Franchise Disclosure Documents in Canada: How Franchisors may avoid making “Misrepresentations” in them

Introduction

Franchisors are required under Canadian franchise legislation to disclose “all material facts” in their franchise disclosure documents. How can franchisors properly fulfill this requirement, and avoiding misrepresentations? How do franchise statutes define and how do the courts interpret “misrepresentation” of “material facts” and what are some potential consequences of making misrepresentations? What are some examples of complying representations versus non-complying misrepresentations under some reported court cases?

[In this paper, bolding of words has sometimes been added for emphasis.]

A.  Statutory Provisions

In Canada, there is no federal statute governing franchising.  Instead, franchising is governed by individual statutes of six provinces: British Columbia, Alberta, Manitoba, Ontario, New Brunswick and Prince Edward Island.  Ontario is the most populous province and it has had franchise legislation (Arthur Wishart Act) since 2000.  Ontario has the most reported franchise decisions.

 

The Arthur Wishart Act of Ontario (“Wishart”) governs franchising in that province.  Wishart contains the following definitions:

material fact” includes any information about the business, operations, capital or control of the franchisor or franchisor’s associate, or about the franchise system, that would reasonably be expected to have a significant effect on the value or price of the franchise to be granted or the decision to acquire the franchise;

misrepresentation” includes,

(a) an untrue statement of a material fact, or

(b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made;

Franchise statutes of the other franchise-regulated provinces have similar definitions.

 

All franchise statutes in Canada require that a properly detailed disclosure document be prepared by a franchisor and delivered to each of its prospective franchisees.  Wishart requires a disclosure document to contain the following details:

Under section 5 (4):

(a) all material facts, including material facts as prescribed; [Note: a franchisor may need to include material facts not listed in the applicable provincial franchise statute(s)/regulations.]

(b) financial statements as prescribed;

(c) copies of all proposed franchise agreements and other agreements relating to the franchise to be signed by the prospective franchisee;

(d) statements as prescribed for the purposes of assisting the prospective franchisee in making informed investment decisions; and

(e) other information and copies of documents as prescribed.

Any failure by a franchisor to fulfill these requirements could result in a “misrepresentation” giving a prospective franchisee the statutory right to sue for misrepresentation and claim damages; often, time elapses before a misrepresentation is discovered by a franchisee and a claim filed in court by it.

Specifically, Wishart provides:

Under section 7 (1):

If a franchisee suffers a loss because of a misrepresentation contained in the disclosure document or in a statement of a material change or as a result of the franchisor’s failure to comply in any way with section 5, the franchisee has a right of action for damages against,

(a) the franchisor;

(b) the franchisor’s agent;

(c) the franchisor’s broker, being a person other than the franchisor, franchisor’s associate, franchisor’s agent or franchisee, who grants, markets or otherwise offers to grant a franchise, or who arranges for the grant of a franchise;

(d) the franchisor’s associate; and

(e) every person who signed the disclosure document or statement of material change.  [The signatories must be two directors or officers of the franchisor; they will have joint and several liability with the franchisor for damages arising from any misrepresentation.]

(2) If a disclosure document or statement of material change contains a misrepresentation, a franchisee who acquired a franchise to which the disclosure document or statement of material change relates shall be deemed to have relied on the misrepresentation and may not waive its right to sue the franchisor for making the misrepresentation;

In addition to statutorily defined “misrepresentation”, case law has also considered what constitutes misrepresentation. It is important to note that the courts have the final say in how any statutory definitions are interpreted and applied.  As guidance, then, let’s have a look at some court cases that decided whether a misrepresentation had or had not occurred.

 

B.  Misrepresentation Found – Two Court Decisions

Here are brief reviews of two court decisions finding that a “misrepresentation” had occurred:

 Zippy Print (1994) BCCA

This case preceded franchise legislation in British Columbia (“BC”).  It involved a representation about pro forma financial statements given by a franchisor to a franchisee that induced the franchisee to enter into a franchise agreement.  The representation was characterized by the court as forming a “collateral contract” preceding and separate from the franchise agreement and which continued in force notwithstanding the “whole agreement” clause in the franchise agreement.  In awarding the franchisee forgiveness of its arrears of both gross sales and advertising royalties, the court found the franchisee’s pro forma statements were misleading misrepresentations which were “at worst intentional and at best negligent”.  [Note: Although this case preceded 2017 franchise legislation in British Columbia, it is still instructive on how courts may determine that a “misrepresentation” has occurred.]

Hyundai (2009) ONSCJ

This case involved an application by a franchisee for an injunction forcing the franchisor not to terminate the parties; franchise agreement. For a long time, Hyundai had asked the franchise to find better premises for its Hyundai dealership.  The franchisee had several times suggested relocation to a nearby “Saturn site”, which the Hyundai rejected as unacceptable.  Hyundai then made a settlement proposal to the franchisee allowing it to continue in its existing location (and restricting it from operating elsewhere).  Unbeknownst to the franchisee, Hyundai had obtained a right of first refusal for the Saturn site and had entered into discussions with a third party to become its franchisee there.  Hyundai’s failure to disclose such activities to the original franchisee was found by the court to amount to a material misrepresentation [by omission] which induced the original franchisee to enter into the settlement agreement.  Given the improper activities of Hyundai, the court cancelled the settlement agreement, thereby allowing the original franchise agreement to continue in force.

 

C.  No Misrepresentation Found – Two Other Court Decisions

Here are brief reviews of two other court decisions.  These ones found that a misrepresentation had not occurred:

Healey v. Canadian Tire (2012) ONSCJ

Canadian Tire (“CT”) appealed an arbitration decision awarding Healey $250,000 against CT for breach of statutory duties of “fair dealing” and “good faith” based on CT’s forecasts of future sales and profits of a re-sale location that had been losing money.  On the facts, the court found that Healey would have bought a franchise at the location even if the forecasts had been worse (therefore, no real reliance on the forecasts).  Also, that Healy himself could have done better ‘diligence’ on the store’s operating results.  The court held that the forecasts made by CT were made within the realm of reasonableness and had not been negligently formed.  Finally, the court found that the forecasts were not really “representations” at all, because they dealt with future potentialities and not present facts. CT’s appeal was therefore allowed, the court finding that no misrepresentation had occurred.

Sharbern v. Vancouver Airport Centres Ltd. (2011) SCC

Vancouver Airport Centres ltd. (“Developer”) was a commercial real estate developer that built two condominium hotels, one a Marriott and the other a Hilton, near the Vancouver Airport.

The Marriott hotel’s real estate disclosure document offered potential investors a guarantee of 12% p.a. return for 5 years under a hotel management agreement. The later disclosure document for Hilton investors did not mention the Marriott guarantee nor did it provide a similar one.

A class action was commenced by Hilton investors alleging that a misrepresentation by omission had occurred in the Hilton disclosure document which entitled them to compensation from the Developer.  However, the court held that a “material false statement” (by omission) had not occurred.  It applied a standard of “materially” that inquired whether there was a “substantial likelihood” that a reasonable investor would consider such an omission to be vitally important, in the mix of substantial other information provided in the Hilton disclosure document.  The Supreme Court of Canada decided in favour of the Developer, in holding that no misrepresentation had occurred.

 

Closing Comments

 This paper provides general information only as at April, 2018 and may not be relied upon as specific legal advice for any particular case.

The author, John L. Rogers, thanks Ethan Plato of Clark Wilson LLP, who kindly conducted case law research for this paper.