Franchisors operating in Canada commonly include questionnaires in the disclosure they provide to prospective franchisees.
Questionnaires in Canadian franchise disclosure documents look much the same as questionnaires commonly found in the United States: franchisors require prospective franchisees, at or prior to signing a franchise agreement, to answer “yes” or “no” to a series of questions, or to agree to a series of representations. The questions typically concern what took place (or did not take place) during the franchise sale process, and ask the prospective franchisee to agree that it understood the contents of the disclosure document and franchise agreement.
Questionnaires are intended to serve both business and legal purposes. From a business perspective, a questionnaire can help a franchisor identify financial representations that were given by a salesperson without the franchisor’s authority and correct any deficiencies in the disclosure process. From a legal perspective, a questionnaire can be used by the franchisor to disclaim liability for future claims that may be asserted by a malcontented franchisee.
Despite their widespread use in Canada, there is reason to doubt that questionnaires can be effectively used to limit a franchisor’s liability against most claims capable of being asserted by a franchisee:
1) Rescission claims: a franchisee’s entitlement to rescind its franchise agreement based on deficient disclosure will turn on whether the alleged disclosure deficiency had the effect of depriving the franchisee of the ability to make an informed decision with respect to its investment in the franchised business.
While there has there been some historical uncertainty in the jurisprudence, recent caselaw has affirmed that, in Ontario and New Brunswick at least, that analysis is an objective one that will focus on the adequacy of disclosure itself and not on whether the deficient disclosure actually impaired the franchisee’s ability to make an informed decision.
Accordingly, the franchisee’s answers to the questions put to it by the franchisor in the questionnaire will be irrelevant to the rescission analysis.
2) Misrepresentation claims: in those provinces that have enacted franchise legislation, franchisees are capable of asserting both statutory and common law claims for misrepresentation.
All of the provincial franchise statutes contain a provision that voids any purported waiver or release by a franchisee of its statutory rights. Accordingly, a questionnaire will be void to the extent a franchisor purports to use it to displace or limit a franchisee’s claim for statutory misrepresentation; however, a questionnaire may have some utility for the franchisor if it contains questions that are specific enough so as to demonstrate that the franchisee had actual knowledge of the alleged misrepresentation. This is so because proof of a franchisee’s specific knowledge of a misrepresentation is a statutory defence available to franchisors in relation to a claim for statutory misrepresentation.
Claims for common law misrepresentation are not similarly protected by the provincial franchise statutes; notionally, then, they can still be defended by recourse to a questionnaire if, for instance, that questionnaire had solicited from the franchisee confirmation that the franchisee was given no representation outside of the disclosure document, or confirmation that the franchisee relied on no such representations, if given.
Even in response to a claim for common law misrepresentation, the utility of a questionnaire may prove to be limited: a franchisee might successfully argue that no consideration was given in exchange for the answers solicited in the questionnaire (which is not an agreement), and a franchisee might also claim that the misrepresentations at issue were fraudulent – Canadian courts have shown a willingness to hear claims for fraudulent misrepresentation notwithstanding the existence of disclaimers and entire agreement clauses, for instance.
3) Claims for failure to comply with a franchisor’s disclosure obligations: provincial franchise legislation (other than in Alberta) entitles franchisees to claim statutory damages resulting from a franchisor’s failure to have complied with the franchisor’s disclosure obligations. Such claims for damages are distinct from rescission claims and might be asserted, for example, if the statutory period has expired by which the franchisee was required to have sought rescission.
While this claim has not been frequently or recently litigated in Canada, it stands to reason that, in considering a franchisee’s entitlement to such a claim, the court would today adopt a similar approach as the courts’ contemporary framework for analyzing rescission claims; the court can be expected to focus on the content and manner of disclosure itself and not on the franchisee’s subjective appreciation of the facts being disclosed. There would be no reason to consider the franchisee’s answers to a questionnaire in such an analysis.
4) Claims for breach of the franchisor’s duty of good faith: claims for breach of the franchisor’s duty of good faith are protected by the same “no waiver” provision that voids statutory misrepresentation claims. Accordingly, a questionnaire will be void to the extent a franchisor purports to use it to displace or limit a franchisee’s claim for breach of the duty of good faith.
Key Takeaways: Though the practice is widespread in Canada, the use by franchisors of questionnaires in the disclosure process stands to be ineffective at insulating a franchisor from liability to most franchisee claims. Questionnaires nonetheless may have value to franchisors in helping them identify at the outset and correct flaws in the disclosure process.
Hoffer Adler LLP provides practical and cost-effective legal assistance to both franchisors and franchisees about all aspects of the franchising relationship. If you have any questions about a franchising matter, we would like to hear from you.