Canada: Disclosure – Can You Demonstrate Your Compliance

Last Updated: March 23 2006
Article by Chris Eagles

Most Read Contributor in Canada, September 2016

For a franchisor operating in Alberta or Ontario, if a dispute arises between the franchisor and a franchisee over receipt of the franchisor’s disclosure document, it will not be sufficient for the franchisor to simply say that the required disclosure document was provided to the franchisee in accordance with the applicable franchise legislation. The franchisor must be able to produce evidence that establishes not only the franchisee’s receipt of the disclosure document, but also the date of receipt and precisely what was received by the franchisee.

In the recent Alberta decision in Rocha v. Panda Flowers (1999) Ltd., the franchisee, Mr. Rocha, claimed that the franchisor, Panda Flowers, failed to make proper disclosure in accordance with the Alberta Franchise Act, such that he was entitled to rescind his franchise agreement and receive repayment of the partial franchisee fee paid to Panda Flowers.

The facts of the case were as follows. Between November 2003 and February of 2004, Mr. Rocha had a number of meetings with the President of Panda Flowers, Mr. Olasker, which ultimately resulted in Mr. Rocha signing a franchise agreement and paying certain sums to Mr. Olasker on account of the franchise fee. Prior to completion of construction of the franchise a dispute arose which resulted in Mr. Rocha delivering a notice to Panda Flowers cancelling the franchise agreement and demanding the return of monies paid to Panda Flowers in accordance with the Alberta Franchise Act.

At issue was the question of whether Panda Flowers had properly complied with the disclosure requirements of the Alberta Franchise Act. Mr. Rocha claimed that he had never received a disclosure document from Panda Flowers and that the only financial information he saw with respect to Panda Flowers was shown to him on the screen of Mr. Olasker’s laptop computer. Although Mr. Olasker challenged the allegation that no disclosure document was provided to Mr. Rocha, he was unable to produce either an executed copy of Panda Flowers’ disclosure document or any other evidence of the disclosure provided to Mr. Rocha. Mr. Olasker stated that the only copy of the executed disclosure document had been provided to Mr. Rocha and that it was not his usual practice to make or retain a copy of the executed document. As a result of Panda Flowers’ inability to produce evidence of the disclosure provided to Mr. Rocha, Mr. Olasker attempted to establish Panda Flowers’ compliance with the disclosure requirements of the Alberta Franchise Act based on his "practice and routine".

Mr. Olasker provided evidence that it was his practice to have prospective franchisees sign a "Confidentiality and Receipt of Documents Agreement" which included an acknowledgement by the franchisee that he or she had received: a) the Statement of Disclosure, b) the Franchisor’s Financial Statement; and c) the Franchise Agreement. Although Mr. Olasker was unable to produce a signed copy of the agreement he maintained that the agreement had been signed by both he and Mr. Rocha and that he had crossed items (a) and (b) out because only the form of franchise agreement was provided to Mr. Rocha at the time he signed the Confidentiality and Receipt of Documents Agreement. Mr. Olasker testified that the Panda Flowers disclosure document and financial statements were provided to Mr. Rocha at a later date. In reviewing Mr. Olasker’s evidence with respect to delivery of the disclosure document and financial statements to Mr. Rocha the Court noted a number of discrepancies and inconsistencies which led the Court to state:

Throughout his evidence Mr. Olasker was unsure of what had been produced. Assumption and speculation on his part were evident throughout. His statement that he endeavoured to provide the best documentation he could from his computer summarized perhaps more clearly the real situation.

Given that the burden of proof with respect to compliance with the disclosure requirements of the Alberta Franchise Act rests with the franchisor, the Court found:

…proper disclosure was never given by Panda to Mr. Rocha. The Statement of Disclosure and the Financial Statements were not received by Mr. Rocha 14 days prior to his signing the Franchise Agreement and paying the initial deposit under the Franchise Agreement. I find there was no proper disclosure to Mr. Rocha up until he served notice of cancellation of the Franchise Agreement pursuant to The Act. Secondly, I find that the purported disclosure document never complied with the requirements of the regulations. I further find that the purported Financial Statements could not have been delivered at the time claimed by Mr. Olasker or at all prior to the Notice of Cancellation.

In the final result Panda has failed to meet its burden of proof. It failed to produce evidence on which I am able to find that proper disclosure was given to Mr. Rocha.

As a result, Mr. Rocha was entitled to recover all monies paid to Panda Flowers, plus costs.

The decision in Rocha v. Panda Flowers (1999) Ltd., provides an excellent reminder, for franchisors operating in Alberta or Ontario, of the importance of having a procedure in place to ensure proper disclosure is provided to all franchisees and of ensuring that all of the franchisor’s agents comply with that procedure at all times. In reviewing its disclosure procedure a franchisor should ensure that the procedure is designed to produce and retain evidence demonstrating the franchisor’s compliance with its disclosure obligations. In particular, franchisors should ensure that their disclosure procedures do the following:

  • provide a verification procedure to ensure that no franchisee is permitted to sign a franchise agreement or pay any fee without confirmation that all required disclosure was provided and that the required 14 days have passed.

  • create and maintain a set of materials disclosed to each franchisee.

  • create and maintain acknowledgement forms to be signed and dated by franchisees confirming their receipt of the required disclosure.

By implementing and following a strict set of disclosure procedures franchisors should be able to avoid (or at least be able to properly respond to) any rescission claims by its franchisees.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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