The Alberta Court of Appeal set a high standard for franchise disclosure under the Franchises Act (Alberta) in its recent decision in HI Hotel Limited Partnership v. Holiday Hospitality Franchising Inc. (HI Hotel). The court decided that strict compliance with statutory provisions is required even when dealing with a sophisticated franchisee.
The Franchises Act permits franchisors disclosing to franchisees in Alberta to use their Ontario disclosure document so long as it is supplemented with certain additional materials prescribed by the Franchises Act and related regulations to address the differing disclosure requirements between the two provinces. This supplemental disclosure is often referred to as the “Alberta Wraparound” because it consists of documents and addenda that are commonly physically attached to an Ontario disclosure document.
Part of the Alberta Wraparound is a certificate in the form prescribed by regulation that must be signed by two officers of the franchisor. By signing the certificate, the two officers become subject to the civil remedies provided to franchisees under the Franchises Act. The certificate contains a declaration by the officers that there are no misrepresentations or material omissions in the disclosure.
The Alberta Wraparound in HI Hotel was in the form of loose sheets slipped inside the cover of an Ontario disclosure document. Further, the franchisor’s certificate was not signed by the franchisor, Holiday Hospitality Franchising Inc. (HHFI). HHFI argued that the lack of a signature was a technical defect and that the disclosure satisfied the statutory standard of “substantial compliance.” HHFI further asked the court to note that the HI Hotel Limited Partnership (Partnership) conceded that there were no omissions or misrepresentations in the disclosure document. The court rejected both of these points. It found that the signature requirement was fundamental and that without a signed certificate, no disclosure document was given. This finding was of particular significance because it meant that Partnership had 2 years, rather than 60 days, in which to exercise its statutory right of rescission of the franchise agreement.
The Alberta disclosure requirements are a trap for the unwary – particularly for foreign-based franchisors who are not always accustomed to the jurisdictional differences that exist in Canada. Moreover, the evidence before the court was that the signing requirement at issue in this case is not found in similar U.S. franchise statutes. It is not surprising, then, that a foreign-based franchisor would supply unsigned certificates and an Alberta Wraparound that is casually slipped inside the cover of an Ontario disclosure document.
Given the Alberta Court of Appeal’s decision in HI Hotel, it is important for all franchisors (particularly foreign franchisors) to ensure compliance with all technical requirements of the franchise legislation in the provinces within which they sell franchises. Franchisors should seek external advice on compliance and should implement internal controls to ensure such compliance. In the absence of such precautions, the risk of technical non-compliance is heightened. And, as HI Hotel shows, technical non-compliance with disclosure requirements can provide franchisees an easy way out of franchise agreements irrespective of the otherwise blameless conduct of a franchisor.