Canada: "Wave" The Deposit Goodbye: Franchisor Escapes Vicarious Liability After Franchisee Deposit Disappears

Last Updated: February 9 2018
Article by Noah Leszcz

In a recent decision, (1738937 Alberta Ltd v Fair Waves Coffee Inc), the Alberta Court of Queen's Bench has denied a claim that a franchisor was liable for the fraudulent actions of a master franchisee against a subfranchisee. This decision is a helpful reminder that a master franchisor can protect itself from vicarious liability for the acts of its master franchisee.

In this case1, in 2013, an Alberta couple, the Kerrs, were in search for a new business opportunity and began making inquiries about a Fair Waves coffee (Waves) franchise. They applied by fax to the Waves' British Columbia head office, and Mr. Abrahim Alhusin, the master franchisee for Waves in Alberta, reached out to them.

Alhusin provided the Kerrs with a disclosure document, which they gave to their corporate lawyer for review. The lawyer conducted a corporate registry and personal property search on M&M Alberta Coffee Ltd dba Waves Coffee Alberta (M&M), the corporate entity that Mr. Alhusin was using to operate as master franchisee. The lawyer advised the Kerrs that M&M and Fair Waves Coffee Inc., the franchisor, were separate companies, and that "everything looked fine."

The Kerrs then signed the franchise agreement with Mr. Alhusin, and paid M&M numerous fees, including $225,000 for a construction deposit. The store was set to open in October of 2013. However, that never happened, as Mr. Alhusin and the deposit vanished, leaving the Kerrs without a franchise and with almost $250,000 in losses.

Mr. Alhusin had been a trusted Vancouver Waves franchisee for many years, before signing the master franchise agreement with Waves for Alberta in 2009. Since that time, he had signed up nine Alberta franchisees, which were assigned to Waves after Alhusin's disappearance.

The Kerr's franchisee company, 1738937 Alberta Ltd., sued Waves and M&M in respect of its losses. The Kerrs argued that despite their franchise agreement being with M&M, the franchisor Waves should be vicariously liable because of: i) the language on the Waves website concerning franchise opportunities; ii) the franchisor's receipt of the franchisee application; and iii) the supervisory powers and financial benefits detailed in the master franchise agreement.

The Kerrs' argument was based on the concept of vicarious liability. Vicarious liability refers to one person being responsible for the wrongdoing of another because of the relationship between the parties. Commonly, this is seen when an employer is held liable for the misconduct of an employee. 

In this case, the Court ruled that neither Mr. Alhusin nor M&M were employees of the franchisor, and they were in fact independent contractors. Justice Topolniski writes:

Fair Waves had no control over how Mr. Alhusin marketed, sold, or monitored his franchisees, who he hired, and in certain circumstances, how he priced product. Subject to the payment of new store and transfer fees, and royalties, Fair Waves did not bear any financial responsibility for or assume risks concerning M&M's operations. In other words, Fair Waves and M&M are separate businesses. They lack the kind of inter-relationship and control that is found in an employment structure.

Failing the employer-employee threshold, the Court turned to an analysis of whether Mr. Alhusin and M&M were ostensible or apparent agents of the franchisor, which is another means by which a person or entity can be found liable vicariously. In order to be found liable vicariously as an agent, the Kerrs needed to assert that Mr. Alhusin and M&M were agents of the franchisor, acting with apparent authority, and that the Kerrs relied on an express or implied unequivocal representation by the franchisor that it had authorized Mr. Alhusin or M&M to act on its behalf. This representation must be determined to have been reasonable, and further, that the loss suffered was attributable to that representation.

The Kerrs asserted at trial that the following facts amounted to a reasonable representation: i) the franchisee application on the franchisor's website, along with the franchisor's receipt of the application, and subsequent communication; ii) the Waves promotional materials available on the franchisor's website; iii) the disclosure document which disclosed the relationship between the master franchisee and the franchisor; and iv) Mr. Alhusin's comments that the franchisor and master franchisee were "one big family," and that "we all work together as one."

The Court ruled that while some of these facts "may have lulled an unsophisticated, vulnerable customer" into thinking that the franchisor had authorized the master franchisee to speak on its behalf, the Kerrs were not unsophisticated in the "language of franchises," having operated a different franchise for many years. While the Court was sympathetic to the plight of the Kerrs', Justice Topolniski ruled that they had opportunities to discover that Mr. Alhusin and M&M "were not, in any fashion, agents" of the franchisor. In coming to this decision, the courts relied on the fact that the Kerrs had assistance from corporate counsel, and were presented with multiple opportunities to discover the nature of the relationship between master franchisee and franchisor, and they instead chose to rest on their assumptions.

The takeway from this decision is that franchisors should govern themselves carefully when dealing with master franchisees and subfranchisees to avoid the implications of vicarious liability. This can be done both contractually in the master franchise agreement, which can include appropriate disclaimers in the master franchisee's disclosure document and subfranchise agreement, and in practice by limiting interactions between the franchisor and subfranchisees. Franchisors can exercise their rights to review the subfranchise agreement and corresponding disclosure document while being mindful not to unnecessarily meddle in the affairs of their master franchisees as they pertain to their relationships with subfranchisees.

Footnotes

1738937 Alberta Ltd v Fair Waves Coffee Inc (Waves Coffee House), 2017 ABQB 714, http://canlii.ca/t/hnvf3

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions