By: Mandana Niknejad, Law Works
Editor: Ben Hanuka, Law Works
In Alphataho Inc., et al v Maaco Canada Partnership LP, et al, a decision of the Court of Queen’s Bench of New Brunswick on a motion for summary judgment, released on January 17, 2022, the court held the failure of the franchisor, Maaco, to include the required financial statements in its franchise disclosure document entitled the franchisee to rescind the franchise agreement under section 6(2) of New Brunswick’s Franchises Act.
The court also held that, while Maaco would have otherwise been entitled to a statutory exemption from the obligation to provide its financial statements, Maaco did not include a statement to that effect in its certificate. The Regulation to the Franchises Act requires a franchisor’s certificate to refer to such an exemption, if a franchisor relied on an exemption. Since its certificate did not do so, Maaco was thus not entitled to claim this exemption in the case.
On the issue of damages, the court directed a conventional trial of an issue to assess the franchisee’s damages since the bulk of the damages claim was based on loss of income, which raised significant contested evidence.
In February 2017, Maaco Canada Partnership LP delivered a franchise disclosure document to the franchisee’s principal, in connection with the purchase of a Maaco collision and auto painting centre franchise in New Brunswick. The disclosure document was extensive but contained Maaco’s 2014 financial statements, rather than its 2015 financial statements.
Maaco was large enough that it had at least 25 franchisees in a single jurisdiction outside of Canada. That qualified it for a statutory exemption from the obligation to include its financial statements in its disclosure document. However, the disclosure document did not avail itself of this disclosure exemption.
In April 2017, franchisee entered into a franchise agreement with Maaco. In June 2018, the repair centre started operating. In October 2018, the franchisee served a notice of rescission on Maaco.
The franchisee was entitled to rescission because of the failure to include 2015 financials
The court found that Maaco failed to comply with its statutory disclosure obligations by failing to include its 2015 financial statements in the disclosure document that it delivered to the franchisee.
The court rejected the franchisor’s argument that the failure to do so did not deprived the franchisee from the ability to make an informed investment decision, and that this failure was a technicality rendering the disclosure document imperfect, but not void. The court relied on recent Ontario decisions, including Mendoza v. Active Tire & Auto Centre Inc., in applying an objective standard and confirmed that the rescission remedy in section 6(2) of the statute turns only on the failure of the franchisor to deliver a disclosure document. It is not dependent on subsequent conduct of the franchisee.
The court concluded that Maaco’s failure to include the 2015 financial statements amounted to a fatal flaw, i.e., rendering the disclosure document void.
The court dismissed Maaco’s reliance on the mature franchisor exemption
The court also rejected Maaco’s reliance on the statutory exemption in the Franchises Act and section 8(1) of the Regulation from the obligation to include its financial statements, the “mature franchisor” exemption. The Court found that Maaco would have undoubtedly been otherwise entitled to this exemption because it met all the requirements in section 8(1) of the Regulation, including having at least 25 franchisees in a single jurisdiction outside of Canada. This would have entitled Maaco to an exemption of its obligation to contain the required financial statements in its disclosure document.
Maaco could have explicitly chosen to avail itself of the exemption to disclosure of financial statements. However, the certificate in Maaco’s disclosure document did not state that it was relying on this exemption. Under New Brunswick’s Franchises Act, and subsection 6(1) of the Regulation, the certificate requires to be in Form 1. That form requires that the certificate explicit wording about the franchisor’s reliance on an exemption. Maaco’s certificate did not claim an exemption.
The court held that, given the central role and importance of financial statement disclosure within the scheme of the Franchises Act, the failure of Maaco to claim the exemption was not a mere technical defect. The requirement to claim the exemption and give the required notice in the certificate is a substantive requirement. It is designed to ensure that the prospective franchisee is aware of the fact that it is not receiving the full financial picture and he can decide to proceed or not as the case may be.
Further, the court held that to permit retroactive exercise of the exemption would undermine the protections that the Franchises Act is intended to provide to franchisees and encourage “poor behaviour” by franchisors.
There were various other alleged disclosure deficiencies, including that the certificate was signed one and a half years before the delivery of the disclosure document and issues about piecemeal disclosure. The court held that these issues, either individually or collectively, would not have rendered the disclosure document so deficient as to amount to no disclosure at all.
On the issue of the franchisee’s damages, the court held that a significant amount of the claim could not be substantiated on the record, based on lost income, and that a trial to assess damages was required. There were issues about whether the costs that the franchisee was claiming as losses under subsection 6(6)(d) of the Franchises Act were reasonably incurred. Lost income claim formed the bulk of this claim. It was based on two years of wages, including salary, bonuses, a stipend for the franchisee’s children’s educations and other amounts. This raised issues of remoteness and mitigation and which could not be resolved on a motion for summary judgement. The damages claim raised genuine issues requiring a trial. The court held that this could not be done by way of a mini-trial. The issues about remoteness and sustainability of the loss of income claim were likely factually complex requiring a conventional assessment of damages at a trial, after discovery.
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