Mapleleaf Franchise Concepts, Inc. Plaintiff - v. -, 2011 ABQB 594

Court of Queen ’ s Bench of Alberta Citation: Mapleleaf Franchise Concepts, Inc. v. Nassus Frameworks Ltd., 2011 ABQB 594 Date: 20110928 Docket: 0901 12889 Registry: Calgary Between: Mapleleaf Franchise Concepts, Inc. Plaintiff - and - Nassus Frameworks Ltd. and Bernard Drouin Defendant _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice G.C.

Hawco _______________________________________________________ Background [ 1 ] The Plaintiff, Mapleleaf Franchise Concepts, Inc. ( “ Mapleleaf ” ), carries on business as a franchisor with respect to the sale of framing and art supplies and services under the name “ Framing and Art Centre ” . The Defendant, Bernard Drouin, is a principle of the Defendant Nassus Framework Ltd. ( “ Nassus ” ). Mr. Drouin and his spouse acquired the shares of Nassus on March 30, 1999. Mr. Drouin subsequently became the sole shareholder of Nassus. [ 2 ] Nassus had been a franchisee of Mapleleaf when Mr.

Drouin acquired his shares in the company. In March 1999, Mr. Drouin had conversations and correspondence with Mapleleaf. The discussions eventually resulted in Mr. Drouin receiving a disclosure document on April 23, 1999. He was asked to review that and return it to Mapleleaf ’ s home office by April 26. That document, dated April 1, 1999, was entered as Tab 1 of Exhibit 1 of this trial. Item XIV of the disclosure document dealt with termination, renew and transfer of the franchise. It stated, in part:

A copy of the Framing & Art Centre Franchise Agreement is attached to this Disclosure Document as Exhibit B. The table below lists important provisions of the Franchise Agreement. i. Your obligations on termination/non-renewal Articles XIV and XV Obligations include complete de- identification, payment of amounts due, and return of all store records, manuals and training materials and compliance with a covenant not-to- compete. r. Non-competition covenants after the franchise is terminated or expires

Article XV.C No competing business for 2 years within 3 kilometers of another Framing & art Centre franchise (including after assignment). [ 3 ] The Exhibit B to the Disclosure Document was the draft agreement of the Franchise Agreement.

Article XV contained the following covenant: C. The Franchisee convenants that, except as otherwise approved in writing by the Company, for a period of two (2) years after expiration or termination of this Franchise Agreement, regardless of the cause for termination, neither the Franchisee nor any person owning five percent (5%) or more of the equity interest of the franchise, regardless of whether such interest be expressed in partnership units, shares or otherwise, shall: ... 3.

Either directly or indirectly, or on behalf of or in conjunction with any other person, firm or company, own, maintain, engage in, or have any interest in any other retail, or any wholesale business which deals in frames, framing services, pictures, prints or photographs or any other related or similar products, within a radius of then (10) kilometers of the Designated Premises. 4.

Either directly or indirectly, or on behalf of or in conjunction with any other person, firm or company, own, maintain, engage in, or have any interest in any other retail, or any wholesale business which deals in frames, framing services, pictures, prints or photographs or any other related or similar products, within a radius of then (10) kilometers of the premises or location of any other Framing & Art Centre or The Framing Experience in existence on the date of termination or expiration hereof. [ 4 ] The Franchise Agreement itself (entered as Tab 3, Exhibit 1) was subsequently forwarded to Mr.

Drouin on or about May 25. It contained the identical wording referred to above in the draft agreement under

Article XV. Mr. Drouin signed the agreement as President of Nassus on May 25, 1999. Ms. Williams signed the agreement on behalf of Mapleleaf on June 3, 1999. [ 5 ] An addendum to the agreement was included which described the franchisees exclusive territory. In the draft agreement, that clause (Article VI) provided that Mr. Drouin ’ s exlcusive territory was to be an area of three kilometres around his store. The addendum of May 25 provided that that area was to be ten kilometres. [ 6 ] As stated, Mr.

Drouin did sign the franchise agreement which provided for a restrictive covenant prohibiting him from having or engaging in any similar business within ten kilometres of his original store or carrying on business within a radius of ten kilometres from his original store, in the event that the agreement was terminated for any reason whatsoever.

[ 7 ] It was Mr. Drouin ’ s evidence at trial that he did not become aware that the area covered by the restrictive covenant was ten kilometres as opposed to three kilometres until some time shortly before the agreement was terminated in 2009. It was at that time that he became aware of the fact that he could not carry on a similar business from his store or within ten kilometres of his store for a period of two years after termination of the franchise. [ 8 ] Nassus carried on business as a franchisee of Mapleleaf at 1232 - 17th Avenue S.W. in Calgary until the expiration of the agreement on April 30, 2009.

After that date, Nassus took steps to disassociate the business from Mapleleaf and from being identified as a Framing & Art Centre. It continued to operate a framing and art business under the name 17th Avenue Framing from the same location. It retained the telephone and fax numbers used while operating as a franchise. Mr. Drouin did not return, as he was obligated to do under the agreement, the customer list to Mapleleaf until months after the franchise terminated.

He did eventually did return all of the other materials that he was required to deliver up under the terms of the franchise agreement within a reasonable time of the franchise having been terminated. He also took down any signage which might indicate that he was carrying on business under the name or style of Framing & Art Centre. [ 9 ] The Plaintiff has initiated these proceedings to prohibit Mr. Drouin or his company from carrying on the business which he currently carries on. The Plaintiff claims that Mr.

Drouin and his company have breached a number of the articles of the agreement, the most important one being that he continues to operate a framing business from the same premises as he operated as a franchisee for the past ten years. [ 10 ] Mr. Drouin maintains that he was misled by the summaries in the disclosure documents which are referred to above. He believed that what he was prohibited from doing was entering into any agreement with any other retailer whose business dealt in frames within a radius of three kilometres from his store.

He maintained that he was not aware at all that he could not continue carrying on business from his store or within a radius of ten kilometres from his store for a period of two years. Issue [ 11 ] The issue, quite simply, is whether Mr. Drouin and his company are required to refrain from engaging in a similar business within ten kilometres, and, perhaps more importantly, whether they are prohibited from carrying on the same business, basically, from his existing premises and for a radius of ten kilometres from those premises. Decision [ 12 ] Although it is clear that neither Mr.

Drouin nor his company have complied with the franchise agreement in a number of ways, specifically, that he has not surrendered the customer list and all copies, that he has not assigned the telephone numbers and that he is carrying on business within the ten kilometres radius, I am satisfied that the Plaintiff had a duty to insure that the information it gave out in its Disclosure Document was accurate. It was not accurate and Mr. Drouin and his company are therefore not prohibited from carrying on business from their present location.

Reasons [ 13 ] The Franchises Act , RSA 2000, c F-23 is legislation which, as stated, is for the purpose of assisting prospective franchisees in making informed investment decisions by requiring the timely disclosure of necessary information. Section 4(1) states: A franchisor must give every prospective franchisee a copy of the franchisor ’ s disclosure document. [ 14 ] 4(3) states: A disclosure document must (

a) comply with the requirements of the regulations,

[ 15 ] The definition

section of the Act contains the following: (o) “ material fact ” means any information about the business, operations, capital or control of the franchisor or its associate, or about the franchise system, that would reasonably be expected to have a significant effect on the value or price of the franchise to be sold or the decision to purchase the franchise; (q) “ misrepresentation ” includes (

i) an untrue statement of a material fact, (ii) an omission to state a material fact that is required to be stated, or (iii) an omission to state a material fact that needs to be stated in order for a statement not to be misleading; [ 16 ] Misrepresentation in disclosure document 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 any or all of the following: (

a) the franchisor; (

b) every person who signed the disclosure document.

(2) If a disclosure document contains a misrepresentation, a franchisee who purchases a franchise to which the disclosure document relates is deemed to have relied on the misrepresentation. 10(1) A person is not liable in an action under

section 9 if the person proves that the franchisee purchased the franchise with knowledge of the misrepresentation. [ 17 ] The Franchises Regulation Alta. Reg. 240/1995,

section 17 provides: 17 Termination, Renewal and Transfer of the Franchise Disclose whether or not there are provisions in the franchise agreement that deal with renewal, termination and transfer of the franchise and, if so, where in the contract these provisions can be found. [ 18 ] In Hi Hotel Limited Partnership v. Holiday Hospitality Franchising Inc. , 2007 ABQB 686 , 2008 ABCA 276 , at paras. 18- 21 , Justice Côté speaks to the nature of the legislation such as the Franchise Act . In para 19, he states: [T]he latest authority says that protective consumer legislation should not be interpreted narrowly ...

At para 21, he states: And the franchises legislation only interferes with rights in a certain sense. It is fairer to call it a restriction on future contracts, in a way known ahead of time to both parties. A franchisor which contracts after failing to comply with the legislation requiring prior disclosure has no vested right. [ 19 ] Although Justice Côté wrote the minority decision, Justice McFadyen and Justice Conrad generally agreed with his reasons.

At para 135, they state: Be that as it may, the mandatory language of the disclosure provisions of the Act and the Regulations, as well as the legislative intent to provide protection for prospective franchisees, all support the chambers judge ’ s conclusion that the error is a fatal one. [ 20 ] The fact is that while the Plaintiff was not required to make a

summary of what the various portions of the agreement contained, if it chose to summarize those provisions, it must summarize them accurately. There is a mistake made with respect to the reference to three kilometres as opposed to ten kilometres. There is an omission with respect to the agreement containing a prohibition from carrying on business at the same location and a radius of ten kilometres from that location for a period of two years upon termination of the franchise. The

summary contained in the disclosure document is not correct. It was, by definition, a misrepresentation. In my view, it constituted a material fact that would reasonably be expected to a have significant effect upon the value or price of the franchise or the decision to purchase it. [ 21 ] As stated by the Supreme Court in Sharbern Holding Inc. v. Vancouver Airport Centre Ltd. , 2011 SCC 23 ,

(2011) CarsewellBC 1102 , at paras 45 and 61 , a misrepresentation is material if there was a substantial likelihood that the disclosure of the fact would have assumed actual significance in the deliberations of a reasonable investor. [ 22 ] In my view, whether a franchisee could continue in business in the same place he/she had opened and operated for ten years would be a significant fact.

Whether a franchisee could continue in business or compete within three kilometres versus ten kilometres of a centre would, in the normal course of events, be significant. [ 23 ] While one might very well expect an investor to read the agreement itself, there is no statement which warrants against accepting the information in the disclosure. To the contrary, the statement says that the information is true. [ 24 ] As to whether the misrepresentations were relied upon, we have the legislated deeming of Mr.

Drouin having relied upon the misrepresentation. [ 25 ] The argument is made by the Plaintiff that the deeming is rebuttable and that it has rebutted this by virtue of the apparent contradictions between Mr. Drouin ’ s evidence at examinations for discovery and at trial. To the extent that the Mr. Drouin says that it was relied upon, I have his evidence before me wherein he stated he would never have entered into the agreement had he been aware that he would not be able to carry on business anywhere within ten kilometres radius or operate a business within ten kilometres of another franchise. [ 26 ] Mr.

Drouin acknowledged that he had read the franchise agreement briefly before signing it. But he was not aware of those restrictive covenants. He knew that it was a separate document but he believed that it would reflect the disclosure agreement which it was required to do in my mind pursuant to the legislation. [ 27 ] The Plaintiff maintains the difficulty for the Defendant is that in his examination for discovery he stated that he had read the disclosure statement but didn ’ t pay any attention to it because it wasn ’ t important to him. [ 28 ] I am simply not satisfied that Mr.

Drouin ’ s examination casts such a pall on his evidence at trial. It is somewhat contradictory but no so much that I am prepared to say that his credibility at trial cannot be accepted. I find that the statements in the disclosure

documents were material misrepresentations. I accept that Mr. Drouin relied upon them to the extent that they did not concern him when he read them. Had there been something in the disclosure which referred to a clause which would prohibit him from carrying on business within ten kilometres as opposed to three kilometres, it may very well have concerned him.

Had there been anything which would have indicated that the agreement contained a clause prohibiting him from carrying on business at all for a restricted period of time within a restricted area, it may well have caught his attention. [ 29 ] The legislation is designed to protect a franchisee who has been materially misled in the disclosure agreements. The deeming provisions may be able to be rebutted. I am not satisfied that it has been. [ 30 ] The Plaintiff ’ s claim is struck as against both Defendants. The Defendants are entitled to their costs. Heard on the 26 th and 27 th day of September, 2011.

Dated at the City of Calgary, Alberta this 28 th day of September, 2011. G.C. Hawco J.C.Q.B.A. Appearances: Edward W. Halt, Q.C. Matthew Vernon Peacock Linder & Halt LLP for the Plaintiff Blair C. Yorke-Slader, Q.C. David R. McKinnon Bennett Jones LLP for the Defendant