What You Need to Know About Manitoba's New Franchises Act

Vol. 15, No. 3

By

Gowling Lafleur Henderson LLP

I. Introduction

On October 1, 2012, Manitoba will become the fifth Canadian province to regulate the grant of franchises under its new The Franchises Act (CCSM c F156) (the “Act”) and its accompanying Franchises Regulation (Man. Reg. 29/2012) (the “Regulations”). The Act and the Regulations are collectively referred to herein as the “Manitoba Franchise Legislation.” This article provides an overview of the new Manitoba Franchise Legislation, highlights key differences from other provincial franchise legislation, and provides a quick reference guide to the scheme of the Manitoba Franchise Legislation.

II. Key features of the Manitoba Franchise Legislation

The Manitoba Franchise Legislation is modeled on The Uniform Franchises Act, prepared by the Uniform Law Conference of Canada, and has also borrowed elements from franchise legislation that is in place in Alberta, Ontario, New Brunswick, and Prince Edward Island (the “Other Jurisdictions”). In Canada, no federal franchise legislation exists, as franchising is a provincially regulated matter. Noteworthy differences between the Manitoba Franchise Legislation and the franchise legislation in the Other Jurisdictions are discussed further below.

A. Duties under the Manitoba Franchise Legislation

There are four duties imposed by the Manitoba Franchise Legislation:

  1. Duty of fair dealing on all parties (section 3 of the Act). A right of action is granted to a party to a franchise agreement against any other party who breaches the duty of fair dealing, which includes the duty to act in good faith and in accordance with reasonable commercial standards.

  2. Franchisee’s right to associate (section 4 of the Act). A right of action is granted to a franchisee against a franchisor that interferes with the franchisee’s right to associate with other franchisees, or its right to form or to join an organization of franchisees.

  3. Franchisor’s obligation to disclose (section 5 of the Act). Section 5 of the Act, as well as the Regulations, contain detailed requirements for disclosure. Significantly, disclosure need not be “in one document at one time,” as is the case in some of the Other Jurisdictions. Instead, disclosure can be in parts. This topic is expanded upon in section C.1 below. The Regulations also allow for disclosure by electronic means.

  4. Franchisee’s right to rescind (section 6 of the Act). Like the Other Jurisdictions, a franchisee may rescind its franchise agreement no later than 60 days after receiving the disclosure document if the franchisor failed to provide the disclosure document or a statement of material change within the time required, which is 14 days prior to the signing of the franchise agreement or any other agreement relating to the franchise, or the payment of any consideration relating to the franchise. The 14-day period does not start until the delivery of the final document if not delivered as “one document.” Statements of material change must be delivered as soon as practicable, and before the signing of the franchise agreement or any agreement relating to the franchise. If disclosure is never received, a franchisee may rescind no later than two years after entering into the agreement.

Furthermore, the rights granted by the Manitoba Franchise Legislation do not derogate from any other rights which the parties may have and cannot be waived.

B. Application of the Manitoba Franchise Legislation

The Manitoba Franchise Legislation applies to franchise agreements that are entered into, extended or renewed after October 1, 2012, if the franchised business is operated or is to be operated, partly or wholly, in Manitoba.

The “relationship” provisions of the Manitoba Franchise Legislation apply to existing franchise agreements. This includes the duty of fair dealing, the franchisee’s right to associate, and the general provisions in sections 9-12 of the Act (namely, no derogation of rights, any attempt to affect jurisdiction is void, “rights cannot be waived,” and the burden of proof for exemptions or exclusions falls to the party claiming it). However, section 7 of the Act (“actions and defences”) and section 8 of the Act (“joint and several liability”) do not apply to existing franchise agreements entered into prior to October 1, 2012.

Section 2(3) of the Act lists several scenarios where the Manitoba Franchise Legislation does not apply, including clause (j), which provides that the Manitoba Franchise Legislation does not apply to any arrangement arising out of an agreement for the purchase of a reasonable amount of goods or services at reasonable wholesale prices. This provision will likely be welcomed by distribution systems that might otherwise be caught under the narrow wording of Ontario’s franchise legislation.

C. Key Differences Between the Manitoba Franchise Legislation and Other Jurisdictions

The following points are important to keep in mind, as they mark differences between the Manitoba Franchise Legislation and some or all of the Other Jurisdictions:

  1. Disclosure in parts. Likely, the most significant difference between the Manitoba Franchise Legislation and Other Jurisdictions is the ability for the franchisor to deliver a disclosure document to a prospective franchisee in multiple parts. Note that there are specific requirements set out in the Regulations regarding disclosure in parts. For example, certain information must be clustered together, and each document must clearly state that it forms part of the disclosure. Section 4 of the Regulations should be carefully reviewed in order to ensure that the requirements are met for disclosing in parts. The franchisor must provide, with the delivery of the final piece of the disclosure document, a certificate containing the statement found in Form 1 to the Regulations. Debate among franchise legal practitioners has arisen as to what impact this “disclosure in parts” will have in practice, and how it will be interpreted by the courts. Key to this debate is the following question: If disclosure can be done in parts, when does the disclosure obligation end? With the signing of the franchise agreement? What if the location has not been determined yet? In addition, given that the term “franchise agreement” includes any agreement that relates to a franchise between a franchisor and a franchisee, is a franchisor required to provide disclosure relating to the sub-lease and the head lease even though they may be entered into many months after the parties sign the franchise agreement? There is no consensus on this among franchise law practitioners in Canada.

  2. Electronic delivery of documents. The Regulations allow for documents to be disclosed electronically, provided a franchisor meets the requirements set out in section 5(1) of the Regulations. Electronic delivery is also specifically permitted in New Brunswick and PEI, and most practitioners agree that electronic delivery is permissible in Alberta. However, Ontario only allows a franchisor to provide its disclosure document by personal delivery, registered mail or any other prescribed methods, and, to date, Ontario has not prescribed any other methods.

  3. Substantial compliance with disclosure obligations. Section 5(10) of the Act provides that a franchisor complies with its disclosure obligations so long as it “substantially complies” with them. Specifically, a franchisor has complied with the Manitoba Franchise Legislation even if the disclosure document contains a “technical irregularity or mistake not affecting the substance of the document.” This is significant and may assist franchisors where disclosure has been less than perfect. Technical irregularities that franchisees in some of the Other Jurisdictions have been relying upon to claim rights of recession may not be available in Manitoba.

  4. Small business disclosure exemption. Similar to the Other Jurisdictions, section 5(11)(g) of the Act exempts a franchisor from providing a disclosure document to certain prospective franchisees that will operate small businesses. To qualify for this exemption, the franchisee’s total annual investment to acquire and operate the franchise cannot exceed a prescribed amount, currently $5,000.

  5. Financial statement disclosure exemption. Large, sophisticated franchisors are exempt from including their financial statements in their disclosure documents. This exemption is substantially the same as the financial statement disclosure exemptions in the Other Jurisdictions. Large, sophisticated franchisors, however, must still meet the remainder of the disclosure obligations under the Manitoba Franchise Legislation.

  6. Deposit allowed. Under section 5(14) of the Act, a franchisor may collect a fully refundable deposit, and this will not be interpreted as “consideration relating to a franchise.” Section 11 of the Regulations prescribe the maximum deposit as being the lesser of $100,000 or 20% of the initial franchise fee charged by the franchisor.

III. Conclusion

The Manitoba Franchise Legislation allows franchisors in Canada to continue to utilize one franchise disclosure document across the country. This is the most important aspect of the Manitoba Franchise Legislation, and welcome news to franchisors. The Manitoba Franchise Legislation is not retroactive with respect to disclosure obligations and, therefore, franchisors may enter into new or renewal franchise agreements prior to October 1, 2012, without providing a disclosure document. From October 1, 2012, onwards, however, franchisors must comply with the Manitoba Franchise Legislation, and it is recommended that franchisors have their Canadian franchise disclosure document reviewed by a franchise lawyer to ensure compliance with the provisions of the Manitoba Franchise Legislation. Included below are quick reference guides to the scheme of the Act and the Regulations.

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