Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: British Columbia Law Institute recommends enactment of franchise legislation, (Apr 7, 2014)

By John W. Arden, J.D., LL.M.

Almost a year to the day after issuing a consultation paper on franchise legislation for British Columbia, the British Columbia Law Institute (BCLI) last week released on its “Report on a Franchise Act for British Columbia,” recommending that the province follow Ontario, Alberta, Prince Edward Island, New Brunswick, and Manitoba in regulating franchising.

The 217-page report principally recommends that British Columbia adopt a law based generally on the Uniform Franchises Act, developed by the Uniform Franchise Law Conference of Canada, in order to provide important protections to BC franchisees, equivalent to those enjoyed by their counterparts in neighboring Alberta and four other provinces.

“Enacting the Uniform Franchises Act would contribute to the already high degree of harmonization of franchise laws within Canada, and further the objectives of the federal-provincial Agreement on Internal Trade,” the report said. “As much as franchising activity takes place on a national scale, legislative harmonization minimizes the regulatory burden for franchisors.”

The pre-sale disclosure practices required by the Uniform Act are already followed by many reputable franchisors active in British Columbia, in part because they are mandatory in some other provinces, the BCLI observed. The report did not recommend enactment of the pre- and post-litigation mediation of franchise disputes, which has been adopted only by New Brunswick, because a structured, party-initiated arbitration is already available to the parties to a civil action and because British Columbia has well developed resources for voluntary mediation.

Additional recommendations include:

Standard of compliance with disclosure requirements. The report supports the practice in Alberta, Manitoba, and Prince Edward Island of holding disclosure documents valid if they are in substantial compliance with the legislation and regulations. Minor or technical defects that do not influence the prospective franchisee’s investment decision should not lead to the drastic consequences of non-compliance—rescission of the franchise agreement at the option of the franchisee.

Fully refundable deposit. Franchisors should be able to obtain a fully refundable deposit from prospective franchisees prior to full disclosure because the franchisor must disclose much commercially sensitive information that may affect its competitive position and may be holding a territory open while negotiations continue.

Disclosure of territorial rights. As in Manitoba, a franchisor should be required to state in a disclosure document whether or not an exclusive territory is granted under the franchise being offered.

Dislosure of reservation of direct distribution rights. If a franchisor intends to reserve the right to sell goods and services directly and in competition with its franchisees, fairness requires that this reservation and the distribution channels reserved should be declared in the disclosure document.

Electronic delivery and electronic disclosure documents. Delivery of a disclosure document by electronic means, such as email or on a DVD, should be expressly permissible.

Action for false financial projections. The franchisee’s statutory right to sue for misrepresentation should extend to misleading statements made in a financial projection supplied by the franchisor to the prospective franchisee, unless the projection contains cautionary language similar to that required by securities legislation in forward-looking statements.

Wrap-around disclosure documents. In order to avoid the need to reformat disclosure documents in different jurisdictions, Alberta, Prince Edward Island Island, and Manitoba allow use of disclosure documents prepared to comply with the laws of another jurisdiction if they are supplemented with additional information needed to comply with legislation and regulations. British Columbia should also permit such wrap-around disclosure.

Claims for rescission and damages. The legislation should clearly provide that the exercise of statutory rescission does not bar the franchisee from also pursuing a statutory right to damages, provided that double recovery does not occur.

Release of statutory claim under settlement agreement. British Columbia franchise legislation should expressly state that the statutory bar to waiving or releasing a right under the legislation does not prevent a waiver or release that is part of a post-dispute settlement.

“Given the prevalence of franchised businesses in BC and their importance to the provincial economy, it is surprising that BC has no franchising legislation,” said Jim Emmerton, Executive Director of BCLI. “The enactment of franchise legislation in BC along the lines set out in this report would give appropriate and needed protection to BC franchise owners. It would also benefit franchisors by contributing to the establishment of consistent standards across the country.”

The British Columbia Law Institute is a not-for-profit law reform agency that works to improve and modernize the law.

News: FranchisingDistribution