[Co-author: Daniel Zajac (articled student)]
After years in development, the British Columbia Franchises Act and its regulations came into force on February 1, 2017.
British Columbia is now one of six Canadian provinces to enact franchise legislation, following Alberta, Manitoba, New Brunswick, Ontario and Prince Edward Island. In general, the BC Act and regulations closely mirror the legislation from other provinces.
Application of the Act
The BC Act applies to the following franchise agreements when a franchisee is operating wholly or partly in British Columbia:
new franchise agreements entered into on or after February 1, 2017;
existing franchise agreements that are renewed or extended on or after February 1, 2017; and
franchise agreements entered into before February 1, 2017 with respect to certain sections of the Act (mostly the “fair dealing” and the “right to associate” provisions, discussed below).
The Act imposes a duty of fair dealing on franchisors and franchisees regarding the performance and enforcement of the franchise agreement, and sets out remedies in the case of a breach. This duty requires that the parties act in good faith and in accordance with reasonable commercial standards.
Right to associate
The Act gives franchisees the right to associate with each other, and prohibits the franchisor from impeding or restricting this right (and provides corresponding remedies). For example, this right gives franchisees the opportunity to associate with each other regarding a class action lawsuit against a franchisor.
The Act’s disclosure obligations are not triggered by entering into an agreement that only contains terms respecting the confidentiality and use of information or material that is provided to a prospective franchisee. However, if the agreement:
requires the confidentiality and non-use of information that is in or enters the public domain without breach of the agreement, or that is disclosed to any person without breach of the agreement, or that is disclosed with all parties’ consent; or
prohibits the disclosure of information to an organization of franchisees, to other franchisees of the same franchise system, or to a franchisee's professional advisors,
then the agreement is considered a “franchise agreement or any other agreement relating to a franchise” and triggers the disclosure requirement discussed below.
Franchise disclosure documents
Franchisors must provide a prospective franchisee with a franchise disclosure document at least 14 days before the earlier of: (1) entering into a franchise agreement or any other agreement relating to the franchise, or (2) paying any consideration relating to the franchise.
If there are any material changes to the franchise system during the pre-franchise disclosure period, the franchisor must also deliver a statement of material change to a prospective franchisee.
As with franchise legislation in other jurisdictions, the Act and its regulations establish a long list of rules regarding the disclosure document’s content. Some important requirements include the following:
The beginning of the disclosure document must contain warning statements about the risks associated with entering into the franchise agreement (similar to the rules in the other legislated provinces aside from Alberta and New Brunswick);
A description of the franchise agreement’s restrictions or requirements regarding the dispute resolution process (consistent with the other provinces except for Alberta);
Financial statements prepared in accordance with recognized accounting standards (similar to Alberta), provided that the franchisor is not exempt (for example, exemptions are available to franchisors with a net worth of at least $5 million);
The franchisor’s business background, including the name under which the franchisor is doing business and the franchisor's business address;
The business background of the franchisor’s directors, officers and general partners, including their names, current positions, and previous business experience;
Information about recent administrative orders, civil proceedings, bankruptcy proceedings, previous convictions and pending charges involving the franchisor or other relevant parties (like a director or officer of the franchisor);
A list of the current franchisees operating in Canada (which is a broader geographic requirement than in other provinces), a list of franchise closures over the past three years, and a list of any former franchisees that left the franchise system in the prior fiscal year;
The details of the franchisor’s advertising fund, specifying the franchisee’s required contribution, the plan for the administration of the fund, and whether franchisees will be entitled to reports on the franchisor’s advertising activities (which is less onerous than the requirements in Ontario, Manitoba and New Brunswick);
The cost of establishing the business, including costs associated with initial franchise fees, inventory, supplies, equipment, etc. The disclosure document must also disclose any other non-enumerated recurring or isolated fees that the franchisee is required to pay;
A description of the training program for new franchisees and any associated fees;
Any “territorial rights” must be detailed. If no territorial rights will be granted, the disclosure document must include a statement to that effect;
If there are any guarantees or security interests required of the franchisee, these must be disclosed (which is in contrast to the Ontario and Alberta legislation);
Any licenses, registrations, authorizations or other permissions required of the franchisee (similar to Ontario, Manitoba and New Brunswick, although Ontario’s disclosure obligation is slightly broader); and
A certificate of the franchisor, signed by at least two directors or officers of the franchisor, certifying that all information contained in the disclosure document is correct and complies with the Act and regulations.
There are other rules regarding the disclosure document. Franchisors must take care to ensure that their disclosure document complies with these specifications, especially considering the Act’s requirement that the document be drafted accurately, clearly and concisely.
Other than content requirements, the Act and regulations provide further rules regarding disclosure documents. For example, franchisors may use disclosure documents from another province if the franchisor incorporates an attachment including such additional information as is necessary to comply with the disclosure requirements of the BC Act and regulations. This is consistent with the legislation in other provinces (aside from Ontario).
Franchisors may require that a deposit be paid, and a deposit will not trigger the disclosure obligations if it is fully refundable, does not exceed 20% of the initial franchise fee, and is given under an agreement that does not oblige the prospective franchisee to enter into a franchise agreement.
Right of rescission
A franchisee may rescind a franchise agreement without penalty or obligation within 60 days after receiving a disclosure document if:
the franchisor failed to provide the disclosure document or a statement of material change within the required time, or
the disclosure document’s contents did not meet the Act’s requirements.
If a franchisor simply never provides a disclosure document, a franchisee has two years to rescind the agreement without penalty or obligation (which could present a significant cost to a franchisor).
Damages and defences
If a franchisee suffers a loss because of a misrepresentation in a disclosure document or statement of material change, or because of a franchisor’s failure to comply with the Act’s disclosure requirements, the franchisee has a right of action for damages against the franchisor, the franchisor’s broker, the franchisor’s associate, and every person who signed the disclosure document or statement of material change.
Unlike in Ontario, the BC Act states that if a disclosure document or statement of material change contains an error the document will still comply with the disclosure requirement if:
the defect or error does not affect the substance of the disclosure document, and
the document is substantially in compliance with the Act.
If a disclosure document or statement of material change contains a misrepresentation, a franchisee is conclusively deemed to have relied on the misrepresentation. This is subject to an exception where the franchisor can prove that the franchisee had actual knowledge of the misrepresentation or material change before signing the franchise agreement. The Act also contains other exceptions and defences to liability regarding misrepresentation in a disclosure document.
Attempts to affect jurisdiction are void
A franchise agreement cannot restrict the application of British Columbia law with respect to claims arising under a franchise agreement to which the Act applies. Any such provisions in a franchise agreement are void.
Waiver of rights
Any provision in a franchise agreement that waives or releases any of the franchisee’s rights or any of the franchisor’s obligations under the Act is void. However, the Act permits a waiver or release made in accordance with a settlement of an action, claim or dispute.
The franchisor and the directors or officers who signed the Franchisor’s Certificate are subject to joint and several liability.
Ensure compliance with BC’s franchise rules
While the BC legislation is substantially similar to the franchise legislation in the other provinces, there are still important differences between each jurisdiction’s laws. If you are familiar with franchise legislation in another province, you should familiarize yourself with the details of the British Columbia legislation before assuming that any of the rules and requirements are the same.
While this bulletin has generally canvassed BC’s new franchise regime, there are many rules that have not been discussed. Please contact DLA Piper (Canada) LLP’s franchise lawyers for more information.