The article is co-authored by: Brendan Craig, Associate and Scott Allen, Articling Student
In today’s market, franchising is becoming an increasingly common method of buying or selling an interest in an established business. On February 1, 2017, the new British Columbia Franchises Act and associated regulation came into effect, changing the rules for current and prospective franchisors and franchisees alike. Anyone involved or looking to be involved in a franchise located wholly or partly in B.C. should be aware of this recent change to the regulatory framework and its impact on franchising in British Columbia.
Duty of fair dealing
The act imposes an overarching duty of fair dealing on all parties involved in a franchise transaction, including a duty to act in good faith and in accordance with reasonable commercial standards. The act and the regulation also impose disclosure requirements on franchisors to provide all material information about the franchisor’s franchise system, as prescribed by the regulation, when negotiating franchising rights with existing or prospective franchisees.
Evaluation period
The prospective franchisee (or existing franchisee, in the case of a renewal) must receive the franchisor’s disclosure document at least 14 days before the earlier of: (a) the date on which the franchise agreement or any other agreement relating to the franchise is signed; and (b) the date the prospective franchisee makes any payment to the franchisor or the franchisor’s associate in consideration for the franchisee’s rights under the franchise agreement. Note that refundable deposits are generally exempt from the foregoing restriction.
The concept behind the 14-day evaluation period is that it affords franchisees (and to a lesser extent franchisors) a chance to evaluate the proposed business relationship, including review of the disclosure documents, without undue pressure.
Disclosure requirements
The franchisor’s disclosure must include all material facts regarding the franchise, as set forth in the regulation. This includes any positive or negative information about the franchisor or franchise that would reasonably be expected to have a significant effect on the value of the franchise system or have an impact on the franchisee’s decision to acquire franchise rights from the franchisor. Additionally, the act and regulation each contain specific disclosure requirements with respect to financial statements and other documents.
The specific disclosure requirements include the background of the franchisor, expected costs to establish and operate the franchise, earnings projections, details of trademarks, other proprietary rights afforded to the franchisee, territory exclusivity, and many others. The full list of disclosure requirements is too extensive to be adequately canvassed in this article.
‘Substantial compliance’ jurisdiction
With the vast amount of information and documentation required under the act and regulation, there is a constant risk of error on the part of the franchisor. The act requires “substantial compliance” with its prescribed disclosure obligations. Therefore, a franchise disclosure document will likely not be invalidated in B.C. for a technical error or defect that does not affect the substance of the disclosure, unlike in other disclosure jurisdictions in Canada. That said, any error, defect or omission that amounts to a misrepresentation may have serious consequences to the franchisor.
Franchisee protection
Franchisees are entitled to certain protections under the act, including certain remedies for a franchisor’s failure to comply with the act. Franchisees have a built-in right of action for damages where a franchisor does not disclose all of the information required in the franchise disclosure document, and where any information disclosed by the franchisor constitutes a misrepresentation resulting in the franchisee’s loss.
The act also grants franchisees the right to rescind a franchise agreement, without penalty or obligation, where a franchise disclosure document is not provided within the time limits outlined in the act (or at all), or where the disclosure document’s contents do not meet the statutory requirements. Depending on the situation, the timeline within which the franchisee may exercise its right of rescission will vary along with the extent of the franchisor’s liability.
Final considerations
Since the potential costs of non-compliance for franchisors in British Columbia can be quite high, it is crucial that franchisors (and their legal advisers) fully understand the new statutory regime. Conversely, franchisees should also be aware of their new statutory rights and the protections available to them. In this regard, experienced legal counsel can help you, whether you are a franchisor or franchisee, to better understand and navigate the complexities of the evolving legal landscape for franchising in British Columbia.
For more information on this topic or any of your business law needs, please contact Brendan Craig or a member of Alexander Holburn’s Corporate / Commercial Practice
The foregoing is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, please contact the author who would be pleased to discuss the issues above with you, in the context of your particular circumstances.
