Franchise disclosure

How BC law treats it

Section 5 of the Franchises Act, SBC 2015, c 35 requires the franchisor to deliver a disclosure document at least 14 days before the earlier of the franchisee signing any agreement relating to the franchise and paying any consideration for it. The document must be delivered as one document at one time and must contain all material facts, the franchisor's financial statements, copies of all proposed agreements, and the other information the regulations prescribe. The franchisor must also disclose any material change before the franchisee signs or pays. There is no regulator, registry or fine under the Act. The consequences are private remedies. Under section 6, if the disclosure document is late or materially deficient, the franchisee may rescind within 60 days after receiving it. If no disclosure document was delivered at all, the franchisee may rescind within two years after entering into the franchise agreement. On rescission, the franchisor must compensate the franchisee within 60 days, by refunding money paid, buying back inventory, supplies and equipment at the franchisee's purchase price, and compensating other losses incurred in acquiring, setting up and operating the franchise (s. 6(5)). Under section 7, the franchisee also has a statutory right of action for damages if it suffers a loss because of a misrepresentation in the disclosure document, or because the franchisor failed to comply with the disclosure obligations. The franchisee is deemed to have relied on any misrepresentation, and liability extends to the franchisor's broker, its associates and every person who signed the disclosure document, subject to the defences in section 8. Some grants are exempt from disclosure, including certain resales by a franchisee for its own account (s. 5(8)). The exemptions are narrow and should be checked before relying on one.

What it means for your business

For franchisors, a defective disclosure document is one of the largest legal risks in the business, because rescission can unwind a sale years later and require repayment of everything the franchisee invested. For prospective franchisees, the disclosure document is the main source of information about litigation history, other franchisees, fees and financial health. Reading it carefully during the 14 day period, ideally with a lawyer and accountant, is the best protection against a bad investment. Example: A Calgary-based franchisor sells a BC unit after delivering a disclosure document without its financial statements. Eighteen months later the struggling franchisee rescinds, arguing the omission made the document materially deficient, and claims a refund of its fees and the buyback of its equipment.

Risks and common mistakes

Taking a deposit or signing a reservation agreement before the 14 day period has run. Delivering disclosure in pieces over several emails rather than as one document at one time. Leaving out financial statements or copies of the agreements the franchisee will sign. Failing to disclose a material change that occurs after delivery but before signing. Believing late disclosure only risks a regulatory fine, when the real risk is rescission and damages.