And Then There Were Six: British Columbia's Franchise Legislation Came Into Effect on February 1, 2017

Following Bill 38-2015, the British Columbia (“B.C.”) Franchises Act (“B.C. Act”), receiving royal assent on November 17, 2015, and the B.C. government’s adoption of the much-anticipated Franchises Regulation (the “Regulations”) on October 3, 2016, the B.C. Act came into force on February 1, 2017. B.C. became the sixth Canadian jurisdiction to implement franchise legislation, joining Alberta, Ontario, Prince Edward Island (“PEI”), New Brunswick and Manitoba (the “Regulated Provinces”).  The B.C. Government has noted that the intention of the B.C. Act is to “help level the playing field for small business owners and provide certainty for investors”.[1]  The legislation is designed to strike a balance between protecting vulnerable franchisees and upholding franchisors’ rights to freely contract to allow for the success of the franchise chain. 

The B.C. Act’s provisions are based, in large part, on a report by the British Columbia Law Institute (“BCLI”), which followed a year-long consultation period during which public comment was sought on the BCLI’s tentative recommendations.  The BCLI’s recommendations borrowed heavily from the Uniform Law Conference of Canada’s Uniform Franchises Act (the “Uniform Act”), including its provisions regarding disclosure, misrepresentation, statements of material change and the right of association.[2] The Uniform Act has a strong commonality with all provincial franchise legislation, as it is modelled on the earliest enactments of Canadian franchise legislation in Alberta and Ontario, and heavily influenced the development of the franchise legislation in PEI, New Brunswick and Manitoba which followed.  The resulting substantial uniformity among the franchise legislation in the Regulated Provinces benefits national franchisors and minimizes the regulatory burden on them, by allowing the use of standardized franchise practices and documentation across Canada.

Key Similarities between the B.C. Act and other Provincial Franchise Legislation

Due to the reliance on the Uniform Act, the B.C. Act contains provisions substantially similar to the franchise legislation in the other Regulated Provinces, including: (1) an obligation on the franchisor to provide prospective franchisees a disclosure document that includes financial information, proposed franchise agreements and other relevant information about the franchise (including all material facts) at least 14 days before the earlier of the signing of the franchise agreement or the payment of any consideration relating to the franchise;[3] (2) a duty of fair dealing on the franchisor and franchisee in the performance and enforcement of the franchise agreement;[4] (3) a right of rescission in favour of the franchisee if the franchisee has received a deficient disclosure document or no disclosure at all;[5] (4) a right of action for damages in favour of the franchisee if the franchisee suffers a loss due to a misrepresentation contained in a disclosure document or related information;[6] (5) protection of franchisees’ rights of association and remedies for infringement;[7] (6) a prohibition on the waiver of rights under the Act;[8] and (7) the inapplicability of any provision in a franchise agreement that purports to restrict the application of B.C. law, jurisdiction or venue to a forum outside B.C. with respect to claims arising under a franchise agreement subject to the B.C. Act.[9]

Key Differences between the B.C. Act and other Provincial Legislation

Formalities of Disclosure – Substantial Compliance

In line with Alberta, Manitoba and PEI’s franchise legislation, but in contrast to Ontario’s Arthur Wishart Act (the “AWA”), the B.C. Act specifies the standard of compliance required to satisfy the disclosure requirement. The B.C. Act provides that a disclosure document or statement of material change complies with the disclosure requirements under the B.C. Act if it is “substantially in compliance” with the B.C. Act.[10]  Notably, the B.C. Act adopts the language used in Manitoba’s Franchises Act for the purposes of this provision.  The B.C. Act also follows Manitoba’s Act in specifying that substantial compliance may be achieved despite a technical irregularity or formal defect so long as the error does not affect the substance of the document.  Therefore, a franchisee seeking rescission for a minor technical defect is less likely to gain traction in B.C. and, as a result, it can be expected that this standard of compliance will prevent frivolous franchisee claims in B.C. that are based exclusively on minor defects in form requirements.

Duty of Good Faith and Fair Dealing

The B.C. Act follows the PEI Act and goes beyond the legislation in the other Regulated Provinces by explicitly stating that the duty of fair dealing applies to the exercise of a right under the franchise agreement.

Due Diligence Defence

The B.C. Act contains additional due diligence defences to actions against non-franchisors for damages for misrepresentation.

Refundable Deposit

Unlike the AWA, the B.C. Act permits a prospective franchisee to pay a deposit to the franchisor prior to the franchisor providing a disclosure document, provided that certain requirements are met.  Specifically, such deposits must: (a) not exceed 20% of the initial franchise fee, as prescribed by the Regulations; (b) be refundable without any deductions if a prospective franchisee does not enter into a franchise agreement; and (c) be given under an agreement with the franchisor that concerns the deposit and that does not obligate the franchisee to enter into a franchise agreement.[11]

Prohibition on Waivers and Releases under the B.C. Act

Although the B.C. Act remains consistent with the other Regulated Provinces in prohibiting the waiver or release of a franchisee’s rights under the Act, the B.C. Act goes one step further by carving out such waivers or releases in the context of an action, claim or dispute.  The B.C. Act specifies that “a waiver or release by a franchisee, or by a prospective franchisee, made in accordance with a settlement of an action, claim or dispute” is permitted.[12]  Effectively, this exception codifies the common law established in Ontario by the Ontario Superior Court in 1518628 Ontario Inc. v. Tutor Time Learning Centres.[13]  This clarification is useful as it enables parties to a franchise agreement to settle their disputes with comfort that any resulting settlement and release should be enforceable.

Election of Remedies

Generally, at common law, a person in a position to sue for both non-statutory rescission of a contract and damages for its breach must elect which remedy to pursue so as to avoid double recovery.  However, in 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd., the Ontario Court of Appeal held that the principles of non-statutory rescission do not apply under the AWA and a franchisee is able to pursue both remedies simultaneously.[14]  The B.C. Act codifies this ruling by stipulating that a franchisee is not required to elect between rescinding the franchise agreement and exercising its statutory rights of action for damages.[15]  In addition, the B.C. Act expressly prohibits double recovery, specifying that a franchisee is not entitled to be indemnified by way of damages in respect of a loss recovered through rescission.[16]

Investment Greater than a Specified Amount

In line with the AWA, but in contrast to franchise legislation in the other Regulated Provinces, the B.C. Act contains an investment disclosure exemption whereby transactions involving franchisee investments above a certain threshold in a franchise are exempt from the disclosure requirement under the B.C. Act.[17]  The Regulations specify the investment threshold as an amount greater than $5 million, above which disclosure is not required.

Investment Less than a Specified Amount

In contrast to the AWA, which includes a disclosure exemption for small franchises where the required investment is less than a prescribed amount (currently $5,000), the B.C. Act does not include a comparable disclosure exemption for small franchises.

Disclosure Exemption for Short Term Agreements with no Non-Refundable Fee

Like the AWA, but in contrast to the legislation in the other Regulated Provinces, the B.C. Act includes a disclosure exemption for franchise agreements that are not valid for longer than one year and do not involve the payment of a non-refundable initial franchise fee.  The exemption in the B.C. Act goes beyond the AWA to provide that the one year term limit must include any renewal or extension of the agreement and, additionally, that there can not be any non-refundable renewal or extension fees.

Attempts to Restrict Jurisdiction

As with other provincial franchise legislation, the B.C. Act states that any provision in a franchise agreement that purports to restrict jurisdiction or venue to a forum outside the province is void with respect to claims arising out of the franchise agreement to which the B.C. Act applies.  The B.C. Act goes further in specifying that this provision applies to provisions in franchise agreements that submit disputes to arbitration.[18]  In the result, an arbitration of a dispute relating to a franchise located in B.C. must be held in B.C. and follow B.C. rules.

Regulations’ Substance

The Regulations were based on the Uniform Law Conference of Canada’s Disclosure Documents Regulation, a template franchise regulation, also substantially included in the BCLI’s recommendations.  The B.C. Government conducted a public consultation period that ended in January, 2016, requesting the public’s feedback on the proposed form of regulations.[19] The feedback collected during this period was intended to inform the specifics of the disclosure requirements and disclosure document drafting and delivery.

Of note, both the Ontario Bar Association (“OBA”) and the Canadian Franchise Association (“CFA”) submitted substantive comments regarding the proposed Regulations.  Most significantly, the OBA recommended the following changes: (1) exclude any requirement for an express statement that assumptions and bases underlying the estimate of annual operating costs for the franchise are reasonable, so as to maintain uniformity with Ontario and Manitoba’s franchise legislation; (2) require a statement that no earnings projections are provided if such is the case, as contained in New Brunswick and Manitoba’s legislation; (3) require disclosure of liability for the costs of training or other assistance offered to the franchisee by the franchisor, whether or not such training or assistance is optional; (4) if manuals are to be provided to the franchisee, require that a table of contents of each manual be disclosed rather than requiring a summary of the material topics covered in the manual, so as to not make the disclosure requirement too onerous; (5) limit the disclosure required if the franchisee is required to contribute to an advertising, marketing promotion or similar fund and streamlining it to New Brunswick’s related requirements; (6) revise the proposed language regarding territory to mirror the New Brunswick and Manitoba approach, so as to maintain congruence amongst the provinces; (7) delete the proposed disclosure requirement for the franchisor’s policies and practices dealing with compensation to franchisees for rights to operate a similar business or sell similar products in the territory, as no other province has adopted it; (8) limit the disclosure on the description of trademarks and other proprietary rights to be uniform with New Brunswick; (9) delete the schedule of franchise and business closure information; and (10) add an exemption for the disclosure of financial statements as in the AWA (for high net worth franchisors with a broad base of franchisees).[20]

In addition to agreeing with the majority of the OBA’s recommendations, the CFA recommended that the B.C. Act: (1) expressly limit its application to businesses operated partly or wholly in B.C.; (2) limit the disclosure regarding rebates, commissions, payments or other benefits as to whether they are taken and shared, as opposed to providing a specific description; and (3) revise the schedule of franchisees, former franchisees, etc. to provide a list of franchisees of the franchisor in all Canadian locations as opposed to requiring province-specific disclosure.

Generally, it appears that the OBA’s and CFA’s recommendations were made with the legislation of the other Regulated Provinces in mind to enhance uniformity among Canadian franchise legislation and ensure that the Regulations were not drastically dissimilar or more cumbersome than those of the other Regulated Provinces.  Of note, the majority of the recommendations made by the OBA and CFA were substantively reflected in the final form of the Regulations with the following exceptions:

• With respect to the proposed language regarding territoriality, the Regulations have adopted a slightly different approach than the regulations in the other Regulated Provinces.  If territorial rights are granted, franchisors in B.C. must include a description of “the franchisee’s rights to the territory, including the manner in which and the person by whom” the rights will be determined.  In New Brunswick and Manitoba, the franchisor must either describe the exclusive territory or the manner in which and the person by whom the territory will be determined.  In Ontario and Alberta, a description of any exclusive territory granted to the franchisee is sufficient.  Unlike the other Regulated Provinces, the Regulations use the term “territory” rather than “exclusive territory” and do not require a description of the franchisor’s policy on proximity between existing franchises.
• The required disclosure on the description of trademarks and other proprietary rights mirrors the relevant provision in New Brunswick, except that New Brunswick also requires a description of “any known or alleged material impediments” to the use of the trademark or other proprietary rights.
• The schedule of franchise and business closure information has not been deleted from the Regulations, and appears as Part 3 of the Schedule to the Regulations.

Following receipt of feedback and further deliberations, the final form of the Regulations was issued on October 3, 2016 with no further public consultation.

What’s Different about the B.C. Act’s Regulations?

While the Regulations generally follow the form and structure of the Ontario franchise regulations, some noteworthy provisions include the following:

• A “wrap-around” document that complies with the disclosure requirements under the laws of another jurisdiction is acceptable in B.C., provided that the franchisor includes such additional information as necessary to comply with the B.C. disclosure requirements.  Alberta has a similar provision, while Ontario does not.
• Financial statements prepared in accordance with the International Auditing and Assurance Standards Board are acceptable in both audit and review engagements.
• Fees that the franchisor or its affiliate imposes or collects on behalf of third parties (except for payments collected by law on behalf of the government) must be disclosed. 
• The franchisor must disclose policies and practices, if any, regarding guarantees and security interests required of franchisees.  Ontario only expressly requires disclosure of the terms and conditions of financing arrangements offered by franchisors and associates to franchisees.
• If applicable, the franchisor is required to include a statement in the disclosure document to the effect that the franchisor is not providing estimated annual operating costs, earnings projections, training, manuals, or exclusive territorial rights to the franchisee.  Disclosure about earnings projections is more extensive as compared to Ontario.
• Risk warning statements follow the format of Manitoba, New Brunswick, and PEI regulations, which vary slightly from those in Ontario.
• Provisions addressing disclosure of territorial rights are more extensive as compared to Ontario’s regulations, particularly with respect to reservation of territorial rights by the franchisor.

Implications for Franchisors and Franchisees

The substantial similarity between the B.C. Act and other franchising statutes in the Regulated Provinces bodes well for franchisors as it will make it easier for a franchisor to comply with multi-jurisdictional disclosure requirements.  It is anticipated that most Canadian and international franchisors will experience minimal change in their franchise operations as a result of the B.C. Act having come into effect on February 1, 2017, as franchisors’ current documentation and practices employed in other provinces can be leveraged to comply with the B.C. Act and Regulations.  The gaps in other provincial franchise legislation that the B.C. Act seeks to clarify gives prospective franchisors and franchisees in B.C. an additional level of certainty in doing business under the franchise model.  Such differences may also serve as a model for future amendments to the franchise legislation in the other Regulated Provinces.

About the authors

David Shaw is a partner in the Blakes Corporate & Commercial and Mergers & Acquisition groups.  He regularly advises clients in a wide range of industries on franchise law matters, including the preparation of master and individual franchise agreements, area development agreements and disclosure documents.  He also assists clients with system rebranding, regulatory compliance, franchise acquisitions, divestitures and terminations.  David’s practice also includes an emphasis on mergers and acquisitions and reorganizations including structuring and negotiating complex commercial agreements.

David can be reached at:416-863-4196 david.shaw@blakes.com

Arash Amouzgar is an associate in the Blakes Vancouver Corporate & Commercial group and primarily focuses on mergers and acquisitions, private equity, and venture capital. Arash also maintains a general business law practice assisting clients with a full range of corporate and commercial matters, including business structuring, drafting commercial agreements, internal reorganizations and corporate governance. In particular, Arash has acted for a number of Canadian and International clients involved in the food and beverage industries on a broad range of franchise law matters, including advising on franchise renewal agreements, legal relationships between franchisors and franchisees, and food and beverage regulatory compliance across franchise systems.

Saktish Pillai is an associate in the Blakes Toronto Corporate & Commercial group.  His practice encompasses a wide range of corporate and commercial matters, including mergers and acquisitions, franchising and distribution arrangements, divestitures and corporate reorganizations. He also provides general corporate advice to clients.  Saktish regularly advises Canadian and international companies on franchise law matters, including the preparation of franchise agreements, disclosure documents and related documentation and assisting clients on franchise acquisitions, divestitures and terminations.

Saktish can be reached at 416-863-2397 saktish.pillai@blakes.com