May 17, 2017
Blog: British Columbia Franchise Act in force February 1, 2017.
All franchise agreements and renewals or extensions in British Columbia, entered into on or after February 1, 2017, are subject to a new law, the Franchises Act, S.B.C. 2015, c. 35 (the “Act”). Some provisions of the Act, including the duty of fair dealing, the right to associate and the prohibition against waiver are retroactive and apply to existing agreements. B.C. is the sixth province to enact such legislation, after Ontario, Alberta, Manitoba, New Brunswick and Prince Edward Island.
The Act provides important legal protections for British Columbia-based franchisees in a manner generally consistent with franchise legislation in other provinces.
For Franchisors, the most significant change is the standardized disclosure requirements. The Act and Franchises Regulation, B.C. Reg. 238/2016 (the “Regulations”) require disclosure of all material facts relating to the franchise, including among other things, the following:
- copies of all proposed franchise and other agreements relating to the franchise;
- risk warnings, dispute resolution requirements and, subject to exemptions, franchisor financial statements;
- business background of the franchisor, including directors, officers and/or general partners;
- previous convictions, pending charges, administrative orders and proceedings, civil proceedings and bankruptcy and insolvency proceedings;
- cost of establishing a franchise and recurring or isolated fees;
- policies and practices with respect to guarantees and security interests;
- details relating to any estimate of operating costs or earning projections;
- terms and conditions of any financing offered by the franchisor;
- availability of training and its costs;
- requirements to operating in accordance with franchise manuals;
- required contributions to advertising, marketing, promotion, or similar funds;
- any purchase and sale restrictions;
- policies and practices with respect to rebates, commission, payments or other benefits;
- territory of the franchisee;
- trademark and other proprietary rights;
- required licenses, registrations, authorizations or other permissions;
- requirements of personal participation by the franchisee;
- terms of termination, renewal and transfer of the franchise agreement;
- lists of current franchisees, former franchisees, businesses and franchise closures.
The required disclosure is intended to assist franchisees in assessing a potential investment in a franchise. Compliance with the disclosure requirements is critical as a franchisor’s failure to comply gives rise to a right of the franchisee to rescind the impugned franchise agreement and recover certain amounts paid to the franchisor.
A misrepresentation in the disclosure may also give rise to a claim in damages against the franchisor, a franchisor’s broker, a controlling party, and every person who signed the disclosure document.
Section 3 of the Act imposes on each party to a franchise agreement, a duty of fair dealing in the performance and enforcement of the franchise agreement, which includes “the duty to act in good faith and in accordance with reasonable commercial standards.” The Act creates a cause of action against a party who breaches the duty of fair dealing.
Right to Associate
Section 4 of the Act protects franchisees’ right to associate with other franchisees and to form or join an organization of franchisees. The right is protected through the creation of a cause of action against franchisors that interfere with or penalize a franchisee in contravention of the right.
Prohibition against Waiver
Section 13 of the Act provides that any purported waiver or release by a franchisee or a prospective franchisee of the rights conferred under the Act, or of the obligations imposed on a franchisor is void.
Franchisors and franchisees in British Columbia will have the benefit of many years of other jurisdictions’ consideration and interpretation of the rights and obligations provided for under the Act. However, if B.C.’s own experience with consumer-focused disclosure requirements (Real Estate Development Marketing Act) is any indicator, in the short term, we can expect the Act to be a source of franchisor-franchisee disputes while the scope of the rights and obligations granted under Act are considered by B.C. Courts.
Although the requirements of the Act should be familiar for franchisors that operate in other jurisdictions with franchise legislation, franchisors should seek legal advice and ensure that they understand and comply with the disclosure requirements and other obligations under the Act.
Parties involved in a franchise dispute should consult a lawyer with regard to whether any of the remedies available under the Act are applicable to their circumstances.
Author: Nolan Hurlburt