Alberta Court Of Appeal Provides Guidance On Net Loss Calculation On Rescission

• Published date: 01 June 2021
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Trials & Appeals & Compensation, Franchising
• Law Firm: Cassels
• Author: Mr George A. Wowk

A recent decision of the Court of Appeal of Alberta provides guidance on the calculation of net losses on rescission, including charges for services provided by principals and whether profits earned by a franchisee following the rescission can be taken into account.

SUMMARY AND IMPLICATIONS

In 1777453 Alberta Ltd. v Got Mold Disaster Recovery Services Inc.,¹ the Court of Appeal of Alberta considered the calculation of expenses claimed by a franchisee that rescinded a franchise agreement under the Alberta Franchises Act. The Court held that the reasonableness of the expenses should be assessed, including any amounts paid to the principals of a franchisee for services they provided, and specifically, they should reflect market value for similar services.

The Court also held that future profits earned by a franchisee cannot be used to offset losses that a franchisee may have incurred for the purposes of calculating compensation payable to the franchisee in connection with a rescission.

Although the Court declined to take into account a franchisee's future profits in calculating net losses, the decision arguably leaves open the argument that intangibles received during the franchise relationship could be taken into account. Intangibles received during the franchise relationship, such as training, have value and therefore should be taken into account when calculating net losses. This is particularly true if the intangibles are likely to contribute to the future profits of the franchisee. The decision did not address this point, so it may be open for someone to argue in the future.

BACKGROUND OF THE CASE AND FINDINGS

1777453 Alberta Ltd. (the Franchisee) operated a mold remediation business as a franchisee of Got Mold Disaster Recovery Services Inc. (the Franchisor). The Franchisor did not disclose as required by the Franchises Act (Alberta).² The Franchisee provided notice of rescission within the time period allowed.

Under Section 14(2) of the Franchises Act, on rescission, a franchisor is to "compensate the franchisee for any net losses that the franchisee has incurred in acquiring, setting up and operating the franchised business." As liability was acknowledged by the Franchisor, the dispute between the parties related to the amount of compensation.

The matter was originally heard by way of a special chambers hearing.³

In determining net losses, the Chambers Judge stated that damages were to be assessed on the basis of reliance damages as opposed to...