Commercial Litigation and Dispute Resolution Blog

On Tuesday October 20, 2015, Bill 38, the Franchises Act, successfully passed third reading. The Government of British Columbia first introduced the bill on October 6, 2015, and it is now in its final stage of enactment. The Franchises Act will come into force upon Royal Assent which is expected to be granted towards the end of 2016 or early in 2017.

Once in force, the legislation would make British Columbia the sixth province to adopt a regime for the regulation of franchises. The framework used for drafting the Franchises Act is based on the model franchise act recommended by the Uniform Law Conference and the 2013 report of the British Columbia Law Institute.

The Government of British Columbia cited the concern that franchisees are often disadvantaged with respect to the relational balance of power between franchisors and franchisees as being the motivation for enacting the Franchises Act. This imbalance can occur as a result of the fact that while franchisees make significant capital investment into a franchise, they often have a lack of knowledge, experience and access to expert advice, and are reliant on the information provided by the franchisors.

To alleviate this concern, the Franchises Act seeks to regulate the sales of franchises in British Columbia by, among other things, establishing requirements for pre-sale information disclosure and providing franchisees with added legal rights and protections relating to dispute resolution.

Specifically, the Franchises Act will require franchisors to disclose and produce, prior to the parties entering into a franchise agreement, a franchise disclosure document (the “FDD”). The FDD will often include items such as a description of the business opportunity, a list of all fees and costs a franchisee must pay to operate and acquire the business, and details of any litigation involving the franchisor or its associates.

In addition to these disclosure requirements, the Franchises Act will further shift the balance of power by providing franchisees with legal remedies in the event of a material misrepresentation or failure to comply with the outlined FDD requirements by the franchisor. The remedies available to franchisees will go as far as potentially allowing for rescission of the franchise agreement depending on the specific circumstances.

Furthermore, franchisees will benefit from the jurisdictional provisions introduced in the Franchises Act that prohibit any attempts to restrict the application of the law of British Columbia to a franchise agreement, or to mandate a venue outside British Columbia for dispute resolution. It has been observed that that this could save franchisees from potentially exposing themselves to the significant costs associated with litigation in the home jurisdiction of a franchisor as it is often the case that franchisors in the relationship are based outside of British Columbia.

While it may seem that the Franchises Act introduces changes that heavily lean in the favour of franchisees, the franchisors’ interests have not been completely overlooked by the legislators. The Franchises Act will benefit franchisors and facilitate compliance with the added disclosure requirements by incorporating a substantial compliance component to the regime. Franchisors will be able to rely on this substantial compliance provision when preparing the FDD. Such a measure could help franchisors avoid the types of litigation often seen in Ontario where franchisees sue based on minor incompliances with disclosure requirements in the overriding statute.

Assuming Royal Assent is granted to the Bill, future prospective franchisees in British Columbia will be entitled to access to the levels of information and the legal protections currently afforded to franchisees in most of Canada. On the other hand, franchisors will be given some leeway towards complying with the new disclosure requirements under the substantial compliance provisions.

Critics of anticipated changes raise the concern that the added regulatory burden introduced in the Franchises Act could inhibit business in British Columbia. Though franchisors accustomed to conducting business in the provinces where regulatory regimes over franchises are in place will likely be unaffected by the new regulatory scheme, franchisors that deal exclusively within British Columbia will be forced to adapt to these changes and could face added costs in doing so. Whether or not the critics are correct that these new burdens will encumber franchisors in British Columbia to such a point that business is negatively affected remains to be seen. However, if the five previously mentioned provinces’ willingness to adopt regulatory regimes is any indication, this should not be the case.

Wish special thanks to articling student Andrew Ross for his assistance with the preparation of this article.