By: Anthony Pugh, Law Works
Editor: Ben Hanuka, Law Works

In 1777453 Alberta Ltd. v. Got Mold Disaster Recovery Services Inc., a January 15, 2021, decision of the Court of Appeal of Alberta, the court allowed in part a franchisee’s appeal of a decision of a chambers judge who dismissed the franchisee’s claim on the ground that it had no net losses, with double costs to the franchisor.

Key facts

The applicant, 1777453 Alberta Ltd. was a franchisee in the Got Mold Disaster Recovery Services franchise system.  177 delivered a Notice of Cancellation to Got Mold under section 13 of Alberta’s Franchises Act, within two years of signing the franchise agreement.  After sending the Notice of Cancellation, 177 de-branded and continued to operate as a mold remediation services company.

177 brought an action and a motion for summary judgment for cancellation of the franchise agreement with Got Mold.  Before the hearing of the summary judgment motion, the parties consented to an Order that 177 was entitled to cancellation, and that the parties would only dispute what compensation, if any, 177 was entitled to.  In addition, Got Mold agreed not to pursue claims against various principals of Got Mold.  A Master ordered that the assessment of the franchisee’s “net losses” under section 14(2) of Alberta’s Franchises Act would proceed to a special chambers application before a judge.

The chambers judge held that the franchisee did not suffer any net losses because, among other things, he factored the profits of the independent business that the franchisee operated after cancelling the franchise agreement.  He then proceeding to dismiss the whole of the franchisee’s action, including its claims for breach of contract and misrepresentation.

The Chambers Judge erred by dismissing the whole action

The Court of Appeal held that the special chambers application was only for an assessment of the franchisee’s net losses under section 14(2) of the Franchises Act.  There was no agreement that the appointment would cover more than that issue, including the franchisee’s claims for breach of contract and misrepresentation.

The court noted that the franchisee did not specifically claim any relief for the purported breaches of the franchise agreement, and its misrepresentation claim was also for net losses.  Nevertheless, the court held that the franchisee could continue pursuing these claims, as any damages may be separate from the net losses awarded for the cancellation claim.  The court therefore held that the chambers judge exceeded his jurisdiction by dismissing the whole action.

The Chambers Judge misinterpreted the meaning of “net losses”

The court held that the meaning of net losses did not go beyond the costs of acquiring, setting up and operating the franchise.  It did not include future profits of a debranded continuation of the franchise.  This is reinforced by the objects of the act, which is to restore the franchisee to the position it was in before it entered into the franchise agreement.

The court also noted that the Franchises Act required the franchisor to make payment within 30 days – a requirement that would lose its meaning if profits from a debranded business were included in the calculation.

Further, taking these sorts of profits into consideration would overcomplicate the analysis, which ultimately is a simple review of whether the franchisee’s expenses acquiring, setting-up, and operating the franchise exceed its revenues.  It was not even clear what the franchisee’s profits were following the cancellation.

The court upheld the application judge’s assessment of the expert reports

At the hearing, the franchisee’s expert based his testimony on the franchisee’s financial statements.  The franchisor’s expert took into consideration whether each expense was reasonably connected to the acquisition, set-up and operation of the franchise.  This resulted in the franchisor’s expert adjusting certain amounts, such as the amounts that the franchisee claimed for management fees.

The chambers judge preferred the evidence of the franchisor’s expert and adjusted certain items, such as the management fees, for reasonableness.  The franchisee appealed, based largely on a complaint that the franchisor’s expert relied on unsworn information from the franchisor about comparable salaries.

Following the jurisprudence, the court held that the franchisor’s expert’s reliance on this evidence may affect weight, but not admissibility, and that the chambers judge was entitled to rely on it.  The court further noted that the franchisee’s lawyer did not object to the evidence when the franchisor served the expert report many months before the hearing, and did not object to the chambers judge’s direction to stop questioning the expert on this issue.  Finally, the court held that the chambers judge was entitled to assessment the claimed losses for reasonableness.

As a result, the court held that the franchisee’s net losses were about $18,000, and set aside the chambers judge’s costs award against the franchisee, which were over $88,000.

Anthony Pugh Associate