The Law Blog

Potential and current buyers of franchises, or "franchisees", now hold a position of power when negotiating with franchise owners, or "franchisors", thanks to new laws that came into effect in British Columbia on February 1, 2017. The Franchises Act has strict requirements that franchisors must follow when offering their franchises for sale, with severe consequences for breaking the rules. Three key aspects of the new laws - the requirement to deliver a "franchise disclosure document", a duty of good faith and fair dealing for both parties, and the right of the franchisee to rescind an agreement or sue for misrepresentation - help to balance the negotiating power between franchisees and franchisors.

The Franchise Disclosure Document

The franchise disclosure document is a "one-stop shop" document that tells potential buyers all about the franchise that they're potentially investing thousands of dollars in, and its key players. Franchisors need to deliver the document at least 14 days before the buyer signs a franchise agreement or pays any money. The disclosure document includes a lot of important information, such as:

• information about the franchisor's key player, such as their business background, and whether any of them have declared bankruptcy or have been convicted of fraud-related charges;
• information about the franchise, including:
  • The cost to buy a franchise;
  • Territorial rights of the franchisee;
  • Any financing, training, or operating manuals that the franchisor offers;
  • Whether the franchisee must pay into an advertising or marketing fund;
  • The licenses, permits, registrations, etc. that a franchisee needs;
  • Whether the franchisee must personally assist in the operation of the franchise; and
  • The termination, renewal, and transfer clauses from the franchise agreement;
• financial statements of the franchisor;
• lists of current and former franchises, closed franchises, and other similar businesses owned by the franchisor; and
• operating cost estimates and earnings projections.

The goal of this information is to allow a potential buyer to make an informed decision before buying into a franchise.

Duty of Good Faith and Fair Dealing

It's not enough for the franchisor to deliver a franchise disclosure document. The bargaining and communication must follow the duty of good faith and fair dealing that the Franchises Act imposes. This duty ensures that both the franchisor and a potential buyer act in accordance with reasonable commercial standards. And yes: this duty applies to both parties.

Either party can sue for a breach of this duty. Of course, since this law is fresh in BC, there are no court cases dealing with such lawsuits, but it's only a matter of time. This duty and the right to sue for a breach go a long way in helping to balance the negotiating power between franchisors and buyers.

Rescission and Lawsuits: Deterring Dishonesty

Finally, the Franchises Act gives buyers two new tools to combat unfair bargaining: the right of rescission ("undoing" an agreement) and the right to sue for misrepresentation.

The Right of Rescission

If a franchisor either fails to give a disclosure document to a franchisee within a certain period, or gives a document that's materially deficient (i.e. missing required information - typos and minor technicalities don't count) then the franchisee can rescind (undo) a franchise agreement without penalty. The franchisee gets their money back, and they're released from the agreement.

Suing for Misrepresentation

Franchisees can also sue if they suffer a loss because of a misrepresentation or a material defect in a disclosure document. This right to sue exposes not only the franchisor, but its broker, associates, and anyone who signed the document. This powerful right helps to balance out the relative positions of power. Individuals who misrepresent the franchise put not only themselves and their business at risk, but anyone else involved in the marketing of the franchise.

Conclusion: Leveling the Playing Field

BC's new Franchises Act helps to protect potential buyers of franchises by giving buyers crucial information at an early stage. Franchisors still hold the ultimate position of power. But, these new laws bring some balance with strict disclosure requirements, the duty of good faith and fair dealing, and the right of a buyer to rescind an agreement or sue for misrepresentation. These changes help to level the playing field for buyers of franchises in what is often a "take it or leave it" industry dominated by franchisors.