On Tuesday, October 20th, BC Bill 38, Franchises Act (the "Act"), was read a third time and passed. On Tuesday, November 17th, Bill 38 was given Royal Assent. This means that British Columbia will become the sixth province in Canada to have franchise legislation.
What this means for franchising in BC
The most important implication for franchisors with operations in British Columbia will be the franchise disclosure requirements stipulated under Section 5 of the Act. Much like the legislation in Ontario and Alberta, the Act requires that a franchisor provide a prospective franchisee with a disclosure document at least 14 days prior to the earlier of:
(a) the signing, by the prospective franchisee, of the franchise agreement or any other agreement relating to the franchise; and
(b) the payment, by or on behalf of the prospective franchisee to the franchisor or the franchisor's associate, of any consideration relating to the franchise.
This 14-day "cooling off" period is identical to the requirements in Ontario under the Arthur Wishart Act and ensures that franchisees have adequate time to consider their investment in the franchise system with their legal and tax advisors without being pressured by overzealous franchisors.
An immediate benefit to franchisees in BC is that the cooling off period prevents franchisors from collecting any fees or deposits or any other form of consideration relating to the franchise. Currently, deposits and other monetary expressions of interest are common in BC, which places additional pressure on a prospective franchisee to sign the franchise agreement. The legislation will stop this practice and provide prospective franchisees in BC with some breathing room during their deliberations.
The Act as passed does not currently contain regulations setting forth the prescribed form of certain components of the disclosure document. However, the list of mandatory contents under Section 5, subsections (4) and (5), of the Act would appear to mirror the two other largest provinces in Canada with franchise legislation, i.e. Ontario and Alberta, and as such, any regulation to follow is expected to similarly follow suit.
Notwithstanding the additional costs for franchisors which will be incurred by virtue of the preparation of disclosure documents for BC franchisees, for those franchisors who are already operating in the other disclosure jurisdictions, "wrap around" language in the current disclosure document should be relatively easy to implement.
Unfortunately, those franchisors who are currently operating solely in BC or other jurisdictions which do not require disclosure, will have to incur the not insignificant cost of preparing a disclosure document which meets the requirements of the Act.
For those franchisors not familiar with the perils of ignoring the statutory disclosure requirements, the Act provides rescission rights to franchisees where franchisors have not complied with the requirements of Section 5 of the Act. The periods for rescission vary depending upon the nature of the non-compliance, but in general:
(a) a franchisee has a right of rescission for a period of 60 days from receipt of a disclosure document if the franchisor has failed to disclose a material fact in such disclosure document; and
(b) a franchisee has a right of rescission for a period of 2 years from the date of the franchise agreement if the disclosure document was never provided to such franchisee.
If you are asking yourself: "what's the big deal?", the big deal is that if a franchisee is entitled to rescind the franchise agreement, then the franchisor or the franchisor's associate, as the case may be, must, within 60 days after the effective date of the rescission:
(i) refund to a franchisee any money received from or on behalf of the franchisee, other than money for inventory, supplies or equipment;
(ii) purchase from the franchisee any inventory that the franchisee had purchased under the franchise agreement and remaining on the effective date of rescission, at a price equal to the purchase price paid by the franchisee;
(iii) purchase from the franchisee any supplies and equipment that the franchisee had purchased under the franchise agreement at a price equal to the purchase price paid by the franchisee; and
(iv) compensate the franchisee for any losses that the franchisee incurred in acquiring, setting up and operating the franchise, less the amounts set out in paragraphs (a) to (c).
If you are in the unfortunate scenario of having a franchisee rescind their franchise agreement with you 2 years after the signature date, you can imagine how big a bill the rescission can incur.
Fortunately, the Franchise Group at Alexander Holburn Beaudin + Lang LLP has years of experience drafting, negotiating and litigating disclosure documents and navigating the nuances of the legislation. The adoption of the Act in BC overall is a positive step and should have the effect of encouraging further growth and investment in the current franchising environment in BC.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.