Franchise Misrepresentation Section Won’t Stay Dormant for Long

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By Ben Hanuka

This article, written by Ben Hanuka, was originally published by The Lawyer’s Daily on December 6, 2017. Click here to view the published article.

Franchise jurisprudence in Ontario is steadily leaving its infancy years behind.  Yet, most cases about pre-sale disclosure are based on one, albeit vital, statutory cause of action – rescission.

The other key statutory cause of action that relates to pre-sale disclosure – ‘misrepresentation/failure to comply with disclosure obligations’ – has been so far mostly dormant.  There appears to be lack of appreciation of the role that this provision can have in the developing jurisprudence of pre-sale franchise disclosure claims in Canada.

The ‘misrepresentation/failure to comply with disclosure obligations’ cause of action will likely not stay dormant forever.  It can be a useful legal tool for franchisees as well as franchisors – the former, if rescission (or rescission alone) is not viable; the latter, as a potential defence platform against a fatal rescission claim.

Chances are that decisions from Ontario courts, and eventually from the courts of the other provinces with similar legislation, will start relying on this provision as an important legal basis to adjudicate franchise disputes.

All Canadian provincial franchise statutes provide for a misrepresentation cause of action.  The same provision in each of the provincial statutes (except Alberta) also includes a cause of action for failure to comply with statutory disclosure obligations.  (See section 7 of Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000, British Columbia’s, New Brunswick’s and PEI’s Franchises Act and Manitoba’s The Franchises Act; and section 9 of Alberta’s Franchises Act).

This cause of action (to which I will refer as a ‘section 7 claim’) seeks damages for either (i) misrepresentation by a franchisor of a material fact, or (ii) failure by a franchisor to otherwise comply with disclosure obligations under the Act.

Unlike a rescission claim, it does not in and of itself seek to end (or rescind) the franchise relationship between franchisor and franchisee; it does not ask to cancel or reverse the franchise purchase, and the franchisee may continue owning and operating the franchised business (whereas in a rescission, a franchisee returns the franchised business to the franchisor).

And unlike a rescission claim, it does not carry an automatic entitlement to damages.  Rather, a franchisee must prove causation – that damages resulted from the misrepresentation or failure to comply.  The section does, however, contain a deemed reliance about a misrepresentation.  So reliance is deemed but causation needs to be proved.

While the requirement to prove causation makes it less desirable to franchisees than a rescission claim, a section 7 claim may support damages for past losses, future losses, or both (unlike a rescission claim which seeks to bring the parties to the position they were in at the outset).

In addition, a section 7 claim provides additional parties against whom liability may be imposed. Unlike a rescission remedy which is limited to a franchisor and franchisor’s associate, a section 7 claim may be brought against the franchisor’s broker, franchisor’s agent (in Ontario), and every person who signed the disclosure document or statement of material change.  It provides defences to those liable, although only in respect of the misrepresentation component (not with respect to a failure to comply with the disclosure obligations).

Further, a section 7 claim does not require a delivery of a notice of rescission within the strict time limits in the legislation, as rescission claims do.  It is only subject to the general limitation period in the respective province for commencing proceedings.

And the general burden of proof applies to a section 7 claim.  With respect to the statutory defences in section 4, the onus of proof shifts after misrepresentation is proved – the person alleged to have made the misrepresentation must prove one or more of the statutory defences.

A section 7 claim and a rescission claim are not exclusive to one another.  In an early decision, the Court of Appeal for Ontario has held that the two may be pursued in tandem.

It is possible that an important feature of a section 7 claim has thus far been overlooked.  It may act as a middle ground between a rescission claim, which in some cases may be difficult to prove, and no claim at all.  This is perhaps a novel approach.  Unlike a rescission claim, a section 7 claim does not necessarily involve a fundamental disclosure failure.  A misrepresentation claim can be narrower in the scope or impact of the material facts involved.  Any misrepresentation of a material fact, or failure to comply with a disclosure obligation, entitles a franchisee to a cause of action for damages – that is, if it results in damages.

As an example of the middle ground between a rescission claim on the one hand and no claim on the other hand, during the recent oral arguments of the appeal in the Raibex v. AllStar Wings in the Court of Appeal for Ontario, in October 2017, the esteemed bench repeatedly asked why some claims by franchisees should not be made under section 7, rather than under the rescission remedy.

The court asked why some complaints of franchisees about issues which are fully within their knowledge, and where franchisees are not bound to complete the franchise purchase, i.e., they can walk way from the deal, should not be treated as section 7 claim – therefore requiring franchisees to prove damages rather than seek rescission.

Consistent with that approach, the focus of the defence in subsection 7(4) is on the knowledge of the franchisee purchaser: his or her knowledge of the misrepresentation or material change.  A person is not liable for misrepresentation under section 7 if the franchisee bought the franchise with knowledge of the misrepresentation or material change.

A section 7 has a fair bit of potential usefulness in adjudicating franchise disputes.  It remains to be seen whether the courts and practitioners will start relying on this presently dormant statutory provision.

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For more information about Law Works’ expertise and how we may be able to help you, please contact Ben Hanuka at https://www.lawworks.ca/book-a-consultation or by phone in Ontario at (855) 978-5293 and in British Columbia at (604) 262-1711.