Beyond the entity: Canadian court extends liability to Franchise principals

Facts

In 2022, the Plaintiff sought to invest in a Sharetea franchise in Alberta. The Defendant was the master franchisee for Sharetea in Alberta, operated and controlled by an individual. The Defendant provided the Plaintiff with promotional materials and revenue figures for existing Sharetea locations, leading to a Memorandum of Understanding (MOU) in September 2022. However, the MOU was not signed by the Defendant and did not mention the Plaintiff. Despite this, the Plaintiff made four payments totaling $74,242 to the Defendant, which included $52,500 as a franchise fee and additional amounts for equipment, inventory, and utensils. No Franchise Disclosure Document (FDD) was ever provided to the Plaintiff, nor was a formal franchise agreement signed. The Plaintiff did not receive any goods it paid for. In October 2023, the Plaintiff’s legal counsel cancelled the franchise arrangement due to the Defendant’s failure to provide the required disclosure documents and demanded a refund.

Issues for determination

1. Did the Defendant and its principal violate Alberta’s Franchise Act by failing to provide a Franchise Disclosure Document (FDD) before accepting payments?
2. Was the principal of the Defendant personally liable for the statutory breach as an “associate” under the Act?

Court’s findings

The Court found that the Defendant failed to comply with the mandatory disclosure obligations under Alberta’s Franchise Act (RSA 2000, c F-23). No valid FDD was provided, and payments were accepted without observing the required 14-day disclosure period. The Plaintiff was therefore entitled to rescind the agreement and recover its losses. The Court also held that the principal of the Defendant was personally liable as an “associate” under the Act due to her direct involvement and control over the Defendant’s operations.

Decision

The Court awarded $74,242 in damages to the Plaintiff, jointly and severally against the Defendant and its principal.

Article by:

Mtho Maphumulo
Attorney at Adams & Adams
Partner in the Insurance & Financial Services Law Department