In 1992, Manitoba’s Legislative Assembly failed to pass Bill 18, The Franchises Act. As reported in the October 2007 Osler Franchise Review, Manitoba began re-considering the enactment of franchise legislation in 2007. On December 4, 2008 the Manitoba Law Reform Commission (MLRC) submitted its Report on Franchise Law (Report) to the Minister of Justice and the Attorney General. In that Report, the MLRC recommends the enactment of legislation to regulate franchising in Manitoba and suggests the elements that should be specifically included in the legislation.
While the MLRC recommends that Manitoba use the Uniform Law Conference of Canada’s Uniform Franchises Act and regulations (Model Law) as a model structure, it does not recommend complete adoption of the Model Law. Rather, the Report includes additional recommendations which the MLRC believes are necessary to address the information and power imbalance inherent in a franchise relationship. This approach has caused some concern among those members of the franchise community who support legislative harmonization across Canada.
The majority of the MLRC’s recommendations enhance a franchisor’s disclosure obligations. Some of these recommendations received support during the public consultation process in 2007. For example, the MLRC recommends disclosure of territory boundaries and detailed disclosure of how the franchisee may face competition from other franchisees, licensees, affiliates, franchisor- or affiliate-owned units, franchisor or affiliate alternative channels of distribution or competitive brands. The MLRC also suggests that the franchisor expressly disclose that a franchise agreement contains no right or option to renew, if applicable. Additionally, since the MLRC recommends that the remedy of damages for misrepresentation include misrepresentations related to future projections and forecasts, the MLRC advises that, to avoid liability for such a misrepresentation, the disclosure document should identify factors that could cause materially different actual results and should contain reasonable cautionary language concerning the representation and/or any reasonable basis for the future projection or forecast.
The Report also sets out recommendations which were criticized during the consultation process because they discounted the confidential nature of certain information. For example, the MLRC recommends that the franchisor disclose the number of franchisor-franchisee disputes resolved through mediation or arbitration in the ten years before disclosure or that are still pending, and the number of lawsuits that were initiated by the franchisor against franchisees in the ten years before disclosure. This requirement disregards the fact that the majority of litigation settlements and arbitration and mediation proceedings are confidential in nature and should not be disclosed unless the information is publicly available. In a similar vein, the MLRC recommends broader disclosure of bankruptcy and insolvency proceedings than exists in other province’s franchise legislation. Additionally, the MLRC contentiously proposes the disclosure of confidentiality agreements with current and former franchisees executed for purposes other than pre-sale disclosure.
Franchisor-Friendly Disclosure-Related Recommendations
The Report supports the use of wrap-around disclosure documents, the electronic delivery of disclosure documents and franchisor protection from liability for minor omissions or errors not affecting the substance of a disclosure document. Additionally, the MLRC proposes that Manitoba’s franchise legislation exempt confidentiality agreements from triggering a disclosure requirement. This recommendation has merit: as franchisors are not required to file their disclosure documents with any regulatory body in Canada, they should be entitled to have the information contained in a disclosure document maintained in confidence as between the franchisor and the prospective franchisee and the prospective franchisee’s advisors. Similarly, the MLRC recommends that site selection agreements and fully refundable deposits be exempt from the advance disclosure requirement. Site selection agreements are often necessary to preserve sites in advance of disclosure and deposits are necessary for a franchisor to obtain a conditional commitment from a prospective franchisee without having to insist upon payment of the entire initial fee.
Regulation of the Franchise Relationship
Franchise laws in other provinces are primarily focused on the delivery of a disclosure document. They contain only general provisions governing the franchise relationship and do not deal with specific provisions of a franchise agreement or ancillary documents. In its Report, the MLRC expresses concern over the power imbalance between franchisors and franchisees and recommends that Manitoba franchise legislation impose more control over the franchise relationship.
The MLRC recommends that the following provisions be included in Manitoba franchise law to regulate the franchise relationship:
(1) the franchisor should be prohibited from interfering with communications between prospective, current and past franchisees in an effort to protect the franchisee’s right to associate;
(2) only a franchisee’s pre-dispute waiver of rights under franchise legislation should be void so that the franchisee may validly bind itself to a post-dispute settlement agreement;
(3) the franchisor should be prohibited from terminating or refusing to renew a franchise agreement without just cause;
(4) the franchisor must allow the sale or transfer of a franchise unless it has reasonable grounds to withhold its approval;
(5) with respect to the sale or transfer of a franchise, the liability of the franchisee should be confined to the terms of its franchise agreement and the franchisor should be prohibited from imposing conditions on a transfer such as requiring the franchisee to undertake obligations or relinquish rights unrelated to the franchise being transferred or enter into a release of claims that is broader than a release entered into by the franchisor;
(6) upon renewal, if the terms of the franchise agreement are materially different from the previous agreement and the parties cannot agree on the terms, the franchisor must buy back the franchise at the original purchase price or release the franchisee from the franchise agreement;
(7) franchisees should be given the opportunity to correct all curable breaches of the franchise agreement;
(8) the franchisee should be allowed to purchase goods or services from any source unless the goods or services are central to the franchised business and are either manufactured or produced by the franchisor or its associate, or incorporate a trade secret of the franchisor or its associate; and
(9) the ability of the franchisor to encroach on a franchisee’s exclusive territory by way of corporate units and internet and direct sales methods should be restricted.
Some members of the franchise community believe that Manitoba legislation should not deviate from the limited general relationship standards contained in Canadian franchise legislation and the Model Law, as to do so would result in discriminatory favouritism for franchisees in Manitoba versus those in other provinces. These members strongly oppose franchise laws that will be invasive concerning specific contractual requirements and which generally include “good cause” definitions that often become uncertain in their application and result in litigation. Because the franchise relationship is a business-to-business relationship and not a business-to-consumer relationship (as some have attempted to define the relationship), there is a strong argument to be made in favour of resisting over-regulation of the franchise relationship and supporting the current Canadian model whereby prospective franchisees have the opportunity to obtain independent advice, have the benefit of franchise disclosure and are entitled to certain rights and remedies for improper or non-disclosure under the legislation.
As of the date of writing, the Manitoba government has not announced whether it will enact franchise legislation. However, should the government decide to do so, the MLRC recommends in its Report that the government circulate draft regulations for public consultation. We will continue to monitor developments in this area and will provide updates in future issues of the Osler Franchise Review.