Epiq Systems, Inc.
Franchise

Franchise laws a mixed blessing

British Columbia has finally jumped on the franchise legislation bandwagon, but the jury is still out on whether that’s good news for the industry, says Toronto franchise lawyer Joseph Adler.

The B.C. Franchises Act came into force in February, making the province the sixth in Canada to enact a law regulating the field, following after Ontario, Alberta, Manitoba, New Brunswick and P.E.I.

Adler, a partner with Hoffer Adler LLP, jokingly referred to B.C. as the “Wild West” because of its status as one of the last large provinces without a legislated franchise disclosure regime. As a result, franchisors were able to sign agreements with franchisees without turning over any key information about the franchised business, including the franchisor's financial statements.

“The legislation is designed, in theory, to provide prospective franchisees with sufficient disclosure to make a fully informed decision about whether to purchase a franchise,” Adler tells AdvocateDaily.com. “Whether it actually achieves that goal is a whole other matter.”

Adler says disclosure requirements help deter unethical franchisors from entering into franchising.

“It weeds out some of those fly-by-nighters who aren’t serious or interested in compliance, and helps set the credentials for franchisors,” he says. “If they want to disregard their legal obligations, they have to do it in a more devious and deliberate way.”

In the event a court decides disclosure from a franchisor was materially deficient, the legislation gives franchisees a right of rescission that allows them to walk away from a deal within two years, with a potentially large damage award that compensates them not only for their initial franchise fees, but also any amounts subsequently investmented to establish the franchised business.

However, Adler says there is a danger the additional legislative protection could lull prospective franchisees into a false sense of security.

“It could become more of a crutch than anything, so that people think they are covered when, in fact, they’re not,” he says. “There’s nothing to prevent a franchisor from providing disclosure that looks comprehensive, but is, in fact, not.”

Although most provinces require disclosure documents to be “clear and concise,” Adler says the typical package still amounts to hundreds of pages, packed with complicated legal language.

“Even if you’re investing $1.5 million, for instance, there are not many people who can read a document of that length written in legalese and understand precisely what they are getting themselves into,” he says, noting that they will need to work closely and extensively with a franchise lawyer to guide them through all the contents.

For franchisors, the extra compliance costs that come with new legislation are substantial, Adler says. And if B.C. courts follow the example of their counterparts in Ontario and other franchise disclosure provinces, he says the price of failure could be even higher. Even apparently technical deficiencies, such as the accidental omission of a signature on a disclosure document, have been enough to trigger the right of rescission here, he adds.  

Adler says the similarity between the B.C. legislation and that in other provinces means franchise lawyers have had to make only minor adjustments to their precedents.  

“The B.C. law is maybe 95 per cent consistent with the other provinces. But it’s the nuances between each jurisdiction that are critical from our perspective. The legislation is also location-specific and evergreen, which means you need to update the disclosure document before each and every disclosure,” Adler says. “It’s going to be interesting to see to what extent the courts in B.C. will look to other provinces, such as Ontario and Alberta, for guidance in its interpretations.”

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