Ben Hanuka, Principal
Anthony Pugh, Associate
Dan Charzewski, Paralegal/Litigation Clerk
Rebecca Colley, Digital Marketing Manager
In franchise disputes, it is critical for parties to assemble all evidence that is relevant to the case. Sometimes, disputes can involve a great number of documents, especially those involving operational issues. Franchisors and franchisees involved in these types of disputes should start gathering documents and evidence as soon as possible. Litigation counsel will need evidence to be as complete and thorough as possible. It will be to each party’s benefit (franchisees, franchisors, and parties to a commercial dispute) to gather these documents at the very early stages of a dispute. Doing so will not only end up strengthening that party’s case, it may also help promote settlement discussions earlier than when they otherwise would occur.
These guidelines apply to all commercial and franchise disputes, including franchise claims of rescission, misrepresentation, system changes, and bad faith conduct, as well as commercial disputes. Most of these guidelines apply to court proceedings (and with some modification to arbitration proceedings).
Pre-litigation: notice of rescission
In rescission claims, the first official step is when a franchisee delivers a notice of rescission to the franchisor. It is generally done before legal proceedings (court or arbitration) commence.
The evidence that a franchisee should provide to its litigation counsel when preparing a Notice of Rescission should include a mix of the preliminary key documents that are listed below under the pleadings stage (FDD, franchise agreements, etc.) and financial documentation about the franchisee’s total investment, payments, and any losses (listed further below).
Another pre-litigation phase that comes up in termination disputes is de-identification (or “de-branding”) of the franchised business. Franchise terminations often involve disputes about whether the former franchisee had properly de-identified its operation of all proprietary information and materials.
Each party to such a dispute should start gathering evidence as early as possible about the former franchisee’s current operation and any alleged misuse of trademarks, information, lists, products, etc. that are proprietary to the franchisor.
If there are any non-competition restrictions in the franchise agreement, each party should produce to its counsel evidence about whether the franchisor has an interest in the disputed territory and whether the non-compete restrictions are reasonable in light of other competition in the territory.
The claim and defence/response stage
When legal proceedings commence, either in court or arbitration, the claimant will file a claim and the respondent or defendant will file a defence or response. This is called the “pleadings” stage in court proceedings. Litigation counsel should provide a client who is a party to a court or arbitration proceeding with a list of categories of documents that may be relevant to the dispute and that are likely needed to draft the claim or defence/response.
The core documents
Clients should provide their litigation counsel with copies of at least the following basic core documents early on:
- the franchise disclosure document (FDD) including all its exhibits (such as the franchisor’s financial statements);
- the franchise agreement;
- lease and sublease;
- all other agreements;
- all documents exchanged before the parties entered into the franchise agreement, including all representations and negotiations, and
- key recent correspondence leading up to the current dispute.
The scope of these documents includes evidence that not only favours the position of a party, but also documents that are more favourable to the other side’s case. The rules governing production of documents in a legal dispute require that each party produce to the other side all documents that are relevant to any issue in the case, whether the documents are favourable or not.
It is critical that a party to a legal proceeding provide its litigation counsel with all potentially unfavourable documents upfront as soon as possible. Doing so will help litigation counsel plan how to integrate it into the overall evidence and the theory of the case. The worst that can happen is for litigation counsel to be taken by surprise when the opposing side raises that evidence when questioning the client.
Record of correspondence
Parties should always retain copies of all relevant correspondence with the other side, so that they can produce them in the event of a dispute. Correspondence includes text messages, emails, and, possibly, phone records. If a party took notes at a relevant meeting, this can also be valuable evidence.
The discovery stage
After the pleadings stage is completed, each party is generally required to produce to the other side a formal package of all relevant documents that are in the party’s possession, power or control, organized chronologically with a table of contents. This is called an “affidavit of document”, and the package of documents is called “productions”.
For electronic documents, such as emails, it is best to produce them in their original electronic format (called “native” format). That will ensure that the metadata of the electronic documents is retained intact. Doing so also preserves the email string and attachments, which helps keep the documents organized.
In franchise disputes involving termination of the franchise agreement as a result of operational or other defaults, relevant evidence will include the operational issues that ultimately led to the termination. This should include at least the following:
- the operating manual;
- any other operating directives or policies;
- all inspection and audit reports,
- demand correspondence, and
- all notices of default and the notice of termination.
Evidence about losses
A party to a franchise dispute should provide its litigation counsel with all financial and damages documentation relevant to the franchisee’s total investment and alleged losses. This is especially important in rescission claims where the franchisee is seeking to recover the costs that it incurred in the setup and operation of the franchised business.
A franchisee should provide evidence to support its damages claim, including the following:
- invoices and receipts of all payments for construction and other initial setup, including equipment purchases, leaseholds, etc., whether to the franchisor, franchisor’s associate or any third party;
- invoices and receipts of all franchise-related payments to the franchisor (such as the franchise fee and royalties);
- bank statements, financial statements, ledgers, tax returns, and
- receipts and invoices related to at least the key amounts that make up the franchisee’s alleged losses.
For litigation counsel representing a franchisor who is challenging a rescission claim, the focus should be on legitimate areas to challenge the franchisee’s claim for losses and damages, if it appears that the franchisee’s damages claim is inflated.
Parties to franchise disputes, or other commercial disputes of similar scope, are well advised to put the effort and resources into producing all relevant documents and evidence as early as possible for their litigation counsel. Gathering and organizing all relevant documents can be a substantial undertaking. Doing so will help litigation counsel build up the party’s claim or defence, be it a franchisor, franchisee, or a party involved in a commercial dispute. The devil is in the details, and the more detail the better. The more thorough and complete the evidence that a party provides to its litigation counsel, the better prepared litigation counsel will be to build a claim or defence to best serve the client’s interests.