Franchise Legislation

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

CHAPT ER 2

FR ANCHISE

LEGISLATION1

A. HISTORY OF FRANCHISE LEGISLATION IN

CANADA

1) Introduction

Franchise legisl ation 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 regist ration, disclosure, or relationship

legislation is wit hin the exclusive ma ndate of the provinces of Ca nada.

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

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

such attempts have been politically dr iven, 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ther, certain legislation orig inally enacted wa s subsequently repealed,

and generally most private members’ bills introduced in t he provincial

legislatures have not proceeded beyond initial consideration.

1 Adapted 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.

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Franchise Legislation 25

2) Alberta

Alberta was the f‌irst province in C anada to enact legi slation deal-

ing directly wit h franchising. The Fran chise s Act 3 was modelled after

counterpart legislat ion in California, United St ates. The Act was a dis-

closure-registration statute rather than a regul atory-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 fact s relating to the franchise being

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

until an application for registr ation of a franchise and cer tain ancillary

documents had been f‌iled with the Alberta Securities Commi ssion and

a receipt for a prospectus had been obtained f rom the Registra r.

In 1987, the Minister of Consumer and Corporate Af fairs 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 i n Alberta. The Disc ussion Paper recognized t hat, since

Alberta was the only Canadia n jurisdict ion with specif‌ic fr anchise

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

such legislat ion was necessary, desirable, or just if‌iable in view of the

expense of administration and compliance. The Paper also recognized

that the cost and inconvenience of complying w ith the legislation may

be signif‌icant enough to keep potential f ranchisors out of Albert a.

In 1990, the Alberta Securities Commission released a number of

draft policies to document t he practices of the Commis sion in admin-

istering the provisions of the Albert a Franchi ses Ac t. While these poli-

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

restrictive covena nts “to ensure that t he franchisee i s informed of the

franchisor’s powers under the agreement to restrict the fr anchisee 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 regist ration and disclosure st atute to a relationship

statute without legislat ive authority.

Later, the Commission authorized the issuance of “policy clarif‌ic a-

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

to clarify items and to identify cert ain practices t hat evolve over time.

In July 1991, the Alberta Sec urities Commis sion sent a letter to

franchisors, f ranchisee s, and industry con sultants request ing com-

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

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

3 S.A. 1971, c. 38.

fra nchise law26

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

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

responses. The summa ry indicated th at there would be amendments

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

included dis closure documents, adm inistrative rev iew of disclosure

documents, merit review, sales people and brokers, relation ship laws,

civil remedies, earnings clai ms, and scope of the legislation.

On 26 June 1992, the Minister of Consumer and Corporate Affai rs

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

legislat ion in North America. This legi slation, i f enacted, would have

exposed franchisors to new risk s, new standards of conduct, new rela-

tionship requirements, and ultim ately signif‌icantly increased costs of

compliance in order to offer franchises in the provi nce of Alberta.

Finally, on 14 February 1995, the Albert a 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 concern s:

a) eliminating t he cost and time delays created by t he requirement of

registration and Commi ssion review;

b) ensuring that prospective f ranchisees have the information neces -

sary to make i nformed 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 rat her than specif‌ic form

items, thereby simplify ing the process of preparing disclosure docu-

ments and reducing the costs of prepa ration. 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 ef fort

between representatives of t he Alberta government and a committee

comprised of representatives of t he Canadian Franchise Associ ation,

the former Alberta Fra nchisors 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

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

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