Is British Columbia Next in Line? Canada's Third Most Populous Province Considers Franchise Legislation

The BCLI clearly states its recommendation that British Columbia adopt franchise legislation. It observes that the need arises from the popularity of franchising as a business model and its use by a wide variety of vendors in both the business and retail sector. Expressing similar concerns as the CBA, the BCLI notes that a franchisee is often required to make significant investment and commitment in the franchise business, but it is typically the franchisor who has the disproportionate balance of power, information that the franchisee does not have access to, and can impose on the franchisee its non-negotiable standard-form franchise agreements.

The Consultation Paper examines the existing franchise legislation in Canada, the Uniform Law Conference's Uniform Franchises Act, franchise legislation from the United States and Australia, and the UNIDROIT model of franchise legislation. The paper then sets out specific recommendations for what should be included in BC's franchise statute.

Specific Recommendations

The first and most significant concern for franchisors is whether the legislation in BC will follow the Uniform Franchises Act. This template legislation was developed by the Uniform Law Conference of Canada (“ULCC”) in 2005 to help encourage uniform franchise legislation across Canada. The ULCC's franchise law project was started at a time when only Alberta and Ontario had legislation in force to directly regulate franchising. The template legislation is based in part on Ontario's and Alberta's franchise legislation and includes key provisions dealing with disclosure, the duty of fair dealing, rescission rights, damages for misrepresentation and dispute resolution. Prince Edward Island, New Brunswick and Manitoba enacted franchise legislation, substantially modeled on the uniform act, in 2005, 2007 and 2012, respectively.

What will doubtlessly come as some relief for franchisors is the BCLI's recommendation that BC's legislation follow the Uniform Franchises Act. The BCLI recognizes that imposing requirements that are unusual, unique or inconsistent with those of other provinces will create barriers to entry in British Columbia. Harmonized legislation “minimizes the regulatory burden for franchisors,” the Consultation Paper states.

However, none of the provinces that adopted the Uniform Franchises Act to date adopted it wholesale; each province has made some changes. Manitoba's recently enacted franchise legislation is the biggest outlier, and its provisions deviate from the model act in certain respects, mainly in relation to the delivery of a disclosure document. Accordingly, it is perhaps unsurprising that the Consultation Paper also provides for some deviations from the template legislation. Highlights include:

• No mandatory mediation provision. The BCLI takes the position that mandatory mediation may actually contribute to the power imbalance between franchisors and franchisees due to potential delay or obstruction of dispute resolution and exertion of economic pressure on a less well-positioned party. In addition, the BCLI takes into consideration the fact that mandatory mediation procedures generally reach success when both parties wish to continue their commercial relationship. Should this be the case for a franchisor and a franchisee, the parties would be motivated to undertake voluntary mediation, regardless of any statutory obligation to do so. Conversely, in the event that the continuing relationship is not a mutual concern, mandatory mediation would merely create an extra financial burden, as well as an extra step on the way to court for the parties.
• A “substantially complete” standard for disclosure documents. The BCLI recommends that disclosure documents be considered valid if they are in substantial compliance with legislation and regulations, thereby ensuring that a minor defect in the documents does not lead to major non-compliance consequences such as rescission of the franchise agreement.
• Additional disclosures. The BCLI suggests some additional mandatory disclosure requirements, including: 1) that a franchisor be required to state whether an exclusive territory will be granted under the franchise being offered to the franchisee, and 2) if the franchisor reserves the right to sell goods and services directly in competition with its franchisees.
• Electronic delivery. The BCLI recommends that delivery of disclosure documents by way of electronic means, such as DVD or e-mail, be expressly permitted.
• Consolidating statutory and non-statutory claims. The BCLI notes that the language in the Uniform Franchises Act to specify the application of local law related only to claims “enforceable under the Act.” The BCLI theorizes that this could result in the division of a single action into one action for claims enforceable under the legislation being brought in the franchisee's jurisdiction, and another action for all other claims ( i.e., claims not enforceable under the Act) being brought in the franchisor's preferred jurisdiction. Accordingly, the BCLI recommends that the jurisdictional provision should be broader than claims “enforceable under the Act,” and should extend to encompass any claim “arising from a franchise agreement.” Accordingly, this means that the franchisee should be able to deal with all claims ' statutory or not ' in British Columbia.
• Arbitration and jurisdiction. The BCLI also notes the lack of clarity with respect to whether the jurisdiction clause should apply to arbitration proceedings and suggests that the legislation should make it clear that it does.
• Misrepresentation of financial projections. The BCLI takes the position that a franchisee's statutory right to sue for misrepresentation should extend to misleading statements regarding financial projections supplied by the franchisor to entice a franchisee to sign a franchise agreement. However, the BCLI also suggests an exclusion from liability if the projections contain cautionary language that states that the forward-looking projections are based on assumptions about the future and that actual results may vary. As a practical matter, given the ease with which a franchisor could comply with this exclusion, it seems that this may not result in much real protection for franchisees. Further, the BCLI does not comment on why the existing right of action for misrepresentation is inadequate to deal with this issue.
• Wrap-around disclosure requirements. The Consultation Paper recommends that the use of “wrap-around” documents be permissible in British Columbia; that is, allowing disclosure documents prepared in one jurisdiction to comply with that of other jurisdictions as long as they include additional information needed to comply with their own legislation and regulations.
• Waivers and releases. The BCLI makes some recommendations to clarify certain confusing issues that have arisen in other jurisdictions, referring particularly to the case law about the non-waiver sections of Ontario's franchise legislation, and when a franchisor can rely on a release by a franchisee. The BCLI recommends that the franchise legislation should have an express provision stating that the statutory bar to waiving or releasing a right under the legislation does not prevent a waiver or release that would take place as part of a post-dispute settlement.
• Rescission and damages claims. The BCLI also states that the legislation should clearly provide that the exercise of the statutory right of rescission should not bar the franchisee from also pursuing a statutory right of damages, as long as double recovery does not occur.

The Path from Here

The BCLI is soliciting comments on the Consultation Paper through Sept. 30, 2013. It will then produce a report with final recommendations and draft legislation. Interested stakeholders, including franchisors, are encouraged to participate in this broad consultation.

If British Columbia becomes the sixth province to enact franchise legislation, the scale will have finally tipped so that the majority of Canadian provinces directly regulate franchising. This may be a signal to the remaining provinces that there is a legislation gap, and it is the appropriate time to consider harmonization of franchise laws across all provinces.

Dominic Mochrie is a partner in the Toronto office of Osler, Hoskin & Harcourt LLP. He can be contacted at [email protected].

'

'

Proposed franchise legislation featured prominently in “An Agenda for Justice,” a report recently released by the British Columbia Branch of the Canadian Bar Association (“CBA”). The document, released on Feb. 5, 2013, in advance of the upcoming provincial election, presents a series of judicial and legislative reforms and recommendations aimed at improving access to justice for all British Columbians.

This was not the first such suggestion. In the fall of 2012, the British Columbia Law Institute (“BCLI”), a law reform research organization, announced the commencement of a project to examine whether there is a need for franchise legislation in British Columbia and, if so, what provisions any such legislation should have in order to provide legal protection for franchisees operating in British Columbia. The project was finalized, and the Consultation Paper on a Franchise Act for British Columbia (the “Consultation Paper”) was made public on April 2, 2013.

Overview of the Consultation Paper

The BCLI clearly states its recommendation that British Columbia adopt franchise legislation. It observes that the need arises from the popularity of franchising as a business model and its use by a wide variety of vendors in both the business and retail sector. Expressing similar concerns as the CBA, the BCLI notes that a franchisee is often required to make significant investment and commitment in the franchise business, but it is typically the franchisor who has the disproportionate balance of power, information that the franchisee does not have access to, and can impose on the franchisee its non-negotiable standard-form franchise agreements.

The Consultation Paper examines the existing franchise legislation in Canada, the Uniform Law Conference's Uniform Franchises Act, franchise legislation from the United States and Australia, and the UNIDROIT model of franchise legislation. The paper then sets out specific recommendations for what should be included in BC's franchise statute.

Specific Recommendations

The first and most significant concern for franchisors is whether the legislation in BC will follow the Uniform Franchises Act. This template legislation was developed by the Uniform Law Conference of Canada (“ULCC”) in 2005 to help encourage uniform franchise legislation across Canada. The ULCC's franchise law project was started at a time when only Alberta and Ontario had legislation in force to directly regulate franchising. The template legislation is based in part on Ontario's and Alberta's franchise legislation and includes key provisions dealing with disclosure, the duty of fair dealing, rescission rights, damages for misrepresentation and dispute resolution. Prince Edward Island, New Brunswick and Manitoba enacted franchise legislation, substantially modeled on the uniform act, in 2005, 2007 and 2012, respectively.

What will doubtlessly come as some relief for franchisors is the BCLI's recommendation that BC's legislation follow the Uniform Franchises Act. The BCLI recognizes that imposing requirements that are unusual, unique or inconsistent with those of other provinces will create barriers to entry in British Columbia. Harmonized legislation “minimizes the regulatory burden for franchisors,” the Consultation Paper states.

However, none of the provinces that adopted the Uniform Franchises Act to date adopted it wholesale; each province has made some changes. Manitoba's recently enacted franchise legislation is the biggest outlier, and its provisions deviate from the model act in certain respects, mainly in relation to the delivery of a disclosure document. Accordingly, it is perhaps unsurprising that the Consultation Paper also provides for some deviations from the template legislation. Highlights include:

• No mandatory mediation provision. The BCLI takes the position that mandatory mediation may actually contribute to the power imbalance between franchisors and franchisees due to potential delay or obstruction of dispute resolution and exertion of economic pressure on a less well-positioned party. In addition, the BCLI takes into consideration the fact that mandatory mediation procedures generally reach success when both parties wish to continue their commercial relationship. Should this be the case for a franchisor and a franchisee, the parties would be motivated to undertake voluntary mediation, regardless of any statutory obligation to do so. Conversely, in the event that the continuing relationship is not a mutual concern, mandatory mediation would merely create an extra financial burden, as well as an extra step on the way to court for the parties.
• A “substantially complete” standard for disclosure documents. The BCLI recommends that disclosure documents be considered valid if they are in substantial compliance with legislation and regulations, thereby ensuring that a minor defect in the documents does not lead to major non-compliance consequences such as rescission of the franchise agreement.
• Additional disclosures. The BCLI suggests some additional mandatory disclosure requirements, including: 1) that a franchisor be required to state whether an exclusive territory will be granted under the franchise being offered to the franchisee, and 2) if the franchisor reserves the right to sell goods and services directly in competition with its franchisees.
• Electronic delivery. The BCLI recommends that delivery of disclosure documents by way of electronic means, such as DVD or e-mail, be expressly permitted.
• Consolidating statutory and non-statutory claims. The BCLI notes that the language in the Uniform Franchises Act to specify the application of local law related only to claims “enforceable under the Act.” The BCLI theorizes that this could result in the division of a single action into one action for claims enforceable under the legislation being brought in the franchisee's jurisdiction, and another action for all other claims ( i.e., claims not enforceable under the Act) being brought in the franchisor's preferred jurisdiction. Accordingly, the BCLI recommends that the jurisdictional provision should be broader than claims “enforceable under the Act,” and should extend to encompass any claim “arising from a franchise agreement.” Accordingly, this means that the franchisee should be able to deal with all claims ' statutory or not ' in British Columbia.
• Arbitration and jurisdiction. The BCLI also notes the lack of clarity with respect to whether the jurisdiction clause should apply to arbitration proceedings and suggests that the legislation should make it clear that it does.
• Misrepresentation of financial projections. The BCLI takes the position that a franchisee's statutory right to sue for misrepresentation should extend to misleading statements regarding financial projections supplied by the franchisor to entice a franchisee to sign a franchise agreement. However, the BCLI also suggests an exclusion from liability if the projections contain cautionary language that states that the forward-looking projections are based on assumptions about the future and that actual results may vary. As a practical matter, given the ease with which a franchisor could comply with this exclusion, it seems that this may not result in much real protection for franchisees. Further, the BCLI does not comment on why the existing right of action for misrepresentation is inadequate to deal with this issue.
• Wrap-around disclosure requirements. The Consultation Paper recommends that the use of “wrap-around” documents be permissible in British Columbia; that is, allowing disclosure documents prepared in one jurisdiction to comply with that of other jurisdictions as long as they include additional information needed to comply with their own legislation and regulations.
• Waivers and releases. The BCLI makes some recommendations to clarify certain confusing issues that have arisen in other jurisdictions, referring particularly to the case law about the non-waiver sections of Ontario's franchise legislation, and when a franchisor can rely on a release by a franchisee. The BCLI recommends that the franchise legislation should have an express provision stating that the statutory bar to waiving or releasing a right under the legislation does not prevent a waiver or release that would take place as part of a post-dispute settlement.
• Rescission and damages claims. The BCLI also states that the legislation should clearly provide that the exercise of the statutory right of rescission should not bar the franchisee from also pursuing a statutory right of damages, as long as double recovery does not occur.

The Path from Here

The BCLI is soliciting comments on the Consultation Paper through Sept. 30, 2013. It will then produce a report with final recommendations and draft legislation. Interested stakeholders, including franchisors, are encouraged to participate in this broad consultation.

If British Columbia becomes the sixth province to enact franchise legislation, the scale will have finally tipped so that the majority of Canadian provinces directly regulate franchising. This may be a signal to the remaining provinces that there is a legislation gap, and it is the appropriate time to consider harmonization of franchise laws across all provinces.

Dominic Mochrie is a partner in the Toronto office of Osler, Hoskin & Harcourt LLP. He can be contacted at [email protected].

'

'