Franchise Disclosure and the Right to Future Exemptions

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By Ben Hanuka

This article, written by Ben Hanuka, was originally published by The Lawyer’s Daily on August 9, 2018. Click here to view the published article.

 Introduction

Canadian provincial franchise statutes oblige franchisors to provide prospective franchisees with a franchise disclosure document (FDD) and create several exemptions from this obligation. The exemptions deal with certain limited circumstances such as the extent of a franchisor’s involvement in a transfer, prescribed investment amounts, and renewals or extensions. This article addresses the question of whether a franchisor may deliver an FDD during the franchise grant process while reserving a future right to rely on one or more of the statutory disclosure exemptions. More specifically, whether a franchisor may deliver an FDD to a prospective franchisee while

a) reserving its right to rely on an exemption to the obligation to provide disclosure;
b) requiring the franchisee to review the FDD; and
c) including no-reliance clauses that purport to disclaim reliance on any of the information contained in the FDD.

Further, where the FDD is alleged to contain misrepresentations, can the no-reliance clause serve as a defence against statutory misrepresentation claims?

The Statutory Prohibition against Waivers and Releases

All provincial franchise statutes contain a prohibition against waiving or releasing franchisees’ statutory rights and franchisor’s statutory obligations (see section 11 of the Ontario Arthur Wishart (Franchise Disclosure) 2000 Act and Manitoba’s Franchises Act, section 12 of New Brunswick’s and Prince Edward Island’s Franchises Act, section 13 of British Columbia’s Franchises Act, and section 18 of Alberta’s Franchises Act).

A leading string of authorities, including 1518628 Ontario Inc. v. Tutor Time Learning Centres LLC, [2006] O.J. No. 3011, 405341 Ontario Limited v. Midas Canada Inc., 2010 ONCA 478 and 2176693 Ontario Ltd. v. Cora Franchise Group Inc., 2015 ONCA 152, have interpreted some aspects of this no-waiver provision. These decisions stand for the following propositions:

– There is a distinction between a waiver or release of present and future rights under the statute in favour of a franchisor, which is made void by this provision, and a settlement of an existing claim under the statute, which the courts will enforce.

– The prohibition only prevents a franchisee from waiving or releasing rights conferred by the statute, not rights which may arise from common law or equity.

No-Reliance Clauses

A no-reliance clause is a variation of the exclusion, limitation of liability, and release provisions commonly contained in standard form commercial contracts. Instead of purporting to limit or negate otherwise existing rights, however, no-reliance clauses set out an acknowledgment that the party has not relied on statements or representations in making the decision to enter into the agreement.

The purpose of a no-reliance clause is to eliminate a necessary element of the misrepresentation cause of action, i.e., reliance (see MacDougall, Bruce “Misrepresentation”, LexisNexis Canada Inc., 2016). It may be argued that by seeking to rebut the statutory presumption of deemed reliance on statements contained in FDDs, no-reliance clauses attempt to nullify misrepresentation claims without directly excluding, limiting or releasing the right.

Applying the No-Waiver Principle to No-Reliance Contractual Concepts

The jurisprudence about no-reliance clauses is traditionally framed in the context of a contract, where the parties have contractually agreed to the no-reliance.

How this concept applies in the context of providing an FDD for purposes of statutory disclosure – before the signing of a franchise agreement – is unclear.  It is arguable that in this scenario the no-reliance clause has not been agreed-to by the prospective franchisee as a matter of contract law.

The Ontario Superior Court has recently made some relevant observations in 2212886 Ontario v Obsidian Group, 2017 ONSC.  The parties entered into a franchise agreement for the operation of a restaurant. The franchisee was allegedly shown earnings projections, the basis of which were not disclosed in the FDD. In assessing this disclosure deficiency, the Ontario Superior Court stated in obiter that no-reliance clauses contained in the franchise agreement about profit representations were unenforceable. Giving effect to the no-reliance clauses would undermine the statutory rights of the franchisee and the strict disclosure obligations imposed on the franchisor.

While the Ontario Court of Appeal has recently overturned the Obsidian decision on unrelated procedural grounds because of partial summary judgment factors, thereby requiring trial (2018 ONCA 670), the comments by the motion judge may indicate the courts’ view on the issue.  In that case, the no-reliance clauses were contained in the franchise agreement, not the FDD. Ontario courts have not yet squarely addressed the issue of using no-reliance clauses in an FDD to simultaneously rely on an exemption from providing disclosure under the statute, while insisting that a compliant FDD has been delivered should that exemption be later found not to apply.

Ben Hanuka, J.D., LL.M., C.S., Q.Arb, is a member of the Ontario and British Columbia Bars and practises in the areas of commercial and franchise litigation and arbitration. He is certified by the Law Society of Ontario as a Specialist in Civil Litigation, and principal of Law Works‎®P.C. (in Ontario) and Law Works‎®L.C. (in British Columbia). The assistance of Robert Jones, student-at-law, in preparing this article is greatly appreciated.

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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.