a franchise agreement. The BCLI has recommended that fully refundable deposits be permissible under provincial franchise legislation given that the franchisor is disclosing commercially sensitive information that may affect its competitive position. Additionally, the franchisor may be placing a territory “on hold” for a prospective franchisee during negotiations and the deposit is a good indication of the prospective franchisee’s good faith prior to receiving disclosure. The BCLI has recommended that the maximum amount of a fully refundable deposit be prescribed by regulation.
The Path from Here
The BCLI concluded in its Report that British Columbia should join other provinces in enacting franchise legislation conforming to the Uniform Franchises Act. We can likely expect the British Columbia legislature to introduce draft legislation in the not-too-distant future.
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1 The full Report may be accessed here
Part of the May 2014 - Franchise Review