In the Court of Appeal of Alberta

Citation: Hi Hotel Limited Partnership v. Holiday Hospitality Franchising Inc., 2008 ABCA 276

Date: 20080814

Docket: 0801-0006-AC

Registry: Calgary

Between:

Hi Hotel Limited Partnership

Respondent

(Plaintiff)

- and -

Holiday Hospitality Franchising Inc.

Appellant

(Defendant)

And Between:

Holiday Hospitality Franchising Inc.

Appellant

(Plaintiff by Counterclaim)

- and -

Hi Hotel Limited Partnership

Respondent

(Defendant by Counterclaim)

- and -

John Torode

Respondent

(Defendant by Counterclaim)

Corrected judgment: A corrigendum was issued on October 7, 2008; the corrections have been made to the text and the corrigendum is appended to this judgment.

_______________________________________________________

The Court:

The Honourable Mr. Justice Jean Côté

The Honourable Madam Justice Carole Conrad

The Honourable Madam Justice Elizabeth McFadyen

_______________________________________________________

Reasons for Judgment Reserved of

The Honourable Mr. Justice Côté

Reasons for Judgment Reserved of The Honourable

Madam Justice McFadyen Concurring in the Result

Concurred in by The Honourable Madam Justice Conrad

Appeal from the Judgment by

The Honourable Mr. Justice P. Chrumka

Dated the 21st day of December, 2007

2007 ABQB 686 (CanLII), (2007 ABQB 686, Docket: 0601-04850)

_______________________________________________________

Reasons for Judgment Reserved of

The Honourable Mr. Justice Côté

_______________________________________________________

A. Issues

[1] In my view, the live issue here is whether the court should overlook a franchisor’s breach of the franchise legislation by failing to provide to the franchisee certificates of truth by its officers or directors.

B. Facts

[2] The respondent is a limited partnership which bought a hotel (from a non-party). It had been run as a Holiday Inn and the respondent proposed that it continue that way. The appellant franchisor sent the respondent some disclosure papers. There is a clash of evidence about whether some of them (Alberta supplement and two Ontario pages) were missing.

[3] However, the evidence is uncontradicted that there was no signed or dated certificate: at most there was a blank form of certificate. There was no other signature, actual or contemplated, anywhere else in the disclosure papers here. Yet the legislation expressly requires a dated certificate of completeness and accuracy, signed by two directors or officers: see Parts E.2, E.3, and F.2 below.

[4] The receipts by the respondent franchisee do not mention certificates. And the receipt for the Alberta addendum says nothing about its date. The Ontario disclosure receipt says that the Ontario Disclosure Document is “dated _____, 2002”. That tends to show that it was never dated.

[5] There never was any covering letter, let alone one signed or dated.

[6] There is no evidence that the appellant franchisor ever provided anywhere a signed or a dated certificate that the disclosure was true or correct, as the legislation requires. (See Parts E.2 and E.3.) The chambers judge’s fact finding of that is plainly correct.

[7] A franchise contract was signed, and for almost a year the respondent paid heavy franchise fees. But it did not renovate the hotel as agreed, and the appellant franchisor threatened contractual penalties. The respondent tried to cancel the franchise, but the appellant franchisor would not let the respondent cancel.

[8] The Franchises Act, R.S.A. 2000, c. F-23 gives a right to rescind if there is insufficient disclosure. So the respondent served such a notice of rescission, plainly purporting to rescind the franchise contract, within its first year. The respondent then sued for a declaration of rescission, and the appellant franchisor counterclaimed for enormous contractual penalties.

[9] The statement of claim says that the respondent franchisee has already paid about $377,000 under the franchise contract, and the franchisor’s counterclaim claims an additional $1,125,000 in further fees.

[10] The chambers judge gave the respondent franchisee summary judgment for an amount to be assessed and upheld that party’s rescission of the hotel franchise contract: 2007 ABQB 686 (CanLII), 2007 ABQB 686. (If that judgment is correct, the counterclaim becomes academic.) The franchisor appeals.

[11] It was agreed by counsel during the hearing of the appeal that if the notice of rescission was properly sent, there must be an accounting on both sides. The details of that are not before us, and will be litigated later in the Court of Queen’s Bench if its summary judgment is affirmed.

C. Basic Approach to Interpreting Franchises Legislation

1. Aim of the Act

[12] The common law and equity give a number of types of relief to someone who has contracted because of misrepresentation. But the Franchises Act goes far beyond franchisors who misstate facts. In particular, the Act devotes a good deal of effort to requiring franchisors to disclose many facts, and to giving remedies for failure to disclose those facts.

[13] The legislation also requires a dated certificate of completeness and accuracy signed by two directors or officers. Parts E.2, E.3 and F.2 below give the details.

[14] Clearly the Legislature thought that relief against misstated facts was not enough. Silence by the franchisor is not enough. Caveat emptor is repealed. Someone soliciting such an investment or the fees for a franchise must put into the investor’s or franchisee’s hands accurate complete written information.

[15] The basic parallel between the Franchises Act and securities legislation is obvious. Further study of the two discloses dozens of similarities in details as well. See Parts F.4, F.5, and F.6 below.

2. Interpreting Protective Legislation

[16] How to interpret legislation has changed. Today Canadian courts are reluctant to label certain classes of legislation as presumptively harsh or intrusive and hence to be strictly construed. Even taxing statutes are no longer so treated: A.Y.S.A. Amateur Youth Soccer Assn. v. Canada Revenue Agency, 2007 SCC 42 (CanLII), 2007 SCC 42, [2007] 3 S.C.R. 42, [2008] 1 C.T.C. 32, 367 N.R. 264. Such a restrictive interpretation has particularly limited value where the Act is regulatory and not truly criminal: R. v. Int. Assn. of Bridge etc. Workers, 2005 SCC 70 (CanLII), 2005 SCC 70, [2005] 3 S.C.R. 425, 341 N.R. 357 (paras. 32-35) and authorities there cited.

[17] That is doubtless why the Canadian courts often say that now there is but one rule of construction. It is to follow the Act’s words grammatically in light of its context, scheme, and the mischief aimed at: Euro-Excellence v. Kraft Can., 2007 SCC 37 (CanLII), 2007 SCC 37, [2007] 3 S.C.R. 20, 365 N.R. 332, 282 D.L.R. (4th) 577 (para. 2); A.Y.S.A. v. Canada Revenue Agency, supra at para. 15. Note also s. 10 of Alberta’s Interpretation Act, R.S.A. 2000, c. I-8:

10 An enactment shall be construed as being remedial, and shall be given the fair, large and liberal construction and interpretation that best ensures the attainment of its objects.

I discuss the mischief and the statutory scheme to combat the mischief in Parts F.2 to F.5, and F.10 below.

[18] In any event, no authority has ever put consumer or investor protection legislation into the category of harsh or intrusive legislation to be strictly construed.

[19] On the contrary: the latest authority says that protective consumer legislation should not be interpreted narrowly, nor “through the lens of freedom of contract and competition”: Assoc. des courtiers et agents immobiliers du Québec v. Proprio Direct, 2008 SCC 32 (CanLII), 2008 SCC 32 (para. 34). There the Supreme Court of Canada adopts quotations explaining why consumer protection legislation is passed, and why the principle of freedom of contract generally yields to that of consumer protection. One of the reasons given is “a growing and frequently total disparity of knowledge concerning the characteristics and technical components of the . . . services . . .”: id. at paras. 35-36.

[20] That is very apt here. Whatever the bargaining power of a prospective franchisee, large or small, he or she will rarely know much about the franchisor, its officers, and its actual practices (absent full disclosure).

[21] Even the traditional presumption that vested rights of contract or property will not be overridden except by very clear words in an Act, is less often heard now. And the franchises legislation only interferes with rights in a certain sense. It is fairer to call it a restriction on future contracts, in a way known ahead of time to both parties. A franchisor which contracts after failing to comply with the legislation requiring prior disclosure has no vested right.

[22] This legislation contains some exceptions and defences irrelevant here. But it nowhere mentions sophisticated investors (franchisees), nor fairness. So we must either

(a) interpret this Act as applying to all franchisees and franchisors in the province, or

(b) interpret this Act as laying down few hard and fast rules and leaving many important topics to lengthy individual Queen’s Bench litigation about what would be fair in the facts of the case.

[23] If a court wished to preserve bargains and produce certainty for business people, method (b) might well be a cure worse than the disease.

D. Does Fairness Trump Legislation?

[24] Counsel for the appellant franchisor suggests that here a sophisticated franchisee simply repented of the deal, and is using merely technical defects in statutory disclosure as an excuse to get out of a contract 11 months later.

[25] Counsel for the respondent franchisees suggests that the unfairness lies in the other direction, and that the franchisees, 15 limited partners, were neither sophisticated or experienced. The appellant franchisor plainly is large and sophisticated. Evidently there could be dangers in making assumptions about fairness.

[26] So two larger interlocking issues emerge from this preliminary debate:

(a) Must the court hold a trial of fairness every time that there is breach of the franchises legislation?

(b) Should the legislation about disclosure, breach, and remedy be read broadly, and applied firmly? Or is it a matter of grace or discretion?

[27] Indeed, how should one approach law which interferes with contracts? The appellant suggests a philosophy which might frame such law narrowly and to confine it to cases of actual unfairness. That is a philosophical debate over 200 years old, and evergreen.

[28] However, here we are not developing the common law. This is a question of statutory interpretation. So my own philosophy, or picking among the two competing philosophies, counts for little or nothing, where the Legislature has spoken reasonably plainly. I refer again to Part C.2 about consumer or investor legislation.

[29] Subject to constitutional limits, the Legislature can pick the policy and philosophy, set the rules, and even select the remedy. I can think of no relevant constitutional limits here, and no one suggested any to us.

[30] I will now describe the legislation and how it was breached here. Then I will turn to the practical implications in light of the specific aims of this legislation.

E. The Undoubted Flaws

1. Introduction

[31] We must recall the other issues about missing pages. They prevent an assumption that the only breach of legislation in evidence was signing and dating (described below in subparts 2 and 3).

[32] Argument before us concentrated on the two unrebutted flaws: no signatures and no date.

2. No Signatures

[33] No one signed any of the disclosure material sent out by the appellant franchisor. There was not even a covering letter. In particular, the forms of certificate were both unsigned. There is no evidence that any signed copy of them ever existed anywhere at any time.

[34] Section 4(1), (2) of the Franchises Act says that:

A franchisor must give every prospective franchisee a copy of the franchisor’s disclosure document . . . at least 14 days before . . . the signing . . . of any agreement . . ., or . . . the payment of any consideration . . .

(emphasis added)

Subsection (3)(a) says “A disclosure document must . . . comply with the requirements of the regulations” (emphasis added). Section 20 allows regulations.

[35] Such a Regulation was passed in 1995 (Alta. Reg. 240/95). Its s. 2(3) provides that

A disclosure document . . . must include a certificate set out in Schedule 2 that must be dated and must be signed . . . by at least 2 officers or directors of the franchisor, or a combination of them totalling at least 2 . . .

(emphasis added)

[36] The forms of certificate (significantly undated) contained the typed name of the company. Below it was the word “per”, and below that was a blank (a horizontal line). Below that line was the typed name of a person. In business and legal circles, such a typed or printed name has two functions. First, it tells who is supposed to sign above the line. The format here shows that a later manual signature was intended. And second, the typed name will later identify an illegible signature. Indeed some securities legislation mandates such typed names, and plainly distinguishes them from the signature: Findlay (ed.), Securities Law and Practice p. 15-33 (§15.7.1(a)) (3d ed. looseleaf, 2006 revision). One may compare Alberta’s Commissioners for Oaths Act, R.S.A. 2000, c. C-20, s. 9.

[37] A typed name in quotation marks (or preceded by a small s between oblique strokes) above the line might indicate that another copy was signed. But that is not what we have here.

[38] The appellant now argues that the disclosure was signed because of the typed names under the signature lines, and that a typed name can be a “signature” for some purposes. The chambers judge’s summary of the arguments before him strongly suggests that this argument is made for the first time on appeal. In this context, no reasonable person would read those typed names as a signature, for the reasons just given. See Re Botiuk and Collison reflex, (1979) 23 O.R. (2d) 677, 103 D.L.R. (3d) 322 (C.A.).

[39] And as counsel said, the Statute of Frauds is so encrusted by history, that decisions under it are of very little use in construing this different modern legislation.

3. Dating

[40] Nor were those forms of certificate dated. There was no date anywhere else, either.

[41] Is this failure to fill in the blank and date a document a mere matter of form or a technicality? The appellant so argues.

[42] However, we must recall that the appellant also wishes to argue (though it has not pleaded) that the attempt to rescind here was too late, because it happened outside a statutory deadline for doing so.

[43] And both sides argue whether the purported rescission here was effective. It is a statutory remedy and depends upon meeting its statutory conditions. Those conditions in turn involve timing.

[44] The legislation has six express provisions on that topic:

(a) Section 4(3) of the Franchises Act says that “a disclosure document must . . . comply with the requirements of the regulations.”

(b) Section 10(2) of the Act gives persons sued for non-disclosure or misstatements defences in certain instances, but most of those depend upon whether knowledge, consent or discovery occurred before or after the disclosure document was “given”.

(c) Section 13 of the Act allows rescission of all the franchise agreements if the “franchisor fails to give a prospective franchisee the disclosure document by the time referred to in section 4” (14 days). Note the word “give”.

(d) That same s. 13(a) contains the 60-day time limit which the appellant relies upon, but which the respondent contends never started to run. Paragraph (a) says “receiving”. (But the respondent says the document was incomplete and invalid in at least four respects.)

(e) The Regulation says that there must be a certificate that must be dated and signed. (Subsection (4) says that substantially complete disclosure satisfies s. 13 of the Act, but that relaxation is confined to rescission).

(f) Section 2(5) of the Regulation says that the “date of a disclosure document is the date set out in the certificate referred to in subsec. (3).”

F. Do These Omissions Matter?

1. How to Approach the Problem

[45] The franchisor’s deponent explains that a signed dated certificate is a requirement of Canadian franchises law; no American state requires it.

[46] The chambers judge properly cites the authority which makes the word “must” in legislation mandatory. Breach cannot be waived and must have some consequence. I will not repeat that discussion here.

[47] The franchisee’s deponent (an officer of its general partner) candidly admits that signature or date was not important to his decision to get a franchise. So the appellant paints lack of signature or date as mere trifling technicalities or form, of no importance, and unworthy of a remedy, still less worthy of rescission.

[48] The appellant franchisor therefore asks this Court to deny any remedy whatever for those two omissions, basing its argument on three different grounds:

(a) interpretation of the legislation (dealt with in this Part F),

(b) section 2(4) of the Regulations barring rescission in cases of substantial completeness (dealt with in Part F.9 below), and

(c) the flexible doctrine of illegality, especially Love’s Realty 1989 CanLII 172 (AB C.A.), (1989) 94 A.R. 341, 57 D.L.R. (4th) 606 (C.A.) (on which see Part H below).

[49] Subjective reliance or non-reliance by the deponent may well be irrelevant. For one thing, the combined effect of ss. 1(q) and 9(2) of the Act deems the respondent to have relied upon any omission of a required “material fact that is required to be stated.” Surely the phrase quoted includes the facts required in the certificate. Besides, this is statutory rescission, not common-law rescission, so the common-law need for reliance is irrelevant. And the disclosure requirements are uniform for all types of investor.

[50] Whether signature or dating is mere form, and of no real importance, is not a common-law question to be decided by the courts. It is part of a statute, and not a cryptic one either.

[51] In a recent Ontario case, the franchisor’s disclosure was given in several instalments, whereas the Ontario legislation required that it be bound together in one book. The franchisor argued that that was a harmless deviation in mere form, and it would be unfair to allow rescission on such a technicality. The Ontario courts disagreed, and held that the Legislature had a reason for this requirement, and that the courts could not reweigh that reason or excuse the breach: 1490664 Ont. v. Dig This Garden Retailers [2004] O.J. #3008, affd. 2005 CanLII 25181 (ON C.A.), (2005) 201 O.A.C. 95, 256 D.L.R. (4th) 451 (C.A.) (paras. 18-19). The trial judge noted that the signed certificates were lacking also (para. 23). Therefore, the courts held there had been no disclosure, so the 60-day time limit for rescission never started to run; only the two-year deadline applied (C.A. paras. 20-22).

[52] And unsigned reasons by a tribunal did not start time to appeal from that decision; only signed reasons did: Pryor v. Ont. Socy. for Prev. Cruelty to Animals, 2008 ONCA 108 (CanLII), 2008 ONCA 108, 2008 Carswell Ont. 692 (Feb. 7) (not a franchises case). The same was held of a notice of sale under a mortgage, in Re Botiuk and Collison, supra.

[53] A rubber-stamped signature of a justice of the peace on a criminal information is a nullity. An actual signature on the jurat is the necessary warrant of responsibility, which only the justice of the peace can give, whereas anyone in his big office could wield the stamp: Re R. v. Welsford [1967] 2 O.R. 496, 500-01 (C.A.), affd. and adopted 1969 CanLII 24 (S.C.C.), [1969] S.C.R. 438, 441, 4 D.L.R. (3d) 450. The purpose of a certificate “signed” by an official “is personally to authenticate a document and implies knowledge and approval of its contents.” A (reproduced) signature put on a blank document and later filled up by other people with facts not seen or checked by the official whose “signature” appears, does not meet the statute: R. v. Zwicker reflex, (1980), 38 N.S.R. (2d) 361, 53 C.C.C. (2d) 239, 249 (C.A.) (driver’s license suspension); R. v. Leslie reflex, [1993] 7 W.W.R. 392, 88 Man. R. (2d) 74 (C.A.) (driver’s license suspension).

[54] The duty to sign an indictment is not a formality:

It was intended to ensure not only that the proper requirements had been fulfilled before a trial proper could start, but that also there should be a certification by way of the signature of the proper officer to indicate that he had inquired into the situation, and satisfied himself that the requirements of the subsection had properly been complied with.

So the signature was a condition precedent to a valid trial, and the legislation was mandatory. The words of an Act are mandatory or they are not: R. v. Morais [1988] 3 All E.R. 161, 164 g to 165 j, 87 Cr. App. R. 9 (C.A.), approved in R. v. Clarke [2008] U.K.H.L. 8, [2008] 1 W.L.R. 338 (H.L.(E.)).

[55] The significance of those cases is that a certificate involves checking facts and confirming to the outside world that one has checked. A gold coin from the Royal Canadian Mint is not the same thing as a rough piece of purported gold of the same weight. An unsigned “certificate” by unknown people is not a certificate. A tortoise’s shell is not a tortoise.

[56] The appellant cites Emerald Devs. v. 768158 Alberta, 2001 ABQB 143 (CanLII), 2001 ABQB 143, 287 A.R. 151, but it is distinguishable. It involved a change of franchisor, a certificate signed by two officials, one of whom was not an official of the new franchisor, and evidence that the new company adopted the franchise disclosure document. There were factual issues not decided there and left for the trial judge to decide. So no final conclusion was reached there.

2. Wording of the Legislation About Signing

[57] We must interpret and apply the legislation by looking at the mischief prompting it, and the scheme used to overcome the mischief: see Part C.2 above.

[58] This legislation is designed to protect franchisees against franchisors. What is the mischief at which the legislation is aimed? Clearly it is that ordinarily the franchisor will have more knowledge and more power than the franchisee.

[59] The legislation requires an overall statement about the disclosure in one place only: in the certificate. The wording is legislated, and states (certifies) that there is no untrue material information, nor omission of a material fact, nor misleading omission, in the disclosure package (Reg., s. 2(3) and Schedule 2). Without a certificate, the franchisee has just some random statements and pieces of paper, but nothing to tie them together or even to say that they are true. The actual disclosure papers in evidence here contain no general statement, nor any statement about truth or completeness. There is not even a table of contents. The bulk of the disclosure papers here referred to Ontario legislation, and the Alberta supplement was thin. That made more serious the lack of a unifying document such as a certificate. The appellant franchisor evidently wishes to rely upon the Alberta legislation when it permits Ontario disclosure, plus an Alberta supplement, but abandon Alberta legislation when it calls for a signed dated certificate. Once again, one sees the relevance of 1490664 Ont. v. Dig This Garden Retailers, supra.

[60] Similarly, the analogous certificate on a prospectus “is the basis for the civil liability provisions [in securities legislation] which hold the issuer and the signatories liable for misstatements or misrepresentations”: Johnston and Rockwell, Canadian Securities Regulation 89 (3d ed. 2003).

[61] Therefore, the certificate is the linchpin of the substance of the disclosure. It is the opposite of mere form.

[62] The contents of the certificate are mandated by Schedule 2 of the Regulation. Schedule 1 of the Regulation lists (under 21 headings) hundreds of pieces of information which the franchisor must provide in that disclosure document.

[63] The disclosure document must give information going far beyond the franchisor or its activities. The legislation also requires all the following information about all the directors, general partners and officers of the franchisor who have day-to-day management responsibilities relating to the franchise:

(a) name;

(b) principal occupation;

(c) “employers during the 5 years preceding the date of the disclosure document”;

(d) convictions in past 10 years for convictions or no-contest pleas to indictable offences;

(e) convictions for fraud, embezzlement or unfair or deceptive actions;

(f) currently-pending indictable charges for franchises or other businesses;

(g) currently-pending charges of fraud, embezzlement or unfair or deceptive acts;

(h) civil findings of liability involving franchises or other businesses and misrepresentation or unfair or deceptive acts;

(i) pending civil actions like those in (h);

(j) current injunctive or restrictive orders by public administrative or regulatory agencies; and

(k) bankruptcy or insolvency proceedings in the past 6 years, including proceedings by other companies or partnerships with any overlapping directors or officers.

(Regulation, Schedule 1, Items 1 (h), 2-5)

[64] Schedule 1 says that the franchisor’s disclosure document must provide other information also. It goes beyond hard and objective data like contracts, financial statements, or basic statistics. It includes the following information:

· recurring or isolated fees or payments collected, even on behalf of others (item 7);

· “initial investment required” (item 8);

· each financing arrangement offered directly or indirectly (item 9);

· rebates which the franchisor may receive from others (item 12);

· whether the franchisor requires personal participation in the business (item 13);

· all other franchisees in Alberta (or near Alberta, if few) and how to contact them (item 14);

· details of all other franchises which ended in the last three fiscal years and how to contact those franchisees (item 15); and

· the franchisor’s policy about proximity and competition by other franchisees (item 18).

[65] It is also significant that the disclosure document must quote ss. 9, 13, and 14 of the Act about rescission and its effect, and the right of action for damages.

[66] Some franchisors are very large and complex and have many franchisees spread over a large geographical area. The evidence shows clearly that the appellant is one of those.

[67] What does this legislation tell us about the significance of signing the certificate?

1. The certificate is mandatory and so are the signatures and dates.

2. The certificate is part of the disclosure (Reg., s. 2).

3. Whoever signs the certificate undertakes a personal duty to investigate the facts and state them completely, with express civil and quasi-criminal personal liability for failure to do so: see Part F.3 below.

4. There is a special statutory personal civil liability on those who sign the certificate.

5. That certificate must be by directors or officers, not anyone of lower power or status.

6. That certificate must be by directors or officers of this franchisor, not some other company.

7. A lot of personal information about all the officers and directors must be given.

8. The company’s financial statements and contracts and regulations do not give enough information; the person signing the certificate must have a detailed knowledge of the franchisor’s actual practices and policies and its individual franchisees.

[68] One reason why a videotape, however lengthy and detailed, cannot be disclosure satisfying this legislation, is that it lacks a signed certificate: Traversy v. Chia Chia Communications, 1999 ABQB 161 (CanLII), 1999 ABQB 161, 241 A.R. 198 (para. 11) (M.); cf. Rocha v. Panda Flowers, 2005 ABQB 640 (CanLII), 2005 ABQB 640, 388 A.R. 145 (para. 38).

3. Legislative Liability of Those Signing

[69] There is direct proof that the signature of a director on franchise disclosure papers matters. Section 9 of the Franchises Act creates a new statutory right to sue for damages. It is joint and several (s. 12), and in addition to all other legal remedies (s. 15). Section 9 reads as follows:

9(1) If a franchisee suffers a loss because of a misrepresentation contained in a disclosure document, the franchisee has a right of action for damages against any or all of the following:

(a) the franchisor;

(b) every person who signed the disclosure document.

(2) If a disclosure document contains a misrepresentation, a franchisee who purchases a franchise to which the disclosure document relates is deemed to have relied on the misrepresentation.

(emphasis added)

[70] The definition section (s. 1(q)) extends that section beyond untrue statements, to include omissions of facts required to be stated (subject to materiality). Note that subsection (2) deems reliance on such disclosure material.

[71] That cause of action lies not only against the franchisor, but also against “every person who signed the disclosure document”. The only signature required by the Act or the Regulation is the signature on the certificate. (And there was no signature, actual or contemplated, anywhere else here.)

[72] Furthermore, s. 10 of the Act gives several defences to such an action. Some are limited to persons other than the franchisor, so they help only people who signed the certificate. One of those defences excludes liability unless that person did not conduct a certain investigation (s. 10(3)(a)).

[73] So one must hook together ss. 1(q), 9 and 10, and strip out the double negatives. Then one is left with this. A person who signs the certificate has a personal duty to “conduct an investigation sufficient to provide reasonable grounds for believing” that the facts stated are accurate, and that all facts to be disclosed were disclosed. Personal liability enforces that.

[74] If no one signs, no one has that duty. No individual need investigate, nor believe.

[75] So a signed certificate is not a question of form. It governs who has huge monetary liability, and who has the duty of investigation and disclosure.

[76] If the respondent franchisee here sued the two persons whose typed names were given, claiming a million dollars for non-disclosure, what would their statement of defence say? “We did not sign anything.”

4. Importance of Personal Verification

[77] In a large organization, information does not always reach every person it should. Where factual statements come (or should come) to outsiders from a number of people in the organization, sometimes there are omissions or misstatements. Often no one person in the organization is insincere or even careless; but the net result is misstatements or non-disclosures by the organization. How can one prevent that? By legislation requiring that two (or more) people personally investigate and then certify correctness and completeness. Requiring that they be directors or officers, ensures that they have enough legal power to get access to all information and enforce compliance with their instructions.

[78] The documents provided by the appellant franchisor here were unsigned. It was not a question of a signature in the wrong place or rubber stamped. No one signed anywhere in any manner.

[79] Furthermore, the evidence shows that the appellant franchisor did not even keep a file copy of what disclosure it sent out to the respondent franchisee. Instead, it merely kept at its office in Georgia a “generic copy” of a basic disclosure package (for Ontario), and of an Alberta supplement. And it seems to have had some sort of routine for sending out copies. The appellant franchisor’s deponent thinks that the franchisor mailed out xeroxes to the respondent franchisee, but the deponent did not do that work. That sloppy practice had been criticized the year before, in MAA Diners v. 3 for 1 Pizza & Wings (2003) 30 Bus. L.R. (3d) 279 (paras. 33-34) (Ont.), affd. (2004) 43 Bus. L.R. (3d) 29 (C.A.). Cf. Rocha v. Panda Flowers, supra (paras. 22 ff., 28).

[80] So it appears doubtful that any one individual took responsibility here for checking the correctness or completeness of what was sent out, still less a director or officer.

[81] The person who tried to assemble, and xeroxed and mailed, copies of the standard bundles here may well not have been a director or officer. So it is entirely possible that she lacked access to the complete information necessary, especially personal information about officers and directors.

[82] The similar securities legislation requiring a signed certificate on a prospectus is enacted “to encourage director oversight, due diligence and care in the prospectus process”: Condon, Anand and Sarra, Securities Law in Canada 264 (2005). These Acts also “are aimed at holding corporate officers accountable for the quality and accuracy of the issuer’s disclosures.”: id. at 406.

[83] The details of this franchise legislation speak eloquently from years of experience with this unusual type of business. (Alberta had the first franchise legislation in Canada.) Many of the items in Schedule 1 of the Regulations could not be invented a priori. Obviously they reflect past practices of franchisees and franchisors, some of them improper.

[84] The Ontario Securities Commission said that the statements in the similar certificate by an underwriter in a prospectus

. . . are not just pious passages that appear as a matter of form at the end of every prospectus. Each word in both phrases has a specific meaning behind which must lie a course of conduct by an underwriter before he can affirm them. . . . That is the underwriter must seek out and question all relevant and material facts concerning the issuer and reasonably ensure himself that these facts are fully and truly set before the investing public. The underwriter cannot and must not merely rely on the statements and opinions of the issuer’s directors, officers and counsel.

– Re A.E. Ames & Co. 1972 O.S.C.B. 98, 112 (June)

5. Parallel Securities Legislation and Practice

[85] Apart from details, the broad approach and structure of the franchise legislation obviously reflects companies and securities legislation and practice extending back for at least 150 years. Alberta’s pioneering 1971 franchises legislation was closely modelled on securities legislation and prospectuses. Prospectuses have long had to be signed by directors or promoters. Modern securities legislation is obviously the model for the certificate in franchises legislation. It requires a certificate of completeness and accuracy signed by two officers or directors. Now securities law calls for an offering memorandum (at an earlier stage) similarly signed, though its wording is simpler: Condon Anand and Sarra, op. cit supra, at 326; Findlay (ed.), op. cit. supra, at pp. 17-46 to 17-47 (§17.2.9). Alberta’s current franchises legislation is a watered-down version of the 1971 Franchises Act. The current one is less onerous and omits government filing: Dillon, Annotated Alberta Franchises Act viii-ix (looseleaf, 2007 version).

[86] The basic technique in securities legislation is the prospectus. Could a large company float a public issue of shares or bonds by a prospectus not signed by any director or officer, indeed not seen by a director and merely assembled ad hoc in house by a lesser anonymous employee from stock or shelf parts? That notion would astonish the investment community.

[87] An anonymous prospectus, or one signed only by the clerical help, is almost useless. So one cannot regard legislation calling for signature by two officers or directors a trivial technicality.

6. Trends in Securities Legislation

[88] To treat signatures by officers as a mere dusty technicality of no importance or enforceability would also disregard a new development in North American securities legislation. In recent years the number of mandatory certifications of various types of disclosure has grown, and the number of officers or directors who must sign such certificates has expanded. See Condon, Anand, and Sarra, op. cit. supra, at 406-07, and the American Public Co. Accounting Reform and Investor Protection Act (public law 107-204 of 2002), popularly called the Sarbanes-Oxley Act.

[89] That is inconsistent with any notion that a signature is a pointless technicality, that it has no rationale, or that anyone’s signature will do. Obviously many legislatures hold the opposite view.

7. Sophisticated Franchisees?

[90] Counsel for the appellant suggested to us that it would be unfair to enforce any of these statutory requirements here because this respondent franchisee was sophisticated. The officer of its general partner may be. Can one assume that that would make all the partners of the franchisee equally sophisticated? I doubt that that matters.

[91] The Act contains 8 exemptions from the duty to disclose, and a Regulation adds more, but no exemption resembles counsel’s suggested large or sophisticated franchisee. To the contrary, the Act exempts small franchises (s. 5(1)(e)), and the Exemption Regulation exempts large franchisors in business over five years with over 25 Canadian franchisees (Alta. Reg. 312/00). Had the Legislature or the Cabinet intended to protect only the small or the unsophisticated franchisee (investor), it would have been very easy to add 10 or 20 words to s. 5 or to the Exemption Regulation and say so.

8. Need for Disclosure

[92] The main theme of the appellant’s argument seems to be an implicit suggestion that the respondent (and maybe similar business people) did not need the protection of this legislation.

[93] But this is not a contract to buy or build a hotel. The respondent bought an existing hotel from someone else, and that contract is not in question. Indeed, the respondent is happy with that purchase and is still operating the hotel. That is a red herring.

[94] The question is what protection the Franchises Act was designed to give here, and whether invoking it was a mere technicality. The Regulation made under it (Alta. Reg. 240/95) is plainly designed to make the franchisor give a prospective franchisee information about three topics:

(a) about the franchisor and its officials, including criminal or regulatory proceedings;

(b) about the practices of the franchisor in its actual operation of this type of franchise; and

(c) about the type of business in question.

[95] Maybe an experienced business person who had run hotels before might have limited need of type (c) information.

[96] But even the most experienced hotel operator in Canada would need type (b) information, unless he or she happened already to have another franchise from this same franchisor for this class of business. And in that event, a statutory exemption would apply (Franchise Act, s. 5 (1)(c)). No one suggests that that is the case here, nor that anyone connected with the respondents had ever run a Holiday Inn before.

[97] One cannot assume that all franchises and franchisors are fungible, and that a vehicle lubricating shop, a famous hamburger outlet, and a Holiday Inn all work the same way and have the same fees and regulations.

[98] As for type (a) information, one could be a franchisee of this very franchisor for 40 years and still not know this type of fact. As described above (Part F.2), that disclosure is not limited to criminal proceedings: the franchisor must disclose civil and regulatory proceedings, including those merely pending and not decided. Only legislation like this would compel a franchisor to reveal such facts. Even the sophisticated need a great deal of protection from dishonest people as do the naïve and inexperienced.

[99] No one suggests that Holiday Inn or its officers are dishonest, but the Act and Regulations compel every franchisor (except the very few exempted) to make all the types of disclosure listed in the Regulations. None of those requirements can be waived says the Act (s. 18).

9. Substantial Completeness

[100] For all the reasons above, a complete absence of signatures cannot possibly be “substantially complete” under s. 2(4) of the Regulation. (Still less can no signatures and no date.) This is not a case where

(a) there was a properly-signed original, but in error an unsigned exact copy was sent out;

(b) the directors or officers signed and acted in that capacity, but had a flaw in their appointment;

(c) the directors or officers expressly authorized a lesser official to sign for them or to affix rubber-stamped signatures; or

(d) each director signed a different copy and the two copies differ in small respects.

[101] Would anyone call an unsigned will “substantially complete”? Or an affidavit with no signature or seal by deponent or commissioner or notary? Any suggestion that an unsigned certificate would suffice for the Dower Act, R.S.A. 2000, c. D-15, or the Guarantees Acknowledgment Act, R.S.A. 2000, c. G-11, would be risible. Legislation calling for signature is neither mere busy work, nor cosmetic.

[102] The major Canadian textbook on securities law says that substantial compliance refers to form, but “in fact it does not permit exclusion of . . . the certificates of the issuer, the promoter and the underwriters . . . or other than minor deviations from the form and content requirements found in the Rules.” Findlay (ed.), op. cit. supra, p. 15-10 (§ 15.4.1).

10. Wording of the Legislation About Dating

[103] The legislation mandates that the information be complete and all material changes be disclosed (Act s. 4). As of what date must that be so? The date on the certificate: Dillon, op. cit. supra, p. AFR-6.1 (note to Reg., s. 2(5)).

[104] And, the date of the disclosure document (certificate) governs what information must be disclosed, says the Regulation. The franchisor has to include information this far back and no further:

Franchises sold 5 years (Item 1(g))

Occupation and Employers 5 years (Item 1(h))

Convictions 10 years (Item 2)

Bankruptcy or Insolvency 6 years (Item 5)

Closures of Franchises 3 years (Item 15)

(These references are to Alta. Reg. 240/95, Schedule 1)

Those times are not otherwise defined, so they must refer to the date of (on) the disclosure document (certificate).

[105] To summarize, the date on the certificate governs

(a) the cutoff dates for convictions, etc., and

(b) deadlines to rescind etc. (discussed in Parts E.3, F.1 and H).

Those are important results set by the legislation, some of which results the parties here rely upon.

11. No Signatures and No Dates

[106] Alone, an erroneous or incomplete date on a signed certificate might not be fatal. Absence of a date on a signed certificate could be debatable, and depend on the circumstances. I express no opinion on that.

[107] Here, it is important to look at the combined effect of no signature and no date. They suggest to me that the “certificates” here were mere unused forms, not operative documents.

G. Taking Advantage of the Act

[108] The appellant franchisor also suggests that the respondent franchisee simply rescinded because it was financially advantageous to do so. With respect, that is no answer. That is the inevitable result of any legislation to protect consumers or investors. Rarely does such legislation automatically nullify a sale or investment, and so it gives the consumer or investor an election whether to get out of the transaction. Only a malcontent or crank would do so if the transaction was profitable for him or her. The person whose shares go up will not complain that he or she did not get a prospectus.

[109] That cannot be a reason to refuse to enforce the legislation. To give protective legislation effect only where the transaction made a profit, would virtually repeal the legislation and make it useless.

[110] It is especially inconsistent to couple such an interpretation with reliance upon a contract. Generally speaking, contracts law and common law let people make a profit, and do not look at motive. If one is bound by a valid enforceable contract, one must obey it, however noble one’s motives. If one is not bound by a valid enforceable contract, one need not obey it, and is free to sell higher or buy lower elsewhere. So a profit motive here is nothing new or exceptional.

[111] Nor is this a case where someone repents of a purchase because the price has fallen, or the new line of business proves unpalatable. In general, prices in Calgary, especially for real estate, boomed at the relevant time, and all Calgary businesses found demand brisk. Specifically here, the respondents did not try to get rid of the hotel in question; on the contrary, they are still running it and happy with it. Nor did the respondents buy the hotel from the appellant; they bought it from someone else.

[112] The only issue is the franchise, which charges hundreds of thousands of dollars to use a well-known name and logo, and doubtless to access a reservation network and other ongoing services.

[113] The appellant’s suggestion of windfalls to the respondent franchisee to a degree may be mitigated by the accounting which is to be done consequent on the rescission.

H. Illegality

[114] Here the franchisor points out that Alberta illegality law is flexible, citing Love’s Realty & Financial Services v. Coronet Trust 1989 CanLII 172 (AB C.A.), (1989) 94 A.R. 341, 57 D.L.R. (4th) 606 (C.A.). Breach of an Act does not always make a contract void. However, that is beside the point in this lawsuit, because illegality is not in issue. The franchisor relies on and sues on the franchise contract. No one suggests that that contract is illegal, nor that performance of it would be illegal.

[115] If the franchisor gave enough disclosure, or substantially enough, then the statutory conditions for rescission are not met. If the franchisor did not do so, then the conditions are met, and the franchisee does not need illegality. The respondent franchisee does not even argue illegality.

I. Conclusion

[116] Instead, the franchisee has served a notice to rescind that franchise contract. The issue is whether that notice was valid because the Act specifically authorized the notice.

[117] The only other claim or defence argued by either side is the appellant’s unpleaded suggestion that rescission was too late. A disclosure package with no signed certificate and no date on the unsigned form of certificate is not “given” 14 days before the franchise contract or fee, and indeed is not “given” at all. Therefore, s. 13 of the Act gives an express right to rescind. (Whether the 60-day time limit to do so started to run would depend on whether the franchisee could be said to have “received” the disclosure document, which would depend on whether it was complete enough.) Cf. 1490664 Ont. v. Dig This Garden Retailers, supra, (trial para. 25). That is discussed above in Part E.3.

[118] Two other issues are whether the respondent franchisee got the Alberta disclosure material, and whether the Ontario disclosure document was missing two pages. The evidence of the respondent franchisee was by Torode, an officer. It is all firsthand, but on some issues, there is doubt (poor memory, did not open own mail). So the evidence about that gap may not suffice for summary judgment. Two signed receipts for disclosure material exacerbate that.

[119] However, given my conclusions above, a trial about receipt or non-receipt of the Alberta disclosure supplement, or about two pages missing from the Ontario one, would be pointless. The certificate issues make the existence or non-existence of any other flaw academic. The appellant could get past that only if it could show that the lack of certificates does not matter, and that the court should ignore those breaches of the franchises legislation. These reasons show that that is impossible.

[120] I would affirm the Court of Queen’s Bench declaration of effective rescission. As the franchise contract has been rescinded, I would affirm the dismissal of the counterclaim under that contract. Argument showed that there should be an accounting on both sides consequent upon rescission. That is overlooked in the formal Court of Queen’s Bench judgment, which should be corrected in that respect. In all other respects, I would dismiss the appeal, with costs to the respondent.

Appeal heard on June 11, 2008

Reasons filed at Calgary, Alberta

this 14th day of August, 2008

Côté J.A.

_______________________________________________________

Reasons for Judgment Reserved of The Honourable

Madam Justice McFadyen Concurring in the Result

_______________________________________________________

[121] I have had the benefit of reading the reasons for judgment of Côté J.A. and agree with his conclusion that the appeal and counter appeal be dismissed, and that there be an accounting on both sides consequent on the effective rescission of the franchise contract. While I generally agree with his reasons, I prefer to limit my decision to the basic issues raised:

(a) whether the trial judge erred in finding that Holiday Hospitality Franchising Inc. (“Holiday”) never provided a signed and dated certificate;

(b) whether legislation requiring that the franchisor provide a certificate signed by two officers or directors as part of the disclosure is mandatory; and

(c) whether the failure to provide the required certificate is sufficient to justify the grant of the remedy of rescission where the dispute between the parties does not relate to any misrepresentation or any misleading disclosure and does not result from any defect in the disclosure.

Facts

[122] Hi Hotel Limited Partnership (“Partners”) purchased a hotel that had been operated as a Holiday Inn and entered into negotiations to acquire a new franchise from Holiday. Holiday provided a disclosure package, which purportedly included both Ontario and Alberta information. Partners does not dispute having received the Ontario information. However, John Torode, the officer who dealt with the franchise agreement on behalf of Partners, denies that he received the Alberta disclosure document and denies having received the certificate mandated by the Franchises Act, R.S.A. 2000, c. F-23.

[123] The parties subsequently entered into a franchise agreement. The parties functioned under the agreement for a number of months until a dispute arose regarding the renovation obligations and the operation of the hotel. After some discussion, Partners purported to terminate the contract. When termination was not accepted, Torode sought the advice of counsel. The absence of signed and dated certificates was then discovered. Partners then took action to rescind the contract by forwarding a notice of rescission to Holiday. Partners subsequently commenced this action for a declaration of rescission, and Holiday counterclaimed for fees and penalties due under the agreement.

[124] A signed certificate was never produced to the court and there was no direct evidence that a certificate was ever dated or signed by Holiday’s directors or officers. The only certificate that was before the chambers judge was appended to the affidavit of Jenny Tidwell, an officer of Holiday. These file documents were not signed or dated, and Ms. Tidwell, whose name appears on the file copy of the certificates as one of the officers expected to sign, does not state in her affidavit that she signed them. Torode denies receiving any certificate, executed or not. He deposed that the only certificates he saw were those appended to the Tidwell affidavit. While he signed separate receipts for the Ontario and the Alberta disclosure packages, neither receipt mentioned a certificate.

[125] The chambers judge found that Holiday failed to provide Partners with a certificate that was signed by two of its officers or directors and dated, as required by the Act. He concluded that these requirements were mandatory and that Holiday had not substantially complied with the disclosure requirements, as the certificate was an essential part of the disclosure document. On this basis, he found that the franchise agreement had been effectively rescinded.

[126] Holiday appeals on a number of grounds, including:

(a) That the chambers judge erred in finding that Holiday had not provided substantial disclosure, including a certificate;

(b) That the chambers judge erred in interpreting s. 2(3) of the Franchises Regulation, and in failing to find that the provision is directory, not mandatory; and

(c) That the chambers judge erred in concluding that in the absence of proof of misrepresentation or misstatement, the alleged deficiency justified rescission.

Legislation

[127] Section 4 of the Act provides:

4(1) A franchisor must give every prospective franchisee a copy of the franchisor’s disclosure document.

(2) The disclosure document must be received by the prospective franchisee at least 14 days before

(a) the signing by the prospective franchisee of any agreement relating to the franchise, or

(b) the payment of any consideration by the prospective franchisee relating to the franchise,

whichever is earlier.

[128] Section 4(3)(a) provides that “a disclosure document must comply with the requirements of the regulations.”

[129] Section 13 provides:

If a franchisor fails to give a prospective franchisee the disclosure document by the time referred to in section 4, the prospective franchisee may rescind all the franchise agreements by giving a notice of cancellation to the franchisor or its associate, as the case may be,

(a) no later than 60 days after receiving the disclosure document, or

(b) no later than 2 years after the franchisee is granted the franchise,

whichever occurs first.

[130] Section 2(3)(a) of the Regulations provides that “a disclosure document ... must include a certificate set out in Schedule 2 that must be dated and must be signed by at least 2 officers or directors of the franchisor, or a combination of them totalling at least 2, if the franchisor has 2 or more directors or officers.” Section 2(5) of the Regulations provides that the date of the disclosure document is the date set out in the certificate.

[131] The Regulations specify the form of certificate, which requires officers or directors to state or certify that the disclosure document contains no untrue information of a material fact, does not omit to state a material fact that is required to be stated, and does not omit to state a material fact that needs to be stated in order for the information not to be misleading.

[132] Section 2(4) of the Regulations provides that the disclosure document is, for the purposes of s. 13 of the Act, properly given if the disclosure document is substantially complete.

Analysis

[133] The chambers judge concluded that Holiday had not provided a signed and dated certificate as part of the disclosure to Partners. He did not err in doing so. Torode testified that Partners had not received the certificate. As indicated above, that evidence has not been contradicted. Holiday provided a form of receipt for Torode’s signature. The space on the receipt where the date of the disclosure document was to be filled in was left blank, and read as follows: “I have received a disclosure document dated ______________, 2002.” The failure by Holiday to fill in the key date provides further support for the conclusion that the certificate had not been dated as required.

[134] Holiday submits that the chambers judge erred in concluding that Partners established a right to rescind the franchise agreement. First, Holiday says that there is no suggestion that the disclosure document contained misleading or inaccurate information, and that Partners does not allege that it was misled by such information. In fact, Torode admitted that he had not relied on the disclosure document in entering into the agreement. The dispute between the parties arose entirely from their post-contract dealings and not from any problems with disclosure. Holiday submits that Partners has not been harmed by the defective disclosure and is merely using that as an excuse to avoid its legal obligations under the contract.

[135] Be that as it may, the mandatory language of the disclosure provisions of the Act and the Regulations, as well as the legislative intent to provide protection for prospective franchisees, all support the chambers judge’s conclusion that the error is a fatal one. In essence, the chambers judge concluded that there is no disclosure as required by the Act unless a signed and dated certificate is included in the disclosure document.

[136] Section 13 of the Act entitles a prospective franchisee to “rescind all franchise agreements” if the franchisor fails to provide the disclosure document. The franchisee is not required to establish that he was misled or otherwise suffered damages as a result of the failure. The chambers judge did not err in this interpretation. The certificate, signed and dated as required by the Regulations, is a mandatory part of the disclosure. Until there is substantial compliance, there is no disclosure. The time limit in s. 13(a) of the Act does not start to run until there is disclosure, and is therefore inapplicable.

[137] The appeal and counter appeal are dismissed.

Appeal heard on June 11, 2008

Reasons filed at Calgary, Alberta

this 14th day of August, 2008

McFadyen J.A.

I concur:

Conrad J.A.

Appearances:

B.C. Yorke-Slader

for the Respondent (Plaintiff)

C.C.J. Feasby

T.R. Prince

for the Appellant (Defendant)

_______________________________________________________

Corrigendum of the Reasons for Judgment Reserved of

The Honourable Mr. Justice Côté

_______________________________________________________

In para. 53, the citation for R. v. Zwicker has been corrected to read reflex, (1980), 38 N.S.R. (2d) 361, 53 C.C.C. (2d) 239, 249 (C.A.) (driver’s license suspension).

In para. 72, the citation to the Franchises Act has been corrected to read 10(3)(a)).