Franchise disclosure law in British Columbia

British Columbia regulates franchise sales through the Franchises Act, S.B.C. 2015, c. 35. Its centre is one obligation in section 5 of the Franchises Act: before a prospective franchisee signs the franchise agreement or any other agreement relating to the franchise, or pays the franchisor or its associate any consideration relating to the franchise, the franchisor must have put a disclosure document in the franchisee’s hands at least 14 days earlier. A buyer taking over an existing franchised business in the province can check whether the Act’s definition of a grant reaches the purchase, whether an exemption applies, how the document must be built and delivered, and what remedies exist if it was not. The Canadian Franchise Association lists British Columbia among the provinces with franchise disclosure legislation. For the national picture, start with what disclosure a franchise resale buyer gets.

What counts as a grant under the Act

The Act defines a “grant” of a franchise to include the disposition of the franchise or of an interest in it, and an interest includes owning shares in the corporation that owns the franchise. Section 2 applies the Act to franchise agreements, and renewals and extensions, entered into on or after it came into force, where the business operated or to be operated by the franchisee is wholly or partly in British Columbia. It does not apply to, among other things, an employer–employee relationship, a partnership, certain cooperative memberships, or a relationship or arrangement arising out of an oral agreement where no writing evidences any material term or aspect of it.

How the disclosure document must be delivered

Section 5(1) of the Franchises Act requires the franchisee to have received the document at least 14 days before the earlier of signing the franchise agreement or any other agreement relating to the franchise, and paying the franchisor or its associate any consideration relating to it. It may be delivered personally, by email or by another prescribed method. Section 5(3) says it must be delivered as one complete document at one time. Manitoba’s Act differs: where a document is not delivered as one, its timing requirement is not met until the last document arrives. Section 5(7) requires the information in the document to be set out accurately, clearly and concisely. Under the Franchises Act, signing an agreement that only contains terms keeping information confidential or prohibiting its use, or designating a location, site or territory, is not treated as signing an agreement relating to the franchise for the 14-day rule, subject to the exceptions in section 5(12). Under section 5(13), a deposit that meets its conditions, including being refundable without any deductions, is not payment of consideration.

What the document must contain

Section 5(4) lists prescribed financial statements, copies of all proposed franchise agreements and other agreements relating to the franchise that the franchisee will sign, prescribed statements meant to help the franchisee make an informed investment decision, other prescribed information, and copies of other prescribed documents. Section 5(5) adds that the document must include all material facts, which the Act defines by reference to what would reasonably be expected to significantly affect the franchise’s value or price or the decision to acquire it. A written statement of any material change must also reach the franchisee before signing or paying. Under section 9, a defect in form, technical irregularity or error does not defeat compliance if it does not affect substance and the document substantially complies.

The resale exemption and who must prove it

Section 5(8)(a) takes a grant by a franchisee out of the disclosure duty if the seller is not the franchisor, its associate, or a director, officer or employee of either; the grant is for the seller’s own account; in the case of a master franchise, the entire franchise is granted; and the grant is not effected by or through the franchisor. Under section 5(9), a grant is not effected by or through the franchisor merely because it has a right, exercisable on reasonable grounds, to approve or disapprove, or because a fee is payable in an amount set out in the franchise agreement or not exceeding its reasonable actual costs of processing. Section 14 puts the burden of proving an exemption on the person claiming it.

Rescission, damages and who can be sued

Under section 6 of the Franchises Act, a franchisee may rescind within 60 days after receiving a disclosure document if the document or a statement of material change came late or its contents fell short of section 5, and within 2 years after entering the agreement if no document was ever provided. The franchisor or its associate, as the case may be, must then refund money received, other than money for inventory, supplies or equipment, buy back inventory, supplies and equipment bought under the franchise agreement at the purchase price paid, and compensate losses less those amounts, all within 60 days of the effective date, as section 6(5) of the Franchises Act requires. Section 7 gives a right to damages, for a loss caused by a misrepresentation or by a failure to comply with section 5, against the franchisor, the franchisor’s broker, its associate and every signer of the document, subject to the defences in section 8, and, subject to the actual-knowledge defence in section 8(1), conclusively deems reliance on a misrepresentation; Alberta’s Act says only “deemed”. Section 12 voids clauses that restrict the application of British Columbia law or restrict jurisdiction or venue to a forum outside the province, including arbitration clauses, for claims arising under a franchise agreement the Act applies to.

Questions that follow from the British Columbia text

A buyer deciding what to request can work from the Act’s own structure. Questions that follow include these.

• Whether the seller or the franchisor is relying on section 5(8)(a), and what shows the grant is not effected by or through the franchisor.
• If a document is being delivered, whether it arrives as one complete document at one time, as section 5(3) requires.
• Whether the document includes the proposed agreements the buyer will sign and a statement of any material change.
• Whether the purchase is of assets or of shares in the corporation holding the franchise, since the Act’s definition covers both.
• Whether any dispute clause sends claims or arbitration outside British Columbia, which section 12 treats as void for claims arising under a franchise agreement the Act applies to.