Franchise Legislation

• Author: Frank Zaid
• Profession: Senior Partner Osler, Hoskin & Harcourt LLP
• Pages: 24-74

CHAPTER 2

FRANCHISE

LEGISLATION1

A.HISTORY OF FRANCHISE LEGISLATION IN

CANADA

1) Introduction

Franchise legislation is a matter delegated to the Canadian provinces,

rather than to the federal government, under Canada’s constitution.2

Accordingly, apart from those areas of Canadian federal legislation that

have direct impact on franchising like intellectual property and com-

petition legislation, franchise registration, disclosure, or relationship

legislation is within the exclusive mandate of the provinces of Canada.

Historically, a number of provinces in C anada have either expressed

an interest in enacting franchise legislation or in fact have done so, but

such attempts have been politically driven, sporadic, and inconsistent.

Some provinces have enacted st and-alone franchise or dealer legislation,

or have include d franchisin g as part of overal l securitie s legislation. Fur-

ther, certain legislation originally enacted was subsequently repealed,

and generally most private members’ bills introduced in the provincial

legislatures have not proceeded beyond initial consideration.

1Adapted from Fran k Zaid, Franchise Disclosure Issues in Canada in Peter Snell

and Larr y Weinberg, eds., Fundamentals of Franchising® — Canada (Ch ica go:

American B ar Association, 200 4) at 159.

2Constitution Act,1867 (U.K.), 30 and 31 Vict., c. 3, reprinted in R.S.C. 1985, App.

II, No. 5, s. 91.

24

Franchise Legislation25

2) Alberta

Alberta was the f‌irst province in Canada to enact legislation deal-

ing directly with franchising. The Franchises Act3 was modelled after

counterpart legislation in California, United States. The Act was a dis-

closure-registration statute rather than a regulatory-relationship stat-

ute. It was administered by t he Alberta Securities Commi ssion and was

designed to provide protection to the public by requiring full, plain,

and true disclosure of all material facts relating to the franchise being

offered. No person, unless exempt, could trade i n a franchise in Alberta

until an application for registration of a franchise and certain ancillary

documents had been f‌iled with the Alberta Securities Commission and

a receipt for a prospectus had been obtained from the Registrar.

In 1987, the Minister of Consumer and Corporate Affairs submit-

ted a Discussion Paper on the organ ization and structure of the Alberta

Securities Commission. Part VII of the Paper dealt with the regulation

of franchises in Alberta. The Discussion Paper recognized that, since

Alberta was the only Canadian jurisdiction with specif‌ic franchise

legislation, a necessa ry question that had to be considered was whether

such legislation was necessary, desirable, or justif‌iable in view of the

expense of administration and compliance. The Paper also recognized

that the cost and inconvenience of complying with the legislation may

be signif‌icant enough to keep potential franchisors out of Alberta.

In 1990, the Alberta Securities Commission released a number of

draft policies to document the practices of the Commission in admin-

istering the provisions of the Alberta Franchises Act. While these poli-

cies were mainly procedural in nature, one of the policies dealt with

restrictive covenants “to ensure that the franchisee is informed of the

franchisor’s powers under the agreement to restrict the franchisee and

to set the minimum sta ndards for termination, transfer and non-renew-

al of franchise arrangements,” the Commission effectively extended the

legislation from a registration and disclosure statute to a relationship

statute without legislative authority.

Later, the Commission authorized the issuance of “policy clarif‌ica-

tion notices,” which were not intended to change the intent of a policy but

to clarify items and to identify certain practices that evolve over time.

In July 1991, the Alberta Securities Commission sent a letter to

franchisors, franchisees, and industry consultants requesting com-

ments on ten areas of the Franchises Act, which it proposed to amend.

Subsequently, in November 1991 the Commission relea sed a “Summary

3S.A. 1971, c. 38.

fra nchise law26

of Responses to Franchise Letter” that also included “Secretariat Com-

ments,” both of which outlined the Commission’s interpretation of the

responses. The summary indicated that there would be amendments

to the Act or additional policies issued in the future. Topics dealt with

included disclosure documents, administrative review of disclosure

documents, merit review, sales people and brokers, relationship laws,

civil remedies, earnings claims, and scope of the legislation.

On 26 June 1992, the Minister of Consumer and Corporate Affairs

for Alberta introduced Bill 45,4 which represented a complete overhaul

of the Franchises Act and included provisions that were at that time the

most far-reaching, insofar a s franchisors were concerned, of almost any

legislation in North America. This legislation, if enacted, would have

exposed franchisors to new risks, new standards of conduct, new rela-

tionship requirements, and ultimately signif‌icantly increased costs of

compliance in order to offer franchises in the province of Alberta.

Finally, on 14 February 1995, the Alberta Securities Commission

issued a letter together with a proposed new Franchises Act, requesting

comments from the franchi se industry at large. The proposal address ed

three main concerns:

a)eliminating the cost and time delays created by the requirement of

registration and Commission review;

b)ensuring that prospective franchisees have the information neces-

sary to make informed decisions; and

c)promoting industry self-management.

The disclosure requirements would be set out in the regulations to

the legislation, which were being developed by a working group. The

purpose was to set out general requirements rather than specif‌ic form

items, thereby simplifying the process of preparing disclosure docu-

ments and reducing the costs of preparation. Written submissions on

the proposal were requested by 1 March 1995.

Ultimately, the Alberta legislature passed Bill 33, its new Fran chises

Act,5 on 16 May 1995. The bill was the product of a co-operative effort

between representatives of the Alberta government and a committee

comprised of representatives of the Canadian Franchise Association,

the former Alberta Franchisors Institute, and the Franchisee Associa-

tion of Alberta. Bill 33 completely overhauled the regulatory mechan-

ism of the prior Franc hises Act by eliminating registration requirements

4Bill 45, Franchises Act, 4th Sess., 22nd Leg., Alb erta, 1992–93.

5S.A. 1995, c. F-17.1 [Alberta Act].