Let’s Be Honest – The Franchisor’s Duty to Disclose

 Let’s Be Honest – The Franchisor’s Duty to Disclose

Alex J. Chang, Associate
Phone:  604-685-1255
Email:  ajc@lmlaw.ca

 

 

The new BC Franchises Act that came into effect on February 1, 2017 imposes duties of disclosure on franchisors to prospective franchisees.  This requirement is the central protection for franchisees under the new Franchises Act.

A franchisor must provide a disclosure document to the franchisee at least 14 days prior to the franchisee making a payment in relation to the franchise or signing the franchise agreement.  The Franchises Act and Franchises Regulations set out the requirements for this disclosure which includes:

  • A prescribed warning on the risk of entering a franchise agreement;
  • Financial statements;
  • A description of the franchisor’s advertising fund including the amount of funds, how much the franchisee must contribute to the fund, how the fund is administered, and whether reports on the use of the advertising fund will be made available;
  • What training is offered and a statement of who is responsible for the cost of training;
  • A statement of whether the franchisee will have to operate according to manuals and where those manuals are available;
  • A description of the franchisee’s right to a territory and the manner in which those rights are determined;
  • A description of any rights reserved by the franchisor to market or distribute goods or services that are the same as those to be sold by the franchisee;
  • A list of franchisees in Canada;
  • A list of businesses of the same type operated by the franchisor in Canada;
  • A list of former franchisees that have been terminated, cancelled, reacquired or not renewed by the franchisor within the last fiscal year and the total number of former franchises that were terminated, cancelled, reacquired or not renewed over the previous three years;
  • A description of any guarantees and security interests required of the franchisee;
  • A description of the franchisor’s rights to trademarks, trade names, logo or advertising or other commercial symbol associated with the franchise;
  • A list of every licence, registration, authorization or other permission the franchisee will be required to obtain under federal or provincial laws to operate the franchise;
  • Requirements for alternative dispute resolution procedures; and
  • All additional material facts relevant to the franchisee’s decision to purchase the franchise.

The above list is not exhaustive. Franchisees should review the disclosure documents with care and seek professional advice before entering into the franchise agreement.

Franchisees whose franchises fail to meet their expectations should consider if the disclosure documents were misleading or incomplete. The Franchises Act prescribes remedies for when the disclosure requirements are not met:

  • If a franchisor fails to provide a disclosure document at least 14 days before entering into a franchise agreement with a prospective franchisee, or the contents of the disclosure document do not meet the requirements, the franchisee may rescind the franchise agreement within 60 days after receiving the disclosure document.

 

  • If a franchisor fails to provide a disclosure document entirely, the franchisee has the right to rescind the franchise agreement within two years after the date the franchise agreement was signed.

 

  • If a franchisee suffers a loss due to a misrepresentation in a disclosure document or as a result of a franchisor’s failure to comply with the disclosure requirements, the franchisee may claim damages against the franchisor, the franchisor’s broker, the franchisor’s associate and the directors of the franchisor that signed the disclosure document. The new Act makes a damages claim for misrepresentation easier by providing that the franchisees are conclusively deemed to have relied on the information set out in the disclosure document.

These rights to claim damages or rescind the agreement entirely are significant and should incentivise franchisors to provide all material information a franchisee should need to make a decision regarding whether to enter into a franchise agreement. If they do not a franchisee may be entitled to damages or rescission of the franchise agreement.

Do you have questions about the new Franchises Act? Please contact Alex Chang

 

THIS ARTICLE IS NOT LEGAL ADVICE:  This article provides general information and should not be relied on without independent legal advice.