Lynchpin of Disclosure: The Certificate
Hi Hotel Limited Partnership Decision
In Hi Hotel Limited Partnership v. Holiday Hospitality Franchising Inc.,[10] the Alberta Court of Appeal ruled that a disclosure document that contained an unsigned and undated certificate was not a disclosure document at all and that the franchisee was entitled to rescind the franchise agreement for up to two years. A dispute arose between the franchisee, Hi Hotel, and the franchisor of the Holiday Inn chain over renovations that the franchisor wanted the franchisee to conduct. Although the franchisee’s grievances had nothing to do with the disclosure document, the franchisee commenced an action under the Alberta Act claiming rescission of the franchise agreement based on absence of proper disclosure. The inadequacy of the disclosure was based entirely on the fact that the disclosure document contained a certificate that was unsigned and undated. No other defects were noted by the court and the decision was focused solely on the consequence of this inadequacy.
The court first looked at the language used in the Alberta Act. It upheld the lower court’s finding that the use of the word “must” in the Regulation under the Alberta Act (in that there must be a certificate that must be signed and dated) made the delivery of a signed and dated certificate mandatory. As such, the court held that a disclosure document that is without signatures is not “substantially complete” for the purposes of the Alberta Act.
Even though the franchisee admitted that a signed certificate was not important to its decision to acquire the franchise, the Court of Appeal held that the franchisee had the right to rescind the franchise agreement over the deficient certificate. Furthermore, the franchisee had the right to rescind the franchise agreement for a two-year period after the agreement was signed, not simply for a 60-day period. This was because the court concluded that a disclosure package with no signed certificate and no date on the certificate was not “given” 14 days before the franchise contract was signed or any fee was paid, and indeed was not “given” at all.[11]
Should it Matter?
Although the Hi Hotel case dealt specifically with the situation where a certificate is not signed and dated, a similar conclusion could be drawn with respect to other defects in a certificate. As noted in Hi Hotel, the certificate is the lynchpin of the disclosure,[12] and so one must wonder whether a perfectly executed certificate is the sine qua non of disclosure in order for the franchisor to say that it has “provided” a disclosure document under the AWA and PEI Act[13] and “given” a disclosure document under the Alberta Act.[14]
Similar to prospectus requirements of public companies, the certificate in the disclosure document compels franchisor oversight and due diligence in ensuring that the franchisee has all materials facts and pertinent information available when making its decision of whether to acquire the franchise. In Hi Hotel, the court noted that “without a certificate all the potential franchise receives is just random statements and pieces of paper, but nothing to tie them together or even to say that they are true”.[15] Similarly, a certificate with only one of two mandatory signatures deprives the franchisee its right to have two senior individuals review and certify the document for accuracy, completeness and timeliness. This is especially critical if one of the persons who was supposed to sign the disclosure document (and didn’t) is the party with the deepest pockets, against whom the franchisee would otherwise have been entitled to claim damages.
It is therefore arguable that a certificate signed by only one officer or director in circumstances where two signatures are required is grounds for rescission of the franchise agreement. Further, under the authority of Hi Hotel, without a properly executed certificate, the two-year window for rescission based on non-disclosure should be available to the franchisee. This is a logical extension of what the court decided in Hi Hotel as, in the opinion of the court, a disclosure document that contained an unsigned and undated certificate was tantamount to no disclosure document at all.
Another issue that arises when there are more than one non-signing officers and only one signature on the disclosure document is whether, by not signing the disclosure document, these non-signing officers can escape personal liability for misrepresentation. The legislation gives a right of action against every person who signs the disclosure document.[16] If one of these persons should have signed the document in order to comply with the Act, should the franchisee be deprived of a claim against officers that wrongfully escaped liability by not signing?
Conclusion
The certificate provides assurance to the prospective franchisee that all material facts and prescribed information has been disclosed in a single document, delivered at one time, and conveys to the franchisee that the signor is willing to bear personal liability over the representations made.
Given the potential consequences of not providing a properly executed certificate, the franchisor’s lawyer has an important responsibility when preparing the disclosure document to go beyond the public-filed information about officers and directors and inquire about who within the corporation performs functions associated with a corporate officer. If there is more than one such individual at the corporation, the certificate must be signed by two or more persons. Without a properly executed certificate, the franchisee may have an unexpected right of rescission, and non-signing officers may be exposed to potential liability if it is found that they should have signed the certificate.
[2] Franchises Regulation, Alberta Reg. 240/1995.
[3] Franchises Act Regulations, P.E.I. Reg. EC232/06.
[4] Section 7(2) of the Ont. Reg.; ss. 2(3) of the Alberta Reg.; s. 4(2) of the PEI Reg. The regulations under New Brunswick’s Franchises Act, S.N.B. 2007, c. F-23.5 have not yet been promulgated but will likely contain a similar requirement.
[5] Section 7(1) of the AWA states that every person who signed the disclosure document or statement of material change is personally liable for damages for misrepresentation. See also Alberta Act, s. 9(1); and PEI Act, s. 7(1).
[6] AWA, s. 1(1); Alberta Act, s. 1(1)(o); PEI Act, s. 1(l)(l).
[7] Section 19(d) of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 codifies the indoor management rule by stating that “a corporation … may not assert against a person dealing with the corporation … that (d) a person held out by a corporation as … an officer … has not been duly appointed or does not have authority to exercise the powers and perform the duties that are customary in the business of the corporation or usual for such … officer.”
[9] s. 1(1)(r) of the Alberta Act.
[10] [2008] A.J. No. 892 (C.A.) [Hi Hotel].
[11] Hi Hotel, supra note 10 at para. 117.
[12] Hi Hotel, supra note 10 at para. 61.
[13] AWA, s. 5(1); PEI Act, s. 5(1).
[15] Hi Hotel, supra note 10 at para. 59.
[16] AWA, s. 7(1)(e); Alberta Act; s. 9(1)(b); PEI Act, s. 7(1)(d).