MISREPRESENTATION AND
DISCLOSURE DEFICIENCIES
Ben Hanuka*
Principal, Law Works P.C.
*
J.D. (Osgoode 1996), LL.M. (Osgoode 2005), Certified Specialist in Civil Litigation
“Practitioner Sessions on Franchise Law “, The Commons Institute, February 8, 2015
CAUSE OF ACTION
TWO CAUSES OF ACTION COMBINED
Section 7(1) of the Ontario Act
If a franchisee suffers a loss because of
a misrepresentation contained in the disclosure document or in
a statement of a material change or
as a result of the franchisor’s failure to comply in any way with
section 5.
CROSS-REFERENCES
Alberta - Franchises Act, RSA 2000, c F-23
Cause of action limited to misrepresentation only:
9(1) If a franchisee suffers a loss because of a
misrepresentation contained in a disclosure document, the
franchisee has a right of action for damages against …
[1]
CROSS-REFERENCES (2)
Identical provisions to Ontario
 PEI - Franchises Act, RSPEI 1988, c F-14.1, s. 7(1)
 New Brunswick - Franchises Act, SNB 2014, c 111, s. 7(1)
 Manitoba - The Franchises Act, CCSM c F156, s. 7(1)
WHEN IS IT USEFUL?
1. When limitation period: beyond two year rescission
period
2. If franchisee does not want to relinquish business
3. No need to prove fundamental disclosure failure
(except if based on material fact)
4. More defendants – other than franchisor and
franchisor’s associate – available.
5. If incurred damages other than those in s. 6(6)
[5]
CAN BE PLEAD WITH RESCISSION
1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd. (2005)
(C.A.), at paras. 38, 39
 Right of action for damages under section 7 is in addition to
rescission remedy.
 The reference in this case is focused on the ‘failure to comply
with s. 5” (i.e., not misrepresentation)
[2]
CAN BE PLEAD WITH RESCISSION
Dig This Garden at paras 38
Failure to comply in any way with s. 5 includes a failure to
provide the disclosure document .
In circumstances where a franchisor fails to make the payments
required of it under s. 6(6), those damages could include such
amounts. As well, if a franchisee suffered any other loss as a
result of the franchisor's failure to comply with s. 5, the
franchisee may sue for such damages under s. 7.
Citation: 256 DLR (4th) 451; 7 BLR (4th) 1; [2005] OJ No 3040; 141 ACWS (3d) 741; 201
OAC 95, 2005 CarswellOnt 3097
[2]
CAN BE PLEAD WITH RESCISSION
While the Dig This Garden case if focused on the “failure to
comply” component:
 If the s. 7 claim is based on material fact, it would make no
difference whether claiming misrepresentation or failure to
comply.
KEY FEATURES
 Does not seek to cancel or reverse the franchise purchase.
 Franchisee is able to continue owning and operating the
franchised business
- Whereas a rescission generally is consistent with a
return of the franchised business to the franchisor.
[2]
KEY FEATURES
 No automatic entitlement to damages.
 Franchisee to prove:
- damages resulted from the misrepresentation;
- the amount of damages that resulted from
the misrepresentation.
 But, unlike with rescission claims, damages may be claimed
for past losses, future losses, or both.
[3]
NO DEROGATION OF OTHER RIGHTS
S. 9. The rights conferred by this Act are in addition to and do
not derogate from any other right or remedy a franchisee or
franchisor may have at law.
Cross-Reference: Similar provision in all provinces
FAILURE TO COMPLY WITH S. 5
FAILURE TO COMPLY WITH S. 5
Failures to comply that could result in losses:*
a. Losses as a result of timing in compliance- 14 days…
b. Material change
c. Accurate, clear and concise*
*Excluding Alberta
MISREPRESENTATION
AND FAILURE TO COMPLY WITH S. 5–
BASED ON MATERIAL FACTS
DEFINITION OF MISREPRESENTATION –
MATERIAL FACT
Boil down to material fact
It is in the definition (same definition in all five provinces):
“misrepresentation” includes,
(a) an untrue statement of a material fact, or
(b) an omission to state a material fact that is required to be stated or that is
necessary to make a statement not misleading in the light of the circumstances in
which it was made;
FAILURE TO COMPLY WITH S. 5 –
MATERIAL FACTS
These disclosure failures are in substance material facts if they result
in losses:
a.
b.
c.
d.
Financial Statements
Copies of all agreements
Prescribed statements
Other information or documents - as prescribed in the Regulation
* Excluding Alberta
FAILURE TO COMPLY WITH S. 5
- MATERIAL FACTS (2)
 Have to prove causation – to link disclosure failure with losses:
“if a franchisee suffers a loss because of…” **
 By implication, the disclosure deficiency has to be important – has to be
consequential, i.e., has to be material fact
Cross-References:
*Excluding Alberta
** In all five provinces
[1]
FAILURE TO COMPLY WITH S. 5
- MATERIAL FACTS (3)
Material fact is of course a key component of disclosure obligations:
5(4) The disclosure document shall contain,
(a) all material facts, including material facts as prescribed;
Cross-References: Same requirement in all other provinces
MATERIAL FACTS
Case law still in its infancy:
First time in Ontario, in 2006:
The Tutor Time decision Court found regulatory deficiencies in day care operation to be material fact, see
paras. 51 to 73
Citation: 518628 Ontario Inc. v. Tutor Time Learning Centres, LLC, [2006] CarswellOnt 4593; [2006] OJ No 3011 (QL); 150 ACWS (3d) 93
(S.C.J. Comm List)
MATERIAL FACTS (2)
Most recent case:
1250264 Ontario Inc. v. Pet Valu Canada Inc., 2016 ONCA 24, released January 14,
2016
One issue was whether non-existent volume purchasing power is
inherently a material fact
i.e., not that the franchisor receives volume rebates, but to the contrary
– that it has no volume purchasing power.
MATERIAL FACTS (3)
Pet Valu, cont‘d
The motion judge ruled that non-existent volume discounts constituted a
material fact under the Act.
The Court of Appeal chose not to deal with this discrete issue and so it
remains open.
To find this as material fact is inherently based on reverse logic: implies a
franchisor is presumed to receive volume rebates absent disclosure to
the contrary.
[1]
PARTIES
KEY PARTIES
S. 7(1)
(a) Franchisor
(b) Franchisor’s agent (sales agent – s. 0.1 of the Regulation) *
(c) Franchisor’s broker **
(d) Franchisor’s associate **
(e) Every person who signed the disclosure document or statement
of materials change (i.e., director, officer)
Cross-References:
*Only Ontario
** Excluding Alberta
JOINT AND SEVERAL LIABILITY
Joint and several liability (s. 8(3))
Cross-References: Same in all provinces
DEFENCES
DEFENCES AGAINST MISREPRESENTATION
Several defences against misrepresentation claims
But no indication of defences against failure to comply with
section 5
MAIN DEFENCE OF FRANCHISOR
 No liability of a person for misrepresentation if franchisee
acquired the franchise with knowledge of the
misrepresentation (s. 7(4))
Cross-References: Same in all provinces
DEFENCES OF OTHERS (1)
 At any time: FDD given without person’s consent, and if
becomes aware, person advised franchisee that given without
consent (s. 7(5)(a))
Cross-References: Same in all provinces
DEFENCES OF OTHERS (2)
 Before purchase: if person becomes aware of
misrepresentation and withdraws consent and gives notice to
franchisee (s. 7(5)(b))
Cross-References: Same in all provinces
DEFENCES OF OTHERS (3)
 Relating to any part of the FDD made on authority of an
expert, or extract of an expert report, no reasonable grounds
to believe, and did not believe, that had misrepresentation,
etc. (s. 7(5)(c))
Cross-References: Same in all provinces
BURDEN OF PROOF
BURDEN OF PROOF (1)
 Plaintiff to prove breach of section 7
- General burden of proof applies to a cause of action
 No need to prove reliance - deemed reliance (s. 7(2), (3))
Cross-References: Same in all provinces
[1]
BURDEN OF PROOF (2)
 But must prove causation
 “if a franchisee suffers a loss because of…” (s. 7(1))
BURDEN OF PROOF – SHIFTING ONUS (1)
Exceptions or exclusions: the burden of proving an exemption
or exclusion from a requirement is on party claiming it (s. 12)
Applies where:
 trying to prove that franchisee was aware of the alleged
misrepresentation
 dealing with disclosure exemptions
References: same in all provinces
[2]
BURDEN OF PROOF – SHIFTING ONUS (2)
 Onus shifts (after misrepresentation proved) to person
alleged to have made the misrepresentation to prove defence
(s. 7(4))
Cross-References: same in all provinces
THANK YOU
Ben Hanuka
Principal, Law Works P.C., Ontario
Ontario’s Regional Franchise and Business Disputes Boutique
Toll Free: (866) 716-6497 ben@lawworks.ca