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This article was originally published in The Lawyer’s Daily on March 13, 2020, under the same title. The assistance of Anthony Pugh, Associate at Law Works PC, in writing this article is acknowledged with thanks.
This article provides an outline of frequently claimed substantive causes of action in franchise disputes. The causes of action addressed in this article are statutory claims.
(As with the previous article, references to statutory sections are to provisional franchise Acts in British Columbia, Manitoba, Ontario, New Brunswick and P.E.I.; the Alberta statute has somewhat different provisions.)
Most claims appear to center around rescission based on allegations of failure to provide a disclosure document. Here are some of the key questions to consider:
Misrepresentation and Failure to Comply Under Section 7
Some claims are brought under section 7 of the Act, for misrepresentation or failure to comply with the disclosure obligations. These may be brought exclusively or concurrently with a rescission claim. Here are some scenarios where a franchisee may opt for a claim under this section:
Section 7 provides several defences (which do not appear to have been used thus far in jurisprudence).
The section also provides for a deemed-reliance on the alleged misrepresentation or disclosure failure. However, it is unclear if a franchisee is required to prove causation (see further on causation under Damages below).
The provincial statutes provide for various exemptions to the obligation to provide a disclosure document. The party claiming the exemption, i.e. the franchisor, has the burden of proving the exemption.
Some of the common ones are the following (there are several other exemptions, which have thus far been rarely used):
Claims for the breach of the duty of fair dealing and good faith are based on the mutual obligation of parties to the franchise agreement to perform their respective contractual obligations in a commercially reasonable manner. These claims center around, first, an interpretation of what the contractual obligation is, and second, whether it is being enforced or performed in a commercially reasonable manner.
Right to Associate
This claim is typically brought in class action or group claim alleging interference by franchisor with the right to associate. Franchisees need to show evidence of interference, whether direct or indirect, including interference, prohibition or restriction. It covers activities of penalizing, attempting to penalize, or threatening to penalize the exercise of this right.
Claims Against Individuals
A franchisee’s claim against a franchisor may be in addition to claims against related parties, such as franchisor’s associates. This may include individuals. The statutes define “franchisor’s associate” as a party that (a) controls or is controlled by the franchisor (or is controlled by another person who also controls the franchisor), and (b) is directly involved in the grant of the franchise, or alternatively exercises significant operational control and has the right to receive payments from the franchisee.
There are also potential claims against individuals under section 7, addressed earlier.
Waivers and Settlements
Some disputes may arise about the impact of a settlement between the franchisee and the franchisor and whether it bars future claims by the franchisee. Provincial statutes bar the waiver or a release by a franchisee of statutory rights or franchisor’s obligations, but settlements are not prohibited. The key factor is whether a true settlement is involved, rather than a waiver or a release. This issue may require an analysis and evidence about typical common law elements of what constitutes a settlement.
In cases of rescission, refunds as mandated by the statute tend to be easily quantifiable. If a franchisee also claims losses on top of that, these tend to be more contentious and may require forensic accounting evidence about net losses. This may also raise issues about operation by the franchisee, i.e. alleged failures to comply with system standards, etc.
For claims under Section 7 for alleged misrepresentation or failure to comply with disclosure obligations, it is remains unclear based on jurisprudence whether a damages claim under this section are automatic is there is also entitlement to a rescission.
It also remains unclear if these damages require proof of causation, i.e. that damages were caused by the alleged failure, or whether damages for all of a franchisee’s losses automatically flow once the liability is established without the need to prove causation.Tags : Rescission, Disclosure, Good & Bad Faith, Misrepresentation, Resale, Damages, What is a Franchise, Settlement
*Law Works is a Canadian law firm. It publishes a newsletter to inform subscribers about franchise and arbitration disputes. You may unsubscribe at any time by clicking the ‘unsubscribe’ link in our emails.
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