Franchise Review - May 2012: Franchise Legislation

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[authors: Dominic Mochrie, Michelle Maleck]

Manitoba’s The Franchises Act comes into Force on October 1, 2012

Manitoba’s The Franchises Act (the Act) and Franchises Regulation (the Regulation) have been proclaimed into force with an effective date of October 1, 2012. On and after that date, franchisors granting franchises to be operated partly or wholly in Manitoba will be required to comply with the Act and Regulation including the obligation to prepare and deliver a disclosure document to prospective franchisees. Manitoba joins Alberta, Ontario, New Brunswick and Prince Edward Island as the fifth province in Canada to enact franchise legislation.

For the most part, the Act and Regulation are consistent with the franchise legislation in the other provinces, though there are some important differences. Some of the noteworthy differences and similarities with the other provinces’ legislation are set out below.

Delivery of the Disclosure Document in Parts

Manitoba’s Act is unique in that it does not require the disclosure document to be delivered as one document at one time. Instead, the Act permits a disclosure document to be delivered in parts, and the 14-day disclosure period begins to run after the franchisee receives the last part of the document.

However, franchisors looking to deliver a disclosure document in parts must be aware that the Regulation sets out specific requirements for the structure, format and delivery of a disclosure document in this manner. Failure to comply with these requirements will mean that the noncompliant part of the disclosure document will not be considered part of the disclosure document at all.

Accordingly, while this method of delivery could be beneficial in certain circumstances, it also introduces yet more technical requirements for franchisors to comply with – and failure to do so could lead to a material part of a disclosure document being excluded from the document.

Electronic Delivery

As in New Brunswick and Prince Edward Island, delivery of the disclosure document or a statement of material change by facsimile, prepaid courier, or by electronic means is specifically permitted, provided that the prescribed method for delivery requirements are followed.

Substantial Compliance and Wrap Around Disclosure

Franchisors will be pleased to know that the Act provides that a substantially compliant disclosure document satisfies the requirement to deliver a disclosure document, even if the disclosure document contains a “technical irregularity or mistake not affecting the substance of the document”. While a similar provision provided no assistance to a franchisor who had neglected to sign the franchisor’s certificate (see Hi Hotel Limited Partnership v. Holiday Hospitality Franchising Inc. (HI Hotel) decision in February 2009 edition of Osler Franchise Review) note that the wording in Manitoba’s legislation specifically addresses technical irregularities. It is an open issue whether this different wording would have helped the Hi Hotel franchisor, and franchisors will have to wait for case law to develop to determine how helpful this provision will be.

Also similar to other regulated provinces, other than Ontario, disclosure documents prepared for use in other jurisdictions can be used in Manitoba provided that additional disclosure is provided to comply with the Act and Regulation. This means franchisors can prepare a wrap-around, standalone document, or incorporate Manitoba’s requirements in their national disclosure documents.

Financial Statement Disclosure

As with the other provinces, subject to specific exemptions, the Manitoba Act requires the franchisor to disclose its financial statements which have been prepared either (i) in accordance with Canadian general accepted accounting principles (GAAP) as set out in the Canadian Institute of Chartered Accountants (CICA) Handbook, or (ii) in accordance with GAAP of the jurisdiction in which the franchisor is based. However, the Manitoba Act includes the additional proviso, if the statements are supplemented by information that sets out any changes necessary to make the presentation and content of such statements equivalent to Canadian GAAP as set out in the CICA Handbook.

Foreign based franchisors may or may not be required to provide supplemental information to their financial statements to make the presentation and content of such financial statements equivalent to Canadian GAAP, depending on how their underlying statements were prepared. Prudent franchisors will consult with their accounting professional to determine whether supplemental information to their financial statements will be required. Given the recent developments in accounting standards both in Canada and foreign jurisdictions, franchisors should pay careful attention to the presentation of their financial statements to ensure compliance with the Manitoba Regulation.

Mediation and Arbitration Disclosure

Although Prince Edward Island and New Brunswick’s franchise legislation already requires disclosure of any restrictions or requirements imposed by the franchise agreement with respect to arbitration, mediation or any other alternative dispute resolution process, the Manitoba Act requires disclosure of a more specific nature, including details about the rules and procedures of the dispute resolution process.

Requirement to Make Positive Statements

In other provinces, the franchisor is required to provide disclosure of certain topics only if that franchisor has information to disclose. The Manitoba Regulation takes a different approach, in that in a number of instances, if the franchisor has no information to disclose, it must made a positive statement to that effect. For example, if a franchisor elects not to provide an estimate of operating costs or earnings projection, or if the franchisor does not provide training or operation manuals, the franchisor must include an express statement to that effect in the disclosure document.

Manitoba-Specific Disclosure

The Manitoba Act also requires specific disclosure for prospective franchisees in Manitoba, such as providing specific risk warnings for Manitoba, a certificate of the franchisor in accordance with Form 1 prescribed by the Regulation, providing the name and address of a person authorized to accept service in Manitoba on the franchisor’s behalf, and providing a list of current franchisees and businesses of the same type as the franchise being offered currently operating in Manitoba.

As in the other provinces, if any of the disclosure requirements listed above are not met, franchisors risk a claim for rescission or misrepresentation. If you plan on granting franchises in the province of Manitoba, your franchise disclosure document should be updated as soon as possible to ensure compliance with the Act and Regulation.

If you have any questions on Manitoba’s franchise legislation or would like advice on how to best update your disclosure document in anticipation of October 1, 2012, please contact a member of Osler’s Franchise Team.