Franchise Regulations in Canada
Although there are several federal and provincial laws that apply to franchising, only five provinces have introduced laws that specifically apply to franchising. These provinces are Alberta, Manitoba, Ontario, New Brunswick and Prince Edward Island, and their respective acts are summarized below. On April 2, 2013, the British Columbia Law Institute (BCLI) issued a Consultation Paper on a Franchise Act for British Columbia to examine whether British Columbia should enact legislation to regulate franchising. If enacted, British Columbia would be the 6th province in Canada with franchise legislation.
At the federal level, various laws can apply to franchising such as income tax, competition, privacy, packaging and labeling, and intellectual property statutes. At the provincial level there are a number of laws that apply to franchising including; consumer protection legislation, sales taxes, liquor licensing, and class action. Franchisors wishing to carry on business in Quebec must also comply with the Charter of the French Language of Quebec and the Quebec Civil Code.
Alberta Franchises Act
Under the Alberta Franchises Act, franchisors are required to deliver a disclosure document to franchisees at least 14 days before the prospective franchisee signs any agreement or pays any consideration relating to the franchise (unless the payment is fully refundable). The disclosure document must contain financial statements and all material facts including: information about the franchisor, obligations of the franchisee, fees and initial investment levels, the franchisor’s financial statements, and other information, such as territorial considerations, the franchisor’s proximity policy, restrictions on products and supplies, rebates and discounts accruing to the franchisor, and a list of franchisees currently operating in Alberta.
The legislation provides for a right of action for damages for losses suffered because of a misrepresentation in the disclosure document and a right of cancellation if the franchisor fails to deliver the disclosure document within the 14-day time requirement. Also, the franchisor is required to compensate the franchisee for any net losses within 30 days of receiving the cancellation notice.
The franchisor must provide details of any earnings claims information they provide, including material assumptions underlying its preparation and presentation, whether it is based on actual results of existing outlets and the percentage of outlets that meet or exceed each range of results. The earnings claim information must have a reasonable basis at the time it is prepared. The disclosure documents must also state the place where substantiating information is available for inspection by franchisees. If the information is given in respect of a franchisor operated outlet, the franchisor must state that the information may differ in respect of a franchisee outlet. Earnings claims consist of information from which a specific level or range of actual or potential sales, costs, income or profit from franchisee or franchisor outlets can be ascertained.
A franchisor is not allowed to prevent a franchisee from forming an organization of franchisees or from associating with other franchisees in any organization of franchisees.
The act imposes a duty of fair dealing on both parties, which includes the duty to act in good faith and in accordance with reasonable commercial standards.
The disclosure document must contain copies of all proposed franchise agreements, financial statements of the franchisor, reports and other documents in accordance with the regulations. A certificate must be signed by at least 2 officers or directors of the franchisor, which states that the disclosure document contains no untrue statement of a material fact and does not omit to state a material fact.
If a franchisee suffers a loss because of a misrepresentation contained in a disclosure document, the franchisee has a right of action for damages against the franchisor and every person who signed the disclosure document. If the franchisor fails to provide the disclosure document within the time requirements, the prospective franchisee may rescind the agreement by giving notice of cancellation no later than 60 days after receiving the disclosure documents, or no later than 2 years after the granting of the franchise. A franchisor must, within 30 days of receiving a notice of cancellation, compensate the franchisee for any net losses the franchisee has occurred in acquiring, setting up, or operating the franchised business.
Manitoba Franchise Act
Franchisors in Manitoba are required to comply with all of the requirements of the Act, which include new disclosure document obligations as well as a variety of “relational” provisions that are read into every franchise agreement. Out of the provinces that have franchise laws in place, the wording, structure and substance of the Manitoba Regulation is most similar to that of New Brunswick.
However, the Manitoba regulation has some unique features. The biggest innovation of the Act is that it allows, in certain circumstances, for disclosure documents to be delivered in parts. This can be contrasted with other provinces which require disclosure documents to be delivered all at once. The Regulation defines the specifics of this “piece-meal” disclosure. In order to deliver a disclosure document in parts:
- the required “risk warnings” must be provided to the franchisee first;
- certain subsets of information must be provided in groups (information about the franchisor, information about the franchise, and lists of franchisees);
- the franchisor must include a specifically-worded statement at the beginning of every document which is intended to form part of the disclosure document; and
- the signed certificate of the franchisor must be included with the last part of the disclosure.
The 14-day cooling off period will only begin once the last document has been delivered to the franchisee. However, prior to the end of the 14 day cooling off period, franchisors may nevertheless accept a fully refundable deposit of up to 20% of the initial franchise fee, to a maximum of $100,000.
Ontario's Arthur Wishart (Franchise Disclosure) Act, 2000
The Ontario act was introduced after the Alberta Franchises Act and is quite similar to the Alberta Franchises Act except that unlike Alberta's legislation, there are no residency requirements for franchisees. Under the Ontario act the franchisee is not allowed to make any payments within the 14-day time requirement even if the payments are fully refundable.
A franchisee may rescind the franchise agreement if the franchisor fails to provide the disclosure document within the prescribed time requirements or if the contents do not meet the statutory requirements. The franchisee may rescind the franchise agreement without penalty or obligation within two years after entering into the agreement if the franchisor never provided a disclosure document.
The franchisor, within 60 days of rescission, must:
(a) Refund any money received from or on behalf of the franchisee, other than money for inventory, supplies or equipment;
(b) Purchase any inventory, supplies and equipment at a price equal to the purchase price paid by the franchisee; and
(c) Compensate the franchisee for any losses incurred in acquiring and operating the franchise less amounts expended on the repurchase.
New Brunswick has published two franchising regulations. The first regulation sets out disclosure requirements similar to the requirements found in the other provinces that regulate franchising. The second regulation sets out a mediation procedure,
The provisions of the Act are essentially similar to those contained in Ontario’s Arthur Wishart Act; however, there are some important differences. For example, the Act explicitly states that the duty of good faith and fair dealing extends to the performance and enforcement of the franchise agreement, which includes the exercise of a right under the franchise; as opposed to the Ontario Act, which does not specifically state that the duty extends to the exercise of a right under the agreement. Similar to the legislation in Alberta and PEI, but unlike the Ontario Act, the Act specifically states that a confidentiality agreement does not qualify as a “franchise agreement” for the purposes of the timing of the 14-day disclosure period. This permits franchisors to enter into limited confidentiality agreements with franchisees within this period. The Act also provides an expanded due diligence defence to directors, officers, brokers and franchisor’s associates in respect of misrepresentations within the disclosure document.
The most unique feature of the Act is the prescribed party-initiated dispute resolution process, which is the first of its kind among regulated provinces. The Act states that if there is a dispute, one party may notify the other of the nature of the dispute and the desired outcome. If such a notice is delivered the parties must attempt to resolve the dispute within 15 days of receiving the notice. If the parties are unable to resolve the dispute a notice to mediate may be delivered, and upon delivery of such notice, the parties must follow the rules relating to mediation as set out in the mediation regulation. However, the mediation regulation permits the party that received the notice of mediation to decline mediation by providing a notice declining mediation.
The disclosure regulation generally requires disclosure similar to that in other regulated provinces; however, there are some noteworthy differences, for example:
- Delivery by courier or electronic means is specifically permitted;
- Disclosure documents prepared for use in other jurisdictions can be used in New Brunswick provided additional disclosure is provided as required by the Act;
- The disclosure document must include the table of contents of any manual or a statement specifying where in New Brunswick the manual, if any, is available for inspection.
- A description of the franchisor’s policies and practices regarding internet or distance sales must be provided; and
- In addition to a list of current franchisees, the franchisor must provide a list of current businesses of the same type as the franchise being offered that the franchisor currently operates in New Brunswick.
There are other differences which must be addressed in the disclosure document, or franchisors risk a claim for rescission or misrepresentation.
Franchisors must prepare documents specific to New Brunswick – either a wrap-around or a standalone document – or risk being offside the legislation. Alternately, franchisors with a national disclosure document can modify that document to comply with New Brunswick’s unique requirements.
Prince Edward Island's Franchises Act
The Prince Edward Island franchise legislation is substantially similar to Ontario's legislation; however, it is modeled after the Uniform Law Conference of Canada's Uniform Franchises Act and contains some additional provisions. The act extends the duty of fair dealing to apply to the exercise of a right under a franchise agreement and permits the use of confidentiality and territory reservation agreements prior to delivery of a disclosure document.