MISREPRESENTATION AND DISCLOSURE DEFICIENCIES Ben Hanuka * Principal, Law Works P.C. * J.D. (Osgoode 1996), LL.M. (Osgoode 2005), Certified Specialist in Civil Litigation “Practitioner Sessions on Franchise Law “, The Commons Institute, February 8, 2015

CAUSE OF ACTION

TWO CAUSES OF ACTION COMBINED Section 7(1) of the Ontario Act If a franchisee suffers a loss because of a misrepresentation contained in the disclosure document or in a statement of a material change or as a result of the franchisor’s failure to comply in any way with section 5.

CROSS-REFERENCES Alberta - Franchises Act, RSA 2000, c F-23 Cause of action limited to misrepresentation only: 9(1) If a franchisee suffers a loss because of a misrepresentation contained in a disclosure document, the franchisee has a right of action for damages against … [1]

CROSS-REFERENCES (2) Identical provisions to Ontario  PEI - Franchises Act, RSPEI 1988, c F-14.1, s. 7(1)  New Brunswick - Franchises Act, SNB 2014, c 111, s. 7(1)  Manitoba - The Franchises Act, CCSM c F156, s. 7(1)

WHEN IS IT USEFUL? 1. When limitation period: beyond two year rescission period 2. If franchisee does not want to relinquish business 3. No need to prove fundamental disclosure failure (except if based on material fact) 4. More defendants – other than franchisor and franchisor’s associate – available. 5. If incurred damages other than those in s. 6(6) [5]

CAN BE PLEAD WITH RESCISSION Ontario Ltd. v. Dig This Garden Retailers Ltd. (2005) (C.A.), at paras. 38, 39  Right of action for damages under section 7 is in addition to rescission remedy.  The reference in this case is focused on the ‘failure to comply with s. 5” (i.e., not misrepresentation) [2]

CAN BE PLEAD WITH RESCISSION Dig This Garden at paras 38 Failure to comply in any way with s. 5 includes a failure to provide the disclosure document. In circumstances where a franchisor fails to make the payments required of it under s. 6(6), those damages could include such amounts. As well, if a franchisee suffered any other loss as a result of the franchisor's failure to comply with s. 5, the franchisee may sue for such damages under s. 7. Citation: 256 DLR (4th) 451; 7 BLR (4th) 1; [2005] OJ No 3040; 141 ACWS (3d) 741; 201 OAC 95, 2005 CarswellOnt 3097 [2]

CAN BE PLEAD WITH RESCISSION While the Dig This Garden case if focused on the “failure to comply” component:  If the s. 7 claim is based on material fact, it would make no difference whether claiming misrepresentation or failure to comply.

KEY FEATURES  Does not seek to cancel or reverse the franchise purchase.  Franchisee is ‎ able to continue owning and operating the franchised business - Whereas a rescission ‎ generally is consistent with a return of the franchised business to the franchisor. [2]

KEY FEATURES  No automatic entitlement to damages.  Franchisee to prove: - damages resulted from the misrepresentation; - the amount of damages that resulted from the ‎ misrepresentation. ‎  But, unlike with rescission claims, damages may be claimed for past losses, future losses, or both. ‎ [3]

NO DEROGATION OF OTHER RIGHTS S. 9. The rights conferred by this Act are in addition to and do not derogate from any other right or remedy a franchisee or franchisor may have at law. Cross-Reference: Similar provision in all provinces

FAILURE TO COMPLY WITH S. 5

Failures to comply that could result in losses: * a.Losses as a result of timing in compliance- 14 days… b.Material change c.Accurate, clear and concise * * Excluding Alberta

MISREPRESENTATION AND FAILURE TO COMPLY WITH S. 5– BASED ON MATERIAL FACTS

DEFINITION OF MISREPRESENTATION – MATERIAL FACT Boil down to material fact It is in the definition (same definition in all five provinces): “misrepresentation” includes, (a) an untrue statement of a material fact, or (b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made;

FAILURE TO COMPLY WITH S. 5 – MATERIAL FACTS These disclosure failures are in substance material facts if they result in losses: a.Financial Statements b.Copies of all agreements c.Prescribed statements d.Other information or documents - as prescribed in the Regulation * Excluding Alberta

FAILURE TO COMPLY WITH S. 5 - MATERIAL FACTS (2)  Have to prove causation – to link disclosure failure with losses: “if a franchisee suffers a loss because of…” **  By implication, the disclosure deficiency has to be important – has to be consequential, i.e., has to be material fact Cross-References: * Excluding Alberta ** In all five provinces [1]

FAILURE TO COMPLY WITH S. 5 - MATERIAL FACTS (3) Material fact is of course a key component of disclosure obligations: 5(4) The disclosure document shall contain, (a)all material facts, including material facts as prescribed; Cross-References: Same requirement in all other provinces

MATERIAL FACTS Case law still in its infancy: First time in Ontario, in 2006: The Tutor Time decision - Court found regulatory deficiencies in day care operation to be material fact, see paras. 51 to 73 Citation: Ontario Inc. v. Tutor Time Learning Centres, LLC, [2006] CarswellOnt 4593; [2006] OJ No 3011 (QL); 150 ACWS (3d) 93 (S.C.J. Comm List)

MATERIAL FACTS (2) Most recent case: Ontario Inc. v. Pet Valu Canada Inc., 2016 ONCA 24, released January 14, 2016 One issue was whether non-existent volume purchasing power is inherently a material fact i.e., not that the franchisor receives volume rebates, but to the contrary – that it has no volume purchasing power.

MATERIAL FACTS (3) Pet Valu, cont‘d The motion judge ruled that non-existent volume discounts constituted a material fact under the Act. The Court of Appeal chose not to deal with this discrete issue and so it remains open. To find this as material fact is inherently based on reverse logic: implies a franchisor is presumed to receive volume rebates absent disclosure to the contrary. [1]

PARTIES

KEY PARTIES S. 7(1) (a)Franchisor (b)Franchisor’s agent (sales agent – s. 0.1 of the Regulation) * (c)Franchisor’s broker ** (d)Franchisor’s associate ** (e)Every person who signed the disclosure document or statement of materials change (i.e., director, officer) Cross-References: * Only Ontario ** Excluding Alberta

JOINT AND SEVERAL LIABILITY Joint and several liability (s. 8(3)) Cross-References: Same in all provinces

DEFENCES

DEFENCES AGAINST MISREPRESENTATION Several defences against misrepresentation claims But no indication of defences against failure to comply with section 5

MAIN DEFENCE OF FRANCHISOR  No liability of a person for misrepresentation if franchisee acquired the franchise with knowledge of the misrepresentation (s. 7(4)) Cross-References: Same in all provinces

DEFENCES OF OTHERS (1)  At any time: FDD given without person’s consent, and if becomes aware, person advised franchisee that given without consent (s. 7(5)(a)) Cross-References: Same in all provinces

DEFENCES OF OTHERS (2)  Before purchase: if person becomes aware of misrepresentation and withdraws consent and gives notice to franchisee (s. 7(5)(b)) Cross-References: Same in all provinces

DEFENCES OF OTHERS (3)  Relating to any part of the FDD made on authority of an expert, or extract of an expert report, no reasonable grounds to believe, and did not believe, that had misrepresentation, etc. (s. 7(5)(c)) Cross-References: Same in all provinces

BURDEN OF PROOF

BURDEN OF PROOF (1)  Plaintiff to prove breach of section 7 - General burden of proof applies to a cause of action  No need to prove reliance - deemed reliance (s. 7(2), (3)) Cross-References: Same in all provinces [1]

BURDEN OF PROOF (2)  But must prove causation  “if a franchisee suffers a loss because of…” (s. 7(1))

BURDEN OF PROOF – SHIFTING ONUS (1) Exceptions or exclusions: the burden of proving an exemption or exclusion from a requirement is on party claiming it (s. 12) Applies where:  trying to prove that franchisee was aware of the alleged misrepresentation  dealing with disclosure exemptions References: same in all provinces [2]

BURDEN OF PROOF – SHIFTING ONUS (2)  Onus shifts (after misrepresentation proved) to person alleged to have made the misrepresentation to prove defence (s. 7(4)) Cross-References: same in all provinces

THANK YOU Ben Hanuka Principal, Law Works P.C., Ontario Ontario’s Regional Franchise and Business Disputes Boutique Toll Free: (866)