So take note!
I don’t usually write about specific legal matters in this column, which I reserve mostly for entertainment purposes, but I think it’s important for BC lawyers to be aware of some new legislation coming into effect on February 1, 2017. It’s the Franchises Act, and it radically changes how franchises are sold in BC. Given that I’ve had a little to do with the Franchises Act (this is, after all, my practice area), the more lawyers in BC who know about the new law, the better.
As of February 1 all businesses franchising in BC must provide to prospective franchisees, a comprehensive franchise disclosure document (called an “FDD”) that discloses all material facts relating to the franchise, including specific matters set out in the Regulations. With a couple of exceptions (confidentiality agreements and fully refundable deposits), franchisors must wait at least 14 days before the franchisee executes the franchise agreement and the franchisor is paid. This is so that franchisees have time to consult with their lawyers and accountants and can make an informed decision about the opportunity.
The BC legislation is generally consistent with franchise laws in the five other provinces that regulate franchising, but there are important differences in terms of what must be disclosed that makes drafting of Canada-wide FDDs a minefield.
If you’re going to do this sort of work, get familiar with Schedule 1 to the BC Regulations, which lists the items that must be disclosed. Be familiar with the case law, particularly where franchisors have failed to make proper disclosure in the sales process and where rescission has been ordered. As well, you should read the definition of what a “franchise” is. Don’t think that just because your client wants to call the contract a “license” it’s not a “franchise” under the Act. If it walks like a duck and quacks like a duck, it’s probably a duck no matter what you call it.
The items that must be disclosed in a BC FDD include a description of the business opportunity itself; a list of all fees and costs a franchisee must pay to establish the business; details of any litigation (including administrative actions/bankruptcy/criminal convictions and pending charges) involving the franchisor, its directors, officers or its associates, a description of any territory granted; and a list of existing and former franchisees for prospects to contact for more information. Audited or reviewed financial statements must also be a part of the disclosure package, together with all contracts the prospective franchisees are required to execute. And even if the matter isn’t specifically listed in the Regulations, you may still have to disclose it if the fact is material (Hint – “material” is defined in the Act).
For those acting for franchisees in BC, the remedies for a breach of the act are significant.
For example, if a franchisor has made a material misrepresentation in the sales process, or has failed to disclose a material fact required in its FDD, or has failed to even provide an FDD to a BC prospect, then this will give the franchisee the legal right to utilize the legal remedies available under the Act, including – and depending on the circumstances – rescission of the entire franchise contract.
Finally, one of the most significant changes to the law involves governing law and forum provisions for franchise disputes. Litigation by or against a franchisee in BC must, after February 1, be carried out in BC under BC law. This will prevent a Minnesota franchisor from forcing a BC franchisee to hire Minneapolis lawyers to sue or be sued under Minnesota law, at monumental expense to the BC-based franchisee who may lack the financial resources to fund US litigation on $.75 Canadian dollars. This is one of the more important benefits to the BC franchisee community and will go a long way to protect BC franchisees from being strategically and financially disadvantaged by non-BC governing law and forum clauses in their franchise agreements.
In addition to being a Bencher of the Law Society of BC, Vancouver Franchise Lawyer Tony Wilson was a member of the Advisory Group advising the BC government on the Franchises Act and its regulations. His comments do not reflect the opinions of the Law Society, CBABC or their respective members.