1448244 Alberta Inc. v. Ellis Jovica, 2013 ABQB 221

Court of Queen ’ s Bench of Alberta Citation: 1448244 Alberta Inc. v. Asian Concepts Franchising Corporation, 2013 ABQB 221 Date: 20130415 Docket: 1101 10961 Registry: Calgary Between: 1448244 Alberta Inc. and Ellis Jovica Plaintiffs - and - Asian Concepts Franchising Corporation, Scott Bender and Lawrence Eade Defendants _______________________________________________________ Reasons for Judgment of J.T.

Prowse, Master in Chambers _______________________________________________________ Franchisee seeks cancellation for non-disclosure [ 1 ] The Franchises Act , R.S.A. 2000, c.F-23 (the “Act”) compels a franchisor to make financial disclosure to prospective franchisees.

If proper disclosure is not made, a franchisee may cancel the franchise contract and recover any net losses incurred in acquiring, setting up and operating the franchised business. [ 2 ] The Plaintiff Ellis Jovica is a franchisee who alleges non-disclosure, and seeks to cancel his franchise contract with the Defendant Asian Concepts Franchising Corporation.

[ 3 ] Jovica alleges that the disclosure document provided to him was deficient in a number of respects, but that one deficiency, a lack of two signatures of representatives of the franchisor, is so plain and obvious that it alone allows him to obtain partial

summary judgment in the form of a declaration that the ‘disclosure document’ provided by Asian Concepts was not ‘substantially complete’ within the meaning of the Act and regulations. [ 4 ] For the reasons which follow, I have concluded that Jovica is entitled to this relief. The Act and regulations [ 5 ]

Section 13 of the Act says that, if a franchisor fails to give a prospective franchisee “the disclosure document” then the prospective franchisee may (within certain time limits) rescind all the franchise documents. [ 6 ] Section 1(1)(

a) of the Act defines “disclosure document” as the document required to be given under

section 4 of the Act. Section 4(3)(

a) of the Act says that a disclosure document must comply with the requirements of the regulations under the Act. [ 7 ] Regulation 2(3) says that a disclosure document shall include a certificate that must, except in the case of a one person franchisor, be signed by at least 2 officers or directors of the franchisor. [ 8 ] Since the certificate in the disclosure document provided by Asian Concepts contained only one signature, it is clear that it was not in strict compliance with the Act. However, the regulations incorporate a degree of flexibility. Regulation 2(4) states: A disclosure document is properly given for the purposes of

section 13 of the Act if the document is substantially complete. Does the lack of two signatures to the disclosure document provided by Asian Concepts mean that it is not ‘substantially complete ’? [ 9 ] Why is it important that a disclosure document contain two signatures as opposed to one signature? [ 10 ]

Section 9 of the Act provides that, if a franchisee suffers loss because of a misrepresentation contained in a disclosure document, then the franchisee has a right of action for damages against the franchisor and every person who signed the disclosure document. [ 11 ] Because the disclosure document provided by Asian Concepts contained only one signature, Jovica is deprived of a potential cause of action against a second signatory to the disclosure document.

Case law regarding the requirement of signatures to a disclosure document [ 12 ] The Alberta Court of Appeal comprehensively reviewed the requirement for signatures in a franchise disclosure document in its reasons in Hi Hotel Ltd. Partnership v.

Holiday Hospitality Franchising Inc. , 2008 ABCA 276 , 2008 CarswellAlta 2030, 296 D.L.R. (4 th ) 335, 437 A.R. 225, 99 Alta.L.R. (4 th ) 1, [2009] 3 W.W.R. 219, 53 B.L.R. (4 th ) 163. [ 13 ] In Hi Hotel , the certificate accompanying the disclosure document contained no signatures, and that prevented it from being a substantially complete disclosure document as required by the Act. The Court of Appeal noted at paragraph 61 of its reasons that the signed certificate “... is the linchpin of the substance of the disclosure. It is the opposite of mere form”.

[ 14 ] By depriving Jovica of one of two required signatures, Asian Concepts deprived Jovica of having two parties, rather than one party, motivated by potential liability to make full disclosure. It also deprived Jovica of the potential to sue two parties under

section 9 for misrepresentation, rather than one. [ 15 ] Asian Concept’s written submissions opposing

summary judgment made a number of observations which it says would minimise the chances of Asian Concepts or the one signatory being held liable to Jovica for misrepresentation at common law. For example, here are some samples of those observations: - Jovica confirms that nothing in Articles 2, 3, 4, and 5 of the disclosure document was misrepresented to him. - Jovica confirms that there were no inaccuracies in

Article 6. - Jovica confirms that the statement of a higher franchise fee [it was actually lower] was not a factor that led him to decide to enter into the franchise agreement. - Jovica confirms that he did not rely on the disclosure document for information that he would be entitled to any rebates or other benefits that the franchisor or its associates may receive or are receiving as a result of the purchase of goods or services by franchisees. [ 16 ] In Hi Hotel , the franchisee’s deponent candidly admitted that the existence or absence of signatures on the disclosure document was not important to his decision to participate in the acquisition of the franchise.

Yet the court allowed the franchise contract to be cancelled on the basis of the non-signature. The reason for this was: Subjective reliance or non-reliance by the deponent may well be irrelevant. For one thing, the combined effect of ss.1(

q) and 9(2) of the Act deems the respondent to have relied upon any omission of a required “material fact that is required to be stated”. Surely the phrase quoted includes the facts required in the certificate. Besides, this is statutory rescission, not common-law rescission, so the common-law need for reliance is irrelevant. (para. 49) [ 17 ] And so Asian Concepts submissions concerning the lack of misrepresentation, or the lack of reliance on representations, are irrelevant to the issue at hand. What matters is whether the disclosure document which was provided was substantially complete or not.

And when the statute requires two signatories responsible for and liable for the required disclosure, yet only one is provided, the disclosure statement cannot be said to be ‘substantially complete’. This is plain and obvious. [ 18 ] Asian Concepts cites the decision in Emerald Developments Ltd. v. 768158 Alberta Ltd. , 2001 ABQB 143 , 287 A.R. 151, as being a decision to the contrary.

It submits that Emerald Developments held that the question of whether one signature rather than two would suffice for adequate disclosure under the Act was a triable issue. [ 19 ] In Emerald Developments , the franchisor was initially proposed to be a Canada corporation, and disclosure documents were signed by two representatives. Ultimately the franchisor was an Alberta corporation in which only one of the signatories participated. However, the disclosure document was not modified. One of the signatories was, to the knowledge of everyone, not involved in the transaction which proceeded.

The decision is predicated on the assumption that there was only one valid signature to the disclosure document, rather than the two required. The Court ruled as follows (paragraph 29): Is it plain and obvious that the Alberta company has failed to provide the disclosure document? In my view it is not plain and obvious. Clearly it is a serious deficiency that the certificate on which [the franchisee] can rely contains only one signature of a director, whom [the franchisee] can sue.

Apart from that deficiency, the evidence discloses that the Alberta company stands by the disclosure document sent earlier by the Canada company and that the Alberta Company had at the material time, and still has, a clear intent, expressed in writing, of adopting that document as its disclosure document for the second negotiation. [The franchisee] was advised of this during negotiation. The question of sufficiency of the disclosure document at the material time is one for the trial judge.

Likewise the question of the sufficiency of the balance sheet is a matter for the trial judge once I am satisfied, as I am, that there is good reason for it being a

small document. [ 20 ] Counsel for Jovica submits that Emerald Developments is inconsistent with the ruling seven years later in Hi Hotel , and that consequently I am bound to follow Hi Hotel . I agree with that submission. [ 21 ] The court in Emerald Developments found that having only one signature to a disclosure document was a “serious deficiency”. Hi Hotel makes it clear that even a minor deviation from the form and content required by the Act can result in a disclosure document which is not substantially complete. Therefore, a serious deficiency would all the more so result in a document which is not substantially complete and which does not satisfy

section 13 of the Act. [ 22 ] The Court of Appeal in Hi Hotel commented on the earlier decision in Emerald Developments as follows: The appellant cites Emerald Developments , but it is distinguishable. It involved a change of franchisor, a certificate signed by two officials, one of whom was not an official of the new franchisor, and evidence that the new company adopted the franchise disclosure document. There were factual issues not decided there and left for the trial judge to decide.

So no final conclusion was reached there. [ 23 ] I do not read the above quotation as approving the concept that the ‘serious deficiency’ of having only one signature can be overlooked as a minor deviation so as to conclude that a disclosure document with only one signature is substantially complete. [ 24 ] Jovica is entitled to a partial

summary judgment in the form of a declaration that the disclosure document provided by Asian Concepts is not substantially complete and not in compliance with

section 13 of the Act. Costs [ 25 ] If counsel cannot agree as to costs, they may approach me for a ruling within 30 days of the release of these reasons. Heard on the 21 st day of February, 2013. Dated at the City of Calgary, Alberta this 15 th day of April, 2013. J.T. Prowse M.C.C.Q.B.A. Appearances:

Robert Hawkes, Q.C. Jensen Shawa Solomon Duguid Hawkes LLP for the Plaintiffs Philip Carson Miller Thomson LLP for the Defendants