The above casei was a franchise case involving a Holiday Inn franchise. Prior to entering into the franchise agreement, the franchisor provided the franchisee with an Ontario form of disclosure document, together with an Alberta addendum. The forms of certificate attached to each of these documents bore no signatures and no dates. No evidence was provided that these documents had ever been signed by any directors or officers of the franchisor. In fact, there was no evidence that any signed copies were ever in existence.
At trial, in the Alberta Court of Queen’s Bench, the franchisee was successful in its action for rescission and damages. The notice of rescission was given 11 months after the franchise agreement was entered into, which, had the franchisor’s disclosure document been treated as such, would have been beyond the statutory limitation period for rescission, of 60 days after receipt of the disclosure document, as provided by Alberta’s franchise legislation.
The franchisor appealed the trial decision to the Alberta Court of Appeal, on the basis that the franchisee should not be allowed the remedy of rescission, based on a “technical” legislative requirement.
The evidence in the case showed that the franchisor had kept no copy of the actual disclosure document provided to the franchisee. Only generic copies of the disclosure materials were maintained by the franchisor on its files at its U.S. head office. There was also no evidence that a cover letter had accompanied the documents when provided to the franchisee. In particular, the form of franchisee receipt did not mention the certificates; the place on the receipts where the date of the disclosure document was to be filled in, were left blank; and the certificate forms themselves contained only the typed name of the franchisor corporation, with the word “per” below, and blank lines, with the names of persons typed below them.
The Court’s view of that format was that it served two functions, namely that it tells who is to sign above the line, i.e. it shows a later manual signature was intended, and the typed name would later identify the signer, if the actual signature was illegible. The franchisor argued in the Court of Appeal that the typed names under the signature lines meant that the disclosure document was signed. Its position was that a typed name can be a signature for some purposes. The Court’s view of this was that “… no reasonable person would read those typed names as a signature ….”
The Court reviewed securities legislation, as well as the Commissioners For Oaths Act of Albertaii regarding the use of typed names, and their distinguishment from signatures. The following quote is of interest:
“A typed name in quotation marks (or preceded by a small s between oblique strokes) above the line might indicate that another copy was signed. But that is not what we have here.”
The Court reviewed the issue of signing or dating being mere form and of no real importance.
The Court reviewed a recent Ontario franchise caseiii where signed certificates were lacking in an Ontario disclosure document, and in which the Court held that there had been no disclosure.
The Court also reviewed various administrative and criminal cases, and had the following comments:
“The purpose of a certificate ‘signed’ by an official ‘is personally to authenticate a document and implies knowledge and approval of its contents’. … … A certificate involves checking facts and confirming to the outside world that one has checked. …
Without a certificate, the franchisee has just some random statements and pieces of paper, but nothing to tie them together or even to say that they are true.”
The Court also considered a very important statement regarding the words in a statute from an English Court of Appeal case,iv as follows:
“Either the words are mandatory or they are not.”
The latter quote was to reinforce the Court’s finding that the certificate requirements under the Alberta Franchises Act and Regulations constitute mandatory requirements. In drawing the analogy to securities legislation, the Court had the following comments:
“Similarly, the analogous certificate on a prospectus ‘is the basis for the civil liability provisions [in securities legislation] which hold the issuer and the signatories liable for misstatement or misrepresentationsv ….
Therefore, the certificate is the lynch pin of the substance of the disclosure. It is the opposite of mere form.
The person who tried to assemble, and xeroxed and mailed, copies of the standard bundles here [in the Hi Hotel case] may well not have been a director or officer. So it is entirely possible that she lacked access to the complete information necessary, especially personal information about officers and directors.
The similar securities legislation requiring a signed certificate on a prospectus is enacted ‘to encourage director oversight, due diligence and care in the prospectus process’vi …. These Acts also ‘are aimed at holding corporate officers accountable for the quality and accuracy of the issuer’s disclosures’.vii
The major Canadian textbook on securities law says that substantial compliance refers to form, but ‘in fact it does not permit exclusion of … the certificates of the issuer, the promoter and the underwriters … or other than minor deviations from the form and content requirements found in the Rules.viii”
The Alberta Franchises Act, in section 9(1)(b), provides that a franchisee who suffers a loss because of a misrepresentation contained in a disclosure document, has a right of action for damages against “every person who signed the disclosure document”. After reviewing the combined import of three sections of the Alberta Franchises Act, the Court concluded that:
“A person who signs the certificate has a personal duty to ‘conduct an investigation sufficient to provide reasonable grounds for believing’ that the facts stated are accurate, and that all facts to be disclosed were disclosed. Personal liability enforces that.
If no one signs, no one has that duty. No individual need investigate, nor believe.
So a signed certificate is not a question of form. It governs who has huge monetary liability, and who has the duty of investigation and disclosure.
If the respondent franchisee here sued the two persons whose typed names were given, claming a million dollars for non-disclosure, what would their statement of defence say? ‘We did not sign anything.’”
To carry on with its intense criticism of the franchisor’s sloppy conduct, and its analogies to the strict requirements of securities disclosures, the Court had the following further comment:
“An anonymous prospectus, or one signed only by the clerical help, is almost useless. So one cannot regard legislation calling for signature by two officers or directors a trivial technicality.”
The Court then carried on as follows:
“For all the reasons stated above, a complete absence of signatures cannot possibly be ‘substantially complete’ under s. 2(4) of the Regulation. (Still less can no signatures and no date.) This is not a case where
(a) there was a properly-signed original, but in error an unsigned exact copy was sent out;
(c) the directors or officers expressly authorized a lesser official to sign for them or to affix rubber-stamped signatures; or
(d) each director signed a different copy and the two copies differ in small respects.”
Considering the wording of the legislation about the dating of the certificates, it was also noted that section 2(5) of the Alberta Franchises Regulation sets out that:
“The date of a disclosure document is the date set out in the certificate referred to in subsection (3).”
Further, it is the date of the disclosure document (the certificate date) which governs what information must be disclosed, according to several items in the Regulation.ix Because the times as stated in the various Regulations quoted are not otherwise defined, the Court concluded that those times must refer to the date on the disclosure document certificate.
The Court found that the language of the Act and Regulations was mandatory, and that it was the legislative intent to provide protection to prospective franchisees. No date and no signature constituted a fatal error of the franchisor, and was the equivalent of no disclosure document ever having been given.
All of the above shows a very strong position taken by the Alberta Court of Appeal, which must serve as a clear warning to franchisors about making proper disclosure. Making no disclosure at all, or making such a fatal error that what was given is the equivalent of no disclosure at all, can be a very expensive mistake. In the circumstances, the franchisee will have its right of rescission for a period of two years after entering into the franchise agreement.
It is interesting to note that in the Hi Hotel case, the items in dispute between the franchisor and the franchisee did not relate at all to any alleged misrepresentations in the disclosures made. The franchisor also did not provide proper financial statements to the franchisee at the time of making its disclosure. However, the items in dispute between the parties all arose after the agreement was entered into, and had to do with operational matters under the franchise arrangement. That was, however, found by the Court to be irrelevant. The disclosure requirements were mandatory, and the right of rescission was a statutory right, which would not be dependent upon the particular circumstances of the case, rather dependent upon whether or not the mandatory requirements of the legislation had been met.
In the face of such a case, certain practical issues arise. What should a franchisor do, to conduct itself properly within the real world of franchise commerce?
There is obviously a strong statutory requirement that two directors or officers sign and date the certificate accompanying the franchisor’s disclosure document.
Surely, this does not mean, or have to mean, that every copy of the franchisor’s disclosure document which is given to a prospective franchisee, must be originally signed and dated.
To repeat a quote from the Hi Hotel Alberta Court of Appeal judgment:
“A typed name in quotation marks (or preceded by a small s between oblique strokes) above the line might indicate that another copy was signed.”
Of course, the above quote does say that the typed name in quotation marks, etc. “might” indicate that another copy was signed.
It is, however, a fairly standard practice in Canadian commercial law that “a trued-up signature”, namely a signature shown above the signing line by a typed name in quotation marks, indicates that an original signature of the party whose name is so typed, has been made, presumably on the original copy of the document in question.
In this context, it is interesting to note that the Court looked at various Canadian and English authorities regarding, for example, the use of stamped signatures, and other means.x
In the Goodman case referred to in Footnote x below, such a document was found to be valid, but there was evidence that the solicitor in question had placed the rubber stamp of his signature on the document himself, and that he kept the stamp locked up in his own room so as to be available only for his own use.
Lord Justice Denning gave the dissenting judgment in this case, but, in typical fashion, his dissenting judgment has been quoted in other subsequent cases. He stated as follows:
“The virtue of a signature lies in the fact that no two persons write exactly alike, and so it carries on the face of it a guarantee that the person who signs has given his personal attention to the document. A rubber stamp carries with it no such guarantee, because it can be affixed by anyone. The affixing of it depends on the internal office arrangements, with which the recipient has nothing to do. This is such common knowledge that a ‘rubber stamp’ is contemptuously used to denote the thoughtless impress of an automaton in contrast to the reasoned attention of a sensible person.”
Two franchise cases were also reviewed in this context by the Court in the Hi Hotel case. In Traversy v. Chia Chia Communicationsxi, it was found that a videotape is not disclosure satisfying the legislation because it lacks a signed certificate. In Rocha v. Panda Flowersxii, it was found that screen displays shown on a laptop computer of the franchisor are not disclosures satisfying the legislation because they lack a signed certificate.
Many franchisors prepare disclosure documents to be given to multiple prospective franchisees. These may be accompanied, where required, by a Statement of Material Change, which would disclose subsequent, and/or site, or franchise, specific information to the prospective franchisee.
The practice does not appear to be that such franchisors would present multiple disclosure documents to multiple prospective franchisees, each bearing an original set of signatures of two directors or officers. Instead, the disclosure documents in question would most likely have attached photocopies of the signed and dated certificate page, or would have a certificate page bearing a typed date and trued-up signatures, each being a typed name of the signing party, appearing on the signing line in quotation marks.
In the light of the Hi Hotel case, can such a practice still be considered safe?
For guidance, one can look at Canadian securities legislation and Canadian real estate legislation, where disclosure is also mandatorily required by statute or regulation, and where not every copy of the disclosure need bear an originally-signed certificate.
In Canadian Securities Regulationxiii, the following appears, in respect of Issuer’s and Underwriter’s Certificates:
“As filing is now done electronically, ‘signatories have to sign a paper document and file it with the electronic system’s operator within three business days after the electronic filing.’ This should ensure no challenges of the civil liability protection due a typed and electronically filed signature.”
Under the System for Electronic Document Analysis and Retrieval (SEDAR)xiv, Section 4.3 provides as follows in respect of signatures:
“(1) A signature to or within any electronic filing shall be presented in typed form rather than manual form.
(2) An electronic filing that is required to be signed or certified shall be signed by means of an electronic entry of the name of the person or company required to sign or certify the electronic filing that is executed, adopted or authorized by the person or company as a signature.
(3) No prospectus, take-over bid circular, issuer bid circular, directors’ circular, officers’ circular or annual information form for a mutual fund, or amendment or supplement to any of these documents, that contains a certificate signed by a person or company, shall be filed in electronic format unless that person or company has manually signed a certificate of authentication on SEDAR Form 6.
(4) An electronic filer that makes an electronic filing to which subsection (3) applies shall file the manually signed certificate of authentification required under that subsection with the SEDAR filing service contractor at one of its offices listed in the SEDAR Filer Manual within three business days after the electronic filing is made.”
SEDAR Form 6, the Certificate Of Authentification, contains a Certification, to be signed by the signatory, which reads as follows:
“I hereby certify that I have authorized the electronic entry of my name in typed form in the document(s) listed above in Part II and that the electronic entry of my name in typed form shall have the same effect as if I had manually signed the document(s).”
The Real Estate Development Marketing Act of British Columbiaxv provides as follows:
“Division 4 – Disclosure Statements
Filing disclosure statements
14.(1) A developer must not market a development unit unless the developer has
(a) prepared a disclosure statement respecting the development property in which the development unit is located, and
(b) filed with the superintendent
(i) the disclosure statement described under paragraph (a), and
(ii) any records required by the superintendent under subsection (3).
(2) A disclosure statement must
(a) be in the form and include the content required by the superintendent,
(b) without misrepresentation, plainly disclose all material facts,
(c) set out the substance of a purchaser’s rights to rescission as provided under section 21 [rights of rescission], and
(d) be signed as required by the regulations.
(3) A developer must provide to the superintendent any records the superintendent requires to support any statement contained in the disclosure statement filed under subsection (1).
(4) Without limiting section 16 [non-compliant disclosure statements], if a developer markets development units in phases, the developer, before marketing each successive phase, must file with the superintendent an amendment to a disclosure statement submitted in respect of the previous phase.
(5) On a person’s payment of the prescribed fee, the superintendent must
(a) permit the person to inspect, at the superintendent's office and during regular business hours, a disclosure statement filed under this section, and
(b) provide a copy of a disclosure statement filed under this section, or a copy of part of it, to a person who requests it.
Providing disclosure statements to purchasers
15.(1) A developer must not enter into a purchase agreement with a purchaser for the sale or lease of a development unit unless
(a) a copy of the disclosure statement prepared in respect of the development property in which the development unit is located has been provided to the purchaser,
(b) the purchaser has been afforded reasonable opportunity to read the disclosure statement, and
(c) the developer has obtained a written statement from the purchaser acknowledging that the purchaser had an opportunity to read the disclosure statement.
(2) A developer must
(a) retain a written statement obtained under subsection (1) (c) for a period of 3 years or a longer period prescribed by regulation, and
(b) produce the written statement for inspection by the superintendent on the superintendent’s request.”
The Real Estate Development Marketing Act Regulationxvi provides as follows:
“Signing disclosure statements
9.(1) Subject to subsection (2), a disclosure statement must be signed by
(a) every developer of the development property to which the disclosure statement relates, and
(b) if a developer is a corporation, every director of the developer.
(2) The superintendent may do one or both of the following:
(a) exempt a person from the requirement to sign a disclosure statement under subsection (1), with or without conditions;
(b) require a person other than, or in addition to, a person described in subsection (1) to sign a disclosure statement.”
It is to be noted that in the above securities law and real estate law instances, there are filing requirements. The originally-signed certificate is filed with the appropriate authority, and is available for public inspection. The issuer of the disclosure then provides “a copy” of the certificate to the prospective purchaser.
In the franchising context, no Canadian franchise legislation requires any sort of filing, or availability for public inspection, and so the provision of the disclosure documents is made directly by the franchisor to the prospective franchisee.
It is also interesting to note that each franchise disclosure document must attach the financial statements of the franchisor for the most recently-completed fiscal year, which must be either audited, or reviewed in accordance with the review standards and reporting standards applicable to review engagements set out in the Canadian Institute of Chartered Accountants Handbook. Audited or review engagement report financial statements are originally signed by the auditor or reviewing accountant when they are issued to the subject corporation. It is standard practice, however, that the financial statements, when they are attached to the franchisor’s disclosure document, bear only photocopies of the auditor’s or reviewing accountant’s report.xvii This serves as a practical example of the circulation of documents requiring certification, where there are no filing requirements, and no public place where interested parties can see the original document.
With the above as guidance, perhaps a safe procedure for a franchisor to adopt for its disclosure document process would be:
1. The disclosure document, once reviewed and authenticated by the signing officers and directors, would have a properly signed and dated certificate attached when it is prepared.
2. The original of the disclosure document, bearing the signed and dated certificate, would be held on file at the franchisor’s head office.
3. It would be stated on the certificate pages attached to each disclosure document copy provided to a prospective franchisee that:
(a) this is a copy of the originally-signed and dated Certificate;
(b) the originally-signed and dated Certificate is available for inspection by the prospective franchisee at the franchisor’s head office located at (here insert the address of the franchisor’s head office)xviii; and
(c) this Certificate is attached to a complete, exact copy of the disclosure document which was originally signed and dated as indicated above.
4. The face page of the disclosure document would bear a legend, stating the “effective date” of the disclosure document. The effective date would be repeated on the certificate page, and would also be referred to on the franchisee’s receipt for the disclosure document.
5. The franchisee’s receipt would refer to the disclosure document, as including a copy of the signed and dated Certificate of the franchisor.
If the provision of copies of an originally-signed certificate equivalent is an accepted auditing practice, then why should a franchisor not be able to also follow a similar practice? The important thing is not whether or not the certificate given to a prospective franchisee has attached an originally-signed and dated certificate. Rather, the important thing is that the certificate has been originally signed and dated, with all that that entails and represents, and that a proper copy of that originally-signed and dated certificate is given to the prospective franchisee, in such a way as to assure the prospective franchisee that the franchisor’s disclosure document has been properly signed and dated by the required directors and/or officers.