Changes to the province’s franchise law protect small businesses

BC’s new Franchises Act came into force on February 1, making B.C. the sixth Canadian province to regulate the franchise industry. Franchisors throughout Canada (as well as franchisors from the United States) who operate in B.C. will now have to adapt their legal contracts and sales processes to comply with the new legislation, or risk significant legal and financial consequences.

As with the other franchise statutes in Canada, the B.C. act requires franchisors to provide prospective B.C. franchisees with a comprehensive franchise disclosure document (FDD), disclosing all material facts relating to the franchised business being offered so the prospective franchisee can make an informed decision about the investment, and get advice from lawyers and accountants. These items of disclosure include (but are not limited to) a description of the business opportunity itself, a list of all fees and costs a franchisee must pay to acquire and operate the franchised business, details of any litigation involving the franchisor or its affiliates, a description of any territory granted and a list of existing and former franchisees for prospects to contact for more information. As well, copies of all agreements the proposed franchisee is required to sign must be part of the FDD.

B.C.-based franchisors who are already franchising in Alberta or Ontario shouldn’t be particularly fazed by the new legislation. That’s because they’ve already created their FDDs in compliance with the laws of those other jurisdictions. Adapting their existing FDD to comply with B.C.’s new law will be a small and inexpensive matter. But the legislation will force smaller franchisors who franchise only in B.C. to comply with the law, and this will require them to have their lawyers prepare FDDs. It will also oblige the B.C.-based franchisors to ensure that their financial statements are, at a minimum, review-engagement-based (vetted by accountants to ascertain whether or not they are plausible), because unverified “notice-to-reader” financial statements are not satisfactory for purposes of the B.C. Franchises Act.

If the act or the regulations have been breached, the remedies available to B.C. franchisees against franchisors are significant. For example, if a franchisor makes material misrepresentations in the sales process, or fails to disclose material facts as required by the act in an FDD, or fails to even provide an FDD to a B.C. prospect, then this will give a franchisee the legal right to use the legal remedies available under the act, including – and depending on the circumstances – rescission of the entire franchise contract, entitling franchisees to all of their money back and compensation for any losses.

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 B.C. must be carried out in the province under B.C. law. This will prevent an Ontario franchisor from forcing a Vancouver franchisee to Toronto to sue or be sued under Ontario law, at monumental expense to the B.C.-based franchisee, who may lack the financial resources to fund out-of-province litigation.

B.C.-based franchisees, who have not been entitled by law to receive complete information about the franchises being offered, and who have not been able to use the legal remedies available to other Canadians in circumstances where there have been material misrepresentations in the franchise sales process by franchisors or their salespeople, will stand to benefit the most. The act will go a long way to protect B.C.’s large and growing number of small-business operators who choose to assume the risks in hope of reaping the rewards of owning and operating a franchised business. 

Tony Wilson, QC, practises franchise and intellectual property law at Boughton in Vancouver and was a member of the advisory committee to the B.C. government on the Franchises Act and regulations.