Guest Author: Ellery Lew, Witten LLP
Alberta was the first jurisdiction in Canada to pass franchise legislation. The first legislation was enacted in 1971.[1] It was modelled after securities legislation and was focused on the requirement for disclosure of material information to a potential franchisee. At the time, the document for disclosure of material information to a franchisee was described as a “prospectus” and had to be filed with the Securities Commission[2]. The prospectus content requirements were quite similar to the Disclosure Document requirements under the current legislation. One key difference is that a Disclosure Document is not filed with the Securities Commission and therefore, unlike a prospectus, is not a public document.
The original Franchises Act was long and complex and included offenses as well as civil remedies. It more closely mirrored securities legislation. There was no specific timeline for disclosure prior to signing a franchise agreement. A prospectus had to be sent to the franchisee prior to execution or, within 4 days of entering into the agreement, failing which it could be rescinded. It could also be rescinded if the prospectus contained a material omission or untrue statement.
In 1995, the Franchises Act was overhauled into the form it is in today. With minor changes, this Act has continued in force in substantially this form until today.
There are five other provinces in Canada which currently have franchise legislation: British Columbia, Manitoba, New Brunswick, Ontario and Prince Edward Island.
Ontario was the next Province to implement a franchises act, called the Arthur Wishart Act (Franchise Disclosure)[3]. Although similar in the broader perspective to the Alberta Franchises Act, there are many differences:
- The Acts are structured quite differently;
- The language and definitions are quite different;
- The Ontario Arthur Wishart Act explicitly requires that a Disclosure Document be contained within one document[4] but the Alberta Franchises Act does not contain any such explicit provision.
These are some examples of the differences. It is not intended to be an exhaustive list.
The purpose of the Franchises Act is as follows:
(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.[5]
Purpose (a) above is similar to the purpose of securities legislation, to ensure the franchisee makes an informed decision.
Franchise legislation has also been described as remedial legislation, to address the power imbalance inherent in the relationship between a franchisor and franchisee.[6] Following are example quotes from case law:
The Arthur Wishart Act [Ontario Act] is unquestionably remedial legislation, designed to address the power imbalance between franchisor and franchisee.[7]
This legislation is designed to protect franchisees against franchisors. What is the mischief at which the legislation is aimed? Clearly it is that ordinarily the franchisor will have more knowledge and more power than the franchisee.[8]
While the Franchises Act imposes duties of fair dealing on both parties, its purpose is to guard against a perceived power imbalance between franchisors and franchisees […][9]
The Franchises Act includes a provision requiring fair dealing between the parties. It reads as follows:
Fair dealing
7 Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement.[10]
In each province that has franchise legislation, the legislation includes a provision of this nature, though the wording varies to some degree from province to province. The definition applies to both franchisor and franchisee. It is focused on the “performance and enforcement” of the agreement. In provinces where there is no statute, though, there is a common law duty of fair dealing that will apply.
The statutory duty is considered a codification of the common law duty. Good faith is a minimal standard, in the sense that the duty to act in good faith is only breached when a party acts in bad faith. Bad faith is conduct that is contrary to community standards of honesty, reasonableness or fairness (e.g. serious misrepresentations of material facts). Good faith is a two way street. Whether a party under a duty of good faith has breached that duty will depend, in part, on whether the other party conducted itself fairly. [11]
The Supreme Court has recently considered the scope of the duty of good faith in the common law of contracts. The commentary in these cases should apply equally to the statutory duty as it is considered a codification of the common law. In Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District[12] the Supreme Court stated that even an apparently unfettered exercise of discretion in a contract is constrained by the duty of good faith and, like any other contractual duty, must be performed “honestly and reasonably and not capriciously or arbitrarily”. In the case of C.M. Callow Inc. v. Zollinger[13] the Supreme Court explored the meaning of dishonesty in a contractual context and concluded that dishonesty can be manifest both through communication or lack of communication, or through conduct, depending on the context. The court stated that “dishonesty or misleading conduct is not confined to direct lies”.
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You may also be interested in LESA’s first-ever Alberta Business Law Practice Manual with a chapter titled, “Franchises” co-authored by Ellery Lew, Witten LLP; Susan Clapp, Witten LLP; and Christina Sahi, Witten LLP.
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[1] The Franchises Act, SA 1971, c 38
[2] The Franchises Act, SA 1971, c 38, sections 5 and 7
[3] 2000, SO 2000, c 3
[4] Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3 at s. 5(3)
[5] Franchises Act, RSA 2000, c F-23, s. 2
[6] 1777453 Alberta Ltd v Got Mold Disaster Recovery Services Inc, 2021 ABCA 9, at para. 25; Hi Hotel Limited Partnership v Holiday Hospitality Franchising Inc, 2008 ABCA 276 at para 58
[7] Fairview Donut Inc. v. The TDL Group Corp., 2012 ONSC 1252, at para. 496
[8] Hi Hotel Limited Partnership v. Holiday Hospitality Franchising Inc., 2008 ABCA 276, at para. 58
[9] 1777453 Alberta Ltd v Got Mold Disaster Recovery Services Inc, 2021 ABCA 9, at para. 25
[10] Franchises Act, RSA 2000, c F-23, s. 7
[11] Fairview Donut Inc v The TDL Group Corp, 2012 ONSC 1252 at para. 499
[12] 2021 SCC 7 at par. 62
[13] 2020 SCC 45 at par. 90 & 91
