Franchise Litigation Preliminary Checklist

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This article was originally published in The Lawyer’s Daily on January 20, 2020, under the same title.  The assistance of Anthony Pugh, Associate at Law Works PC, in writing this article is acknowledged with thanks.

Here is a basic preliminary checklist for litigation counsel involved in a franchise dispute, whether representing franchisor or franchisee. (References to statutory sections are to provisional franchise Acts in British Columbia, Manitoba, Ontario, New Brunswick and P.E.I.; the Alberta statute has somewhat different provisions).

Causes of Action and Evidence

Many franchise disputes are based on allegations of adequacy of a disclosure document.  Others are based on allegations of enforcement of contractual provisions.  The latter may include alleged bad faith in the enforcement of contractual rights or obligations, which is typically statutory.

If the dispute involves the adequacy of a disclosure document, the lawyer should assess the nature of the alleged deficiencies: are they about critical deficiencies, such as financial statements, or material facts?  The latter may require a more involved evidentiary analysis about the materiality of misrepresentations or omissions and their impact on the franchisee’s ability to make an informed investment decision.  This may apply to claims under section 6 (rescission claims) or section 7 (misrepresentation or failure to comply with disclosure obligations).

Cases involving an accidental franchise will require evidence about the nature of the business operation and extent of control or involvement of the alleged franchisor.

Damages and Evidence

The amount of losses or damages claimed by a franchisee may be in significant dispute.  Alleged losses or damages may be alleged as additional net rescission losses under the rescission claim of section 6, or as damages for statutory misrepresentation or failure to comply with disclosure obligations under section 7.  Proving such losses may require forensic financial accounting evidence.

(In the context of a rescission claim, net losses should not be confused with a claim for a refund of franchise payments and repurchase of inventory, supplies and equipment, which (except for Alberta where there is only a net loss regime) are typically more or less straightforward in rescission claims.

In section 7 disputes, other than the quantum of damages, there may also be issues about proof of causation.  In section 7 claims, there may be an obligation on the franchisee’s part to prove causation between the alleged failure and the damages that are being claimed.

These issues should also provide guidance about the appropriate adjudication procedure: whether the case can be adjudicated summarily under the applicable provincial rules of civil procedure.

Limitation Periods

Limitation period issues come up on a regular basis in franchise disputes and may be critical to the parties’ rights.  Limitation periods are normally applicable under franchise and the general limitations statutes.

The lawyer should ascertain all franchise and related agreements that the parties signed, including such agreements (if they exist) as the head lease, sublease, guarantee, security, supply, etc.

Provincial franchise statutes have two limitation periods for the delivery of a notice of rescission.  The first imposes a limit of 60 days from the delivery of the disclosure document if the disclosure document does not comply to the requirements of the statute.  The second imposes a limit of two years from the date of the franchise agreement if the franchisee has never received the disclosure document that is required under the statute.

If a notice of rescission has been served in time, the lawyer should ascertain the application of the general provincial limitation period.  It will generally be two years from the delivery of the notice of rescission, or, in the case of a claim for misrepresentation, two years from the date of discovery of the cause of action, as set out in the provincial limitation statute.

The Parties and Evidence

Parties to the dispute may include personal guarantors and alleged franchisor’s associates.  A franchisor’s associate may be an affiliate of the franchisor to whom the franchisee owes continuing financial obligations (such as a sub-landlord or an affiliated supplier).  This may also be an individual who is alleged to have been directly involved in the franchise grant by making representations to the franchisee or by reviewing or approving the franchise grant.

If the allegations involve a franchisor’s associate based on direct involvement in the review or approval, the evidence will likely involve internal corporate information about the review or approval process.

Mediation and Arbitration

The franchise agreement may require the parties to submit all disputes to arbitration.  It is important to evaluate whether all the parties to the dispute are parties to the franchise agreement.  If the dispute involves alleged franchisor’s associates or others who are not signatories to the franchise agreement there may be no jurisdiction to arbitrate the entire dispute.

The franchise agreement may also require the parties to first mediate their dispute before proceeding to litigation or arbitration.  It is important to comply with this prerequisite as the relevant cause of action may not otherwise start until after that time.