Franchisees Must Not Take Advantage of Typographical Errors

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Author: Jeff Nguyen, Student-at-Law, Law Works P.C.         
Editorial Committee: Law Works P.C.
Editor: Ben Hanuka

Franchise agreements tend to be long and dense documents containing boilerplate language.  Sometimes, they may contain typographical errors that are not discovered until after the parties sign the contracts.  Courts are prepared to overlook minor errors where the intention of the parties is clear.

A recent case in Alberta considered whether a franchise agreement is binding where the signature page identified the wrong party.  In Hanewich v. Budget Brake & Muffler Franchising, 2016 ABQB 727, Master J.T. Prowse of the Alberta Court of Queen’s Bench held that typographical errors of this kind do not void a contract where it was clear which name should have appeared on the signature page.  The correct name otherwise appeared throughout the agreement and the parties had conducted business as usual with each other for over seven years.

The facts

The plaintiff franchisees, John Hanewich and 1211550 Alberta Inc. (collectively “Hanewich”), signed a franchise agreement with Budget Brake & Muffler Franchising (“BBM Franchising”) in 2006.  The franchise began operating at a loss in 2012.  By the end of 2013, Hanewich terminated the franchise agreement with more than two years remaining on the term.  BBM Franchising counterclaimed for post-termination damages.

Although the franchise agreement identified BBM Franchising as the franchisor throughout the contract, the name that appeared on the signature page was BBM Franchising’s parent company, Budget Brake & Muffler Distributors (“BBM Distributors”).

Hanewich argued the following:

• There was a “mutual mistake” by the parties;
• The franchise agreement should be rectified with the correct franchisor’s name; and
• Hanewich’s right of rescission ran from the rectification date, and therefore within the two-year limitation period under the Alberta Franchises Act.

Master Prowse dismissed Hanewich’s claims and granted summary judgment to BBM Franchising.

No mistake, no rectification, no rescission

The court refused to declare that there was a mutual mistake because both parties knew that BBM Franchising was the franchisor under the franchise agreement.

It was clear that Hanewich intended to be bound by an agreement with BBM Franchising, not BBM Distributors.  Hanewich knew before signing the franchise agreement that BBM Franchising and Distributors were two separate entities.  Between 2006 and 2013, Hanewich paid 550 invoices to BBM Franchising for franchise-related fees.

Because there was no mutual mistake, the court held that it did not need to rectify the franchise agreement with the correct franchisor’s name.

Master Prowse also rejected Hanewich’s argument that the limitation period under the Franchises Act would have ran from the date of rectification.  The Franchises Act limits rescission remedies to two years from the date the franchisee is granted the franchise.  Hanewich sought to rescind the franchise agreement more than seven years after purchasing the business.

Although Master Prowse refused to rectify the franchise agreement, he held that the date of rectification would have been irrelevant to the limitation period.  BBM Franchising granted the franchise in 2006 when Hanewich began operating it.  There was no authority supporting Hanewich’s argument that BBM Franchising had never granted the franchise until the date of rectification.

Court ordered Hanewich to pay damages for non-payment of advertising fees

Under the franchise agreement, Hanewich had to pay 4% of his monthly gross sales to BBM Franchising’s advertising fund.  Because it was no longer necessary for BBM Franchising to advertise in Hanewich’s territory, Hanewich argued that BBM Franchising suffered no damages as a result of the non-payment of advertising fees.

The court disagreed.  The franchise agreement contained a clause that described the purpose of the advertising fund as maximizing public recognition of the franchise system generally.  The clause also stated that the franchisor had no obligation to ensure that each franchisee benefitted directly from the advertising fee.  The language of the contract was clear.  The court concluded that the advertising fee was a contribution for the benefit of all franchisees, and ordered Hanewich to pay the outstanding advertising fees.

Court enforced accrued interest on overdue payments

BBM Franchising required Hanewich to pay interest at 24% per year on any overdue payments under the franchise agreement.  BBM Franchising was entitled to royalties and advertising fees for the remaining term of the franchise agreement, which became due on the date of termination in January 2014.

The court rejected Hanewich’s argument that he should not pay the accrued interest because the remaining royalties and advertising fees were damages ordered by the court, not amounts due on the date of termination.  Master Prowse held that the date of judgment did not affect when the amounts became due, and ordered Hanewich to pay the interest accrued from the termination date.

Court ordered costs against Hanewich

The court rejected Hanewich’s argument that ordering costs against him would have rewarded BBM Franchising for its negligence in drafting the franchise agreement.  Since the case did not involve a mutual mistake, the court ordered costs against Hanewich because of his wrongful termination of the franchise agreement.

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 at (855) 978-5293.

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