Distributor Fails to Establish That He is a Franchisee on Summary Judgment Motion

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Author: Anthony Pugh, Law Works P.C.
Editor: Ben Hanuka, Law Works P.C.

In Diduck v. Simpson, a May 10, 2018, decision of the Manitoba Court of Queen’s Bench, the court dismissed the plaintiff distributor’s summary judgment motion for franchise rescission on the basis that he had not established a prima facie case that the distributor agreement was a franchise agreement within the meaning of Manitoba’s franchise legislation, The Franchises Act.

Furthermore, the motion judge granted the defendants’ motion for summary judgment to dismiss the plaintiff’s claim for negligent misrepresentation in the sale of the business, holding that there was no genuine issue for trial.

Key facts

In November 2015, the distributor, Robert Diduck, entered into an agreement with a business calling itself Narol Professional Services Ltd. to distribute a product called Sure Step, manufactured by Interlake Chemicals. David Simpson, identified by Interlake as a “master distributor” signed the agreement on behalf of Narol.

Mr. Diduck later discovered that Narol was not a limited company, but was instead a partnership. David Simpson and his wife were the sole partners.

Mr. Diduck paid $24,750 to enter into the distributor agreement. He received an exclusive sales territory, and was required to attend training sessions.

Further, the agreement required Mr. Diduck to supply and apply the product in accordance with Narol’s directors, but there was no evidence that Narol ever issued any directives.

The business relationship was not successful. In January 2017, Mr. Diduck filed a statement of claim against Simpson, Narol, and Interlake, alleging breaches of the agreement and negligent misrepresentation. He claimed that Mr. Simpson and Interlake misrepresented the distributorship program in their assertions about potential profit, sales, and income; and that the agreement should be rescinded for misrepresentation regarding the legal status of Narol.

In May 2017, Mr. Diduck amended his statement of claim, claiming that he was a franchisee and that Mr. Simpson and Interlake failed to provide him with a franchise disclosure document as required under section 5 of The Franchises Act. In July 2017, he delivered notices of rescission to Interlake, Narol, and Mr. Simpson

Mr. Diduck sought summary judgment on disclosure document issue. Interlake also sought summary judgment, on the basis that any representations were merely sales talk and projections, and could not found a claim for negligent misrepresentation.

The evidence did not show that the distributor agreement was a franchise agreement

The motion judge held that Mr. Diduck had not established a prima facie case that the distributor agreement was a franchise agreement.

The first required element of a ‘franchise’ under section 1(1) of Manitoba’s The Franchises Act is that the franchisee is required to make a payment or continuing payments to the franchisor or franchisor’s associate.

The court held that this element was met in this case because Mr. Diduck was required to make payments to the purported franchisor or franchisor’s associate. The distributor agreement required him to pay $24,750 to Narol. To renew the deal annually, the agreement required Mr. Diduck to either purchase $2,400 worth of Sure Step product in a year, or made a payment of $2,400.

The second required element has two alternative components:

Either:

– (I) The franchisor (a) grants a right to sell or distribute goods and services that are associated with the franchisor’s or franchisor’s associate’s marks, and (b) the franchisor or franchisor’s associate exerts significant control or offers significant assistance to the franchisee under a business plan.

Or:

– (II) the franchisor or franchisor’s associate (a) grants distribution rights to sell or distribute goods and services supplied by the franchisor or a designated supplier, and (b) provides location assistance by either securing retail outlets or customer accounts, or by securing locations for product sales displays.

The court held that the evidence did not show that Interlake, Narol, or Simpson exercised significant control over, or offered significant assistance to, Mr. Diduck, under the first alternative definition of ‘franchise’. Nor did it show that they offered location assistance, under the second alternative definition.

Mr. Diduck argued that Interlake, Narol, and Simpson provided significant assistance to him, particularly marketing strategies and training. Interlake’s Manual provided information about the product, how to apply it, answers to common questions, suggestions for acquiring business, and sales strategies.

The court held that providing information and advice did not amount to significant assistance under The Franchises Act.  It also held that The Franchises Act requires the purported franchisor to provide the assistance “under a business plan”. Here there was no business plan.

Mr. Diduck also argued that Interlake, Narol, and Simpson provided location assistance by granting him an exclusive territory. The motion judge held that this did not amount to location assistance, within the statutory definition of “franchise”. The Franchises Act requires location assistance to include “securing retail outlets or customer accounts”, or “securing locations for vending machines or product sales displays”, none of which applied.

No genuine issue for trial regarding allegations of negligent misrepresentation

The motion judge held that the alleged misrepresentations were projections, forecasts or statements of opinion, contained in an information packet which Interlake provided to Mr. Diduck.  He decided that since this information did not amount to statements of fact, it could not form the basis of a claim for negligent misrepresentation.

(Author’s/Editor’s note: it is unclear if this is a correct legal conclusion, namely that pre-contractual financial projections may not form the basis of a claim for negligent misrepresentation.)

However, the court also found that there was no evidence that Mr. Diduck relied on those statements when entering into the agreement, or that it would be reasonable for him to have relied on those statements.

As a result, the court granted Interlake’s motion for summary judgment dismissing Mr. Diduck’s negligent misrepresentation claim.  In addition, the court dismissed Mr. Diduck’s motion for summary judgment for rescission (Author’s/Editor’s note: it is unclear from the decision if this leaves him the option to proceed to trial on the claim for franchise rescission).

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