The Alberta Court of Queen’s Bench recently issued a reminder to franchisors of the consequences of inaccurate disclosure. In Mapleleaf Franchise Concepts, Inc. v. Nassus Frameworks Ltd. the plaintiff, a franchisor of framing and art supply stores, was denied enforcement of the non-competition clause in their franchise agreement against a former franchisee for having misstated the contents of the clause in their franchise disclosure document.

Like Ontario’s Arthur Wishart Act, Alberta’s Franchises Act requires franchisors to deliver a disclosure document to all prospective franchisees at least 14 days prior to signing a franchise agreement. Under the Alberta regulations, franchisors are required to disclose, among other things, the existence and location in the franchise agreement of terms that deal with renewal, termination and transfer of the franchise. Under both the Alberta and Ontario regimes, franchisees are deemed to rely on the contents of the disclosure document and any misrepresentation of a material fact in a disclosure document can give rise to a claim for damages.

In this case, the franchisor provided a disclosure document that incorrectly described the non-competition clause in the franchise agreement as prohibiting the franchisee from operating a competing business within three kilometres of another franchise for two years after termination or expiry.

The franchise agreement, a draft copy of which was attached to the disclosure document, contained a slightly different provision. The actual clause prohibited the franchisee from operating a competing business within 10 kilometres of another franchise or the franchisee’s former designated territory for two years after termination or expiry.

The franchisee subsequently signed a franchise agreement containing the more restrictive 10 kilometre non-competition clause. Despite testifying that he received and read the agreement, the franchisee claimed he only read it briefly and believed it would reflect the disclosure document. After his franchise agreement expired, the franchisee simply disassociated his store from the franchisor’s brand and continued to operate in the same location as an independent framing and art supply store.

The court found the franchisor was required to ensure their disclosure document was accurate. Since it was not accurate with respect to the description of the non-competition clause, a material fact of the agreement, the franchisee was not prohibited from carrying on business in his present location. Despite the franchisee’s admission at examinations for discovery that he did not pay attention to the disclosure document and that it was unimportant to him, the court found that he had sufficiently relied on the misrepresentation to negate the enforcement of the non-competition clause against him.

This case should stand as a warning to franchisors operating in Canadian jurisdictions with statutory disclosure regimes. Even a small discrepancy between the disclosure document and the franchise agreement can have dire consequences on the enforceability of the terms of the agreement.