Essa v Mediterranean Franchise Inc, 2016 ABQB 178

Court of Queen ’ s Bench of Alberta Citation: Essa v Mediterranean Franchise Inc, 2016 ABQB 178 Date: 20160324 Docket: 1203 02301 Registry: Edmonton Hesham Essa and Enas Afifi Plaintiffs - and - Mediterranean Franchise Inc. Defendant _______________________________________________________ Reasons for Oral Judgment of the Honourable Mr. Justice W.N. Renke _______________________________________________________ This oral judgment has been edited for publication. [ 1 ] The Defendant Mediterranean Franchise Inc. (MFI) is an Ontario corporation that carries on business in Alberta and elsewhere in North America.

It developed a system for the operation of fast food restaurants that serve Greek and Middle-Eastern food. The restaurants carry on business under the trade name “Taste of Mediterranean.” MFI, as franchisor, grants to franchisees the right to operate franchised “Taste of Mediterranean” restaurant businesses at specified locations. Sam Hussein, president and director of MFI, testified on its behalf. [ 2 ] The Plaintiffs Hesham Essa and Enas Afifi, who are married, became MFI franchisees under a Franchise Agreement with MFI.

On August 6, 2010, they opened the doors for a Taste of Mediterranean restaurant at the College Plaza location, 82 Avenue and 113 Street in Edmonton. [ 3 ] The restaurant was not a success. The restaurant closed in April 2011 after 9 months of operations. [ 4 ] The Plaintiffs claim that they suffered financial losses for which MFI was responsible. Generally, they claim that they suffered losses because MFI failed to provide proper disclosure as required by the governing provisions of the Franchises Act (the Act ), the Franchises Regulation (the Regulation), and

Schedule 1 to the Regulation (the Schedule). MFI made additional material misrepresentations and failed to provide the support and assistance it was obligated to provide. MFI failed to deal fairly with the Plaintiffs, as expressly required by s 7 of the Act .

The Plaintiffs claim that they were entitled to rescind the Franchise Agreement under s. 13 of the Act . [ 5 ] MFI responds that its conduct complied with the Act , the Regulation, the Schedule, and the Franchise Agreement and any losses suffered by the Plaintiffs were caused by the Plaintiffs themselves, specifically by their inability to generate sufficient daily sales. MFI denies that certain elements of the Plaintiffs’ damages claim are legally compensable.

MFI also denies that the Plaintiffs were entitled to rescind the Franchise Agreement and claims arrears of royalty payments owing by the Plaintiffs under that agreement. MFI

had originally made a defamation counterclaim, but abandoned that cause of action at trial. [ 6 ] Five issues must be addressed: A. Did MFI provide the disclosure required by the Act ? B. Were the Plaintiffs entitled to rescind the franchise arrangement under the Act ? If not, what royalty arrears do they owe to MFI? C. Did MFI make material misrepresentations on which the Plaintiffs relied to their detriment? If so, what consequences follow? D. Did MFI fail to deal fairly with the Plaintiffs, particularly respecting support for business operations and assistance in operating the Restaurant?

If so, what consequences follow? E. Did the Plaintiffs suffer damages because of any misconduct by MFI? If so, for what elements of their damages claim is MFI legally responsible? These issues must be determined under the special provisions of the Act and the general law of contracts and torts. Under s. 15 of the Act , the rights under the Act are “in addition to and do not derogate from any other right the franchisee or franchisor may have at law.” Table of Contents A. DID MFI PROVIDE THE DISCLOSURE REQUIRED BY THE ACT ? . 4 1.

What document or documents did MFI provide to the Plaintiffs as disclosure documents? . 4 (

a) regulatory context 4 (

b) interactions between MFI and Mr. Essa in 2009 . 5 (

c) interactions between MFI and Mr. Essa in February 2010 . 5 2. If MFI provided a second disclosure document in February 2010, would the timing of the provision of this document comply with the Act ? . 9 3. Was MFI required to provide a separate disclosure document to Ms. Afifi? . 9 (

a) was Ms. Afifi entitled to disclosure? . 10 (

b) did Ms. Afifi receive disclosure? . 11 (

c) effect of the Acknowledgement 11 3. Did the disclosure document provided by MFI to the Plaintiffs comply with the Act and the Regulation? 12 (

a) working capital 13 (

b) other franchisees . 13 (

c) location closures . 16 (

d) earnings claims . 17 (

e) financing arrangements . 18 (

i) financing through SRI not MFI . 18 (ii) sufficiency of financing information provided . 19 (

f) failure to sign . 20 (

g) conclusion . 20 B. WERE THE PLAINTIFFS ENTITLED TO RESCIND THE FRANCHISE AGREEMENT? 21 C. DID MFI MAKE MATERIAL MISREPRESENTATIONS ON WHICH THE PLAINTIFFS RELIED TO THEIR DETRIMENT? . 21 1. Advertising . 21 2. Food Costs . 22 (

a) the representations . 22 (

b) were the representations accurate? . 23 (

c) fault 23

(

d) does clause 18.21 apply to prevent reliance by the Plaintiffs on any misrepresentations? . 24 (

e) what remedy is available to the Plaintiffs relating to misrepresentations? . 25 D. DID MFI FAIL TO DEAL FAIRLY WITH THE PLAINTIFFS, PARTICULARLY RESPECTING SUPPORT FOR BUSINESS OPERATIONS AND ASSISTANCE IN OPERATING THE RESTAURANT? 26 1. Training . 26 2. Supply Disruptions . 27 (

a) Eberhardt Foods . 27 (

b) supply disruption . 28 E. DID THE PLAINTIFFS SUFFER COMPENSABLE DAMAGES BECAUSE OF ANY MISCONDUCT BY MFI? 29 COSTS . 31 A.

DID MFI PROVIDE THE DISCLOSURE REQUIRED BY THE ACT ? [ 7 ] Four issues must be addressed to determine whether MFI provided the disclosure required by the Franchises Act : 1. what document or documents did MFI provide to the Plaintiffs as disclosure documents? that is, did MFI provide only one disclosure document in November 2009 or did it also provide a second disclosure document in February 2010? 2. if MFI provided a second disclosure document in February 2010, did the timing of the provision of this document comply with the Act ? if not, what are the consequences? 3. was MFI required to provide a separate disclosure document to Ms.

Afifi or was an exemption from the disclosure document rules engaged in the circumstances in which she became a franchisee? if MFI was required to provide a separate disclosure document to Ms. Afifi, when was the disclosure document provided to her? 4. did the disclosure document provided by MFI to the Plaintiffs comply with the Act , the Regulation, and the Schedule? 1. What document or documents did MFI provide to the Plaintiffs as disclosure documents? [ 8 ] Three matters must be addressed to answer this question: (

a) the general regulatory context for disclosure documents, (

b) the interactions between MFI and Mr. Essa in 2009, and (

c) the interactions between MFI and Mr. Essa in February 2010. (

a) regulatory context [ 9 ] Under s. 2(

a) of the Act , the “disclosure document” contemplated by the Act serves the statutory purpose of assisting prospective franchisees to make informed investment decisions by requiring the timely disclosure of necessary information.The disclosure document must contain copies of all proposed franchise agreements and must comply with the Act and the Regulation. [ 10 ] Under s. 4(2)(

a) of the Act ,

(2) The disclosure document must be received by the prospective franchisee at least 14 days before (

a) the signing by the prospective franchisee of any agreement relating to the franchise …. Subsection 4(4) of the Act also requires that the franchisor provide to the franchisee a written description of any “material change.” “Material change” is defined through ss. 1(1)(

n) and (g). Under s. 4(5), (5) The prospective franchisee must receive the description of the material change as soon as practicable after the change has occurred and before (

a) the signing by the prospective franchisee of any agreement relating to the franchise, or

(

b) the payment of any consideration by the prospective franchisee relating to the franchise, whichever is earlier. (

b) interactions between MFI and Mr. Essa in 2009 [ 11 ] Mr. Essa learned about the MFI franchise opportunity on the internet. At the end of October or early in November 2009, he contacted MFI and submitted an application to acquire a franchise. Mr. Hussein called Mr. Essa shortly after Mr. Essa submitted his application. [ 12 ] Mr. Hussein sent to Mr. Essa the November 1, 2009 Disclosure Document at tab 2 of Exhibit 1 (the November 2009 Disclosure Document). [ 13 ] The two had some discussions about location and costs. Mr. Essa did not personally have enough funds to proceed.

No further steps were taken respecting the franchise at this time. [ 14 ] Mr. Essa claimed that he was clear in his discussion with Mr. Hussein that he had neither restaurant nor management experience. Mr. Essa testified that Mr. Hussein said that the lack of experience was not a problem. Support would be provided. Mr. Essa said that he was looking into this opportunity to provide a job for his wife, but she didn’t have relevant experience either. Mr. Hussein said that the necessary support would be provided. In his testimony, Mr. Hussein did not dispute these claims by Mr. Essa. (

c) interactions between MFI and Mr. Essa in February 2010 [ 15 ] Some aspects of the interactions between MFI and Mr. Essa in February 2010 are clear and uncontested. Some aspects are contested. [ 16 ] It is clear and uncontested that Mr. Essa had a business partner named Abed Ataoui. Mr. Essa talked to Mr. Ataoui about the franchise opportunity. Mr. Ataoui liked the idea. [ 17 ] Mr. Ataoui did not personally receive the November 2009 Disclosure Document. He reviewed Mr. Essa’s copy. [ 18 ] On Mr. Essa’s request, Mr. Ataoui contacted some MFI franchisees to ask about the business. Mr.

Ataoui obtained the phone numbers for the franchisees from Mr. Hussein. Mr. Ataoui reported that the franchises contacted were doing very well. Mr. Essa and Mr. Ataoui decided that an MFI franchise would be a good investment. [ 19 ] Mr. Essa speculated in his testimony that Mr. Ataoui did not speak to actual franchisees and did not obtain accurate information. Mr. Ataoui was not called as a witness by either the Plaintiffs or MFI. Neither, of course, were the persons contacted called as witnesses. I attached no weight to Mr.

Essa’s speculations, which were not supported by any admissible evidence. [ 20 ] On February 23, 2010, Mr. Hussein sent an e-mail, at tab 15 of Exhibit 1, which read in part as follows: … back in October and November I gave you lots of locations to look at. Also, we gave you disclosure Documents back in November. So if you are serious about our Franchise, I would suggest that we first sign the Franchise Agreement and then I start showing you the Locations and will find you a good Location in Edmonton. ….

I will be in Edmonton on Thursday so if you are serious about buying a Franchise from us, We can sign the Franchise Agreement this week while I am in Edmonton and the only payment will be required at this time is $10K for the Franchise Fee …. [ 21 ] Mr. Essa replied that he and his partner were willing to sign the agreement. [ 22 ] Mr. Hussein sent an e-mail to Mr. Essa on February 24, 2010: Exhibit 3. This e-mail read, in part, “I will meet with you guys tomorrow night, Thursday night, February 2010 at 8pm at the Hotel I am staying at … at 8 pm.

Please bring the Bank draft or Money order in the amount of $10,000, made payable to Mediterranean Franchise Inc.” [ 23 ] Mr. Essa and Mr. Ataoui met with Mr. Hussein. [ 24 ] Mr. Essa and Mr. Ataoui signed the Franchise Agreement, at tab 1 of Exhibit 1. [ 25 ] Mr. Essa claimed that he did not receive a copy of the Franchise Agreement that he signed, before it was presented to him at his meeting with Mr. Hussein. He acknowledged that a form of franchise agreement was attached to the November 2009 Disclosure Document.

He did not read through the Franchise Agreement before signing it. [ 26 ] At the time the Franchise Agreement was signed, a location for the restaurant had not been established. [ 27 ] Mr. Essa and Mr. Ataoui paid the $10,000 Franchise Fee to Mr. Hussein. Each contributed $5,000. [ 28 ] There are two contested features of the February meeting. [ 29 ] First, Mr. Hussein claimed that the parties met twice – once on Thursday the 25 th and once on Friday the 26 th . The two- meeting approach was, according to Mr. Hussein, in accordance with his policy.

He had prospective franchisees sign on the day following the initial meeting, just in case they changed their minds. [ 30 ] Mr. Essa claimed that the parties met once only, at Mr. Hussein’s hotel.

[ 31 ] The Franchise Agreement is dated February 26, 2010. However, it recites that the parties signed the agreement “as of the day and year first above written.” The first page of the agreement recites “THIS AGREEMENT made effective the 26 day of February 2010.” The “as of” and “effective” language entails that the document does not on its face determine the date it was signed. It may have been signed on February 26 or on February 25. [ 32 ] Second, Mr. Hussein claimed that, on the 25 th he provided an updated disclosure document dated February 12, 2010 to Mr. Ataoui (the February 2010 Document).

He did not provide a copy of the February 2010 Document to Mr. Essa but Mr. Essa was present, according to Mr. Hussein, when the document was presented. Further, Mr. Hussein claimed that the February 2010 Document was reviewed in the meeting, carefully, point by point. Mr. Hussein testified that, in particular, they went through the information about advertising in the February 2010 Document. [ 33 ] Mr. Essa denied seeing or discussing the February 2010 Document before signing the Franchise Agreement. Indeed, he did not learn of its existence until it was produced in litigation. To Mr. Essa’s knowledge, Mr.

Ataoui did not receive a copy of the February 2010 Document. [ 34 ] Again, Mr. Ataoui was not called as a witness by any party. Since Mr. Ataoui’s evidence could be viewed as favourable to either side, depending on the nature of his testimony, it would not be fair to draw an adverse inference based on either party’s failure to call him as a witness. Furthermore, as will be indicated below, there were good reasons for Mr. Essa not to call Mr. Ataoui as a witness. [ 35 ] When cross-examined, Mr.

Hussein provided no intelligible reason for the failure to refer to the February 2010 Document in Exhibit 3, dated February 24, 2010. The first two sentences of this e-mail read as follows: I will prepare all the documents today. Please make sure to read the Disclosure Documents AGAIN and ask me as many questions as you want in the Meeting. The e-mail did not have any attachments. I note that since the February 2010 Document was not provided before the date of Exhibit 3, which was February 24, Mr. Essa and Mr.

Ataoui were not in a position to read it at all, let alone read it “again.” [ 36 ] There is no document confirming receipt of the February 2010 Document by Mr. Essa and Mr. Ataoui. Mr. Hussein did refer to an “acknowledgement” dated March 2, 2010 but this was not an acknowledgement of receipt of the February 2010 Document. It was a certificate under the Guarantees Acknowledgment Act relating to a guarantee given in accordance with the loan agreement with Sam’s Restaurant Inc. (SRI): Exhibit 4. [ 37 ] Similarly, Mr.

Hussein’s February 13, 2010 e-mail at tab 15 of Exhibit 1 states “we gave you disclosure Documents back in November.” The omission of reference to the February 2010 Document was not explained. [ 38 ] Clause 19 of the Franchise Agreement refers to Disclosure Documents received via e-mail on November 3, 2009. Mr. Hussein was cross-examined on the failure to refer to the February 2010 Document in the agreement. Mr. Hussein variously suggested that (

a) the February 2010 Document was not a “disclosure document” but only constituted notice of material changes – so the earlier disclosure, not the February disclosure, was properly referred to in the Franchise Agreement; (

b) the February 2010 Document, which replicated many of the provisions of the November 2009 Disclosure Document, was actually a form of notice of material changes – although the differences between the two documents are not highlighted in the February document. (

c) the February 2010 Document was both a disclosure document and a notice of material changes. (

d) regardless (if the February 2010 Document was a disclosure document), Mr. Essa and Mr. Ataoui had 60 days to cancel after receipt. [ 39 ] I find that Mr. Hussein did not provide the February 2010 Document to Mr. Essa or Mr. Ataoui before they signed the Franchise Agreement or at any other time prior to producing the document in the course of this litigation. [ 40 ] The February 2010 Document was not referred to in the e-mails of February 23 and 24, 2010. It was not referred to in the Franchise Agreement. Mr.

Hussein’s explanation respecting the lack of reference in the Franchise Agreement vacillated between characterizing the document as a disclosure document, a notice of material change, and both. He recharacterized the document in response to perceived challenges relating to the document. [ 41 ] Mr. Hussein also took care to mention that the advertising provisions of the February 2010 Document were reviewed. Those provisions, as will be mentioned briefly below, did differ between the November 2009 and February 2010 documents.

An innocent explanation, then, would be that there was a discussion of what had actually changed. A less innocent explanation is this: the difference relating to the advertising provisions could be one of the matters relied on to show improper disclosure and to contribute to grounds for rescission of the Franchise Agreement. Mr. Hussein, in context, appeared to be attempting to minimize the adverse effects of the changed advertising provisions. [ 42 ] In contrast to Mr. Hussein’s evidence, Mr. Essa’s evidence was simple, direct, and forthright.

He did not receive the February 2010 Document and he was not otherwise made aware of it. He was not budged in cross-examination. [ 43 ] I prefer Mr. Essa’s evidence to Mr. Hussein’s where their evidence conflicts. Mr. Hussein did not provide the February 2010 Document at the February 25 meeting with Mr. Essa and Mr. Ataoui. [ 44 ] This finding has consequences. It is not simply that Mr. Hussein made an observational error or had a recollection differing from Mr. Essa’s. Mr. Hussein described a detailed sequence of events predicated on the presentation of the February 2010 Document,

which I find was not presented at all. I have not merely failed to accept Mr. Hussein’s evidence. I have found that what he said was knowingly not true. That finding undermines his credibility in relation to all of his testimony. [ 45 ] At this juncture I should refer to one further matter that undermined Mr. Hussein’s credibility. At two points in his evidence at least, he offered the view that a cause of the Plaintiffs’ lack of business success was that the Plaintiffs – unlike Mr.

Ataoui – were not “Canadianized.” The precise nature of this aspersion was not clear, but it did appear to be an unfair and veiled appeal to discriminatory sentiments about the Plaintiffs. This type of ad hominem attack is designed to distract from a weak case. The inference I draw from the aspersion is that Mr. Hussein realized his case was weak and he was attempting it to salvage it through improper means. Again, this diminishes his credibility. [ 46 ] I therefore find as well that there was only one meeting between the parties.

Not much would have turned on one meeting or two, except again there might have been an implication that the parties were not rushed into any deal. Regardless, one meeting or two would not affect any timing issues under the Act . [ 47 ] Since I find that the February 2010 Document was not provided to the Mr. Essa and Mr. Ataoui, subject to my conclusions respecting Ms. Afifi and disclosure, the rights and liabilities of the parties must be decided based on the November 2009 Disclosure Document. 2.

If MFI provided a second disclosure document in February 2010, would the timing of the provision of this document comply with the Act ? [ 48 ]

Section 13 of the Act provides as follows: 13 If a franchisor fails to give a prospective franchisee the disclosure document by the time referred to in

section 4, the prospective franchisee may rescind all the franchise agreements by giving a notice of cancellation to the franchisor or its associate, as the case may be, (

a) no later than 60 days after receiving the disclosure document, or (

b) no later than 2 years after the franchisee is granted the franchise, whichever occurs first. [ 49 ] If the February 2010 Document was a disclosure document, if it had been provided at the February 25 meeting, and if it complied with the contents requirements of the Act and Regulation, then (again, subject to my comments respecting Ms. Afifi below), Mr. Essa and Mr. Ataoui would have had only 60 days from receipt of the February 2010 Document to provide the notice of cancellation under s 13. It would have been true that MFI would have provided the disclosure in violation of the timing requirements of the Act .

Subsection 4(2) requires that disclosure be received at least 14 days before signing or payment. This violation would not prevent the franchisor from relying on s 13. A s. 4(2) violation is precisely what is contemplated by s 13: “If a franchisor fails to give a prospective franchisee the disclosure documents by the time referred to in

section 4.” [ 50 ] If the February 2010 Document had deficiencies from the perspective of the Act and the Regulation, then the “disclosure document” would not have been “given” to Mr. Essa and Mr. Ataoui within the meaning of s. 13. A “disclosure document” is not a defective or deficient or de facto disclosure document. Under s. 1(1)(a), “‘disclosure document’ means a disclosure document required to be given under

section 4 and includes any changes required to be given under section 4(4).” This complete and compliant document must be actually transmitted or given to the prospective franchisees before the s. 13 clock starts to run against the franchisees: Hi Hotel Limited Partnership v Holiday Hospitality Franchising Inc. , 2008 ABCA 276 , Côté JA at para 117. [ 51 ] I will not review the compliance of the February 2010 Document with the Act and Regulation, since I have found that it was not provided at all. 3. Was MFI required to provide a separate disclosure document to Ms. Afifi? [ 52 ] The relationship between Mr.

Essa and Mr. Ataoui broke down after the restaurant began operations in August 2010. Mr. Essa alleged that Mr. Ataoui engaged in a range of dishonest acts relating to the restaurant business. These were allegations only. No wrongful acts were established and Mr. Ataoui was not here to defend himself. This does explain why he was not called as a witness by Mr. Essa. [ 53 ] It was established that the decision was made to replace Mr. Ataoui with Ms. Afifi. Mr. Ataoui was bought out by Mr. Essa and Ms. Afifi for $36,000. [ 54 ] On September 29, 2010, an Amendment to Franchise Agreement was signed.

It provided as follows: All Parties have agreed to the following: The following Person to be deleted from the Franchise Agreement as a Franchisee & Guarantor: Abed Ataoui

The following Person to be added into the Franchise Agreement as a Franchisee & Guarantor: Enas Afifi All the remaining terms and conditions of the Franchise Agreement remains the same. By [signing] below, Enas Afifi Acknowledges that she has received and read the Disclosure Documents and Franchise Agreements, 14 days in Advance and fully understands the Contents, Terms and Conditions of the Disclosure Documents and Franchise Agreement. This agreement was signed by Mr. Hussein, Mr. Essa, Mr. Ataoui, and Ms. Afifi. [ 55 ] Three disclosure issues relate to Ms. Afifi.

First, did the Act require that she receive disclosure or did an exemption apply? Second, did she receive disclosure? Third, even if she did not receive disclosure, was she bound by her acknowledgement in the Amendment to Franchise Agreement, so that she is estopped by contract from denying receipt of disclosure? (

a) was Ms. Afifi entitled to disclosure? [ 56 ] Under s. 19 of the Act , MFI bears the burden of establishing that an exemption applies: 19 In any proceeding under this Act , the burden of proving (

a) an exemption, or (

b) an exclusion from a definition is on the person claiming it. [ 57 ] Under s. 5(1)(

a) of the Act , the following are exempt from s. 4 disclosure requirements: 5(1) The following are exempt from

section 4: (

a) the sale of a franchise by a franchisee if (

i) the franchisee is not the franchisor or an associate of the franchisor or a director, officer or employee of the franchisor or its associate, (ii) the sale is for the franchisee’s own account, (iii) in the case of a master franchise, the entire franchise is sold, and (iv) the sale is not effected by or through the franchisor. [ 58 ] Plaintiffs’ counsel contended that the transaction removing Mr. Ataoui from the franchise relationships was not a “sale of a franchise.” Instead, it was simply an “amendment” to the franchise. [ 59 ] Mr.

Ataoui received consideration for relinquishing his rights as a franchisee and for relinquishing his rights under the franchisee’s operating corporation – more on this below. This transaction was a sale. As Defence counsel pointed out, it met the definition in s. 1(1)(t): “‘sell’ means a sale or a disposition of a franchise or an interest in a franchise.” The transaction was not merely a modification of an agreement [ 60 ] Mr. Ataoui was a franchisee and was not the franchisor or a person otherwise described in s 5(1)(a)(i). The sale was for his own account.

The s. 5(1)(a)(iii) qualification is not relevant, since the sale was not of a “master franchise”. The sale was not effected by or through MFI. [ 61 ] MFI established that the s. 5(1) exemption applied. MFI was not obligated to provide disclosure under s. 4 to Ms. Afifi. (

b) did Ms. Afifi receive disclosure? [ 62 ] If I am wrong about the exemption issue, I should consider whether Ms. Afifi received disclosure. [ 63 ] Ms. Afifi denied receiving disclosure from MFI. She in fact asked the lawyer involved in the Amendment to Franchise Agreement transaction about documentation relating to the franchise. The lawyer advised that the disclosure would be the same as what her husband had already received. [ 64 ] Mr. Hussein claimed that Ms.

Afifi received disclosure the second time that he attended in Edmonton to provide training. [ 65 ] When confronted in cross-examination with the issue of why Ms. Afifi would have received disclosure a substantial time before the sale occurred – i.e., what reason Mr. Hussein would have had to provide disclosure to her then, before it was known that she would become a franchisee – his evidence changed. He indicated that he provided the documents in a training session one or two weeks before the sale. [ 66 ] The evolution of Mr.

Hussein’s evidence in response to questions again causes me to prefer the straightforward and unwavering evidence of Ms. Afifi. She received no disclosure from Mr. Hussein. Given my finding respecting the application of the exemption, this factual finding does not harm MFI’s position. That does not make Mr. Hussein’s evidence less troubling, even if it were founded on a mistake of law about the import of a failure to provide disclosure to Ms. Afifi. The changes in Mr. Hussein’s evidence in

response to questioning fortify my conclusion that Mr. Hussein’s evidence is not to be preferred if it conflicts with the evidence of the Plaintiffs. (

c) effect of acknowledgement [ 67 ] If the Act did require that Ms. Afifi receive disclosure, she could not have contracted out of that right.

Section 18 of the Act provides as follows: 18 Any waiver or release by a franchisee of a right given by this Act or the regulations or of a requirement of this Act or the regulations is void. Hence, the acknowledgement in the Amendment to the Franchise Agreement could not be relied on to block Ms. Afifi’s allegation that she did not receive disclosure. [ 68 ] Again, in the circumstances, in my view an exemption to the disclosure requirements was engaged in relation to Ms. Afifi.

The fact that she did not receive disclosure did not affect the legal position of MFI. [ 69 ] I turn to the review of the compliance of the November 2009 Disclosure Document with the Act , the Regulation, and the Schedule. 3. Did the disclosure document provided by MFI to the Plaintiffs comply with the Act and the Regulation? [ 70 ] According to paragraph 4 of the Statement of Claim, the disclosure provided by MFI (

a) failed to provide information regarding all franchisees (and the related contact information) operating in Alberta under the same trade name, and all franchisor outlets operating in Alberta under the same trade name; (

b) failed to provide information regarding location closures and any locations taken over by the franchisor; (

c) failed to provide information regarding financing arrangements; (

d) failed to provide an estimate of working capital requirements; [and] (

e) failed to disclose reasonable expectations with respect to earnings. [ 71 ] Moreover, the Statement of Claim alleged that the Disclosure was not signed by or on behalf of Mediterranean Franchise Inc. [ 72 ] Some of the alleged deficiencies of the November 2009 Disclosure Document were not deficiencies. Some alleged deficiencies were indeed deficiencies. [ 73 ] In interpreting the Act , Regulation, and

Schedule to determine whether or not there were deficiencies in disclosure, I must adopt the interpretive approach mandated by the Court of Appeal in Hi Hotel at para 19: [19] On the contrary: the latest authority says that protective consumer legislation should not be interpreted narrowly, nor “through the lens of freedom of contract and competition”: Assoc. des courtiers et agents immobiliers du Québec v. Proprio Direct , 2008 SCC 32 (para. 34 ).

There the Supreme Court of Canada adopts quotations explaining why consumer protection legislation is passed, and why the principle of freedom of contract generally yields to that of consumer protection. One of the reasons given is “a growing and frequently total disparity of knowledge concerning the characteristics and technical components of the . . . services . . .”: id. at paras. 35-36. In accordance with s. 10 of the

Interpretation Act , the Act , the Regulation, and the

Schedule must be interpreted in a large and liberal fashion that best accords with the achievement of the consumer protection objectives of the Act . [ 74 ] Before dealing with the claimed deficiencies, I should refer to

Article 5 of the Franchise Agreement which concerns advertising. It differs from

Article 5 in the form of Franchise Agreement attached as

Schedule A to the November 2009 Disclosure Document. This difference, although referred to in testimony, was not relied on in argument by the Plaintiffs as vitiating disclosure. The change to the advertising provisions was not a “material change” as defined by the Act . (

a) working capital [ 75 ] The November 2009 Disclosure Document was not deficient for failing to provide an estimate of working capital requirements. [ 76 ] According to s. 10 of the Schedule, If an estimate of working capital is provided, the information must (

a) have a reasonable basis at the time it is made, and (

b) include the material assumptions underlying its preparation and presentation.

If an estimate of working capital is not provided, the disclosure document must include a statement that additional funds will be required to finance operations until a positive cash flow is produced. [ 77 ] The provision of working capital information is not mandatory. Details are required, but only if an estimate of working capital is provided.

Section 10 of the November 2009 Disclosure Document expressly confirmed that no estimate of working capital was provided. Further, s. 10 set out the statement required by the

Schedule if no estimate of working capital is provided: “additional funds are required for a Franchisee … to finance operations until positive cash flow is produced ….” [ 78 ] Mr. Essa sought to invoke the working capital information disclosure obligations by relying on his communicated inexperience. He relied on the fact that he was “new to this.” Mr. Essa admitted that Mr. Hussein did not specifically say that he would assist Mr. Essa with the development of a working capital estimate. Mr. Essa admitted that he had never prepared such an estimate. Further, he had never prepared a business plan.

His plan was to rely on Mr. Hussein to guide him. Even if Mr. Hussein failed to provide business guidance – and the failure here appears to be the failure of Mr. Essa to do any business planning – this failure by Mr. Hussein was not a violation of s. 10 of the Schedule. (

b) other franchisees [ 79 ]

Section 14 of the

Schedule provides as follows: 14 Existing Franchisee and Franchisor Outlets Provide the names, mailing addresses and phone numbers of all existing franchisees presently operating an outlet in Alberta under the same trade name as the franchise being offered and the addresses and phone numbers of those outlets. Provide the addresses and phone numbers of all existing franchisor outlets presently operating in Alberta under the same trade name as the franchise being offered.

If, with respect to franchisees operating outlets under the same trade name as the franchise being offered, there are less than 20 franchisee outlets in operation in Alberta and there are franchisee outlets outside Alberta, provide information on additional outlets that are geographically closest to Alberta until information on 20 outlets is provided.

If the total number of franchisee outlets in operation in Alberta and outside Alberta is less than 20, information is only required for the total number of franchisee outlets in operation. [ 80 ] The November 2009 Disclosure Document complied in part with this requirement. The first two paragraphs referred to “presently operating outlets” in Alberta. At the time the Franchise Agreement was signed there were no other presently operating outlets in Alberta. Mr.

Hussein’s evidence, and this was supported by the February 2010 Document, was that two other franchises were set to open as of February 2010 but were not yet open. The City Centre location opened in March 2010. The St. Albert location opened in April 2010. Mr.

Essa provided no contrary evidence on the timing of the commencement of operations of the other Alberta franchisees. [ 81 ] The information required by the first two paragraphs of s. 14 then need not have been supplied respecting outlets that were not operating but were “opening soon.” Hence, a failure to provide all of the s. 14 information respecting these outlets did not violate s. 14. [ 82 ] I also accept Defence counsel’s argument that the opening of new franchise outlets would not be a “material change” as defined by the Act . Under s 1(1)(n), “material change” means (

i) a change in the business, operations, capital or control of the franchisor or its associate, or (ii) a change in the franchise system, that would reasonably be expected to have a significant adverse effect on the value or price of the franchise to be sold or the decision to purchase the franchise and includes a decision to implement the change made by the board of directors of the franchisor or its associate or by senior management of the franchisor or its associate who believe that confirmation of the decision by the board of directors is probable. “Franchise system” is defined in s 1(1)(g). [ 83 ] Adding franchise outlets does not meet the s.1(1)(n)(

i) or (ii) criteria. Hence, there was no obligation to advise of new Alberta outlets under the “material change” rules. [ 84 ] The November 2009 Disclosure Document nonetheless failed to comply with s. 14 in another respect. The Disclosure referred to outlets outside Alberta since there were not 20 outlets in Alberta. Referring to those outside outlets was appropriate. However, the franchisor is obligated to provide “information” about those extra-provincial outlets. I interpret the term “information” in paragraph 3 of s. 14 to include the information referred to in paragraphs 1 and 2.

That includes the phone numbers of the extra-provincial outlets. These were not provided. The only phone number provided was an MFI phone number which prospective franchisees were told they could call to obtain franchisee phone numbers. Phone numbers were also available on the internet: Exhibit A to the November 2009 Disclosure Document. [ 85 ] Subsection 2(4) of the Regulation does provide that

(4) A disclosure document is properly given for the purposes of

section 13 of the Act if the document is substantially complete. [ 86 ] Franchisee phone numbers were stated to be available from the Franchisor. The numbers were available through the internet. There was reference, although this was not explored in testimony, to numbers being available on the MFI website. Mr. Hussein’s reason for not including franchisee phone numbers in the disclosure was that some franchisees do not want to be bothered at work by inquiries. As a matter of fact, it appears that Mr. Ataoui was able to contact other franchisees. Mr. Essa referred to having had conversations with

other franchisees. The absence of the phone numbers in the disclosure did not appear to have been a significant practical impediment to contacting the extra-provincial franchisees. Was the information respecting the extra-provincial outlets “substantially complete”, despite the absence of the phone numbers? [ 87 ] As Master Prowse observed in 1448244 Alberta Inc v Asian Concepts Franchising Corporation , 2013 ABQB 221 at para 21 , [21] …. 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 ….

Section 14 specifically refers to addresses and phone numbers. This information must be important, because it is expressly mentioned. Further, Mr. Hussein’s reason for not providing the phone numbers does not make sense. If numbers were obtained from Mr. Hussein, the franchisees would be contacted and distracted just as they would be if contacted directly by a prospective franchisee. In terms of practicalities, leaving prospective franchisees to scour the internet for phone numbers may not yield good results.

They are likely to obtain general contact information only, not the more private contact information appropriate for frank discussion about the franchise. [ 88 ] Inserting the franchisor as the custodian of phone numbers reinforces the power and informational imbalance between the franchisor and prospective franchisees. I turn again to Hi Hotel , at para 58: [58] This legislation is designed to protect franchisees against franchisors. What is the mischief at which the legislation is aimed?

Clearly it is that ordinarily the franchisor will have more knowledge and more power than the franchisee. [ 89 ] Non-disclosure of the information and disclosure only on contacting the franchisor lets the franchisor know which franchisees are being contacted (those whose information is released) and when those franchisees are being contacted (the prospective franchisor would only contact the franchisees after acquiring the information). [ 90 ] A time gap is also established between the request for information and the provision of information which could allow the franchisor to have a discussion with the franchisees before the prospective franchisee contacted the franchisees.

The franchisees would know that the franchisor has their information and that the franchisor would know when the prospective franchisee will seek to contact them, so they would know that the franchisor knows that discussions about the franchise will be held. That could impose a chill on discussions. [ 91 ] Finally, allowing a franchisor to be the custodian of the information could allow an unscrupulous franchisor to provide information for non-franchisees or franchisees who will provide favourable assessments only – the very thing that was feared by Mr.

Essa but not established on the evidence in this case. [ 92 ] What would better promote the free flow of information between prospective franchisees and current franchisees would be to set out franchisee phone numbers in the disclosure so prospective franchisees could call current franchisees directly, avoiding the scrutiny of the franchisor. That is exactly what is, in fact, contemplated by the Schedule. [ 93 ] Providing phone numbers seems like a small thing, but it is a small thing with important consequences. To omit the phone numbers is to omit practically important information.

The failure to include the phone numbers did not leave the disclosure “substantially complete.” [ 94 ] The

Schedule requirements were violated through inadequate disclosure of the phone numbers. (

c) location closures [ 95 ]

Section 15 of the

Schedule provides as follows: Provide information about closures of franchisee outlets or franchisor outlets that operated under the same trade name as the franchise being offered, including the total number of franchises in the total operating territory of the franchisor within the previous 3 fiscal years that have (

a) been terminated or cancelled by the franchisor, (

b) not been renewed by the franchisor, (

c) been reacquired by the franchisor, or (

d) otherwise left the system. Provide, with respect to any outlet operated under the same trade name as the franchise being offered, the name, last known address and telephone number of every former franchisee in the total operating territory of the franchisor whose franchise has been terminated, cancelled, not renewed, reacquired by the franchisor or otherwise left the system within the previous fiscal year. [ 96 ] MFI’s basic response to this information requirement was that there was no failure to report because there was nothing to report. There had been no closures. Mr.

Hussein indicated that no locations had closed “since the initial disclosure.” That, though, is not the test. The reporting must go back at least 3 years. The reporting, it should be noted, would not concern only Alberta, but the “total operating territory” of the franchisor. [ 97 ]

Section 19 of the November 2009 Disclosure Document deals with Franchise Closure. Paragraph (

b) refers the reader to Exhibit A. Contrary to the “nothing to report” view, Exhibit A discloses two “previous franchisees,” with some information but no explanation.

[ 98 ] In his cross-examination, Mr. Hussein testified that MFI had in fact exercised the right of first refusal referred in s 16.2 of the Disclosure (see clause 15.3 of the Franchise Agreement) twice when franchisees went into default. The franchises were resold later. SRI carried on the franchise business for some years. [ 99 ] Exhibit A mentions several outlets owned by SRI. These may not concern closures at all. It is not clear whether any of the listed SRI operations were based on closures. [ 100 ] The disclosure failed to provide information about closures. The disclosure did not comply with the

Schedule requirements. [ 101 ] Further, the disclosure, again, failed to set out the telephone numbers for the previous franchisees. A limitation is that the relevant closure must have occurred within the previous fiscal year. The disclosure does not indicate when the “previous franchisees” became previous franchisees. Once again, on the face of the document, in the absence of proper explanation, there was a failure to comply with the Schedule, and the disclosure was not substantially compliant with the requirements of the Schedule. (

d) earnings claims [ 102 ]

Section 16 of the

Schedule provides as follows: If information is given or is to be given, by or on behalf of the franchisor or its associate, to a prospective franchisee from which a specific level or range of actual or potential sales, costs, income or profit from franchisee outlets or franchisor outlets can be easily ascertained, the information must (

a) have a reasonable basis at the time it is made, (

b) include the material assumptions underlying its preparation and presentation, whether it is based on actual results of existing outlets and the percentage of outlets that meet or exceed each range of results, and (

c) indicate the place where substantiating information is available for inspection by the franchisee. If information is given in respect of a franchisor outlet, the franchisor must state that the information may differ in respect of a franchise outlet. [ 103 ] This provision is not mandatory: “ if information is given or is to be given.”

Section 20 of the November 2009 Disclosure Document expressly denied that earnings claims were given. [ 104 ]

Section 20 is confirmed by clause 18.21 of the Franchise Agreement, which provides as follows: … Franchisee specifically acknowledges that no representation, promise, guarantee or warranty concerning the result or profits to be derived from the Franchised Business has been made to induce the Franchisee to enter into this Agreement. [ 105 ] It is true that the evidence did not support the finding that Mr. Hussein gave to Mr.

Essa any information from which a “specific level or range of actual or potential sales, … income or profit from franchisee outlets or franchisor outlets can be easily ascertained.” To that extent, the s. 16 earnings claims requirements were not engaged. [ 106 ] Mr. Essa sought to invoke the earnings claims obligation by claiming that he advised Mr. Hussein that his acquisition of the franchise was an investment, meaning his intention was to make money, not waste money. Mr. Essa admitted that he was never promised particular earnings. One might observe that restaurants are not safe investment opportunities. Mr.

Essa’s motivation for acquiring the franchise – one additional and complementary to his desire to provide work for his wife – even though communicated to Mr. Hussein, did not entail that Mr. Hussein made any earnings claims. [ 107 ] However, Mr. Essa did testify that Mr. Hussein had told him, both before and after the Franchise Agreement was signed, that food costs are typically 33% of the selling price of products (30% in Alberta). Mr. Hussein did not dispute having made these representations both at the meeting with Mr.

Essa at the hotel and on the telephone. [ 108 ] These representations engaged s. 16 of the Schedule.

Section 16 refers to information that “is given … to a prospective franchisee from which a specific level … of actual or potential … costs can easily be ascertained ….” Mr. Hussein was providing costs information. The information supporting his representations should have been provided in the disclosure. It was not. On this ground too, the disclosure was incomplete. [ 109 ] What, one might ask, of clause 18.21 of the Franchise Agreement? Once again, under the Act , a party cannot waive information rights. Insofar as clause 18.21 might serve as a purported obstacle to this particular finding of lack of proper disclosure, that provision of the Franchise Agreement is void. (

e) financing arrangements [ 110 ]

Section 9 of the

Schedule provides as follows: Disclose the terms and conditions of each financing arrangement that the franchisor offers directly or indirectly to the franchisee. [ 111 ]

Section 10 of the November 2009 Disclosure Document states the following: Sam’s Restaurant Inc. may arrange Financing. A draft copy of Purchase and Sale agreement will be provided to Franchisee from Sam’s Restaurant Inc. after the location is arranged. If the franchisee would like to see a draft copy of this document before signing the

franchise agreement, the franchisee must request this document in writing and send the request by fax to 1-866-735-1045. This paragraph only applies if Sam’s Restaurant has agreed to finance the location. [ 112 ] It is important to recall that in this case, the Franchise Agreement was signed first and the location for the outlet determined later. Mr. Essa and Mr.

Ataoui, then, did not have information about financing before signing the Franchise Agreement. [ 113 ] Two issues arise: First, was MFI not required to provide further information about financing, because the financing was provided – in at least some cases – by SRI? Second, if MFI was required to provide additional financing information, was the “request for further information” procedure equivalent to providing the information directly? (

i) financing through SRI not MFI [ 114 ] MFI’s position was that further information about financing was not required because financing was provided by SRI. SRI is a separate corporation from MFI. SRI was not the franchisor. [ 115 ] In his cross-examination, Mr. Hussein stated that he was and has been the sole director and shareholder of both MFI and SRI. MFI and SRI then are related corporations. That could be cause for concern, but that is not the test for this aspect of disclosure under the Act or the Regulation. [ 116 ] The test is whether financing is offered directly or indirectly by the franchisor. I must keep in mind that the Act , Regulation, and

Schedule are consumer protection legislation, should be interpreted in light of that objective, and should not be interpreted narrowly. [ 117 ] In this case, the financing was not offered directly by MFI since it was offered by SRI. However, the financing was offered indirectly by MFI through SRI. That is, if direct financing would be by MFI, indirect financing would be through a third party such as SRI. The third party financing through SRI was connected to and referred to in the franchise arrangements. [ 118 ]

Section 10 of the November 2009 Disclosure Document refers to financing by SRI. The Franchise Agreement is more direct. Clause 10.1 provides that the Franchisee agrees to buy a turn-key operation from SRI. The franchise is only available through an arrangement with SRI. [ 119 ] Mr. Hussein stated in his evidence that despite the language of clause 10.1, a franchisee would have an “option” to build itself and not to contract with SRI. This was explained in meetings with prospective franchisees. The simple response is that this is not what the Franchise Agreement says.

There was no evidence that a non-SRI option was presented to Mr. Essa and Mr. Ataoui. [ 120 ] Mr. Essa and Mr. Ataoui, along with their operating corporation, A&H Inc., did purchase the restaurant location – the turn-key fast food restaurant – from SRI for $85,000. They provided a deposit of $60,000. The balance of $25,000 was paid through monthly payments of $793.08. The balance was treated as a loan with a three year term with an interest rate of 9% per annum. Mr. Essa and Mr. Ataoui provided guarantees. SRI also received a General Security Agreement. Mr. Ataoui was removed and Ms.

Afifi was added as a purchaser and guarantor under the SRI purchase agreement on September 29, 2010. [ 121 ] Through the disclosure and Franchise Agreement provisions, MFI indirectly offered financing through SRI. Therefore the terms and conditions of the financing arrangement or arrangements with SRI should have been disclosed. [ 122 ] I note that s. 10 of the November 2009 Disclosure Document already referred to financing by SRI.

This appears to be a manifest concession that MFI was required to provide information about SRI financing. (ii) sufficiency of financing information provided [ 123 ] The provision of a draft copy of a purchase and sale agreement after the Franchise Agreement was signed was clearly inadequate. Does the “request for a draft” procedure suffice to provide the requisite information? [ 124 ] The

Schedule requires that the terms and conditions of each financing arrangement be disclosed. Disclosure on request is not disclosure. It is at best later disclosure. The point of the disclosure obligation is that a prospective franchisee is to know in advance what the terms and conditions of financing would be. [ 125 ] Defence counsel argued that details cannot be provided in advance, even 14 days in advance.

Interest rates, for example, may vary depending on quick changes in market conditions. [ 126 ] This argument would not deal with terms and conditions of financing other than interest rate – e.g. the need for personal guarantees and a GSA, the term of the loan, or a required down payment expressed as a percentage of the total loan.

Further, a reason for disclosure is to constrain the franchisor from tinkering with the interest rate and other terms and conditions of the financing, based, for example, on an assessment of what the particular prospective franchisee can pay or on what types of assets the particular prospective franchisee has that can be securitized. The up-front financing information not only provides information that the franchisee needs, but ensures fairness in treatment in financing between franchisees. [ 127 ] I find that the November 2009 Disclosure Document failed to comply with the requirements of the

Schedule respecting financing arrangement information. [ 128 ] The provision of this information by MFI would not have worked any great hardship. The SRI purchase agreement is very short, only 2 pages. The February 2010 Document contained the form of GSA as an Exhibit. The November 2009 Disclosure Document did not. (

f) failure to sign

[ 129 ] Paragraph 2(3) of the Regulation provides as follows:

(3) A disclosure document, including any material changes made in respect of a disclosure document, must include a certificate set out in

Schedule 2 that must be dated and must be signed … (

b) if the franchisor has only one director or officer, by that person. [ 130 ] The Plaintiffs claimed in the Statement of Claim that the Disclosure was not signed by or on behalf of Mediterranean Franchise Inc. This might seem a perverse claim. Mr. Hussein provided a signed certificate at p. 17 of the November 2009 Disclosure Document. On the signature page of the Franchise Agreement at clause 19, we read the following: Hesham Essa and Abed Ataoui … received the Disclosure Documents … on NOVEMBER 3, 2009 via e-mail as requested by the Franchisee …. Consent form is attached to this Agreement.

By signing below you are both agreeing not to rescind the Franchise Agreement as the disclosure documents were sent electronically. [ 131 ] However, the Court of Appeal suggested in Hi Hotel that a “rubber stamped” version of a signature is not a signature. Similarly, an e-signature is not the same as an actual signature. The signatures of Mr. Hussein on p. 17 of the November 2009 Disclosure Document and p. 18 of the February 2010 document are identical. They are e-signatures. E-signatures pose the same difficulties as rubber-stamped signatures. [ 132 ] Counsel did not address this issue.

I took from their silence that the e-form of the signature was not at issue. The agreement not to rescind would be void under s. 18 of the Act .

But I take counsel to have relied on s. 16(1) of the Electronic Transactions Act which provides that “a legal requirement that a record be signed is satisfied by an electronic signature.” See also s. 10 of this Act: “Information or a record to which this Act applies must not be denied legal effect or enforceability solely by reason that it is in electronic form.” There was no argument that disclosure documents under the Franchises Act are exempted from the Electronic Transactions Act by virtue of a provision in that Act or the Electronic Transactions Act General Regulation . [ 133 ] Absent the application of the Electronic Transactions Act , arguably the e-signature would not have met the requirements of the Franchises Act , on the authority of Hi Hotel . (

g) conclusion [ 134 ] In conclusion, the November 2009 Disclosure Document was deficient in four ways: [ 135 ] It failed comply with s. 14 of the

Schedule respecting telephone numbers for other franchisees. [ 136 ] It failed to comply with s. 15 of the

Schedule respecting location closures. [ 137 ] It failed to comply with s. 16 of the

Schedule respecting earnings claims. [ 138 ] It failed to comply with s. 9 of the

Schedule respecting financing arrangements. [ 139 ] In my opinion, each of these deficiencies considered in isolation from one another would have been serious deficiencies. Cumulatively, the disclosure was seriously deficient. The disclosure was not substantially complete. B. WERE THE PLAINTIFFS ENTITLED TO RESCIND THE FRANCHISE AGREEMENT? [ 140 ] No proper disclosure was provided to the Plaintiffs. They were entitled to rescind or provide notice of cancellation under s 13 of the Act : Hi Hotel at para 117. Because no proper disclosure was provided to them, the 60 day time limitation was not engaged.

The s. 13 clock had not started to run. [ 141 ] The notice of cancellation under ss. 13 and 14 of the Act was provided on April 13, 2011: tab 10 of Exhibit 1. [ 142 ] It follows that, since the Franchise Agreement was cancelled by notice from the Plaintiffs, further royalty payments were not due to MFI from the Plaintiffs. [ 143 ] I will return to the issue of the compensation owing to the Plaintiffs shortly. C. DID MFI MAKE MATERIAL MISREPRESENTATIONS ON WHICH THE PLAINTIFFS RELIED TO THEIR DETRIMENT? [ 144 ] Two types of alleged misrepresentations arose on the evidence, relating to advertising and food costs.

1. Advertising [ 145 ] The Plaintiffs asserted that Mr. Hussein represented to them that MFI would embark on an advertising program. Mr. Essa testified that he had discussed this issue with Mr. Hussein before the February 25 meeting. The advertising campaign, Mr. Hussein had advised, would be national in scope, running in newspapers and on TV. [ 146 ] Ms. Afifi too testified to a similar promise. Mr. Essa and Ms. Afifi reported that Mr. Hussein had said that the advertising would occur once all three Edmonton franchises were in place. [ 147 ] Mr.

Hussein did not deny making the representations respecting advertising. I find as a fact that he made the representations. [ 148 ] This advertising simply didn’t happen. [ 149 ] The representations about advertising did not form part of disclosure and are not governed by the special rules of the Act . The representations then must be approached through the common law. [ 150 ] The representations were promises or statements of intention.

No consideration was provided to secure the promises so the failure to advertise did not support a cause of action for breach of contract. [ 151 ] Advertising is a subject covered by the Franchise Agreement. Under clause 5.1, the Franchisee has advertising obligations. Under clause 5.2, the Franchisor has the discretion to maintain and administer a general advertising fund for national, regional, and other advertising programs. The statements of intention in question, however, did not fall within any obligations of MFI under the Franchise Agreement.

Again, no cause of action for breach of contract was established. [ 152 ] There was no evidence, no claim, and no pleading that Mr. Hussein did not in fact intend to do what he said he would to when he made the promises about advertising. In the circumstances, whatever Mr. Hussein may have had in mind when he made the statements, going ahead with a regional or national campaign may not have made sense given the difficulties the Plaintiffs were having with their restaurant. They were in operation for only about 9 months before they ceased operations.

It would have made sense to see whether the other two Edmonton-area franchises were viable before putting money toward significant advertising, at least advertising with regional impact. [ 153 ] Mr. Hussein was also dealing with the disruption in food supplies. This was, at least, a legitimate distraction and worthy of greater attention than advertising. Getting supplies to franchisors was a more immediate problem than pursuing advertising, with its uncertain results. Thus, the fact that Mr.

Hussein did not go ahead with advertising did not entail that he was not sincere when he made the representations about advertising. The tort of deceit was not established. [ 154 ] The failure to advertise as promised doubtless disappointed the Plaintiffs. That failure, though, did not provide any independent legal support for their claims against MFI. 2. Food Costs [ 155 ] The issue of food costs was extremely important to Mr. Essa. From his perspective, excessive food costs were at the root of the failure of the restaurant. Food costs did not operate in isolation. Mr.

Essa failed to do market research, failed to do a business plan, and had no prior restaurant experience. Whether the restaurant would have succeeded had food costs been lower is a matter of speculation. [ 156 ] What are not matters of speculation are Mr. Hussein’s representations about food costs. [ 157 ] What is in dispute is first, whether Mr. Hussein’s representations were accurate; second, what fault, if any, attached to Mr.

Hussein respecting the representations if they were not accurate; third, whether clause 18.21 of the Franchise Agreement applied if the representations were not accurate; and finally, if clause 18.21 did not apply, what remedy the Plaintiffs would have relating to these representations. [ 158 ] It was conceded that Mr. Essa did rely on Mr. Hussein’s representations. (

a) the representations [ 159 ] Mr. Essa discussed food costs with Mr. Hussein prior to entering into the Franchise Agreement. [ 160 ] Mr. Essa’s testimony was that Mr. Hussein told him that food costs ran at about 33% of costs as a percentage of sale price, 30% in Alberta. [ 161 ] Mr. Hussein did not dispute having made these representations, both at the meeting with Mr. Essa at the hotel and in telephone conversations. (

b) were the representations accurate? [ 162 ] Mr. Hussein’s testimony was that he provided his estimate of food costs based on his knowledge of franchisees’ costs. The estimate was based on average costs and sales of a sample of restaurants. Mr. Hussein had operated Taste of Mediterranean restaurants and was operating one at the time that he was having discussions with Mr. Essa.

[ 163 ] Mr. Hussein pointed out – and this could not be disputed – that neither he nor MFI controlled food prices. These were dependent on market conditions, particularly on the price of gas. [ 164 ] But again, were the representations by Mr. Hussein accurate? [ 165 ] Contrary to a Defence counsel submission, there was evidence that Mr. Hussein’s estimate was inaccurate. This was Mr. Essa’s testimony about his costs. By Mr. Essa’s calculations, food input costs were closer to 54% of the sales price than to 33% of the sales price. Mr. Essa demonstrated a flaw in Mr. Hussein’s advice. Mr.

Hussein did not take into account the “shrinkage” of food materials as they were processed into saleable items. As described in his e-mail to Mr. Hussein of March 9, 2011, meat purchased from suppliers was fatty. The fat melts away during cooking. Additional meat must be added to make up the amount needed for a product. The price of meat for products must be calculated on the basis of the cooked meat (or processed food generally) that serves as inputs for products sold. Mr. Essa’s evidence was that the cost of meat inputs was frequently equal to or greater than the prices for which he could sell products. Mr.

Essa was painfully aware that he could always raise prices, but this would put him at a competitive disadvantage. [ 166 ] Second, Mr. Hussein’s estimate was misleading. Mr. Essa was clear – and this was not disputed by Mr. Hussein – that he had no restaurant experience. He was relying on Mr. Hussein for advice. Mr. Essa was focused on food costs. That makes sense, since it is a primary cost input for restaurant products. However, sales price cannot relate only to food cost. Sales price must factor in other costs such as rent, labour, capital costs, and fixturing.

The only revenue sources for a restaurant like Taste of the Mediterranean are the food and beverages that are purchased. Sales of those items have to cover all expenses, plus, it is hoped, generate some profit. Talk of food costs as a percentage of sales, without further elaboration about factors bearing on sales prices, was misleading. Mr. Hussein was encouraging Mr. Essa to have a business form of tunnel vision. [ 167 ] Therefore, I find that Mr. Hussein’s representations about food costs were inaccurate. (

c) fault [ 168 ] Once again, the evidence did not support a finding that Mr. Hussein had made deceitful or intentionally untrue statements relating to food costs. [ 169 ] In my opinion, neither did the evidence support a finding that Mr. Hussein’s representations about food costs were negligent. Mr. Hussein manifestly had experience and expertise in the restaurant business and Mr. Essa expressly relied on Mr. Hussein’s advice. A duty of care and reliance were made out. Mr. Hussein, though, provided an explanation in his testimony about the bases for his claims.

There was no challenge to his explanation in cross-examination. His representations about food price conflicted with Mr. Essa’s but that does not entail that Mr. Hussein arrived at his views negligently. [ 170 ] The difficulty is that we do not know enough about what Mr. Hussein did take into account in forming his views and about what Mr. Hussein should have taken into account in forming his views. There was no evidence, for example, on the food costs of restaurants selling types of foods similar to those sold by the Plaintiffs. [ 171 ] The burden of establishing negligence was borne by the Plaintiffs.

It would be improper simply to assume that Mr. Hussein failed to take into account what he should have taken into account, or to put the burden on Mr. Hussein to show that he was not negligent. [ 172 ] Even an innocent misrepresentation, though, could support rescission in equity. I will return to this point in a moment. (

d) does clause 18.21 apply to prevent reliance by the Plaintiffs on any misrepresentations? [ 173 ] The Franchise Agreement contains an “entire agreement” clause, which provides as follows: 18.21 Entire Agreement . This Agreement constitutes the entire agreement between the parties and supersedes all previous agreements and understandings between the parties relating to the subject matter hereof.

It is expressly understood and agreed that the Franchisor has made no representations, inducements, warranties or promises, whether direct, indirect, or collateral, express or implied, oral or otherwise, concerning this Agreement, the matters herein, the business franchised hereunder or any other matter, which are not embodied herein …. [ 174 ] On its face, this clause would apply to the representations about the price of food as representations concerning the franchised business. I did not find that Mr.

Hussein’s representations were negligent, but I confirm that the failure of the clause to refer expressly to negligent misrepresentations would not preclude its application to negligent misrepresentations: Horizon Resource Management Ltd v Blaze Energy Ltd , 2013 ABCA 139 at para 47 . [ 175 ] The page containing the “entire agreement” clause was initialed by Mr. Essa, although his evidence was that he did not read the agreement before signing it. There is some authority that if an entire agreements clause like s 18.21 is not brought specifically to a plaintiff’s attention, it is not binding: see John D.

McCamus, The Law of Contracts (Toronto: Irwin Law, 2005) at 355 – 356 [ McCamus, The Law of Contracts ]. A severe evidential difficulty from the Plaintiffs’ perspective is that no evidence was provided respecting what Mr. Ataoui knew or didn’t know about clause 18.21. Mr.

Hussein’s evidence was that he went through the February 2010 Document in detail, but I cannot in fairness take that evidence – which was not narrowed through cross-examination – to entail that he did not also go through the Franchise Agreement, which was initialed. [ 176 ] It is fair to observe, though, that no party provided evidence that the “entire agreement” clause had received any special attention or indeed any attention.

[177] One way to approach the issue of whether the “entire agreement” clause should bind the Plaintiffs is whether the fair dealingobligation, which applies to the enforcement of the Franchise Agreement, entails that the clause must be “read down” so that it does notpreclude relief for a franchisee based on pre-contractual misrepresentations, at least when the clause is not specifically explained to thefranchisee. [178] Another way to approach the issue of whether the entire agreement clause should bind the Plaintiffs is whether MFI as aprospective franchisor was under a duty of fair dealing prior the signing of the Franchise Agreement.

Section 7 of the Act provides that“Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement.” But that sectionpresupposes a franchise agreement, as opposed to conduct preceding the signing of a franchise agreement. The issue is not (from thisperspective) about fair dealing in performance or enforcement, but fair dealing in negotiation or in pre-contractual discussions.

That is,the issue is whether common law fair dealing extends beyond performance and enforcement, as discussed in Bhasin v Hrynew, 2014SCC 71. [179] In my view, the law remains as stated by the Ontario Court of Appeal in 2001. The law is currently unclear as to whether afranchisor is under a duty of fair dealing in relation to pre-contractual discussions with a prospective franchisee: 978011 Ontario Ltd vCornell Engineering Co (2001), (ON CA), 53 O.R. (3d) 783, [2001] O.J. No. 1446 (QL), leave to appeal refused,[2001] S.C.C.A.

No. 315, Weiler JA at paras 32 – 35. [180] In my opinion, I am not required to resolve the “entire agreement” problem and I shall refrain from doing so. First, the partiesdirected no argument to the application of clause 18.21. Second, the Act provides a remedy, to which we shall return. Third, even ifclause 18.21 did not apply, given my findings respecting Mr. Hussein’s lack of established fault, the remedy available would support orcomplement but not enhance the remedy available under statute. (

e) what remedy is available to the Plaintiffs relating to misrepresentations? [181] As for the statutory remedy, the lack of particulars respecting food prices amounted to a disclosure deficiency, which, alongwith other disclosure deficiencies, permitted the Plaintiffs to cancel the Franchise Agreement. [182] As for the remedy based on innocent misrepresentation, equity would permit rescission but would limit its remedy to restitutionof the status quo. Its approach was restitutionary. It would not award compensatory damages.

In this case, it may be that the equitywould not extend so far as to award any “net loss” damages to the Plaintiffs in addition to the remedy of rescission: McCamus, The Lawof Contracts at 347. [183] It may be that the historical approach in equity should be augmented by compensatory damages. In Bank of Montreal vMurphy, [1986] B.C.J.

No. 973 (B.C.C.A.), Justice Lamerbert wrote the following in obiter at para 16: if the circumstances are appropriate, the courts of British Columbia should not regard themselves as confined to the remedy of rescissionwhere a contract is induced by a misrepresentation and the awarding of the remedy of rescission does not do justice between the parties.In some cases a money award may be given instead of rescission. In other cases a money award may be given as well as rescission.

It isunnecessary to deal further with the question of rescission on this appeal. [184] Even if money damages were available upon equitable rescission, the damages might not extend to the amounts paid to SRI (forexample), since MFI did not benefit by those amounts: McCamus, The Law of Contracts at 340 – 341.

That is, even if money damageswere available upon equitable rescission, the Plaintiffs’ recovery would not exceed the recovery available under s 14(2) of the Act.Equitable rescission, then, would support the statutory remedy but not enhance it. [185] And as for the remedy for violation of a duty of fair dealing in negotiation, that has not yet been established.

Since the Plaintiffscould not claim a loss of profits since the restaurant was not profitable, the best they could expect would be rescission plus damagescompensating them for their investment losses – again the remedial territory covered by s. 14(2) of the Act. D.

DID MFI FAIL TO DEAL FAIRLY WITH THEPLAINTIFFS, PARTICULARLY RESPECTING SUPPORTFOR BUSINESS OPERATIONS AND ASSISTANCE INOPERATING THE RESTAURANT? [186] MFI’s performance of its obligations under the Franchise Agreement must be assessed against the standard of fair dealing.Under s 7 of the Act, “Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement.” [187] The Plaintiffs had two main complaints respecting MFI’s performance of its obligations under the Franchise Agreement. First,MFI failed to provide proper training.

Second, MFI failed to address supply disruptions, either properly or at all. 1. Training [188] MFI’s obligations to provide training were set by clauses 7.1 and 7.2 of the Franchise Agreement and were referred to in s. 15 ofthe November 2009 Disclosure Document. [189] Under clause 7.1, franchisees must receive training prior to commencing operations. This is for at least one week. Under clause

7.2, additional training may be requested by a franchisee. The franchisor shall provide the training at a reasonable cost. The franchisee is responsible for reasonable costs, including travel. [ 190 ] In this case, the evidence confirmed that Mr. Hussein provided the initial mandatory training. He also attended in Edmonton at least a second time in August 2010 when, in his words, “the lady became a partner”. His testimony was that he was in Edmonton once or twice more, but there is no confirmation of this. The testimony of Mr. Essa and Ms. Afifi was that Mr.

Hussein attended two or three times in total. [ 191 ] In the mandatory training, Mr. Hussein provided instruction respecting the making of sandwiches and salads, food preparation, and business planning. He provided and reviewed the operations manual. He provided instruction respecting closing and accounting for expenses. In his words, he went through the manual step-by-step. [ 192 ] This was not disputed by the Plaintiffs. [ 193 ] Mr. Hussein did not attend once per month, but he was not required to do so. He was not requested to do so.

The Plaintiffs were entitled, pursuant to clause 7.2, to request further training. It is true that the Plaintiffs had no restaurant experience and that Mr. Essa wanted support from Mr. Hussein. It was not Mr. Hussein’s job, however, to supervise, manage, or oversee the Plaintiffs’ restaurant. As a franchisor, even one bound by the duty of fair dealing, it was not Mr. Hussein’s job to help run the restaurant. [ 194 ] My sense is that Mr. Essa and Ms. Afifi were looking for greater contributions by Mr.

Hussein than he was obligated to give or even that he should have given in the context of a business relationship. [ 195 ] Further, there was no evidence that Mr. Essa and Ms. Afifi did not have adequate training. There was no evidence that were not able to do the jobs that needed to be done in the restaurant because of some deficiency in Mr. Hussein’s instruction. The business problems of the restaurant cannot be traced to Mr. Essa and Ms. Afifi’s training. [ 196 ] I find no violation of Mr. Hussein’s duty to provide training to Mr. Essa and Ms. Afifi. 2.

Supply Disruptions [ 197 ] Under s 13 of the November 2009 Disclosure Document, Franchisees are required to purchase and use only equipment, and other products and material that are supplied by suppliers, manufacturers and distributors approved by the Franchisor …. [ 198 ] Under clause 8.2(

a) of the Franchise Agreement, “a Franchisee shall purchase all products, accessories and supplies for the Franchised Business from the Franchisor or from suppliers approved or designated by the Franchisor.” [ 199 ] This sort of provision makes sense. A franchisor has a very strong interest in maintaining the good will associated with its brand, which depends on consistency and quality of products in franchised outlets. One important element promoting that consistency and quality is the use of standardized, approved suppliers. [ 200 ] The franchisor, though, has an obligation of fair dealing.

It cannot tie franchisees to suppliers whose products are so costly or are delivered so erratically that franchisees cannot run their businesses. The franchisor must exercise its discretion respecting suppliers in a way that provides benefits not only to itself but to franchisees.

Further, the franchisor’s exercise of discretion must provide benefits not only to some franchisees, but – especially when considering outlets across North America – to all franchisees. [ 201 ] The Plaintiffs had two types of problems with MFI-designated suppliers. [ 202 ] First, and this problem arose before the supply disruption, MFI’s food supplier was Eberhardt Foods. Mr. Essa claimed that the food it provided was excessively expensive. The cost concern was linked to the concern about the percentage of costs tied up in food inputs.

Further, Eberhardt provided old produce which had only a short in-restaurant shelf-life before it had to be thrown away. [ 203 ] Second, in January 2011, a supply disruption occurred. The Plaintiffs had to acquire their own supplies in the last two months before they cancelled the franchise arrangement. (

a) Eberhardt Foods [ 204 ] In my opinion, MFI did not violate its duty of fair dealing respecting Eberhardt foods. [ 205 ] On the evidence, the Edmonton area did not have an abundance of food providers. Reference was made to Eberhardt, Sysco, GFS, and a local supplier. MFI was Ontario-based. Mr. Essa and Mr. Ataoui were the first prospective franchisees to sign an MFI Franchise Agreement in Alberta. The other two Edmonton-area franchises commenced at about the same time as the Plaintiffs’ restaurant. There was no evidence of the other franchisees’ concerns about Eberhardt.

On the evidence, it could not be concluded that Eberhardt was a poor or unreasonable supplier or that MFI made an unreasonable business decision in selecting Eberhardt as the first supplier for the Alberta franchises. [ 206 ] Mr. Essa pointed out that products, such as vegetables, could be purchased more cheaply at supermarkets than from Eberhardt. Mr. Essa’s view was that it was unreasonable that a commercial supplier’s prices should exceed prices in consumer retail environments. However, there was no evidence that better prices woul

[…]