Five provinces in Canada have passed franchise disclosure and fair franchise relationship laws: Alberta, Manitoba, New Brunswick, Ontario, and Prince Edward Island. British Columbia is also considering franchise disclosure and franchise relationship legislation. In the United States, the Federal Trade Commission (FTC) requires the use of a Franchise Disclosure Document (FDD) in all 50 states and in all U.S. territories, but does not contain a right of action or remedies and does not include a franchisee-franchisor relationship component.
Maine is one of a number of states that are currently considering franchise relationship laws similar to its northern neighbors. There are 20 states in the US that have enacted franchise protection laws. The Maine Small Business Investment Protection Act (LD 1458) has recently moved from the Labor Commerce and Economic Development Committee with a favorable report to the Maine House of Representatives.
In the last few years the Canadian provinces of New Brunswick which borders Maine in the north and Prince Edward Island which is northeast of the Maine border have enacted franchise disclosure and fair franchising relationship laws that offer significant protections for franchisees. The rights and obligations under the law are substantially similar in each province and their aim is the same: to regulate and protect both prospective franchisees and those already party to a franchise relationship. The laws are intended to address the imbalance of power in the franchisor-franchisee relationship.
The Province of Quebec does not have a specific franchise disclosure or franchise relationship law, but they do have civil law.
Province of Québec
The province of Québec is a civil law jurisdiction. While Québec has no franchise-specific legislation, the Civil Code of Québec and the Québec Charter of the French Language each have application to franchising.
Québec’s Civil Code contains provisions governing “contracts of adhesion,” which would include franchise agreements and other standard-form agreements of a franchisor. One interesting provision is that terms of a contract that are not fully known to a party, such as a franchisee at the time of signing, will not be enforceable. In franchising, this could affect the usual franchise agreement term that franchisees must comply with the operations manual and would require franchisors to arrange for a controlled and confidential disclosure of the operations manual to a franchisee before the franchise agreement is signed.
The Civil Code also contains a statutory duty of good faith, which is broader than the duty of good faith and fair dealing included in other provincial franchise legislation, as it applies to the negotiation as well as the performance and enforcement of franchise agreements.
In addition to disclosure requirements the franchise legislation in New Brunswick and Prince Edward Island adopt four key principles for the franchisee-franchisor relationship: the duty of good faith and fair dealing imposed upon franchisors and franchisees; the right of franchisees to associate; provides that provisions that restrict the application of the laws of the province or that restrict jurisdiction or venue to a forum outside the province are void. The fourth principle is that failure to comply with any of the disclosure obligations gives rise to significant right of actions and remedies for franchisees.
The Duty of Fair Dealing
Franchise legislation in Canada imposes on each party to a franchise agreement a duty of fair dealing in its performance and enforcement, which expressly includes the duty to act in good faith and in accordance with reasonable commercial standards. The duty of fair dealing has been interpreted to require that the franchisor enforce the franchise agreement in a manner that takes into account the interests of the franchisee (but not to the exclusion of the franchisor’s interests) without malice or ulterior purpose. In effect, the obligation imposes limitations on a franchisor’s discretion in enforcing its strict contractual rights where such exercise negatively impacts the interests of the franchisee. A breach of the duty of fair dealing is imposed on both the franchisor and a franchisee, and entitles the non-breaching party to claim damages for the breach.
The Right of Association
Franchisees have the right to associate with other franchisees and form or join an organization of franchisees without interference from the franchisor. Any provision in a franchise agreement that restricts this right is void, and breach of this right by a franchisor entitles a franchisee to commence an action for damages. This provision has been interpreted by the courts to protect a franchisee’s right to participate in a class action, with the courts refusing to enforce a requirement under the franchise agreement that a franchisee release the franchisor as a condition to the franchisor’s consent to a transfer by the franchisee of its franchise during the course of the class action proceedings. However, the courts will uphold a release given by a franchisee as part of the negotiated settlement of a dispute.
Jurisdiction and Venue:
The franchise legislation of each province also provides that provisions in franchise-related agreements that restrict the application of the laws of the province or that restrict jurisdiction or venue to a forum outside the province are void, with respect to claims enforceable under the franchise legislation of that province.
Remedies for Disclosure Violations:
The right of a franchisee to rescind the franchise agreement arises when the franchisor fails to properly comply with the disclosure requirements. The franchisor is then obliged, pursuant to the rescission remedy, to essentially put the franchisee back into the position it had been in prior to the purchase of the franchise. A franchisor faced with a rescission claim is required to repay the franchisee all monies paid to it; purchase all inventory, equipment and supplies purchased by the franchisee pursuant to the franchise agreement; and compensate the franchisee for all losses incurred to establish and operate the franchised business.
In addition to the rescission remedy, franchisees can bring a claim for damages for misrepresentations made in the disclosure document or if the franchisor fails to comply with the disclosure requirements. Accordingly, if a franchisee misses the time period for rescission, it can still seek damages for breach of the disclosure obligation. Claims for misrepresentation can be made against not only the franchisor, but also against others in their personal capacity, including any director or officer of the franchisor who signed the certificate of disclosure. “Misrepresentation” is defined broadly to include an omission, and a franchisee is deemed to rely on a misrepresentation in a disclosure document and on the information contained in the disclosure document that has been provided.
In the Maine Small Business Investment Protection Act (LD 1458) includes a principle of Good Faith & Reasonable Care, the Right to Association, was removed from the original bill, as well as Jurisdiction and a Venue restriction clause. The right to rescind or to seek damages for breach of disclosure obligation is not part of LD1458. Neither is there a right of action under the FTC Franchise Rule to seek remedy for a disclosure breach.
Removing these clauses were done in an effort to gain bipartisan support on the committee which failed to materialize for supporting Ought to Pass (5 committee members voted approval) but bipartisan support did materialize for moving LD 1458 to a study (5 committee members voted approval), as opposed to Ought not to Pass (2 committee members voted approval). All three reports have moved to the Maine House of Representatives.
All in all fair franchising legislation is gaining ground in capital cities across the United States and Canada. The reason behind this inevitable movement is because States and Provinces have finally realized that it’s the franchise owner that makes the investment in the local community not the franchisors. Franchise owners deserve the same protections that those same States and Provinces provide for auto dealers and equipment dealers. Those protections address the imbalance of power in the manufacturer-dealer relationship in Auto and Equipment sales and service, and are needed to address the imbalance of power in franchisor-franchisee relationships.
Please contact us at 207-274-2046 if you would like to help our efforts in supporting the Maine Small Business Investment Protection Act.
This article has also been posted at: BlueMauMau