In an increasingly globalized and internet-dependent business marketplace, franchising has continued to expand as one of the world’s most popular business structures. A 2014 British Columbia Law Institute Report on the prospect of new franchise legislation in BC states that franchises are “estimated to account for 40 per cent of Canadian retail sales and to employ one in every 22 inhabitants of Canada”. No matter how large a multinational corporation may be, the actual owners of individual franchised locations of the business may for all intents and purposes be “small business” owners in terms of day-to-day operations and resources, except that their rights with respect to the operation of the business are often governed by an onerous and lengthy franchise agreement drafted by the franchisor’s legal team.
Bill 28 – Franchises Act
Until now there has been no legislation in British Columbia which directly addresses franchise agreements despite their ubiquity, but on October 20, 2015, Bill 28 – Franchises Act passed Third Reading in the BC Legislature, meaning that it has been fully approved and will come into force once the government has drafted related regulations and the business community has been provided with a transition period to become familiar with the new requirements. The new Franchises Act will be largely consistent with legislation already in place in five other provinces in Canada (Alberta, Ontario, New Brunswick, P.E.I. and Manitoba all have franchise legislation modeled on the Uniform Franchises Act developed by the Uniform Law Conference of Canada).
The BC Government has stated in a press release that the “the Government recognizes that franchise purchasers make a significant capital investment yet they are often at a disadvantage when relying on the information provided by the company offering the franchise due to a lack of knowledge and experience, and access to expert advice”. The release goes on to suggest that “Franchise legislation will help to rectify this imbalance and support the expansion of franchises by standardizing regulatory requirements, while at the same time encouraging investment in BC”.
Some of the major new requirements that will come into effect when the Franchises Act comes into force include the following:
- The franchisor must provide a “disclosure statement” setting out specified information about the franchise at least 14 days before the earlier of the signing of the agreement or the payment of any consideration by the franchisee to the franchisor;
- The above 14-day “cooling off” period will permit prospective franchisees to withdraw any commitment to proceed with the franchise agreement within that period;
- Perhaps the most significant aspect of the new Franchises Act will be the ability for a franchisee to rescind the franchise agreement as a whole within 60 days after receipt of a disclosure statement if the franchisor failed to disclose a material fact in the statement. There is also a right of rescission for a period of two years from the date of the franchise agreement if the disclosure statement was never actually given to the franchisee;
- In addition, if rescission is permitted due to inadequate disclosure, the Franchises Act will impose very onerous restitution obligations pursuant to which the franchisor must:
- return any money received from the franchisee other than payment for items like inventory, supplies and equipment;
- purchase back any current inventory, supplies and equipment from the franchisee; and
- compensate the franchisee for any other losses incurred in the course of setting up and running the franchise (which could be very significant if almost two years have passed!).
Before signing a franchise agreement, whether before or after the new Franchises Act comes into force, it is critical that prospective franchisees receive professional legal and accounting advice, as franchise agreements tend to be presented as “set” forms without the prospect of alteration. However, a franchise agreement is just like any other agreement in that both parties need to understand and agree on all aspects of the agreement. While certain clauses may be “non-negotiable” from the franchisor’s perspective, franchisee parties often find out too late that there is a clause buried in the (frequently very lengthy) franchise agreement they would not have agreed to if the clause had been fully considered with the benefit of legal advice.
This blog entry is provided for general informational purposes only, is not legal advice, does not create a solicitor-client relationship, and should not be relied on without first obtaining detailed and specific legal counsel.