COURT FILE NO.: 05-CV-32423

ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

ABDULHAMID SALAH and

1470256 ONTARIO INC.

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Stephen S. Appotive, for the plaintiffs

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Plaintiffs

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- and -

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TIMOTHY’S COFFEES OF THE WORLD INC.

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Jaan E. Lilles/Matthew B. Lerner, for the defendant

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Defendant

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HEARD: Before Justice deLobe Panet on November 10, 13, 18, 20, 2008, January 12, 13, 14, 15, 16, 19, 20 and 21, 2009.

This matter was tried over a period of 12 days, after which Justice Panet was, by reason of illness, unable to deliver a judgment in the matter.

The Chief Justice, pursuant to s.123 (4) and (7) of the Courts of Justice Act, authorized the appointment of a judge to complete the trial.

The judgment, therefore, is based a review of all of the transcripts, the exhibits, the oral and written arguments as well as the authorities cited by counsel.

MÉTIVIER J.

DECISION

BACKGROUND

[1] The Bayshore Shopping Centre is a three-level enclosed shopping mall containing a food court on the third level of the complex. The defendant, Timothy’s Coffees of the World Inc. (hereinafter “Timothy’s”), is a corporation incorporated pursuant to the laws of the Province of Ontario and carries on business as a franchisor of a retail system offering specialty coffee related products for sale to the public. The individual plaintiff, Abdulhamid Salah (hereinafter “Mr. Salah”), became a franchisee of Timothy’s.

[2] Timothy’s was present in Ottawa for a number of years prior to 2001, including running a number of corporate stores in the Ottawa area. By 2001, Timothy’s operated 160 retail locations, as well as additional stores owned by Timothy’s but operated as Mmmuffins and Michel’s Baguette.

[3] One of those corporate stores was located at Bayshore Shopping Centre. In June of 2001, Timothy’s was advertising for franchisees with a view to having accepted candidates take over a number of its existing stores and changing them from corporate to franchise stores. In June of 2001, the franchisor had a head lease with the Bayshore Shopping Centre for a four year term ending on September 30, 2005.

[4] The plaintiffs, Mr. Salah and 1470256 Ontario Inc. (hereinafter “147”), became a franchisee of the defendant and, pursuant to a franchise agreement entered into, operated the third floor former corporate store at the Bayshore Shopping Centre in Ottawa.

[5] Mr. Salah’s background included a Bachelor of Commerce with a specialty in accounting obtained in 1972 in Cairo. He and his family moved to Canada from Kuwait in 1993 and he engaged in two different businesses, a towing company and a convenience store. He then returned to school to upgrade his qualifications and took courses in accounting and computer application at the Toronto Business School located in Ottawa.

[6] The franchise agreement and the sublease entered into by the parties provided for a term of four years beginning November 15, 2001 and ending September 30, 2005. On the latter date, the franchisor treated the agreements as being at an end. Timothy’s entered into a new lease agreement with the Bayshore Shopping Centre for a location on the second floor and entered into a franchise agreement with a new franchisee at that second floor location.

PARTIES’ POSITIONS

[7] The plaintiffs’ claim is that, pursuant to the franchise agreement, they had a right to a new lease term not restricted to the location on the third floor, but extending to and including the entire Bayshore Shopping Centre. The franchise agreement was to be amended accordingly. The plaintiffs claim that Timothy’s breached this term of the franchise agreement and seek damages as a result of the breach and of the defendant’s conduct.

[8] The franchisor, Timothy’s, asserts that the plaintiffs had no right of renewal and that the parties had intended the franchise agreement to be co-terminous with the lease. The lease ended on September 30, 2005. If there was a right of renewal, it would extend only to the original premises on the third floor of the Bayshore Shopping Centre. Since the franchisor was not able to renew the lease at that location, the franchise agreement terminated and there was no option to renew elsewhere.

FRANCHISING PROCESS

[9] It is useful to examine Timothy’s leasing and franchising process:

• Timothy’s invariable process is to first secure a head lease with a landlord for the desired premises. This head lease is entered into directly by Timothy’s and the landlord. In the case of a franchise location, once a franchisee is secured, Timothy’s enters into a sublease arrangement with that franchisee.

• Timothy’s recruits candidates through various marketing initiatives. Once an interested applicant initiates contact with Timothy’s head office, they are forwarded a brochure detailing information about Timothy’s generally, along with a franchise application. Once a completed franchise application is received by Timothy’s, a telephone interview is conducted, or a business manager within that applicant’s geographical area conducts a first interview. If the first interview is successful, the candidate is then scheduled to attend at Timothy’s head office in Toronto for an interview to be conducted by three of Timothy’s employees.

• After that interview, if the applicant is acceptable, the applicant is provided with a number of standard-form franchising documents, Timothy’s current Capital Disclosure Document as required by the Arthur Wishart (Franchise Disclosure) Act, 2000 S.O. 2000 c. 3 (Wishart Act). The package also includes an affidavit of independent legal advice, which is used to acknowledge that the applicant has engaged the services of a chartered accountant and a lawyer to review the documents in order to discuss their meaning and the business implications associated with operating a Timothy’s franchise. The applicant is required to confirm in writing that independent legal advice will be obtained.

• The applicant has a minimum of 14 days to review the documents, after which time they make a first deposit of $5,000.

• In return for the affidavit of independent legal advice and the $5,000 deposit, applicants may then receive Site Kits for available locations that they are interested in reviewing.

• In the case of an existing store, such as in the case at bar, the parties then agree on a purchase price, and the franchisee must provide a second deposit of $5,000 in order to obtain a franchise-specific set of franchising agreement documents. Those documents are particularized in order to accommodate any variation to the agreement. The company’s practice is to insert information in the franchise-specific version of the franchise agreement directly derived from the pre-existing head lease entered into by Timothy’s with the respective landlord. If the franchisee takes over an existing corporate store, there is an agreement of purchase and sale for the existing assets of the store.

• Once the set of franchise agreements are executed, the franchisee attends a operational training session in Toronto for approximately 2 to 3 weeks.

[10] David Black is Timothy’s senior vice president of development. His department was responsible for over-seeing all franchising and leasing activities. He also oversaw the recruitment of franchisee candidates and eventually the process by which Timothy’s entered into contractual relationships with its franchise partners. He testified at the trial.

[11] Marie-Anne Parent was Timothy’s business district manager (hereinafter BDM) for the Ottawa Region and Eastern Canada. She was a witness at the trial. The role of the BDM is to work with franchise partners to ensure compliance with Timothy’s franchise agreements, corporate standards and operating directives. The role of the BDM is also to assist franchisees with the operations of their specific retail locations. This person can be further described as the eyes and ears of the company in each location.

[12] Mr. Lou Fallico was the director of the operations division. He reported to the vice-president of operations and had various business district managers reporting directly to him, including Ms. Parent. He was not called as a witness.

[13] Ms. Joanne Floropoulos was Timothy’s franchise development manager and reported to Mr. Black. She did not testify.

THIS FRANCHISE

[14] In June 2001, Mr. Salah responded to an ad by Timothy’s and began making inquiries about the possibility of opening a franchise with that company. He felt financially able to do so since he says he had a net worth of about $500,000 at that time.

[15] He filled out an application form giving financial information such as this and then was interviewed by two women, one was Joanne Floropoulos and the other was Marie-Anne Parent.

[16] The parties proceeded through the various steps of the franchise process and Mr. Salah did an analysis of what he could expect in terms of returns on his investment.

[17] On reviewing the documents, he testified that he expected that the franchise term should be ten years in length with the option of renewal for another ten years. His expectation of a term of ten years proved not to be possible since the term on his preferred location at Bayshore was only for four years.

[18] Mr. Salah testified that he explained to Ms. Floropoulos that he thought that a four year term was very short for a $200,000 investment. Indeed, the lawyer he consulted confirmed this view. Mr. Salah testified that after he had expressed his serious concerns, Ms. Floropoulos indicated to him that she would take his concerns into consideration.

[19] Mr. Salah was given the opportunity to review the franchise agreement and the sublease and to obtain legal advice on these documents, all as set out above. He was allowed by Timothy’s to assign the franchise agreement to the company he incorporated for that particular purpose by way of an Assignment and Guarantee. He was required to sign a General Security Agreement as required on behalf of his company.

[20] The grant of the license to Mr. Salah and 147 is as follows:

4. GRANT OF LICENSE

4.1 Subject to all of the terms and conditions of this Agreement, the Company hereby grants to the Franchisee, and the Franchisee accepts, for the term of this Agreement:

(a) A licence to operate a retail Store for the sale of the Merchandise only at the premises known as Bayshore Shopping Centre, 100 Bayshore Drive, Nepean, Ontario. The Franchisee will not carry on any business from the Store premises other than the Business and it will not pursue any sales other than from the Store premises without the prior written consent of the Company; … [Bold in original.]

[21] The franchise agreement contains many terms to which the parties agreed, including the payment of franchise fees and royalties. The franchise agreement is a 57 page document with, in this case, Schedules A, B and C in addition. It was entirely drafted by the defendant company. The franchise agreement is dated the 11th day of October, 2001, although the evidence is that it was not signed until approximately November 12, when Mr. Mr. Salah was in a training session provided by Timothy’s Coffees to their new franchisees.

[22] In the actual franchise agreement, Timothy’s World Coffee is described in the preamble as situated at Bayshore Shopping Centre, 100 Bayshore Drive, in the City of Nepean, in the Province of Ontario.

[23] Also signed was a document entitled Sublease Agreement, which recites that the company has entered into a head lease dated June 28, 2000 as tenant for certain premises, located at Bayshore Shopping Centre, 100 Bayshore Drive, Nepean, Ontario. This sublease obliges the franchisee to operate his franchise business in the Demised Premises, commencing on November 15, 2001 and ending on the earlier of the expiration or termination of the franchise agreement. This period included the initial term of the head lease plus any possible renewal terms less one day in accordance with and subject to the terms, covenants and conditions contained in the sublease and the franchise agreement and to the observance and performance by the franchisee of all the terms, covenants and conditions contained in the head lease to be observed and performed by the company with respect to the Demised Premises.

[24] Section 4 of this Sublease Agreement reads as follows:

4. EFFECTS OF FRANCHISE AGREEMENT AND GENERAL SECURITY AGREEMENT

This Sublease is to be read in conjunction with the Franchise Agreement and General Security Agreement made between the Franchisee and Company in their respective capacities as franchisor and franchisee, in the case of the Franchise Agreement, and Debtor and Creditor, in the case of the General Security Agreement, therein and all covenants and agreements on the part of the Franchisee/Debtor therein to be performed under the terms of the Franchise Agreement and the General Security Agreement shall be deemed to be included in this sublease and, in the event of a breach by the Franchisee/Debtor of any such covenant or the Franchise Agreement or General Security Agreement, the Company shall have the rights as if such covenants and agreements were specifically set out herein and such rights shall include the right to terminate this Sublease. In the event of any inconsistency or conflict between the terms of this Sublease and any terms of the Franchise Agreement, the parties hereto acknowledge that the Franchise Agreement shall be read in priority to and shall supersede any provisions contained in this Sublease. [Emphasis added.]

[25] Section 19 reads:

19. NOTICE

Any notice of default required or permitted to be given hereunder shall be either delivered personally or delivered by prepaid registered mail or by courier to the appropriate location. Any other notice, request, demand, approval, consent or other communication which the parties hereto may be required or permitted to be given hereunder shall be in writing and may be given to the party for whom it is intended by personal delivery, facsimile transmission or by delivering it to such party by courier or by mailing it by prepaid registered mail, in the case of the Company to:

TIMOTHY’S COFFEES OF THE WORLD INC.

400 STEEPROCK DRIVE

NORTH YORK, ONTARIO

M3J 2X1

FAX (416) 638-7670

and in the case of the Franchisee, to

ABDULHAMID MOHAMAD SALAH

1932 MONTCLAIR AVENUE

GLOUCESTER, ONTARIO

K1W 1H9

[26] The General Security Agreement was only signed by Mr. Salah’s company, 147.

[27] The Assignment and Guarantee was signed by Mr. Salah and 147. The Assignment and Guarantee document permits the assignor, Mr. Salah, to transfer and assign to the assignee, 147, all of its rights, title and interest, benefits and obligations under the franchise agreement, the sublease and the general security agreement. In this agreement, the assignor, Mr. Salah, unconditionally and irrevocably guarantees payment and discharge of all liabilities of the franchisee to the company.

[28] In this document, again, the notice specifically sets out that any communication, notice, demand, etc. required shall be in writing and given to the party for whom it is intended. In the case of the assignor, Mr. Salah, documents were to be sent to his home address at 1932 Montclair Avenue, Gloucester, Ontario K1W 1H9.

[29] The acknowledgment for the receipt of the training manual signed by Mr. Salah indicates a store location of Bayshore Shopping Centre.

[30] On October 31, 2001, the agreement of purchase and sale was sent to Mr. Salah. It describes the location as Bayshore Shopping Centre.

[31] When Mr. Salah’s lawyer had reviewed the documents, he wrote to Mr. Salah on November 2, 2001 expressing concern as to the terms of the agreement which Mr. Salah was considering, in particular, to the four year term with no right to renew.

[32] The lawyer’s comments were passed on to Timothy’s franchise development manager, Joanne Floropoulos, the person with whom Mr. Salah had been dealing with to this time. She answered the concerns expressed by the lawyer. In that letter she said:

Should we be able to renew our lease in the future we would extend the option to renew providing you are in good standing under the franchise agreement at the time of the renewal.

[33] She explained that a renewal fee in the amount of 50 per cent of the franchise fee, that is, $12,500, was normally charged on all of their franchise renewals. Since the term he would be entering into was a four year term she said:

We are willing to decrease the usual fee to half of the 50% of the franchise fee (i.e. $6,250).

[34] She also said at paragraph 3 of the enumerated points in her letter of November 5, 2001:

As has already been explained to you, franchisees are required to sign the franchise agreement in their personal names. They may assign the franchise agreement to a numbered company with the Assignment and Guarantee Agreement. Personal guarantees are required to ensure that the company will honour all of the terms and conditions of the franchise agreement as signed by the individual. Our relationship is with the individual and not with the company. Personal guarantees are required. [Emphasis added.]

[35] The evidence establishes that the authorization for the above offer of an option to enter a new lease came from David Black. When Mr. Salah next saw the documents, Schedule “A” was included. It provided that if the landlord and Timothy’s entered into a new lease for either five or more years or for less than five years, the franchise agreement would be amended and there would be certain discounts to fees which would apply. This is the term on which this claim is based.

[36] Mr. Salah relied on another document to support his contention that he had a right to an extension. In his evidence, he pointed to a schedule showing an evaluation of the equipment that he was purchasing for the store, which indicated a 10 per cent depreciation. Mr. Salah explained that normally all of the furniture or fixtures or signs have to be depreciated on the length of the franchise agreement so he understood that if it were to be depreciated by ten per cent per year it meant that the length of the franchise agreement was ten years. Mr. Salah took that to mean that Timothy’s had agreed that the franchise agreement would be extended for 10 years. In fact, that is the length of the new lease into which Timothy’s entered in the spring of 2005.

[37] Mr. Salah attended training at Timothy’s in Toronto from November 12, to approximately November 30 and opened the store on December 1, 2001. The franchise agreement and the sublease identify the date of November 15 as the opening date, while the agreement of purchase and sale specifies the date of December 1, 2001.

[38] Mr. Salah then operated the store with the occasional assistance of his wife, who might replace an employee, and for a period of time with one of his sons acting as a regular employee. Mr. Salah paid his son slightly more than the $8.00 per hour which he paid other employees. He paid his wife $1,500 per month in a pure income splitting scheme.

[39] Mr. Salah paid himself $2,000 per month. His evidence was that he worked extremely long hours, the store being open 7 days a week, Monday to Saturday 8:30 a.m. to 9:30 p.m. and Sunday from 9:30 a.m. to 6:30 p.m.

[40] The BDM for Timothy’s, Marie-Anne Parent, attended the store every three months. She looked to the quality of certain products, the cleanliness of the store and the clothing of the employees, appropriate presentation, the maintenance of the machines, etc.

[41] Ms. Parent’s evaluations continually placed Mr. Salah in the top rank of franchisees in the region. As a result of these excellent evaluations, Mr. Salah received several awards for his top-rated performance. He received an award for the year 2002 and one for 2003, and he was also given a watch at the convention for franchisees in 2004.

[42] However, during the course of the year 2003 an anchor tenant filed for bankruptcy in the Bayshore Shopping Centre. An I.G.A. was also left vacant. Mr. Salah testified there was a significant decrease in traffic, as tenants were not replaced throughout part of 2003 and 2004 and extensive construction was going on.

CREDIBILITY

[43] Before I turn to the issues, I must comment on the parties’ manner of giving evidence. Generally, I found the defendant’s witnesses to be credible, but I had considerable concerns about the evidence of Mr. Salah.

[44] Mr. Salah’s evidence contained many inconsistencies. In particular, his evidence that he no longer had a home and was now living in someone else’s home, became very troubling when the evidence revealed that, in fact, he had sold his house to his son and continued to live there. He drafted a document and ascribed it to the defendant. Words were mis-spelled “royality” and this evidence was rejected. He declared with great certainty that he had not received certain documents, when the evidence from his lawyer or from other reliable sources indicated that he had in fact received them.

[45] His evidence was at times very difficult to understand, as a result of his imperfect grasp of English and his difficulty explaining more abstract concepts, such as his use of the line of credit.

[46] I have examined Mr. Salah’s evidence with particular caution, but much of his evidence is borne out by the documents and the evidence of Mr. Black and Ms. Parent. Overall, any lack of credibility that I found was not determinative of the issues in this case.

ISSUES

[47] The issues can be identified by posing the following questions.

(a) Who is the franchisee: 1470256, Mr. Salah personally or both of them?

(b) What is the proper interpretation of this franchise agreement?

(c) Was there a breach of the franchise agreement?

(d) Is the Wishart Act an implied term of the contract? Does it constitute a separate and actionable duty in the event of a breach?

(e) Has either plaintiff proven their damages?

ANALYSIS OF ISSUES

(a) Who is the franchisee?

[48] The defendant submits that 147 is the only entity who is entitled to claim against them, because Mr. Salah assigned his rights to that corporation. The plaintiffs submit that Mr. Salah personally remains liable notwithstanding the assignment to his company. The plaintiff submits that therefore both 147 and Mr. Salah are franchisees.

[49] The disclosure document sent to Mr. Salah early in their negotiations says, at paragraph 6.13(f) of page 23,

Personal Involvement

The franchisee (or the principles in the case of an assignee corporation or one of the partners in the case of a partnership) must participate personally in the actual operation of its franchise and devote his or her full time attention and effort to the business. The franchisee must provide direct, on-premises, daily supervision of the operation and ensure the proper management of staff, inventory, and resources and that proper levels of customer service and operating standards are met.

Paragraph 6.20 (c) Topic C (at page 44) states:

Assignment to Assignee Corporation

As it is intended each franchisee enter into the franchise agreement in his or her personal capacity in the first instance, the franchise agreement gives the right to the franchisee to assign his or her interest in the franchise agreement, with the consent of the franchisor to an assigning corporation, provided the franchisee and/or the assignee corporation comply with all requirements which may be imposed by the franchisor to such assignment.

Franchise Agreement

[50] This document, as executed, is between Timothy’s and Mr. Salah in his personal capacity only.

[51] It states in part:

16.4 Notwithstanding anything to the contrary herein contained, the company shall, upon franchisees compliance with such requirements as may from time to time be prescribed by the company including the obtaining of all necessary approvals to the assignment of the lease or sublease of the store premises (before, including and after premises), consent to assignment of the franchisee’s right title and interest in and to this agreement, or sublease of the store premises and the property and assets owned and used by the franchisee in connection therewith and any other agreement then in effect between the franchisee and the company to a corporation which is wholly owned and controlled by the franchisee, subject to the following (provided that such assignment shall in no way release the franchisee from any liability under this agreement):

(a) contemporaneously with such assignment and thereafter upon the appointment or election of any person as director or officer of such corporation, such corporation shall cause each shareholder, director(s) and officer(s) of the corporation to execute a written agreement with the company under seal personally guaranteeing full payment and performance of the franchisee’s obligations to the company and individually undertaking to be bound, jointly and severally by all the terms of this agreement…

[Emphasis added.]

General Security Agreement

[52] The general security agreement is made out in the name of 1470256 only and not in Mr. Salah’s name personally. However, at paragraph 19 under the heading “Notice” the document refers to the debtor as Mr. Salah personally and gives both his home address and the Bayshore Shopping Centre as addresses at which he is to receive any notices. Mr. Salah signed the document in both his own name and as the person who can bind the company.

Sublease Agreement

[53] The sublease is made out between Timothy’s and Mr. Salah personally. 147 is not included.

Assignment and Guarantee

[54] This document is made out in the name of Mr. Salah personally as well as 147. Paragraph 18 of this document sets out that notices shall be sent to the assignor and lists Mr. Salah’s home address. On the signature page Mr. Salah signed both personally and as representative of the corporation. In this document the assignor, Mr. Salah personally, undertakes to meet all the obligations of the franchisee to the company and s. 4, entitled “Performance by Assignor” ends with this sentence:

Furthermore and without restricting the generality of the foregoing, the assignor shall continue to be personally bound by any and all provisions of the franchise agreement related to confidentiality and non-competition.

And further:

The Assignor shall not be discharged or released from this continuing guarantee, nor shall the liability of the Assignor be in any way affected as a result of any breach or non-fulfillment of this Agreement, the Franchise Agreement, the Sublease or the General Security Agreement by the Company…

[55] It is clear that the relationship intended was one directly between Timothy’s and the individual, in this case Mr. Salah. While the company granted to the individual the right to assign all obligations under the franchise agreement, they continued to be those of the individual personally, either directly or as a guarantor. As well, the permitted assignee corporation was confined to carrying on only one line of business, that of the franchisor, and the corporation had to be fully controlled by the individual. Mr. Black himself testified that the key part of the Assignment and Guarantee document was to ensure that the person is personally obligated.

[56] There is a longstanding common law rule, first stated in Foss v. Harbottle (1843), 2 Hare 461, 67 E.R. 189, holding that a shareholder does not have a cause of action for a wrong done to the corporation. The Supreme Court of Canada has affirmed this rule in Hercules Managements Ltd. v. Ernst & Young, 1997 CanLII 345 (S.C.C.), [1997] 2 S.C.R. 165.

[57] The separation between corporate entities and their shareholders is emphasized in the Ontario Business Corporations Act, R.S.O. 1990, c. B.16, which states the following:

Corporate powers

15. A corporation has the capacity and the rights, powers and privileges of a natural person.

Shareholders’ liability limited

92. (1) The shareholders of a corporation are not, as shareholders, liable for any act, default, obligation or liability of the corporation except under subsection 34 (5), subsection 108 (5) and section 243.

[58] According to The Law of Partnerships and Corporations, 2nd ed., by Anthony VanDuzer (Toronto: Irwin Law, 2003), the courts “rigidly adhere” to the separateness of the corporate personality. However, they do refuse to accept this separateness in some specific situations. For example, the courts have disregarded the separate existence of the corporation where the corporation is simply acting as an agent for another corporation, where the corporation has been incorporated with an illegal or improper purpose or where to fail to do so would yield a result which is “flagrantly opposed to justice”.

[59] This was set out in Kosmopoulos v. Consitution Insurance Co., 1987 CanLII 75 (S.C.C.), [1987] 1 S.C.R. 2, where the Supreme Court of Canada noted that the courts can ignore the separate existence of the corporation where not to do so would be create a result “flagrantly opposed to justice”.

[60] In 467515 B.C. Ltd. v. 478075 B.C. Ltd. And Martin Steward 2002 BCCA 270 (CanLII), (2002), 100 B.C.L.R. (3d) 244 (C.A.), sometime after a franchise agreement was entered into, it was amended to replace the name of the franchisee with that of a corporation. According to the franchise agreement, there was no release of the individual from his obligations and the amended agreement provided that all terms and conditions of the original agreement remained.

[61] That case involved the non-payment of franchise fees by the franchisee, which the franchisor had taken action to recover. The franchisee defended part of the action by relying on the assignment to the corporation to absolve himself, as individual, from liability.

[62] The Court held that the evidence led to the conclusion that “the franchisor did not intend to accept the corporation in the place of Mr. Steward for all purposes”. The Court specifically referred to the franchise agreement which “contemplated continuation of Mr. Steward’s obligations” in the event he assigned the contract to a corporation.

[63] In the case at bar, the same facts exist, but in reverse, in that we are dealing with enforcing rights rather than defending against liabilities. I see no reason why the same reasoning should not apply. Here, Timothy’s has made it abundantly clear that, despite the assignment, their relationship is with the individual and he continues to have liabilities and obligations.

[64] The Assignment and Guarantee document provides:

The Assignor shall not be discharged or released from this continuing guarantee, nor shall the liability of the Assignor be in any way affected as a result of any breach or nonfulfillment of this Agreement, the Franchise Agreement, the Sublease or the General Security Agreement by the Company…

[65] In 467515 B.C. Ltd. v. 478075 B.C. Ltd., supra, the B.C. Court of Appeal agreed with the trial judge that both the corporation and the individual plaintiff were to be treated as one.

[66] On the evidence before me, I conclude that the defendant has maintained a relationship with both the individual franchisee and its assignee corporation. It never intended to accept the corporation in the place of Mr. Salah for all purposes. Accordingly, both have rights to enforce against Timothy’s as they are both franchisees.

(b) Interpretation of the franchise agreement particularly of Schedule “A”

[67] Schedule “A” to the franchise agreement states:

SCHEDULE “A”

Attached to and forming part of the Franchise Agreement (the “Agreement”) between Timothy’s Coffees of the World Inc. (the “Franchisor”) and Abdulhamid Mohamad Salah (the “Franchisee”) relating to the Timothy’s World Coffee Bayshore Shopping Centre, 100 Bayshore Drive, Nepean, Ontario (the “Location”).

Notwithstanding the terms of the Agreement, the parties agree to amend the Franchise Agreement as follows:

1) Should the Franchisor enter into a new lease term with the Landlord, and provided that the franchisee is in good standing under the Franchise Agreement, there will be no franchise fee upon entering into the new lease term, should the lease term be less than five (5) years.

2) If Timothy’s World Coffee is able to secure a lease term greater than five years at the expiry of the current lease (September 1, 2005), and provided that the franchisee is in good standing under the Franchise Agreement, the Franchisee will be granted the new lease term at a franchise fee equal to fifty percent (50%) of the then current franchise fee.

3) There will be a warranty on the existing equipment for a total of ninety (90) days from the take over date.

[68] Mr. Black was categorical in his evidence that the franchise agreement is co-terminous with the sub-lease. The sub-lease was for the particular third floor location. Therefore, the option to renew in Schedule “A” was only for that third floor location.

[69] It is submitted by the defendant that the interpretation of the franchise agreement to include a right of renewal would lead to a commercially absurd result. The defendant points out that many important questions governing the parties’ relationship would remain unanswered. For example:

(a) who was obligated to pay for the costs associated with the construction of the Winners location?

(b) since the corridor in which the Winners location is situated was not even in existence at the time of contract formation, how can the parties, in the context of that fact, have contemplated a renewal for the Winners location? and

(c) what are the terms that would have governed the parties relationship during the intervening period from September 30, when the food court location’s head lease expired, until the opening of the Winners location in late November 2005?

[70] I agree with the view, set out in 3869130 Canada Inc. v. Chenier 2008 ONCA 396 (CanLII), (2008), 239 O.A.C. 137 (C.A.), that an objective approach to the question of the construction of the commercial contract best serves the needs of commerce.

[71] In a case such as this, where several different agreements essentially form components of a larger transaction, where each agreement is entered into on the faith of the others being executed and where it is intended that each agreement form part of a larger composite whole, assistance in the interpretation of any particular agreement may be drawn from the related agreements.

[72] If it is necessary to examine the context in which the written words were used, then that examination must begin with consideration of the parties who negotiated the agreement. On the one hand, we have an extremely knowledgeable vice-president of a large, successful company, and on the other hand, we have a man searching for a business opportunity who has some background in commerce and accounting but who has been involved in endeavours which were not successful. The Wishart Act was specifically enacted so as to correct the imbalance which existed in a situation like this one.

[73] With respect to the location, in all of the documents executed by the parties, none listed or defined the premises in any other way but Bayshore Shopping Centre at 100 Bayshore Drive in Nepean. The franchise agreement, the general security agreement, the sublease, and the assignment and guarantee document all refer to certain premises located at Bayshore Shopping Centre, 100 Bayshore Drive. There is one document, the Bayshore Mall Site Plan, which has the number and the location expressed in a more particularized way, referring to the third floor locale.

[74] It is not reasonable to expect that the franchisee would have deduced from that one document that only the one specific site was covered by Schedule “A”.

[75] Whatever the corporate policy or intention, the documents are clear and they refer to the Bayshore Shopping Centre at 100 Bayshore Drive. That is what the parties agreed to. It may be argued that an ambiguity arises from the fact that the mall site plan describes the location in the third floor food court. If this is the case then the contract must be interpreted contra proferentam. However, this interpretive tool is to be used only when all other rules of construction fail to enable the court to ascertain the meaning of a contract.

[76] I find there is no ambiguity in the franchise agreement.

[77] The defendant is correct when he points out that many terms of a new agreement were unknown. Some terms, such as the reduction to the franchise fee, were specifically set out, but others would, in the normal course, have to be negotiated.

[78] The defendant submits that the evidence shows that “the parties by their conduct clearly regarded Schedule “A” as a technicality”. It submits that Mr. Salah considered these concerns to be “minor.” No inference can be drawn from his opinion or courteous wording. It is not open to the franchisor to say that what it drafted is not what was intended.

[79] The parties never agreed that their agreements and various documents were “specific to the food court location”. It is very clear that all refer to the Bayshore Shopping Centre at 100 Bayshore Drive.

[80] In applying rules of contract interpretation to a franchise agreement, it must be noted that there are significant differences between a franchise agreement and an ordinary commercial contract.

[81] A franchise agreement is a contract of adhesion. It involves, in essence, a “take it or leave it” position adopted by the franchisor. Therefore, this type of contract is subject to being interpreted against its author, in this case, the franchisor, as was the case in Aamco Transmissions Inc. v. Kunz reflex, (1991), 97 Sask. R. 5 (Sask. C.A.) at para. 7. In that case, the Saskatchewan Court of Appeal, referring to Chitty on Contracts, 24th ed. at p. 334, stated that a franchise agreement is one which is subject to being interpreted against the grantor.

[82] I conclude, on the basis of all the evidence, that the proper interpretation of Schedule “A” is that the premises subject to the option to amend the franchise agreement applied to the Bayshore Shopping Centre in general and not specifically to the existing third floor location.

(c) Was there a breach of the franchise agreement?

[83] To determine if there was a breach, facts respecting the treatment of Schedule “A” must be examined.

[84] Mr. Salah began communications with the franchisor in approximately June of 2004 in order to determine what would happen when the existing lease ran out. Mr. Salah approached Mr. Black at a convention and reminded him to start negotiating the lease for Bayshore. He heard nothing further during 2004.

[85] On October 7, 2004, Mr. Gauthier of Ivanhoe Cambridge acting for the Bayshore Shopping Centre, wrote to Mr. Black asking him to consider the proposition that Timothy’s relocate. Mr. Gauthier pointed out that otherwise the rent would go up by approximately $15,000 and that if Timothy’s agreed to move to the second floor, the costs would be reduced for the next ten years.

[86] On November 23, 2004, Mr. Black, not satisfied with this offer, wrote back and raised the idea of a kiosk operation on the second floor or elsewhere in the mall.

[87] On November 26, 2004, Mr. Gauthier wrote back and said that Ivanhoe Cambridge did not want a coffee kiosk with seating in the mall and that the proposal they had made would reduce rent for Timothy’s by $22,000 in the first year. He again pointed out that “rents in the food court will not work for you”. No whisper of any problem with the current location was passed on to Mr. Salah.

[88] In January 2005, Mr. Salah phoned Mr. Black and left a message reminding him about the lease and the need for the re-negotiation of the lease. He received no return phone call.

[89] In February 2005 Mr. Salah called again and left a message for Mr. Black. Mr. Black did call back to say they were still negotiating the lease.

[90] On February 8, 2005 Mr. Gauthier sent yet another proposal to Mr. Black pointing out that the gross rental reduction would be $30,000 per year and adding “[t]he food court in our opinion will not be a viable option for your franchisee”. No indication of the direction of the landlord’s thinking and of his continued resistance, if not refusal, to consider a renewal of the third floor location was passed on to Mr. Salah.

[91] On March 17, 2005, an employee of Timothy’s inadvertently sent Mr. Salah a copy of a proposal for a different location. Mr. Salah, therefore, albeit accidentally, received some information about the proposed second floor locale.

[92] On March 20, 2005, Mr. Salah and Ms. Marie-Anne Parent went to see the proposed new location. Mr. Salah was concerned about the location and testified that “[i]t is far from the traffic and it is no food court and it is separate between the retail stores”. He did not like it.

[93] On March 29, 2005, Mr. Black wrote to Mr. Gauthier and again raised the idea of the kiosk. He was still “negotiating”, as he informed Mr. Salah in February. However, he admitted in cross-examination that he knew by January that they could not stay at the third floor location.

[94] On April 1, 2005, Mr. Gauthier, on behalf of the landlord finally confirmed that there would be no kiosk and advised that the old “Timothy’s” space in the food court would be leased to another tenant.

[95] On April 5, 2005, Mr. Black sent Mr. Salah the exchange of e-mails between himself and the Shopping Centre representative containing the above noted information. He also e-mailed some of his employees including Marie-Anne Parent that: “I have informed Abdul. He has problems listening or doesn’t understand”. He made no effort to ensure Mr. Salah understood.

[96] On May 10, 2005, Mr. Black visited the Bayshore Shopping Centre and was advised of the excellent results since the presence of a new tenant, Winners, including a 20 per cent increase in traffic and the significant surpassing of anticipated sales by that new tenant. Mr. Black e-mailed Bayshore Shopping Centre representatives asking them to refrain from passing on any information about the second floor location to Mr. Salah.

[97] On May 15, 2005, Mr. Salah called Mr. Black and was told that he and the landlord were still negotiating. By then, the franchisor had received an application from another potential franchisee.

[98] By May 22, 2005, apparently accepting the inevitable Mr. Salah was doing sketches of designs for the location on the second floor. Mr. Salah was able, for the first time, to actually see the specific site, as the on-going construction had prevented access up to that point.

[99] On May 29, 2005, Mr. Salah made another sketch of what he hoped to have in place on the second floor.

[100] On June 8, 2005, Mr. Lou Falliko called Mr. Salah and made it clear that Timothy’s would not be permitted to have a kiosk and that Timothy’s had taken the other site.

[101] Mr. Salah was asked if he wanted to have the store on the second floor and he told them that he would take it. Mr. Fallico advised him that it would cost him $350,000.

[102] Mr. Salah then asked to speak with Mr. Black. Mr. Black phoned him within minutes and asked him again whether he wanted the store. Mr. Salah answered again that he would take it and was told that it would cost him $350,000.

[103] This cost shocked him. Mr. Salah testified that he told them he had inventory, equipment and a reduced franchise fee as per Schedule “A” and he would need simply to pay for the construction and decoration, but he was told that he had to buy it as a brand new store. Mr. Salah had paid $225,000 to Timothy’s. That amount was made up of $25,000 for the franchise fee, $113,500 for commercial goodwill and $86,500 for hard assets such as equipment and inventory.

[104] He also said that he could not pay $350,000 and was told that Timothy’s would be sending him a letter. A letter dated June 8 was delivered by courier on Friday, June 10, and it reads as follows:

Re: Lease Renewal for Timothy’s World Coffee - Bayshore Shopping Centre, Ottawa, Ontario

As you are aware we’ve been in extensive negotiations with the landlord of Bayshore Shopping Centre to renew the lease in our existing location. Unfortunately we have not been successful in securing the existing location however we’ve now committed to leasing the space outside the “Winners” location on the second level. We will be entering into a new lease for this space directly with the landlord.

We have discussed this location with you on several occasions and believe it would not be a good investment or opportunity for you as the sales would need to be significantly higher than your existing location sales in order for the loan to be paid back. We feel this venture requires a highly motivated and extremely affluent individual who is determined to grow sales in order to make the economics of this situation work for them. It will be a big endeavour to build the sales and grow them to a degree that would ensure that the occupancy costs are at an acceptable level.

Please be advised that in view of recent developments, your term for the existing location will expire effective September 30, 2005. We will advise in due course with respect to the landlord’s requirements of termination closer to that date. We thank you for your commitment and service in being a Timothy’s World Coffee franchisee. Should you have any questions or concerns please do not hesitate to contact me directly at (416) 638-3333 extension 291.

Yours very truly,

J. Black

Senior Vice-President, Development

[105] Also on June 8, 2005, an e-mail sent by David Black to other people in his company indicated that he wanted Mr. Salah to clearly understand that “we are opening a new location with a new lease and with a new franchise owner”. He stated: “I told Abdul that we were not going to offer the new location to him nor were we going to enter into a new franchise agreement with him.”

[106] I find as a fact that $350,000 was mentioned in conversations that Mr. Salah had with Mr. Fallico and Mr. Black. I accept Mr. Salah’s evidence on this point. It is confirmed by the notes of Marie-Anne Parent. Mr. Black does not remember saying this. According to both experts the price to the new franchisee was $264,460.

[107] On June 13, 2005, Mr. Salah called Mr. Black. He received no return call. The next day he also left a message and again received no return call. The following day, Mr. Fallico telephoned Mr. Salah and set up an appointment for him to meet Mr. Black in Toronto at the head office on the June 17, 2005.

[108] Mr. Salah went to the meeting with examples of promotions and samples of the work he had done and with a view to determining the reason for the termination and to see if they could solve the problems. He knew his sales had decreased over time. The sales in 2002 were $480,000 but they declined to $407,000 by 2004, the last full year of operation. The anchor tenant referred to earlier had vacated and there were other vacancies in the mall. As noted above, the evidence is that there was an increase in traffic of 20 per cent after a new tenant was installed and the construction completed. The new location would benefit from this improvement.

[109] At the meeting in Toronto Mr. Salah pointed out Schedule “A” and his view of the option of renewal at Bayshore Shopping Centre, 100 Bayshore Drive.

[110] The information from Mr. Black was simply that the franchise agreement would be terminated. In his evidence, he pointed to the decline in sales, to the statement made by the franchisee that he did not like the location and to the fact that the franchisee did not wish to pay the required price but wanted to pay a maximum of $50,000. I do not accept this evidence as cause for the company’s decision. As to the $50,000 cost figure, I find it was merely a negotiating stance by Mr. Salah. The defendant was aware since 2003 of the reduction in sales, knew of vacancies, expressed no concern and gave the franchisee awards.

[111] The satisfaction of the company with Mr. Salah, throughout the term is revealed by the awards received and by some of the comments from Ms. Parent throughout her evaluations:

• “well done”

• “an A location”

• “service is excellent”

• “the caring and passion for the product is second to none”

• “the store and staff are amazing”

• “keep up the fantastic job”

• “thank you for all the hard work”

• “outstanding”

• “the passion for quality is reflected in the 98.5% mark I have scored you.”

[112] Mr. Salah’s evidence is that he was shocked and upset at this turn of events, and this is confirmed by the evidence of Ms. Parent. She continued to come to the store for regular inspections and each of her evaluations continued to be most positive. One of her evaluations noted that while Mr. Salah was upset, he continued to be professional with her.

[113] The evidence persuades me that Timothy’s has breached the franchise agreement by virtue of its failure to offer Mr. Salah the option to amend the agreement for the new lease in the new location as provided in Schedule “A”.

[114] The only option put to Mr. Salah was to move to a new location as if Schedule “A” did not exist, for a price that was dishonest and apparently intended only to dissuade him.

(d) Does the Wishart Act apply and, if so, does a breach constitute a separate and actionable duty?

[115] The Wishart Act is specifically designed to prevent abuses by the powerful, sophisticated franchisor by requiring good faith and fair dealing. Section 3 of the Arthur Wishart Act states:

Fair dealing

3.(1) Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement.

Right of action

(2) A party to a franchise agreement has a right of action for damages against another party to the franchise agreement who breaches the duty of fair dealing in the performance or enforcement of the franchise agreement.

Interpretation

(3) For the purpose of this section, the duty of fair dealing includes the duty to act in good faith and in accordance with reasonable commercial standards.

[116] Good faith has been defined as permitting one party to act in its own interest but requiring it to take into consideration the interests of the other party; see Weiler, J.A.’s reasons in Shelanu Inc. v. Print Three Franchising Corp. 2003 CanLII 52151 (ON C.A.), (2003), 64 O.R. (3d) 533 (C.A.) at paras. 64-66. Acting in good faith however does not need to meet the standards of a fiduciary duty where one is required to act in the interests of the other party.

[117] Iacobucci J., in Wallace v. United Grain Growers [1977] 3. S.C.R. 701, noted that the employment context that creates a duty of good faith is also present in a franchisor-franchisee context. He stated that the relationship between a franchisor and a franchisee is not one between equals. The franchisee, like the employee, is unable to negotiate more favourable terms. The inequality of power continues during the relationship, as the franchisee must buy certain equipment or products and be subject to supervision and inspection. As a result, the franchisor must be held to a duty of good faith and fair dealing.

[118] I find that the manner in which the defendant franchisor dealt with the franchisee during the course of the contract, specifically as of approximately June of 2004 and as the end of its term approached, was not fair and does not constitute good faith.

[119] The franchisor is aware of the need for a franchisee to have ample notice of any renewal as the franchise agreement requires advance notice not more than 9 months and not less than 6 months to allow both parties to plan in an orderly manner for any transition.

[120] Throughout especially 2005, Timothy’s management did not communicate with its franchisee: it neglected to share critical information and did not return calls, even when the BDM, Ms. Parent, sought to find out what was happening at the Bayshore Shopping Centre. In Shelanu Inc., supra at para. 78, the Ontario Court of Appeal specifically stated that the duty of good faith requires a prompt response to a request from the other party.

[121] I find that, not only did the franchisor not communicate, it actively sought to keep the franchisee from finding out what was going on with the lease that he expected to be renewed and that was in fact renewed.

[122] The defendant knew that this franchise was the full time employment of the franchisee, yet they actively misled him until June 2005, some four months before the end of the term.

[123] The defendant states it would be absurd to give credence to the plaintiffs’ Schedule “A” interpretation since many exact terms were not agreed upon. While I accept that the terms of the renewal were not known, on the evidence there was a willing franchisee with the financial ability to pay. Whether there would have been agreement on all terms is unknown, but Mr. Salah was prevented from having the option to even consider these, due to unanswered questions, a deliberate withholding of information and, finally, a gross falsehood as to the price he would have to pay.

[124] I find the defendant has breached its duty of good faith.

[125] The corollary question is what flows from this breach of the duty of good faith. That is, does it constitute a separate and actionable duty? I find that it does and will deal with this in damages.

DAMAGES

Breach of Contract

[126] In light of the findings above, I turn now to the reports and evidence of the experts as to the quantification of losses. The two witnesses on this point are chartered business valuators. The defendant’s expert, Mr. Hoare, was given a more restricted mandate. He was to calculate only the loss of profits of 147. This was in keeping with the defendant’s position that, having assigned all his rights to 147, Mr. Salah could not claim any damages arising from the breach of contract alleged by 147.

[127] The defendant relies on Walters v. Royal Bank of Canada, [2000] O.J. No. 702 (C.A.), to claim that Mr. Salah

…cannot assert as a personal cause of action, claims of the corporation for its losses. Nor can he, as shareholder of the corporation, claim those losses that he suffered indirectly as a result of the losses of the corporation.

[128] The plaintiffs’ expert, Mr. Clarke, was instructed to consider the company and Mr. Salah collectively. This is in accordance with the plaintiffs’ position and my earlier finding on this point. The separate entities principle of corporate law should not be applied where it would yield a result too flagrantly opposed to justice or would defeat the desired effect of legislation: see Kosmopoulos, supra.

[129] Mr. Hoare’s conclusion, briefly stated, was that the company had a negligible future loss of $7,000 to $8,000 and no past loss given its losses of $44,000 over four years of operation. On the other hand, Mr. Clarke concluded that the past loss of income was $153,900; and the estimated future loss was in a range of $230,400 to $395,400. This future loss was calculated for a period of ten years, the usual term of a Timothy’s franchise and the actual term of the new franchisee’s agreement with Timothy’s.

[130] Mr. Clarke’s report states that he chose the loss of income model because:

…it is our view that Mr. Salah would have withdrawn substantially all of the available annual income to support him and his wife.

… Accordingly, we have quantified the loss of income to Mr. Salah based on the amount of income he would have been able to draw from the business had the alleged breach not occurred.

[131] Despite the different mandates and conclusions, the experts are only apart on four issues:

1) The appropriate figure for gross margins

Clarke - 66.2%

Hoare - 65%

[132] In 2002, the gross profit margin of the franchise was 72 per cent. It was 64.6 per cent in 2003, 63.6 per cent in 2004 and 64.6 per cent in 2005. Mr. Clarke averaged the margin to 66.2 per cent. Mr. Hoare ignored the 72 per cent year as an “anomaly,” and he calculated a margin of 65 per cent. This was the margin predicted by the company. However, he did not take into account the high rate of vacancy over the three years following a major tenant declaring bankruptcy and closing. Nor did he consider the impact on sales while there was extensive construction.

[133] I prefer the margin used by Clarke. However, I note that he failed to consider the one month of operation in 2001. Accordingly, I find that the gross profit margin should be recalculated using the method of Mr. Clarke, but including the month of December 2001.

2) The extent of Ms. Mahmoud’s involvement

[134] This factor affected the calculation of operating expenses and overhead. According to Mr. Hoare’s report, if Mrs. Salah’s spouse Ms. Mahmoud was paid wages for actual services performed, then the costs of operation would increase and would equal 28.2 per cent of sales.

[135] Mr. Clarke considered that Ms. Mahmoud’s wages were purely a method of income splitting and the appropriate percentage was then 25.2 per cent. In cross-examination Mr. Hoare accepted that if Mr. Clarke’s assumption was correct, then 25.2 per cent was appropriate.

[136] In my view, while Ms. Mahmoud was present occasionally, she was not being paid legitimate wages for her services. She was the recipient of income-splitting.

[137] Therefore, the correct percentage is 25.2 per cent of gross revenues as set out in Mr. Clarke’s report.

3) Inventory loss of $16,000

[138] Mr. Clarke included a loss of inventory of approximately $16,000 in his calculations of loss. Mr. Hoare concluded that this was the approximate normal level of inventory kept by Mr. Salah, and that whenever the franchise agreement was terminated, there would have been the same level of non-salvageable inventory.

[139] I am of the view that this submission is sound and I disallow this item as a loss.

4) Deduction for management remuneration

[140] Mr. Hoare testified that a management salary for Mr. Salah must be accounted for in determining the lost profits of 147. He obtained his information from a statistical data bank and determined what an arms-length company would pay for a manager to operate the franchise outlet. The figures he used started at approximately $30,000. This would mean that the cost to the company would increase, thus its profits would decrease and its losses would increase, making damages minimal.

[141] However, nowhere does Mr. Hoare calculate the loss to Mr. Salah of this income stream. This omission demonstrates why it would be against the interests of justice to maintain the company and the individual as separate entities in this particular case. Mr. Hoare testified as to the different factors that would be taken into account in quantifying income losses – such as possibility of lay off, overtime or past periods of absenteeism. These are all factors which I find to be irrelevant to the consideration of contingencies here.

[142] In any case, Mr. Hoare remained of the view that no matter how calculations were made, the net losses of the company of $44,000 over three years, would still make the company’s losses zero. This equated loss with profitability only, and I do not accept that principle. Mr. Salah, the individual, lost the opportunity to take a location which would have permitted him to continue a business that had supported his family for four years.

[143] According to Mr. Appotive’s submissions, the total of Mr. Hoare’s figures for the management salary from 2005 to 2008, found in Schedule 4Aof his Report, is equal to $104,675. Totalling the same line item from Schedule 5A until 2015, he arrived at the sum of $285,500. The submission is that, after applying the .75 per cent discount rate pursuant to Rule 35.09 of the Rules of Civil Procedure, one ends up with a stream of income, past and future, totalling $355,000.

[144] The submission was that comparing that result to Mr. Clarke’s figure of $358,000, it is evident that the inclusion or exclusion of either a theoretical manager’s salary or a loss of income to Mr. Salah is the real difference between a substantial loss by the collective 147/Salah or minimal loss by 147 only. Having found that the two entities can be treated as one, I assess the damages on the basis of Mr. Clarke’s report and evidence.

[145] I award damages for past loss of income based on Mr. Clarke’s total of $153,899. This amount must be recalculated to include the month of December 2001 in the calculation of average sales and to omit the $16,000 inventory loss.

[146] Concerning the future loss calculations, the evidence at trial was that in November of 2008 there was a turbulent economic climate previously unheard of that would justify increasing the discount rate to 19.5 per cent (according to Mr. Clarke) or to 25 per cent (according to Mr. Hoare). However, because of the wide fluctuations that are possible, I find that it is more appropriate to use a historical range, and that is from 15 per cent to 18 per cent. I choose the highest rate. The discount rate to be applied to the aggregate present value of that loss of future income is therefore 18 per cent, which leads to a future loss amount of $230,358, subject to deductions for contingencies.

[147] Mr. Clarke did consider the age of Mr. Salah as a contingency but other contingency deductions are appropriate. I find that a general contingency deduction of 15 per cent for factors such as illness or other contingencies of life is appropriate.

[148] Since I have accepted the loss of income method for calculation of past and future loss, it is appropriate to consider whether Mr. Salah has mitigated his loss.

[149] The evidence is that in 2006, Mr. Salah entered into another business venture that proved to be disastrous. The defendant claims that, at the most, any damages for which it is found responsible should go only to the date of his taking part in that enterprise. I decline to accept that submission because, overall, I am persuaded on a balance of probabilities that Mr. Salah has done what he could to mitigate his losses, given his inability to work in any related business and that he has not been successful in so doing. The defendant has not discharged its burden to prove otherwise: Red Deer College v. Michaels, 1975 CanLII 15 (S.C.C.), [1976] 2 S.C.R. 324. As S.M. Waddams said of the duty to mitigate in The Law of Damages (Toronto: Cartwright Group Ltd., 2008),

In case of doubt, the plaintiff will usually receive the benefit, because it does not lie in the mouth of the defendant to be over-critical of good faith attempts by the plaintiff to avoid difficulty caused by the defendant’s wrong.

[150] I am not satisfied that Mr. Salah’s award should be reduced on the basis of failure to mitigate. My view is that the company is responsible for the losses flowing for the period that would have been the term of the lease and franchise agreement, which was granted to another franchisee.

[151] I award damages for future loss of income based on Mr. Clarke’s total of $230,358. A deduction of 20 per cent for factors such as illness or other contingencies of life must be factored in and the amount recalculated.

Damages for Breach of the Duty of Good Faith and for Mental Distress

[152] The conduct addressed by an award of damages under this head is the total non-responsiveness of Mr. Black and head office to Mr. Salah’s repeated requests for information. As a result of this behaviour, Mr. Salah was unable to get any information as to the possible outcomes being anticipated in the renewal of the lease. As well, the counselling of secrecy on the matter and the lack of honesty in the price quoted to Mr. Salah was seriously unacceptable. Since the corporation is a sophisticated one and the plaintiff was a vulnerable franchisee, it is important to assess damages at a level which will prevent the franchisor from failing in this duty in the future.

[153] The plaintiff also claims damages for mental distress arising out of the breach of contract. There is little medical evidence available as to Mr. Salah’s medical state at the date of trial, but it was clear that he had undergone a variety of tests, and the evidence was that he had suffered two fainting spells since hearing that he was not going to be given an amended franchise agreement at the Bayshore Shopping Centre. I accept the evidence of Mr. Salah and his wife that he was ill, and this is buttressed by the note made by Ms. Parent during a store visit on August 23, 2005 that Mr. Salah’s wife had opened the store for the first time in four years and that Mr. Salah was ill with high blood pressure and could not sleep or eat.

[154] Since Wallace, supra, general damages for mental distress can be awarded in wrongful dismissal cases, even where an independent actionable wrong is absent. The analysis of damages for mental distress had historically been dependant on the existence of such an independent actionable wrong. Given the comments of the Court of Appeal in Shelanu Inc., supra, where the Court spoke on the theme of employee vulnerability in Wallace, supra, and then applied that concept to the franchise contract, damages for mental distress can now be awarded without an independent actionable wrong. In this case, however, there is an independent actionable wrong, the breach of the duty of good faith, and therefore the factors listed in Hadley v. Baxendale [1843-60] All E.R. 461 at 465 are satisfied.

[155] Given that the franchisor was aware that Mr. Salah was the full-time operator of the store, with his wife assisting, it was reasonable to assume that if the franchisor’s conduct left him without the business, he would be unable to support his family. Further, he would be restrained, according to the terms of the franchise agreement from employment with any competitor for a period of two years. Given his documented “passion” for the product, as noted by Ms. Parent, and given the restraint clause, it is evident that he would be seriously impacted by being unable to “amend” the agreement as provided in Schedule “A”.

[156] Mental distress should have been anticipated by the defendant who breached its duty of good faith. In my view, the claims under this head are subsumed one into the other. I find an appropriate amount for the breach of the duty of good faith, with a modest apportionment for mental distress, to be $50,000.

Punitive Damages

[157] According to the Supreme Court of Canada in Whiten v. Pilot Insurance Co., 2002 SCC 18 (CanLII), [2002] 1 S.C.R. 595 at para. 35, punitive damages in the commercial arena are awarded only where there has been “malicious, oppressive and high handed” misconduct that “offends the court’s sense of decency”. In Katotikidis v. Mr. Submarine Ltd. 2002 CanLII 36809 (ON S.C.), (2002), 29 B.L.R. (3d) 258 at paras. 9-10, the Ontario Superior Court of Justice held that these damages are generally awarded where the misconduct would otherwise go unpunished. Further, when awarded, they should be proportional to such factors as the harm caused, the degree of misconduct, the relative vulnerability of the plaintiff and any advantage or profit gained by the defendant.

[158] The conduct of the defendant in this case did not reach the level of the misconduct described above. In addition, the award of damages for the breach of good faith is intended to deal with the misconduct as found. Double recovery or double punishment would not be appropriate.

[159] Accordingly, this claim is dismissed.

ORDER

[160] I award damages to Abdulhamid Salah and 1470256 Ontario Inc. collectively in the following amounts:

a) Damages for past loss of income based on Mr. Clarke’s total of $153,899. This amount must be recalculated to include the month of December 2001 in the calculation of average gross revenues and to omit the $16,000 inventory loss;

b) Damages for future loss of income based on Mr. Clarke’s total of $230,358. A deduction of 15 per cent for factors such as illness or other contingencies of life will also be applied.

c) Damages of $50,000 for breach of duty of good faith and mental distress.

[161] Damages for past and future loss of income due to the breach of contract are to be recalculated by one or both experts, as per my order. If the parties are unable to agree, I may be spoken to.

[162] If the parties are unable to agree on costs, they may submit brief written submissions: the plaintiff within 14 days and the defendant 14 days thereafter.

_______________________________________

The Honourable Madam Justice M. Métivier

Released: October 26, 2009

Court File No. 05-CV-32423

ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

ABDULHAMID SALAH and

1470256 ONTARIO INC.

Plaintiffs

- and –

TIMOTHY’S COFFEES OF THE WORLD INC.

Defendant

DECISION

Métivier J.

October 26, 2009