Canada Update: New Brunswick Passes Franchises Act; Is Manitoba Soon to Follow?

Significantly, the New Brunswick Act:

a) Expands the definition section to include 'franchisor's broker';

b) Binds the Crown ' the provincial government ' (with some exceptions);

c) Explicitly exempts cooperatives from the Act's application;

d) Tightens applicability of the franchisor's obligation to disclose; and

e) Provides a comprehensive dispute resolution mechanism.

Let us consider each of these elements in some detail.

Franchisor's Broker

The New Brunswick Act expands the definition section beyond 'franchisor' and 'franchisor's associate' to include the expression 'franchisor's broker' and defines such an entity as: 'a person, other than the franchisee, franchisor, or franchisor's associated who grants, markets, or otherwise offers to grant a franchise or who arranges for the grant of a franchise.' (s.1(1) of the New Brunswick Act)

This contrasts with the Ontario Act, which defines 'franchisor's broker' only in relation to according a right to damages in favor of a franchisee who suffers a loss by reason of a misrepresentation to which a 'franchisor's broker' is a party (s.7(1) of the Ontario Act). The inclusion of this definition in the general interpretation clauses with which the New Brunswick Act commences is significant in that it may be signaling legislative intent to broaden certain other areas of the regulations to include and apply to a franchisor's broker.

Binding the Crown

In contrast to the Ontario and PEI Acts (which expressly do not apply to the Crown) and the Alberta Act (which does not expressly exempt the Crown), s.2 (1) of the New Brunswick Act specifically binds the Crown, albeit with significant protection. Notably, s.5(9) exempts the Crown from including financial statements otherwise required in disclosure documents, whereas paragraphs 7(5)(d) and (e) provide exemption from liability for misrepresentation with respect to any part of a disclosure document or statement of material change made by, or on behalf of, a public official where such person had no reasonable grounds to believe that there had been, inter alia, a misrepresentation.

Exemption of Cooperatives

Cooperatives are explicitly exempted under s.2(4)(c) from application of the New Brunswick Act. In Ontario, exemptions of this nature are found in the Regulations. This is perhaps an attempt by the New Brunswick legislature to recognize and alleviate concerns from provincial industries such as fisheries and farming, many of which operate on a cooperative basis under arrangements that might otherwise be regarded as franchising.

Disclosure Obligations

Typically, '5(1) of the New Bruns-wick Act requires a franchisor to provide a prospective franchisee with a disclosure document not less than 14 days before the earlier of the signing of any agreement relating to the franchise and the payment of any consideration relating to the franchise. However, while s.5(8) provides certain exemptions from the disclosure requirement, s.5(8)(b) tightens the exemption by limiting the disclosure exemption for the grant of a franchise to a person who has been an officer or director of the franchisor or of the franchisor's associate for at least six months immediately [emphasis added] before the grant and not simply at any time, or for discrete periods of time that simply aggregate to a six-month time period. Moreover, s.5(8)(e) also limits the disclosure exemption to entities where anticipated sales will not exceed 20% of the total sales of the business during the first year of operation of the franchise ' the so-called 'fractional franchise' exemption. This contrasts to the Ontario legislation where exemption thresholds are set by regulation and may be more easily changed than if enshrined in the Act, as is the case in New Brunswick.

Whereas s.5(8) tightens certain disclosure exemptions, s.5(11) specifies that for the purposes of disclosure documents and statements of material change, confidentiality agreements prohibiting the use of any information or material by a prospective franchisee or the designation of a location, site, or territory for a prospective franchisee do not constitute a franchise agreement [emphasis added]. However, and importantly, s.5(12) holds that an agreement that only contains the terms of s.5(11) is a franchise agreement [emphasis added] if the agreement:

(a) requires keeping confidential or prohibits the use of information

(i) that is or comes into the public domain without breaching the agreement

(ii) that is disclosed to any person without breaching the agreement

(iii) that is disclosed with the consent of all the parties to the agreement, or

(iv) prohibits the disclosure of information to an organization of franchisees, to other franchisees of the same franchise system or to a franchisee's professional advisors (s.5 (12) of the New Brunswick Act).

Dispute Resolution

Significantly, the New Brunswick Act is the first of the provincial statutes to provide for a comprehensive dispute resolution mechanism that enables any party to a franchise agreement to deliver notice of a dispute and to express in the notice the outcome desired by the notifying party. Further, the Act requires parties to attempt to settle disputes within 15 days after delivery of the notice. If the parties fail to resolve the dispute within 30 days after the notice, the Act provides that any of the parties may deliver a notice to mediate the dispute. This mediation notice cannot be delivered prior to the expiration of the initial 15-day period, and delivery of a notice of dispute or of a notice to mediate does not preclude a party to a franchise agreement from taking any other judicial measures. Additionally, the Act protects the confidential nature of the mediation process by precluding disclosure of information obtained in connection with mediation. The rules surrounding the mediation procedure will be set out in the Regulations.

To date, there has been no indication of when the Regulations will be introduced. However, it appears that in most, if not all, material respects the Regulations will largely mirror those of the other provinces.

Regulatory Developments in Manitoba

Not to be left behind, the Manitoba Law Reform Commission on May 31, 2007 published a consultation paper on franchise law (available online at www.gov.mb.ca/justice/mlrc/reports/2007-05franchise_legislation.pdf). In a backgrounder to the paper, the Commission notes that in January 2006 it received a suggestion from a Winnipeg lawyer to undertake a review of possible reforms to franchise law, and it decided to undertake the project. Public comment has been invited, following receipt of which the Commission plans to issue its final report to the Manitoba Minister of Justice and Attorney General for consideration. The deadline for public comment was July 31, 2007.

The consultation paper concludes with the following: 'Franchising is an important and growing component of the Canadian economy, and Manitoba is no exception. The franchise concept is appealing to many prospective business owners, offering a model for business success accompanied by ongoing support. However, franchising is not risk-free, and there is a trend in other jurisdictions toward regulating franchising, to require franchisors to provide significant disclosure to prospective franchisees, and in some cases, to regulate more extensively the ongoing relationship.'

Manitoba, along with the other as-yet unregulated provinces, bears watching.

Markus Cohen, Q.C. is a franchise attorney and franchise and trademark counsel to Aylesworth LLP in Toronto, Ontario, Canada. He can be contacted at 416-413-9822 or [email protected]. The author acknowledges with thanks the kind assistance of Martine Ordon, summer student, and David J. Gray, Esq., associate, both with Aylesworth LLP.

On June 26, 2007, the long-awaited New Brunswick Franchises Act (Bill 32) received Royal Assent in the legislature. This law is now on the books, but it is not yet in force. That will happen when the Act is 'proclaimed.' Proclamation is expected following the promulgation and finalization of disclosure regulations, and is commonly done in stages: An example is Ontario's law, proclaimed in force on July 1, 2000, with the exception of the disclosure provisions, which came into force on Jan. 1, 2001.

New Brunswick now joins Alberta (Franchises Act. R.S.A. 2000. c. F-23), Ontario (Arthur Wishart Act [Franchise Disclosure], 2000 c.3), and Prince Edward Island ('PEI') (Franchises Act, S.P.E.I. 2005, c.36) in the growing number of Canada's provinces that have chosen legislative measures as a means to protect franchisees, primarily in the presale process, but also with a few relationship provisions inserted along the way.

The New Brunswick Act substantially mirrors the model Uniform Franchises Act ('UFA') adopted by the Uniform Law Conference of Canada in 2004. New Brunswick therefore follows the path of PEI, which was the first province to model its statute on the UFA. That said, the New Brunswick version is usefully contrasted with Ontario's Arthur Wishart Act (Franchise Disclosure), 2000, whose appearance preceded the development of the UFA. Of any of the provinces, most readers will likely be most familiar with the Ontario Act, because Ontario is the most populous and ' perhaps ' commercially sophisticated of the Canadian provinces.

Significantly, the New Brunswick Act:

a) Expands the definition section to include 'franchisor's broker';

b) Binds the Crown ' the provincial government ' (with some exceptions);

c) Explicitly exempts cooperatives from the Act's application;

d) Tightens applicability of the franchisor's obligation to disclose; and

e) Provides a comprehensive dispute resolution mechanism.

Let us consider each of these elements in some detail.

Franchisor's Broker

The New Brunswick Act expands the definition section beyond 'franchisor' and 'franchisor's associate' to include the expression 'franchisor's broker' and defines such an entity as: 'a person, other than the franchisee, franchisor, or franchisor's associated who grants, markets, or otherwise offers to grant a franchise or who arranges for the grant of a franchise.' (s.1(1) of the New Brunswick Act)

This contrasts with the Ontario Act, which defines 'franchisor's broker' only in relation to according a right to damages in favor of a franchisee who suffers a loss by reason of a misrepresentation to which a 'franchisor's broker' is a party (s.7(1) of the Ontario Act). The inclusion of this definition in the general interpretation clauses with which the New Brunswick Act commences is significant in that it may be signaling legislative intent to broaden certain other areas of the regulations to include and apply to a franchisor's broker.

Binding the Crown

In contrast to the Ontario and PEI Acts (which expressly do not apply to the Crown) and the Alberta Act (which does not expressly exempt the Crown), s.2 (1) of the New Brunswick Act specifically binds the Crown, albeit with significant protection. Notably, s.5(9) exempts the Crown from including financial statements otherwise required in disclosure documents, whereas paragraphs 7(5)(d) and (e) provide exemption from liability for misrepresentation with respect to any part of a disclosure document or statement of material change made by, or on behalf of, a public official where such person had no reasonable grounds to believe that there had been, inter alia, a misrepresentation.

Exemption of Cooperatives

Cooperatives are explicitly exempted under s.2(4)(c) from application of the New Brunswick Act. In Ontario, exemptions of this nature are found in the Regulations. This is perhaps an attempt by the New Brunswick legislature to recognize and alleviate concerns from provincial industries such as fisheries and farming, many of which operate on a cooperative basis under arrangements that might otherwise be regarded as franchising.

Disclosure Obligations

Typically, '5(1) of the New Bruns-wick Act requires a franchisor to provide a prospective franchisee with a disclosure document not less than 14 days before the earlier of the signing of any agreement relating to the franchise and the payment of any consideration relating to the franchise. However, while s.5(8) provides certain exemptions from the disclosure requirement, s.5(8)(b) tightens the exemption by limiting the disclosure exemption for the grant of a franchise to a person who has been an officer or director of the franchisor or of the franchisor's associate for at least six months immediately [emphasis added] before the grant and not simply at any time, or for discrete periods of time that simply aggregate to a six-month time period. Moreover, s.5(8)(e) also limits the disclosure exemption to entities where anticipated sales will not exceed 20% of the total sales of the business during the first year of operation of the franchise ' the so-called 'fractional franchise' exemption. This contrasts to the Ontario legislation where exemption thresholds are set by regulation and may be more easily changed than if enshrined in the Act, as is the case in New Brunswick.

Whereas s.5(8) tightens certain disclosure exemptions, s.5(11) specifies that for the purposes of disclosure documents and statements of material change, confidentiality agreements prohibiting the use of any information or material by a prospective franchisee or the designation of a location, site, or territory for a prospective franchisee do not constitute a franchise agreement [emphasis added]. However, and importantly, s.5(12) holds that an agreement that only contains the terms of s.5(11) is a franchise agreement [emphasis added] if the agreement:

(a) requires keeping confidential or prohibits the use of information

(i) that is or comes into the public domain without breaching the agreement

(ii) that is disclosed to any person without breaching the agreement

(iii) that is disclosed with the consent of all the parties to the agreement, or

(iv) prohibits the disclosure of information to an organization of franchisees, to other franchisees of the same franchise system or to a franchisee's professional advisors (s.5 (12) of the New Brunswick Act).

Dispute Resolution

Significantly, the New Brunswick Act is the first of the provincial statutes to provide for a comprehensive dispute resolution mechanism that enables any party to a franchise agreement to deliver notice of a dispute and to express in the notice the outcome desired by the notifying party. Further, the Act requires parties to attempt to settle disputes within 15 days after delivery of the notice. If the parties fail to resolve the dispute within 30 days after the notice, the Act provides that any of the parties may deliver a notice to mediate the dispute. This mediation notice cannot be delivered prior to the expiration of the initial 15-day period, and delivery of a notice of dispute or of a notice to mediate does not preclude a party to a franchise agreement from taking any other judicial measures. Additionally, the Act protects the confidential nature of the mediation process by precluding disclosure of information obtained in connection with mediation. The rules surrounding the mediation procedure will be set out in the Regulations.

To date, there has been no indication of when the Regulations will be introduced. However, it appears that in most, if not all, material respects the Regulations will largely mirror those of the other provinces.

Regulatory Developments in Manitoba

Not to be left behind, the Manitoba Law Reform Commission on May 31, 2007 published a consultation paper on franchise law (available online at www.gov.mb.ca/justice/mlrc/reports/2007-05franchise_legislation.pdf). In a backgrounder to the paper, the Commission notes that in January 2006 it received a suggestion from a Winnipeg lawyer to undertake a review of possible reforms to franchise law, and it decided to undertake the project. Public comment has been invited, following receipt of which the Commission plans to issue its final report to the Manitoba Minister of Justice and Attorney General for consideration. The deadline for public comment was July 31, 2007.

The consultation paper concludes with the following: 'Franchising is an important and growing component of the Canadian economy, and Manitoba is no exception. The franchise concept is appealing to many prospective business owners, offering a model for business success accompanied by ongoing support. However, franchising is not risk-free, and there is a trend in other jurisdictions toward regulating franchising, to require franchisors to provide significant disclosure to prospective franchisees, and in some cases, to regulate more extensively the ongoing relationship.'

Manitoba, along with the other as-yet unregulated provinces, bears watching.

Markus Cohen, Q.C. is a franchise attorney and franchise and trademark counsel to Aylesworth LLP in Toronto, Ontario, Canada. He can be contacted at 416-413-9822 or [email protected]. The author acknowledges with thanks the kind assistance of Martine Ordon, summer student, and David J. Gray, Esq., associate, both with Aylesworth LLP.