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Gerald Kelly

FRANCHISING IN ALBERTA

1980 Franchise Act v 1995 Franchise Act

ISSUE

This comparative analysis was prepared just prior to the coming into force of the (then)

new Alberta Franchise Act, as part of a review of Ontario commercial legislation to

determine expeditious means of reducing red tape in government.

SUMMARY

Alberta reduced bureaucratic involvement in franchising activities by removing the Alberta

Securities Commission from the role of regulatory watchdog; establishing a self-governing

body for regulation of franchise activities; and loosening the strictures on commerce in

franchises.

THE OLD ACT: FRANCHISES ACT, CHAPTER F-17

(Revised Statutes of Alberta, 1980)

The original Act set stringent (in the opinion of many franchisors) restrictions on the

activities on any franchise company which wanted to operate in the province of Alberta.

The old Act was a highly regulated approach to controlling franchise activities. There was

extensive involvement from the Alberta Securities Commission in assessing the financial

and business validity of franchise offerings, and determining the moral fitness of the

directing minds of the franchise corporation. Both civil and regulatory remedies were

possible, with the Commission acting as the tribunal of first resort in administrative actions.

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DISCLOSURE

Under the old Act, it was necessary to fulfil two requirements prior to commencing

operations. The Franchisor had to register with the Alberta Securities Commission (the

Commission) before trading in franchises (s. 6) and also had to provide written disclosure

of business details to the Commission in the form of a Prospectus (s. 8). The registration

documentation submitted was reviewed by the Commission for adequacy, accuracy and

public interest factors prior to the grant of the registration (s. 11 & 12).

Regulations prescribed that both the registration and the prospectus had to be up-dated

annually. To comply with the Act, the franchisor had to provide a copy of the prospectus to

all prospective franchisees either prior to the signing of the franchise agreement, or within

four business days after entering into the agreement (s. 36).

STATUTORY EXEMPTION

The Act also offered franchisors an exemption from the registration requirement should

they meet certain conditions. These conditions were that the company had a specified net

worth; had a specified number of franchisees for a certain time period; and must have

been in the franchise business for which the exemption was requested for a specified

period of time (s. 2). The exemptions had to be renewed annually (s. 4), and a statement

of material facts, similar in form to a prospectus, had to be filed with the Commission (s. 5).

DISCRETIONARY EXEMPTION

As an alternative to registration or a statutory exemption, the franchisor could have

requested that the Director provide a discretionary exemption from compliance with any or

all of sections 4, 5 or 6, or of any of the regulations made under the Act (s. 3). The only

criteria for making such an exemption was that it not be contrary to the public interest.

CIVIL REMEDIES

The franchisee had several civil remedies enshrined in the Act. There was a cooling-off

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period of four days after signing the agreement within which the franchisee could withdraw

from the agreement (s. 36). The franchisee had the right to rescind the agreement for up

to two years after signing it, should the prospectus or statement of material facts have

contained an untruth or an omission which would have misled the franchisee (s. 37).

The franchisor's executive officers who certified that the prospectus was correct were

personally liable, along with the company, to all franchisees for loss or damages suffered

as a result of reliance on the false statements, regardless of whether or not the franchise

purchaser actually relied upon the prospectus (s. 39).

REGULATORY REMEDIES

The Act contained a strict regulatory regime for acts done by franchisors in contravention

of the Act or regulations, and also for criminal offences committed in connection with their

trade in franchises. The Commission had the power to investigate (s. 43), make a report

(s. 47), suspend or cancel the franchisor's registration, or freeze the franchisor's assets (s.

48), and appoint a receiver (s. 49). The Minister also had the same powers to regulate a

franchisor as the Commission (s. 45). Any decision which affected a franchisor under the

regulatory regime was appealable to the Commission (s. 50). Should the franchisor not

find satisfaction at the administrative hearing, recourse could be had to the Alberta Court

of Appeal (s. 51).

As can be seen from the brief overview of the old Act regulating franchise activity in

Alberta, there was a strong emphasis on control by, and accountability to, the Alberta

Securities Commission. The Commission mandate extended to policing franchisors to the

full extent possible for an administrative body.

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THE NEW ACT: FRANCHISES ACT, CHAPTER F-17.1

(came into force November 1, 1995)

The new Act marks a strong departure from the previous 1980 legislation regulating

franchising in Alberta. It was produced after extensive consultation with members of the

franchise industry. The language and structure of the new Act are easier to comprehend

than the old Act. In addition, it is much shorter than the old Act. This brevity was made

possible through terminating the involvement of the Alberta Securities Commission in the

regulation of franchising activities.

Other highlights of the new Act include broadening the definition of franchise to include

"fractional franchises"; the inclusion of a requirement for "fair dealing" between franchisors

and franchisees; and the establishment of a body for the self-regulation of franchise

activities.

DISCLOSURE

The requirements to register a franchisor and file a prospectus with the Commission have

been removed from the new Act. The Commission is no longer responsible for checking

the viability of the franchisor or for assessing the veracity of the prospectus. The franchisor

now has simply to provide a prospective franchisee with a disclosure document which

complies with the format set forth in the regulations at least 14 days prior to entering into a

franchise agreement (s. 4).

The disclosure document in some respects provides more information to a prospective

franchisee than the prospectus did. Specifically, it gives much more information on the

personal and business background of the directing minds of the franchise corporation than

was previously available for the consideration of the prospective franchisee. The

information necessary to be given in the disclosure document is similar to that which was

required for the application for registration under the old Act.

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The disclosure document has to contain a financial statement, as did the prospectus.

However, the financial statement now has to be prepared to a "review engagement"

standard, rather than the higher "audited" standard of the prospectus.

REGULATORY EXEMPTION

The new Act has a regulatory exemption which corresponds to the statutory exemption

offered franchisors under the old Act. A statutory exemption was allowed for certain large

franchisors who did not have to present a prospectus nor the included financial statement;

instead, it sufficed for them to prepare a statement of material facts upon which the

prospective franchisee relied.

This exemption has been reduced somewhat under the new Act. All franchisors now have

to provide a disclosure document within which a financial statement would be included.

However, under the regulations to the new Act, an exemption can be applied for which

would eliminate the need to provide a financial statement within the disclosure document.

The criteria for the exemption are exactly the same as for the statutory exemption under

the old Act; i.e. a pre-determined net worth; a certain number of franchisees; and

experience in the franchise business for a pre-determined length of time.

STATUTORY EXEMPTION

The statutory exemption offered under the new Act, which is a departure from the

regulatory strictness of the old Act, relieves certain franchisors totally from the need to

provide a disclosure document (s. 5). This section would operate in instances where the

prospective franchisee has an inside knowledge of the franchisor's operations, such as

where the franchisee works for the franchisor, or is purchasing additional franchises. It

would also operate where the franchise outlet is being sold subject to legal actions such as

receivership, bankruptcy or as part of an estate.

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There is no need to provide a disclosure document where the total annual investment

required to purchase and operate the franchise does not exceed $5,000. The statutory

exemption would also apply in the case of a fractional franchise, which is defined as a

franchise operating in conjunction with another business, where the franchise sales will not

exceed 20% of the total business sales.

DISCRETIONARY EXEMPTION

The discretionary exemption provisions represent an easing of the strictures of the old Act.

Under the old Act, the Director could exempt a trade (i.e. one franchise sale) from three

sections of the Act or one of the regulations. The new act allows the Minister to exempt

any person or class of person; any sale of franchise or class of sale of franchise; any

franchise or class of franchise from the any or all provisions of the Act or of the regulations

(s. 6).

Given a proper ministerial exemption, a franchise operation could function in Alberta

without being regulated in any manner by the new Act. There are two control measures

put into place to rein in unbridled ministerial grants of the discretionary exemption. Firstly,

the Minister must consult with the franchise self-governing body prior to granting an

exemption. Secondly, there must be a consensus of opinion between the Minister and the

self-governing body that a discretionary exemption would not be contrary to the public

interest.

REFUNDABLE DEPOSIT

The new Act provides that a franchisor can ask a franchisee for a refundable deposit of up

to 15% of the initial franchise fee prior to the release of the disclosure document to the

interested buyer (s. 4, ss. 8). The deposit must be fully refundable without any deductions

and must not be tied to an agreement which in any manner binds the prospective

franchisee to enter into the sale of a franchise. This section can be seen as one designed

with the franchisors in mind, as it would protect them from releasing confidential

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information without some form of surety that the request was not frivolous, or that the

prospective franchisee was not under-financed.

It should also be noted that under the old Act, when the Alberta Securities Commission

received a prospectus, a copy was placed in a public document file after registration of the

franchisor. Prospective franchisees or the general public could request a copy of any

prospectus in the file upon payment of a small photocopying fee. Another public record

service offered by the Commission was the weekly publication of a summary list of all

franchise registrations, franchise exemptions, and renewals of both. As the Commission is

no longer involved in any aspect of franchise regulation, these types of public services

would probably terminate. Under the new Act, it would now fall to the self-governing body

to determine whether these types of services should be offered.

FAIR DEALING

A new provision in the Act states that both parties to a franchise agreement have a duty to

deal fairly with each other in the performance and enforcement of the franchise agreement

(s. 7). Unfortunately, the Act does not give a definition of "fair dealing". The Lieutenant-

Governor in Council is invested with the power to define terms used within the Act which

are not defined in the Act (s. 20). It remains to be seen whether this power would be

exercised with respect to defining fair dealing. Currently, the interpretation of what

constitutes fair dealing may well require judicial input. Should one party choose to deal

unfairly, civil liability in tort would ensue, and resolution of the problem would be sought

through the court system.

The imposition of fair dealing as a criteria in franchisor-franchisee relations points out a

major shift in the legislative emphasis. No longer will an administrative tribunal function as

the initial method of resolving certain disputes. The civil courts have been chosen as the

vehicle for determination of franchise problems, which is an admission that generally the

problems are contractual in nature.

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ASSOCIATION RIGHTS

The new Alberta Act gives statutory relief to a long-standing problem between franchisors

and franchisees. The Act states that any franchisee can form an association with other

franchisees, or join any organization of franchisees without fear of reprisal from the

franchisor (s. 8). The right to associate has long been sought by franchisees and

discouraged by some franchisors, as there were fears that franchisee organizations could

alter the balance of power negatively for franchisors.

CIVIL REMEDIES

Where a franchisee, in reliance upon or deemed reliance upon a misrepresentation

contained in a disclosure document suffers a loss, that person has the right to an action for

damages against the franchisor and/or any person who signed the disclosure document

(s. 9).

Damages can also be awarded against the franchisor where there has been a

contravention of the franchisee's right to associate (s. 11). Both of these civil remedies of

damages to be assessed against the franchisor would result in civil litigation to determine

the extent of the damage award.

The civil remedies outlined under the above two systems shows that currently there is not

an alternative dispute resolution mechanism contemplated under the new Act. However,

such an ADR mechanism may fall within the purview of the self-governing body.

STATUTORY REMEDIES

Franchisors are to provide prospective franchisees with a copy of the disclosure document

fourteen days prior to entering into a franchise agreement. Where there has been a failure

to provide the disclosure document, but the franchisee has nonetheless signed a franchise

agreement, the franchisor has left himself open to the operation of the statutory remedies.

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The franchisee can rescind the franchise agreement by giving a notice of cancellation on

the first of two occurrences: either within 60 days of receiving the disclosure document, or

within two years of being granted the franchise in cases where disclosure was never

forthcoming (s. 13).

Where the franchisee has rescinded the franchise agreement, the franchisor has to

compensate the franchisee for any net losses incurred in acquiring, setting up and

operating the franchise outlet (s. 14). This remedy would undoubtedly lead to further civil

litigation as the term "net losses" is not defined in the Act. Undoubtedly, franchisors and

franchisees would not share the same concept of what constitutes the elements of a net

loss.

SELF-GOVERNING BODY

With respect to the organization, composition and powers of the body which will be

established to self-regulate franchising in Alberta, there is currently no information

available to determine the direction which will be taken by this body. The new Act states

that the Lieutenant-Governor in Council may designate one or more bodies to govern

franchising and promote fair dealing among franchisors and franchisees (s. 21).

Regulations may be made under this section to define the powers, duties and functions of

this body. Bylaws may be made to ensure fair dealing between franchisors and

franchisees. Self-government as made possible under the new Act is presently undefined.

OTHER CHANGES

Under the old Act, it was necessary to register each person who was a salesman of

franchises in Alberta. The registration application required an extensive history of the

applicant, and a decision to allow the person to sell franchises was made by the

Commission after making a determination of his or her moral fitness. This requirement has

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been removed from the new Act. At present it appears that a franchisor can empower

anyone to sell franchises for them without question. It remains to be seen whether the

organization which is to be established to self-regulate the franchise business will address

this issue.