Here’s what you need to know about British Columbia’s new franchise law

On February 1, 2017, the Franchises Act S.B.C. 2015, c. 35 (the “Act”) came into force in British Columbia.

What this means for franchising in British Columbia:

The most important implication for franchisors with operations in BC will be the franchise disclosure requirements stipulated under section 5 of the Act, and as prescribed by the Franchises Regulation, B.C. Reg. 238/2016 (the “Regulation”). Much like the existing 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 (Franchise Disclosure), 2000, S.O. 2000, c. 3 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 non-refundable 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.

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, given the similarities between the Act and franchise legislation in the other Canadian disclosure jurisdictions.

Unfortunately, those franchisors who are currently operating solely in BC or in other jurisdictions that 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:

  1. 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
  2. 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 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:

  1. refund to a franchisee any money received from or on behalf of the franchisee, other than money for inventory, supplies or equipment;
  2. 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;
  3. 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
  4. 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).

Depending upon the franchise system and the operating costs, a rescission claim can easily come to hundreds of thousands of dollars. To that end, franchisors are well advised to seek competent legal advice to assist them in fulfilling their disclosure obligations.

While there has been no caselaw involving rescission claims at this point in BC, one benefit of the Act (as compared to other disclosure jurisdictions in Canada) is that BC is a substantial compliance jurisdiction. Section 9 of the Act provides that a disclosure document or a statement of material change will comply with section 5 of the Act despite the presence of a defect in form, a technical irregularity or an error if:

  1. the defect in form, the technical irregularity or the error does not affect the substance of the disclosure document or the statement of material change; and
  2. the disclosure document or the statement of material change is substantially in compliance with the Act.

While section 9 will likely protect franchisors from predatory practices by lawyers acting for franchisees seeking rescission in bad faith, it remains to be seen how our courts will interpret section 9, especially in light of the caselaw in other provinces, e.g. Ontario, where relatively minor technical defects in disclosure have led to successful rescission actions by franchisees.

Overall, the adoption of the Act in BC is a positive step and should have the effect of encouraging further growth and investment in the current franchising environment in BC.

This article was originally published on Fox Rothschild LLP Attorneys at Law’s Franchise Law Update