The New Brunswick Court of Queen’s Bench has recently released its first decision under the New Brunswick Franchises Act (the “Act”) in Alphataho Inc., et al. v. Maaco Canada Limited Partnership LP, et al. Due to this being the first decided case made under the Act, the New Brunswick court relied heavily on the large body of existing case law under Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000; the Ontario and New Brunswick franchise statutes are, in many respects, almost identical.
The court in Alphataho held that a franchisor’s failure to provide financial statements that are compliant with the Act in a franchise disclosure document is a fatal flaw amounting effectively to a complete failure of disclosure and giving a franchisee the right to rescind under the 2-year statutory remedy.
The franchisor (“Maaco”) provided the prospective franchisee with a disclosure document on February 12, 2017 that contained financial statements from 2014. Maaco also disclosed to the franchisee other important information after initially providing the franchisee with the disclosure document.
The franchise agreement was signed on April 18, 2017. The franchised location opened for business on June 2, 2018, failing soon after.
The franchisee then issued a Notice of Rescission on October 19, 2018. Maaco rejected the rescission and instead purported to terminate the agreement on the basis of the franchisee’s alleged abandonment of the franchise.
The franchisee alleged several material deficiencies as grounds for rescission:
- The financial statements were not compliant with the Act and its Regulation;
- The franchisor’s certificate was stale-dated and not in the prescribed form;
- The earnings projections provided to the franchisee failed to identify the location/areas/ territories/markets from which the figures were derived;
- The disclosure document was missing material information on costs and competitors; and
- The franchisor provided piecemeal disclosure by providing additional documents after delivering the disclosure document.
The court held that the only ground entitling the franchisee to rescission was Maaco’s failure to provide up-to-date, statute-compliant financial statements. The other grounds were held not to be so-called “fatal” flaws.
THE IMPORTANCE OF FINANCIAL STATEMENTS:
The court followed a long line of Ontario cases that have held that financial statements are fundamentally important to a franchisee’s ability to make an informed investment decision; many of those cases recognize that a failure to include financial statements amounts to a complete failure to make disclosure. The court emphasized recent Ontario case law that reiterated and clarified that the court’s inquiry into whether a franchisee was deprived of their opportunity to make an informed decision is an objective one: there is no evidentiary burden on the franchisee to prove that its ability to make an informed investment decision was impaired by the alleged deficiencies in disclosure.
Maaco admitted that, as per the Act, it was required to provide financial statements from 2015, rather than 2014; however, Maaco put forward two arguments to submit that this amounted to mere imperfect disclosure, not fatal non-disclosure:
- The 2015 statements showed even better growth, which would have only increased the franchisee’s confidence in the system had they been disclosed and would not have materially changed the franchisee’s investment decision. The court rejected this and held that the rescission remedy is based only on the franchisor’s failure to deliver a disclosure document – not the franchisee’s conduct.
- Maaco qualified for the mature franchisor exemption from disclosing financial statements under the Act (available to franchisors with 25 franchisees in another jurisdiction); notably, however, Maaco had failed to include in its disclosure document the required disclaimer telegraphing to the franchisee that Maaco was relying on this exemption. The court rejected this argument also, holding that the exemption could not be relied on retroactively. .
Ultimately, the court found that Maaco’s provision of stale financial statements was “fatal”, amounting to no disclosure and entitling the franchisee to rescind the franchise agreement.
- In New Brunswick, like in other provinces, the disclosure of financial statements that do not comply with the Act will amount to non-disclosure and will entitle a franchisee to rescind.
- In New Brunswick, like in other provinces, the court’s inquiry into whether a franchisee was deprived of the opportunity to make an informed investment decision is an objective one;there is no evidentiary burden on the franchisee to demonstrate impairment.