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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.