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A Case on Franchises and Cancellation for Non-disclosure in Alberta

The Alberta Court of Appeal looked at the cancellation of a franchise in the case of 1777453 Alberta Ltd v Got Mold Disaster Recovery Services Inc, 2021 ABCA 9.

The Court said at paragraph 2:

[2]Under the Franchises Act, if a franchisor fails to give its franchisee a certain disclosure document in a timely manner, the franchisee may cancel the franchise agreement and claim any net losses it incurred in acquiring, setting up and operating the franchise business. Here the franchisor failed to give the appellant franchisee the required disclosure document in the time required by the Act and Regulations. As a consequence the franchisee elected to cancel its franchise agreement and claim its net losses. However, the court below found that the franchisee did not have any net losses. It is from that ruling that the franchisee appeals.

At paragraph 21:

[21] Section 14(2) of the Franchises Act states:

The franchisor or its associate, as the case may be, must, within 30 days after receiving a notice of cancellation under section 13, compensate the franchisee for any net losses that the franchisee has incurred in acquiring, setting up and operating the franchised business.

At paragraph 22 the Court had an interesting discussion on the difference between reliance damages and expectation damages:

[22]In Essa v Mediterranean Franchise Inc, 2016 ABQB 178, Justice Renke characterized “net losses” in section 14(2) of the Franchises Act as “similar to reliance damages, rather than the usual expectation damages for breach of contract” (para 222, citing John McCamus, The Law of Contracts (Toronto: Irwin Law, 2005) at 832). Neither party to this appeal appeared to disagree.

[23] Reliance damages compensate claimants for expenses incurred in reliance on a contract to try to return them to the position in which they would have been had they not entered the contract (Guenter Treitel, The Law of Contract, 10th ed, (London: Sweet & Maxwell, 1999) at 875). Interpreting net losses as reliance damages is consistent with the conferring of a statutory right of rescission for failure to disclose in a timely matter. The right of cancellation is intended to restore the franchisee to the position it was in prior to the franchise agreement (Stephanie Sugar, Franchise Law in Canada (Toronto: LexisNexis Canada, 2019) at 184, citing Sovereignty Investment Holdings, Inc v 9127-6907 Quebec Inc, 303 DLR (4th) 515, 2008 CanLII 57450 (ONSC) at para 54; Peter Macrae Dillon, Annotated Alberta Franchises Act, (Aurora, Ontario: Canada Law Book, 2008) (loose-leaf, updated 2008, release 10) at 14-1).

[24] In our view, the chambers judge’s interpretation of s.14(2) as requiring profits later received by the franchisee following cancellation of the franchise agreement to be deducted from the net losses the franchisee incurred while the franchise agreement was in force goes beyond what was contemplated by the wording of s.14(2), which confines net losses to those costs incurred in acquiring, setting up and operating the franchised business, and which also requires those net losses to be paid within 30 days of the cancellation of the agreement.

If you have questions related to franchises, please feel free to contact us.

The information contained in this article is not legal advice. No solicitor client relationship is formed through this article. The reader is encouraged to retain counsel for advice in these matters.

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