New Franchises Act: levelling the playing field?

The new Franchises Act enacted on November 1, 1995 (the new Act) has significantly changed the atmosphere of franchising in Alberta. The focus of the new Act is quite different from the previous Franchises Act (the old Act).

Some of the major changes are as follows:

* the Alberta Securities Commission (ASC) no longer has jurisdiction over franchising matters;

* franchisors are no longer required to meet registration and filing requirements contained within the Old Act; and

* the responsibility for enforcing noncompliance now lies solely with the parties involved in the franchise relationship.

This article reviews some of the rights and remedies available to franchisees under the new Act and certain other amendments which will have an impact on franchisees carrying on business in Alberta.

Purpose of the New Act

Section 2 of the New Act provides that its three main purposes are

(a) to assist prospective franchisees in making informed investment decisions by requiring the timely disclosure of necessary information,

(b) to provide civil remedies to deal with breaches of this Act, and

(c) to provide a means by which franchisors and franchisees will be able to govern themselves and promote fair dealing among themselves.

Any franchisee or prospective franchisee should bear these purposes in mind when assessing their rights and obligations in relation to franchisors.

Disclosure

The first purpose, to ensure proper disclosure, is addressed by imposing certain obligations on the franchisors. The inclusion of these obligations has the effect of continuing the old Act's philosophy of assisting franchisees by forcing disclosure of information. In contrast with the old Act, the new Act does not require franchisors to prepare file prospectuses and other registration documents with the ASC. Instead, the new Act requires franchisors to provide certain prescribed information directly to franchisees.

The disclosure requirements of the new Act create a more flexible system. Franchisors are no longer required to prepare the disclosure document in accordance with a strict format. Instead, franchisors must only ensure all of the information required by the new Act is contained in the disclosure document.

From a franchisee's perspective, this may create some difficulty as a franchisor's compliance with the new Act will not be easy to ascertain. Franchisees should, as a result, carefully review the provisions of the new Act and its regulations to ensure that they have received all of the information to which they are entitled. A through review is also helpful as it will assist the franchisee in identifying the issues that are generally a concern to franchisees and which may otherwise be overlooked. In this way, the Act can be used as a form of checklist.

Rights and Remedies

The second purpose, to allow for adequate remedies, is addressed in various sections of the new Act. If the Franchisor fails to meet its obligations or misrepresents the information that it does provide, the new Act provides specific remedies through which the franchisee may seek recourse.

Section 9 grants franchisees a right to sue for damages if they suffer a loss because of a misrepresentation of information contained in the disclosure document. The franchisee may sue the franchisor and each person who has signed the disclosure document. The new Act also contains two key provisions to assist franchisees bringing an action pursuant to Section 9. It provides,

..a franchisee who purchases a franchise to which the disclosure document relates is deemed to have relied on the misrepresentation.

Since reliance is "deemed", the franchisee does not have to prove its reliance on the misrepresentation. This, in turn, minimizes the evidence which a franchisee must present to establish its claim against the franchisor or the other signatories to the disclosure document.

The new Act also provides that where liability arises from a misrepresentation, the liability is joint and several. Therefore, if a franchisee obtains a judgment, it may pursue all or any of the defendants against whom it has obtained a judgment for the full amount of the judgment. This provision is useful as it assists the franchisee in executing any judgment it obtains under the new Act.

Section 10 contains defences upon which both the franchisor and other parties that sign the disclosure document may rely. These defences may cause the franchisee's action to fail and it is important for franchisees to be aware of them.

Despite the availability of the remedies, franchisees must realize that the ability to sue franchisors is only a right of action and does not guarantee recovery from the franchisor. The onus of bringing the action rests on the franchisee. This means the franchisee will likely have to incur the time and expense associated with a law suit before it will receive any compensation.

Another remedy available to franchisees under the new Act is set out in section 13. This section deals with the rights of franchisees that arise should a franchisor fail to provide it with the disclosure document within prescribed time limits. Franchisees should review the new Act and its regulations to determine whether the franchisor has met the applicable time limits.

If the franchisor has failed to comply with section 13, the franchisee has the right to cancel the franchise agreement by providing notice of cancellation to the franchisor within the earlier of 60 days after receiving the disclosure document or 2 years after the franchisee is granted the franchise. The effect of providing this notice is to cancel the franchise agreement or to withdraw the offer to purchase, whichever is applicable. Section 13 also requires the franchisor to compensate the franchisee within the time prescribed in the new Act for "any net losses that the franchisee has incurred in acquiring, setting up and operating the franchise business." Unfortunately, the new Act does not impose any specific penalty on the franchisor if such compensation is not paid. As a result, the franchisee would once again be forced to sue the franchisor to obtain this compensation.

Fair Dealing

The third purpose set out in section 2(c) is achieved in part by section 7 of the new Act. The one point which must be stressed is that this section imposes an obligation of fair dealing on all parties involved in a franchise. This duty relates to both the performance of each parties' obligations, and the enforcement of their rights.

Summary

The new Act's provisions relating to disclosure of information, remedies, and duty to deal fairly, appear, in the first instance, to satisfy its purposes. Whether these purposes have truly been achieved, however, will depend on the success franchisees have in asserting their rights and remedies under the new Act.

In any event, it has simplified the requirements both franchisees and franchisors must comply with. In so doing, the Act will hopefully stimulate the growth of franchises in Alberta.