COURT FILE NO.: CV-09-7997-00CL

DATE: April 28, 2009

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

QUIZNO’S CANADA RESTAURANT CORPORATION and QUIZNO’S CANADA REAL ESTATE CORPORATION

Plaintiffs

- and -

1450987 ONTARIO CORP., 2036249 ONTARIO INC., 2036250 ONTARIO INC., THOMAS JOHNSON and DOUGLAS JOHNSON

Defendants

COUNSEL:

Geoffrey B. Shaw, Eunice Machado, and Timothy Pinos for the Plaintiffs

David Sterns and Sam Hall for the Defendants

HEARING DATES: April 20, 21, and 22 2009

REASONS FOR DECISION

PERELL, J.

Introduction and Overview

[1] This is a breach of contract action between a restaurant franchisor and three of its franchisees. As a background factual matter, the relevance of which is disputed, this contract action has been connected to a class action in which one of the franchisees has been nominated as the representative plaintiff. In that action, it is alleged that the franchisor has conspired to overprice supplies to all its franchisees. As it happens, in March 2008, I dismissed the motion for certification. (See 2038724 Ontario Ltd. v. Quizno’s Canada Restaurant Corp., [2008] O.J. No. 833 (S.C.J.).) My judgment, however, was appealed, the appeal was argued in November 2008, and the judgment of the Divisional Court was released on April 27, 2009. With a dissenting judgment, the court granted the appeal and conditionally certified the class action. I will return to the matter of the connection of the contract action with the class action.

[2] In the contract action, the franchisor, and a co-plaintiff, is Quizno’s Canada Restaurant Corporation (“Quizno’s Canada”), which oversees a chain of fast food restaurants across Canada that sell toasted submarine sandwiches. There are around 450 Quiznos restaurants in Canada and the parent corporation oversees a considerably larger number of Quiznos restaurants in the United States. Related to the Canadian franchisor is the co-plaintiff, Quizno’s Canada Real Estate Corporation. This corporation leases properties for Quiznos restaurants, and it is the landlord for one of the three defendant franchisees in the contract action.

[3] The co-owners of the three franchises are the defendants, Mr. Douglas Johnson and his nephew, Mr. Thomas Johnson. The three franchisees joined as defendants are: (1) 1450987 Ontario Corp. (“the Dundas St. Restaurant,” sometimes referred to as the Trafalgar Restaurant); (2) 2036249 Ontario Inc. (“the Third Line Restaurant”); and (3) 2036250 Ontario Inc. (“the Cornwall Rd. Restaurant”). The Johnsons are guarantors under the franchise agreements.

[4] The Dundas Street and Cornwall Rd. Restaurants have carried on business as Quiznos restaurants since April 2001. The Third Line Restaurant has been a Quiznos franchisee since March 2003. The Cornwall Rd. Restaurant is one of the proposed representative plaintiffs in the class action, which has been brought on behalf of all the Canadian Quiznos franchisees.

[5] In the breach of contract action, Quizno’s Canada, amongst other things, asks the court to help it close down three fast-food restaurants and to restrain the three franchisees and their owners from operating a similar restaurant business within an eight-kilometer radius of the franchisees’ current locations in Oakville, Ontario.

[6] By way of their response to the franchisor’s motion – but without having delivered a counter-motion until the last minutes of three days of hearings – the franchisees seek an order that would restrain Quizno’s Canada from disrupting the status quo pending the trial and that would continue the terms of an existing interim interlocutory order.

[7] I shall have more to say about the franchisees’ request for substantive relief by way of a defence to a motion but foreshadow to say that this approach yielded rhetorical fireworks during the argument of the motion not to mention a due process problem.

[8] When, during the argument, the three franchisees appreciated - apparently for the first time – that their aspiration for an order maintaining the status quo might be stillborn, they offered to deliver a notice of motion without any supporting material other than the record before the court. The franchisor objected, but the late arriving notice of motion arrived, and thus, I must solve this added problem of determining what requests for relief are properly before the court.

[9] For its part, Quizno’s Canada has no procedural problems in making its request for interlocutory relief. In support of its motion breach, Quizno’s Canada submits that in the past 12 months, the three franchisees have breached their respective franchise agreements. During this time, three main types of breaches are alleged: (1) selling under-portioned sandwiches to customers; (2) failing to participate in promotions; and (3) failing to provide the delivery service as directed by Quizno’s Canada.

[10] Quizno’s Canada also alleges other breaches of the franchise agreements. It submits that given the breaches, it was within its rights to terminate the franchise agreements and to call on the franchisees to comply with their post-termination obligations as set out in the franchise agreements. In terminating the franchises, Quizno’s Canada also relies on what was described as the “three strikes rule” in the franchise agreements (section 18.2 (k)).

[11] All the breaches are and have been denied by the three franchisees, but, nevertheless, Quizno’s Canada served several notices of default, and on February 4, 2009, it purported to terminate the three franchises because of the alleged defaults.

[12] The three franchisees deny the validity and bona fides of the notices of default and of the terminations and submit that Quizno’s Canada is using the terminations: to retaliate against the Johnsons for standing up against the franchisor; to coerce other franchisees to abandon the association known as Denver Subs Canadian Franchisee Association (“Denver Subs”), which is led by Mr. Douglas Johnson; to threaten and intimidate the class members in the class proceeding; and to coerce the franchisees to accept a settlement proposed by Quizno’s Canada.

[13] The three franchisees submit that Quizno’s Canada and its American parent corporation have a history of using harsh, retaliatory, and punitive tactics to silence and isolate franchisees that Quiznos regards as defiant. The three franchisees also submit that, they are not defiant but rather compliant - but not servile - franchisees who are just exercising their rights under their franchise agreements in a proper and respectful manner.

[14] For the obvious reason that they deny default and for other reasons connected to the alleged intimidation tactics, the three franchisees have refused to comply with the post-termination provisions of the franchise agreements. Under the franchise agreements (section 18.7), upon termination, a franchisee must, among other things, cease to identity itself as a Quiznos franchise or use any marks, trade secrets, signs, symbols, devices, trade names, or other materials of Quiznos. Upon termination, it must return Quizno’s operations manual and other proprietary material. After termination, the franchisee promises (section 20.3) not to compete within a defined eight-kilometer radius for two-years.

[15] When the three franchisees refused to accept the termination of their franchises, Quizno’s Canada and Quizno’s Real Estate sued the franchisees. Quizno’s Canada delivered a statement of claim and brought the interlocutory motion now before the court to close down the restaurants and to enforce the post-termination obligations contained in the franchise agreements. Quizno’s Canada has given the usual undertaking as to damages with respect to injunctive relief. In anticipation of a counter-motion - which did not arrive until the end of the argument - Quizno’s Canada voluntarily and on a without prejudice basis indicated that it would not take any enforcement steps pending a court order.

[16] The franchisees delivered a statement of defence and counterclaim. The original counterclaim claims damages, but the counterclaim did not include a claim for injunctive relief until the franchisees delivered an amended statement of claim and counterclaim after the argument of the motion.

[17] In moving for an interlocutory injunction, Quizno’s Canada submits that its franchise system and its brand will suffer irreparable harm and the entire purpose and integrity of its business would be undermined if the three franchisees continue to operate a submarine restaurant at their current locations. Quiznos submits that the balance of convenience favours the granting of an injunction since the three franchisees can compete outside of the territory delimited by the non-competition clause.

[18] Quizno’s Canada submits that the continued operation of a terminated franchise would harm Quiznos because it would mean that it has lost control of its goodwill and of its franchise network. Further, it would prevent Quiznos from servicing the market that is being serviced by the unauthorized franchisees.

[19] Mr. Macdonald, who is President of Quizno’s Canada, deposes at paragraph 113 of his affidavit sworn on February 5, 2009:

If the Franchisees are permitted to operate competing restaurants in the same premises as their Quiznos Sub restaurants despite their termination of the Franchise Agreements, there will be less incentive for Quiznos’ other franchisees to abide by their agreements. The message will be sent through Quiznos’ system that Quiznos’ franchise agreement (i) provide no protection to other franchisees, and (ii) may be disregarded at will. This will have a detrimental and devastating effect throughout the Quiznos franchise system. It has the potential to effect the demise of the system in Canada as Quiznos depends on renewals and the enforcement of its non-competition covenants to maintain its vitality. In particular, there are eight other Quiznos’ franchisees in the GTA who have, to date, refused to offer delivery services. They will no doubt continue to breach the terms of their franchise agreements should this court not grant the injunctive relief sought.

[20] As already noted, before moving for an interlocutory injunction, Quizno’s Canada did not exercise its self-help remedies in anticipation of a counter-motion by the franchisees. When before the argument of the motion, that counter-motion did not come, in its factum and during argument, Quizno’s Canada took the positions that this circumstance supported their claim for injunctive relief and also precluded the court from making an order that would maintain the status quo or interfere with the franchisor’s rights to exercise self-help in the event that injunctive relief was refused. It was the verbalization of these positions that galvanized the franchisees to deliver their counter-motion and their amended statement of defence and counterclaim.

[21] Either by way of a defence to the franchisor’s motion or now by their counter-motion, the franchisees submit that the court should dismiss Quizno’s Canada’s motion for interlocutory relief and instead the court should make an order preserving the status quo pending the trial of the action and of the franchisees’ counterclaim.

[22] The franchisees submit that they will suffer irreparable harm if the status quo is not maintained. Mr. Douglas Johnson states at paragraph 144 of his March 3, 2009 affidavit:

I am struck by the statement of the President of my franchisor [Mr. Macdonald] that the loss of my stores on which I depend for my livelihood, however meager it may be, is of little consequence. I have no occupation other than my employment as owner/operator of my stores. I draw from the stores a wage sufficient to support myself, my wife who is eight months pregnant, and our two-year old baby. Tom also depends entirely on the restaurant for his subsistence. As independent business owners, we do not pay into unemployment insurance and would receive no benefits if we lost our stores.

[23] The franchisees also submit that the other Canadian franchisees will suffer irreparable harm because they will lose their champion in the ongoing struggle for redress against the franchisor if the defendant franchisees are removed from the franchise system. In paragraph 167 of their factum, they state:

167. Uniquely to this motion, other franchisees within the Quiznos system would be irreparably harmed by the termination of the Johnsons’ stores and loss of their leadership. Should the certification decision be reversed on appeal, the termination of the Johnsons’ stores prior to the opt-out period will cause irreparable harm to all franchisees who have banded together in the Class Action to obtain justice despite Quiznos’ tactics and intimidation. This harm cannot be quantified in monetary terms.

[24] At the conclusion of the hearing of the motion, I made the following endorsement:

This is a motion for interlocutory relief brought by Quiznos. I am reserving judgment with respect to this motion. There is also before me a motion delivered today by the defendants. I am reserving judgment on whether the court will receive this motion and on whether or not it should be decided on its merits. In the interim, the interim interlocutory order that I granted on February 18, 2009 is to continue pending further order of the court.

[25] Now having considered the matter and for the reasons that follow, I have decided to receive the franchisees’ counter-motion and to dismiss it on its merits. I dissolve the interim interlocutory injunction and I grant Quizno’s Canada’s motion as requested.

[26] To explain these conclusions, I will first address the matter of the counter-motion. Second, I will discuss the general principles of the law associated with requests for interlocutory injunctions that I will be applying in the circumstances of the case at bar. Third, I will describe the factual background and foreground to the case at bar. Fourth, I will apply the law associated with requests for interlocutory injunctions in the context of the competing factual and legal arguments of the parties and explain why I dismiss the franchisees’ motion and grant the motion of the franchisor. Fifth, and finally, I will have a concluding comment about how others might avoid the unhappy outcome that has been visited on the franchisees in the case at bar.

The Counter-Motion

[27] The first matter to address is what motions are before the court for determination.

[28] In this regard, the franchisees apparently believed until near the end of the hearing that they could obtain an interlocutory order enjoining the franchisor from exercising its self-help remedies without a notice of motion seeking interlocutory relief having been delivered and without claiming an injunction in their counterclaim against the franchisor.

[29] It was apparently the franchisees belief that if they successfully defended the franchisor’s request for interlocutory relief, it would follow that the court would make an order enjoining the franchisor from exercising its self-help remedies in the franchise agreements and maintaining the status quo.

[30] The fallacy of these beliefs is that while the dismissal of the franchisor’s request for relief might create issue estoppels about some issues between the parties, it would not necessarily determine whether the franchisees were themselves entitled to interlocutory relief. For instance, I might have decided not to grant an interlocutory remedy to Quiznos precisely because it had self-help remedies and did not need the court’s remedial assistance.

[31] Thus, from the franchisees’ perspective, they did need the counter-motion that they eventually tendered to the court. Quiznos, however, has objected to the late arriving counter-motion. Thus, there is a question about what requests for relief are before the court for decision.

[32] As I noted in the introduction and overview, notwithstanding its late delivery, I have decided to accept the delivery of the franchisees’ notice of motion and to rule on the merits of the franchisees’ requests for relief.

[33] My first reason for these decisions is that I see no substantial prejudice to the franchisor in proceeding in this way. As I have already noted, the franchisor always anticipated that there would be a counter-motion, and given that the legal and factual issues of the anticipated counter-motion largely mirror the issues of the franchisor’s motion, and given that there was no additional factual material filed in support of the counter-motion, it is unlikely that the franchisor was prejudiced in any meaningful way by the late arrival of the anticipated motion.

[34] Mr. Shaw for the franchisor argued that the franchisor’s cross-examinations of the franchisees and the franchisor’s argument of the motion might have been designed differently if the franchisees had delivered their counter-motion in a timely way. That may be true, but I think that the question is not whether the franchisor might have done something different but whether the franchisor had sufficient notice of the franchisees’ case and an opportunity to meet that case. In my opinion, regardless of whether the franchisee’s case was stated by way of defence or by way of affirmative claim, the franchisor has not been prejudiced and it is unlikely that it would have conducted its own case much differently than it was presented.

[35] My second reason is that all the parties are better served if the court is able to make an order that comprehensively determines all the competing claims for interlocutory relief that could and should have been made by the parties when the franchisor put its rights before the court. Both parties have now had their days in court, and it makes little sense to make an order on the plaintiffs’ motion that leaves uncertain how the defendants’ counter-motion should be determined.

[36] Therefore, I am going to proceed as if the franchisees’ counter-motion had been delivered in a timely and proper way.

The Test for an Interlocutory Injunction

[37] Both motions before the court request interlocutory injunctions. In R.J.R. MacDonald Inc. v. Canada (Attorney General), 1994 CanLII 117 (S.C.C.), [1994] 1 S.C.R. 311, the Supreme Court of Canada described the test to be applied in deciding whether to grant an interlocutory injunction. Under the R.J.R. MacDonald test, the court considers three factors: (a) whether the plaintiff has presented a serious issued to be tried or, in a narrow band of cases, a strong prima facie case; (b) whether the plaintiff would suffer irreparable harm if the remedy for the defendant’s misconduct were left to be awarded at trial; and (c) where does the balance of convenience or inconvenience lie in the granting or the refusing to grant an interlocutory injunction.

[38] For most cases, the first factor of the strength of the plaintiff’s case sets a low threshold, and this factor negates the need of any in-depth review of the merits at the preliminary phase of the proceedings. If the action is shown not to be frivolous or vexatious, then it has satisfied the low threshold. However, a higher threshold of showing a strong prima facie case is required where the outcome of the interlocutory injunction, practically speaking, will make proceeding to trial pointless for one party or when the plaintiff’s right can only be exercised immediately or not at all.

[39] The strong prima facie case standard involves a more intensive examination of the merits of the plaintiff’s case. Since a “prima facie case” is established when on the balance of probabilities it is likely that the plaintiff will succeed, I understand a “strong prima facie case” to involve a higher level of assurance at the interlocutory stage that it is likely that the plaintiff will succeed at the trial. In the context of claims for mandatory injunctions, a strong prima facie case has been interpreted to mean that the plaintiff must satisfy the court that he or she is clearly right and is almost certain to be successful at trial. Given the very intrusive nature of a mandatory injunction, there must be a high assurance that the injunction would be rightly granted. See Barton-Reid Canada Ltd. v. Alfresh Beverages Canada, [2002] O.J. No. 4116 (S.C.J.) at para. 9; Benjamin v. The Toronto-Dominion Bank 2006 CanLII 9960 (ON S.C.), (2006), 80 O.R. (3d) 424 (S.C.J.) at para. 27.

[40] I do not, however, understand the requirement of showing a strong prima facie case to go so far as to require the plaintiff to actually prove his or her case. If this were true, a trial would be superfluous and the interlocutory motion would move from being an examination of the strength of the case to an actual determination of the merits of the case. In paragraph 2.130 of the leading Canadian text about injunctions and specific performance, Injunctions and Specific Performance (Canada Law Book: Aurora, 2008, loose leaf), Justice Robert Sharpe states that the question of whether the plaintiff has shown a strong prima facie case “probably means no more than, if the court had to finally decide the matter on its merits, on the basis of the material before it, would the plaintiff succeed?”

[41] The strong prima facie test standard is the measure used for determining whether it is appropriate to enforce a restrictive covenant by an injunction that would restrain an individual’s cherished ability to make a living and to use his or her knowledge and skills obtained during employment: Boehmer Box L.P. v. Ellis Packaging Ltd., [2007] O.J. No. 1694 (S.C.J.); Sherwood Dash Inc. v. Woodview Products Inc., [2005] O.J. No. 5298 (S.C.J.); 1259695 Ontario Inc. v. Guinchard, [2005] O.J. No. 2049 (S.C.J.); Kohler Canada Co. v. Porter, [2002] O.J. No. 2418 (S.C.J.).

[42] In the case at bar, for Quizno’s claim for injunctive relief, I will apply the standard of showing a strong prima facie case, by which I mean a showing of a strong case with a high although not absolutely assured likelihood of success based on the material presently before the court.

[43] In contrast, for the franchisee’s claim for injunctive relief, I will apply the standard of showing a serious issue to be tried. Granting an interlocutory injunction for the franchisees would not involve a final determination of the rights of the parties and rather would maintain the status quo pending a trial determination that might end or continue that status. Further, in my opinion, enjoining Quizno’s Canada from terminating the franchise would be a restrictive injunction and not a mandatory injunction. Thus, the appropriate standard is that of showing a serious issue to be tried. On these points, see: TDL Group Ltd. v. 1060284 Ontario Ltd., [2001] O.J. No. 3614 (Div. Ct.); Erinwood Food Sales Ltd. v. Ford Motor Co. of Canada, [2005] O.J. No. 1970 (S.C.J.); 674834 Ontario Ltd. (c.o.b. Coffee Delight) v. Culligan, [2007] O.J. No. 979 (S.C.J.); 1323257 Ontario Ltd. (c.o.b. Hyundai of Thornhill) v. Hyundai Auto Canada Corp., [2009] O.J. No. 95 (S.C.J.).

[44] The second element of the test for an interlocutory injunction is irreparable harm. In determining whether the plaintiff would suffer irreparable harm, the court will consider whether damages awarded after a trial will provide the plaintiff with an adequate remedy without the need for an interlocutory remedy: Traynor v. Unum Life Insurance Co. of America 2003 CanLII 40149 (ON S.C.D.C.), (2003), 65 O.R. (3d) 7 (Div. Ct.); Paddington Press Ltd. v. Champ (1979), 43 C.P.R. (2d) 175 (Ont. H.C.J.); Evans Marshall & Co. Ltd. v. Bertola S.A. et al., [1973] 1 W.L.R. 349 at p. 379. If damages or some other trial remedy would come too late or be inadequate to repair the harm or to do justice, then the harm may be said to be irreparable.

[45] When the plaintiff shows a sufficiently strong case and irreparable harm, the analysis moves to the balance of convenience element, which considers what is the effect on the parties, and sometimes on third parties, of the court granting or not granting the interlocutory injunction. The third element involves a determination of which of the two parties will suffer the greater harm from the granting or the refusal to grant an interlocutory injunction pending a decision on the merits.

[46] In considering the balance of convenience, it is appropriate to reconsider the comparative strength of the parties’ cases. If the plaintiff’s case seems weak, then the undoubted convenience of an injunction may not balance the inconvenience of the defendant suffering the interference with his or her rights based on a doubtful claim. Conversely, if the merits of the plaintiff’s case seem quite strong then the plaintiff’s inconvenience of being denied an interlocutory remedy may seem to outbalance the inconvenience of the defendant having to suffer a restraint on his or her rights.

The Factual Background and the Factual Foreground

[47] I turn now to the factual background and the factual foreground for the two motions before the court. As already mentioned above, the franchisees urge the court to consider matters beyond the contractual relationship between the parties including the significance of the motion for interlocutory relief to an outstanding class proceeding. Thus, the dispute between Quizno’s Canada and the three franchisees has both a factual background and a factual foreground.

[48] In the factual background is the larger context of the relationship between the franchisor and the franchisees in both Canada and the United States. In the background are the class action and other litigation involving Quiznos franchisees in Canada and in the United States. In the factual foreground are the circumstances of the contractual relationship between Quizno’s Canada and the three franchisees and the events of the last year and a half that occurred at the three Oakville restaurants.

[49] Some of the background and foreground facts are common ground. However, the parties dispute the truth, admissibility, relevance, materiality, or legal significance of much of the evidence advanced in support of their two motions. It is not for me, but for a trial judge, to decide the numerous factual controversies. Given the test for interlocutory relief, described above, my description of the facts can and should be done without deciding the merits of the competing claims and without making a final determination about most disputed matters. For my part, in this section of my Reasons for Decision, I will describe the factual background and foreground to the extent necessary to decide the two motions, although I will save some details about factual matters for discussion later when I consider the application of the law to the requests for relief made in the two motions.

[50] At the outset of this discussion of the facts and by way of an overview it is helpful to observe that the relationship of the parties has gone through three phases. During the first phase, it appears that there was a friendly relationship and the franchisees appear to have been viewed favorably. In the second phase, which involves the activities of the Canadian franchisee association, events in both Canada and the United States, and the class action in Canada, it appears that the parties began to view each other as foes and perhaps as mortal enemies. In the third phase; that is, during the last year and a half, the relationship has deteriorated until it has now reached the point that the franchisor has taken steps to end it. The franchisor submits that the termination is lawful and justified. The franchisees submit that the termination is unlawful and retaliatory.

[51] Also at the outset of this discussion of the facts, I note that Quizno’s Canada relies on 11 customer complaints as evidence of under-proportioning, and it relies on other customer complaints as evidence of other breaches of the franchise agreements by the franchisees. For the purposes of deciding the two motions before the court, and with a slight exception for the evidence of Ms. Jane Fisher, of which more will be said below, beyond accepting that the complaints were made, I give no significance to them. I also give no weight to the evidence and allegations about whether there has been a fundamental breakdown in the ability of the parties to have a business or contractual relationship one with the other. These matters may be for the trial judge to determine. In my opinion, whether Quizno’s Canada is entitled to any interlocutory relief should be determined with respect to the circumstances of the allegations of breach of the franchise agreements that are referred to in the three notices of termination dated February 4, 2009, mentioned below.

[52] Proceeding in this way, the following factual background and foreground emerges.

[53] Quiznos restaurants are participants in the very competitive fast food market in Canada and in the United States. The Quiznos restaurants pride or distinguish themselves by offering toasted subs that they claim to be superior in both quality and quantity than the competing perhaps lower priced products of their competitors.

[54] In 2001, after investigating the Quiznos franchise system, the Johnsons decided to open a Quiznos restaurant in Oakville. By the spring of 2005, they had opened two more Quiznos restaurants in Oakville. As franchisees, they all signed standard form Quiznos franchise agreements. For present purposes, the important contract terms are sections 2.2, 8.1, 11.1, 12.1, 13.1, 13.2, 18.2, 18.3, 18.7 and 20.3. These are the provisions that Quizno’s Canada relies on in support of its positions that the franchise agreements have been breached and lawfully terminated and that the franchisees are breaching their post-termination obligations. With exceptions for the provisions in the franchise agreements describing the obligations of the franchisee upon termination (section 18.7) and the post-termination covenant not to compete (section 20.3), I will set out the relevant portions of the franchise agreements later in this narrative when they become important. I will not set out sections 18.7 and 20.3 because I have already described them in the introduction of these Reasons for Decision.

[55] Beginning in 2004 Quiznos franchisees began to express complaints over the costs of goods under their franchise agreements. However, up until at least early 2006, there appears to have been no direct problems between the parties to the case at bar. The franchisees received awards from Quiznos for the best training store in Canada and for highest average unit volume in Eastern Canada.

[56] The friendliness, however, seems to have ended in 2006. In January 2006, the Denver Subs Canada Franchise Association was formed by franchisees to deal with what they believed to be overcharging by the franchisor. The first president of the association was Mr. Jonathan Talbot-Kelly, who owned five restaurants in the Maritime Provinces. It is alleged by the franchisees in the case at bar that Quiznos took steps to thwart the efforts of Denver Subs and to retaliate against Mr. Talbot-Kelly for his pursuit of fair pricing. The retaliation included suing him, excluding him from an advisory council established by Quiznos, and terminating an agreement with him, although not his franchises. One outcome of this confrontation was that Mr. Talbot-Kelly resigned as president of Denver Subs, and in the fall of 2006, Mr. Douglas Johnson was elected in his place.

[57] On May 12, 2006, with Mr. Johnson’s Cornwall Rd. Restaurant as one of the plaintiff’s, a class action against Quizno’s Canada and several others was commenced. The plaintiffs in the class action allege, amongst other things, a conspiracy and price maintenance by Quizno’s Canada contrary to s. 61 of the Competition Act and a breach of the duty of fair dealing under Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3.

[58] Mr. Johnson alleges that after his appointment as President of Denver Subs, and with his role in the class proceedings, he became the target of retaliatory and punitive measures by Quizno’s Canada. Like Mr. Talbot-Kelly, he was removed as a representative on the advisory council. Mr. Johnson alleges that he and his nephew have been victims of a smear campaign and that their restaurant franchises have been subject to harassing inspections. He alleges that Quiznos attempted to isolate him from other franchisees and that Quiznos ignores him or fails to respond to his requests for information, assistance, or service.

[59] Mr. Johnson alleges that in the context of the class proceedings, Quiznos has wrongfully attempted to contract the class members directly without prior court approval to solicit releases and to undermine the class proceeding and his role as representative plaintiff. He also alleges that Quiznos has a history of abusive retaliation against the leaders of independent franchisee associations both in Canada and in the United States including wrongfully terminating their franchises. As proof, he refers to the recent decision of U.S. District Judge Morris B. Hoffman in Quiznos Franchising v. Zig Zag Restaurant Group. He relies on this history as proof that the terminations in the case at bar are illegitimate.

[60] Turning then to those terminations, Quizno’s Canada justifies them as a lawful response to breaches of the franchise agreements that genuinely occurred, and it denies that the terminations are retaliatory or intended to interfere with the franchisees rights of association or with the class proceeding. They say that the terminations arise as a result of breaches of the franchise agreement discovered by inspections or customer complaints. In this last regard, to ensure quality control at its franchisees’ restaurants, Quizno’s Canada exercises its right to inspect, which is provided for in section 13.2 of the franchise agreement. Section 13.2 states:

13.2 Inspections. QCC shall have the right to interview customers or examine the Franchised Location … including without limitation the inventory, products, equipment, materials or supplies, to ensure compliance with all standards and specifications set by QCC. QCC shall be entitled to conduct such inspections during regular business hours without prior notice to Franchisee.

[61] Inspections include the use of “mystery shoppers,” who are third parties that covertly inspect franchisees to ensure that they are complying with Quizno’s Canada’s standards for its products and business practices. In the case at bar, the mystery shoppers are not employees of Quiznos but rather are engaged by Sensors Quality Management Inc. and Service Sleuth, which are independent corporations retained by Quizno’s Canada to engage the mystery shoppers. The franchisees know that they may be inspected in this fashion.

[62] During the two and a half month period between November 23, 2007 and January 14, 2008, and in September 2008, and in January 2009: seven products at the Cornwall Rd. restaurant were purchased by mystery shoppers; nine products at the Dundas restaurant were purchased by mystery shoppers; and six products at the Third Line restaurant were purchased by mystery shoppers. It is alleged by Quizno’s Canada that the mystery shoppers reported under-proportioning for these 22 food audits.

[63] Quizno’s Canada submits that under-proportioning is a breach, at least, of sections 2.2, 8.1, 11.1 and 13.1 of the franchise agreement. Sections 2.2, 8.1 and 13.1 are set out immediately below [emphasis added]. Section 11.1 is set out later in these Reasons for decision.

2.2 Scope of Franchise Operations. Franchisee agrees at all times to faithfully, honestly and diligently perform Franchisee’s obligations hereunder, to use best efforts to promote its Restaurant and to not engage in any other business or activity that conflicts with the operation of the Restaurant in compliance with this Agreement. Franchisee agrees to utilize the Marks and Licensed Methods to operate all aspects of Franchisee’s Restaurant in accordance with the methods and systems developed and prescribed from time to time by QCC, all of which are part of the Licensed Methods. Franchisee’s Restaurant shall offer all products and services designated by QCC, all of which are part of the Licensed Methods. Franchisee’s Restaurant shall offer all products and services designated by QCC, which may include, without limitation, restaurant services offered in conjunction with a distinctive theme and décor and a uniform menu and style offering specialty and other sandwiches, salads and other food and beverages. Franchisee shall implement any additions and changes to the products and services offered by its Restaurant required by QCC.

8.1 Operations Manual QCC agrees to loan to Franchisee one or more manuals, technical bulletins or other written or videotaped materials (collectively referred to as “Operations Manual”) covering the proper operating and marketing techniques of the Restaurant. Franchisee agrees that it shall comply with the Operations Manual as an essential part of its obligations under this Agreement. Franchisee shall at all times be responsible for ensuring that its employees and all other persons under its control comply with the Operations Manual in all respects.

13.1 Standards and Specifications. QCC will make available to Franchisee, QCC’s standards and specifications for services and products offered at or through the Restaurant and the uniforms, recipes, materials, forms, menus, items and supplies used in connection with the franchised business. QCC reserves the right to change standards and specifications for services and products offered at or through the Restaurant or for the uniforms, recipes, materials, forms, items and supplies used in connection with the franchised business upon 30 days prior written notice to Franchisee.

[64] The methodology, validity and integrity of the food audits by the mystery shoppers are challenged by the three franchisees. In any event, as indicated here and below, Quizno’s Canada took steps only with respect to some of the instances of alleged under-proportioning. Thus, on February 5, 2008, Quizno’s Canada served each of the franchisees with written notice that the franchisees were in default for under-proportioning sandwiches.

[65] Meanwhile, on March 4, 2008, I dismissed the motion for certification of the class action.

[66] In the summer of 2008, Quizno’s Canada required all of its franchisees to participate in the “$5 after 5PM Promotion.” Quizno’s Canada submits that this obligation may be imposed pursuant to sections 2.2 (set out above), 11.1 (set out later in these Reasons for Decision) and 12.1 of the franchise agreement. Section 12.1 of the franchise agreement states [emphasis added]:

12.1 Approval of Advertising …. Franchisee acknowledges that advertising and promoting the Restaurant in accordance with QCC’s standards and specifications is an essential aspect of the Licensed Methods and Franchisee agrees to comply with all advertising standards and specifications established by QCC.

[67] Relying on sections 2.2 and 11.1 of the franchise agreement, in July 2008, Quizno’s Canada sent a series of notices of default for the alleged failure of the three franchisees to participate in the “$5 after 5PM Promotion.”

[68] After receiving legal advice from a lawyer specializing in Canadian franchise law, the franchisees advised Quizno’s Canada that the franchise agreements do not require the franchisees to follow Quizno’s Canada’s promotions. The franchisees’ legal counsel advised Quizno’s Canada that there was no provision in the agreements that requires the restaurants to sell products at prices determined by Quizno’s Canada. The franchisees rely on the fact that in other franchise agreements with other franchisees, s. 12.1 contains the sentence “Franchisee also agrees to participate in any promotion campaigns and advertising and other programs that Franchisor periodically establishes.” The franchisor obviously argues that the additional wording in other contracts does not detract from the breadth of the current language of section 12.1.

[69] On October 28, Quizno’s Canada sent two of the franchisees written notice that the franchisees were in default for under-proportioning sandwiches.

[70] In the fall of 2008 having already tested the project in London, Ontario and Ottawa, Ontario, Quizno’s Canada directed its franchisees in the Greater Toronto Area, which territory includes Oakville and the territory of the three franchisees in the case at bar, to implement a program offering delivery service to customers who placed orders by phone or online. In imposing the delivery program, Quizno’s Canada relies on section 11.1 of the franchise agreement, which states [emphasis added]:

11.1 Business Operations. Franchisee acknowledges that it is solely responsible for the successful operation of its Restaurant and the continued operation thereof is partially dependent upon Franchisee’s compliance with this Agreement and the Operations Manual. In addition to all other obligations contained herein and in the Operations Manual, Franchisee covenants that:

(a) Franchisee shall operate a clean, safe, and high quality Restaurant operation and shall promote and operate the business in accordance with the Operations Manual and in such a manner as not to detract from or adversely reflect upon the name and reputation of Franchisor or QCC and the goodwill associated with the QUIZNO’S name and Marks;

(d) Franchisee acknowledges that the franchise granted hereunder requires and authorizes Franchisee to offer only authorized products and services as are fully described in the Operations Manual, which may include, without limitation submarine and other sandwiches, salads and other authorized food and beverage products and related restaurant and carry out or delivery services. …. Franchisee shall offer all types of services and products as from time to time may be prescribed by QCC and shall not offer any other types of services or products ….

[71] There are controversies between the parties about: the desirability of the delivery program; the adequacy of its testing; the evaluation of its testing; its profitability; its consequential advantages and disadvantages; and whether Quizno’s Canada breached duties of good faith and fair dealing in introducing the delivery program. The franchisees submit that the program has not been adequately tested and has been introduced without regard to the franchisees’ legitimate commercial interests. They submit that franchisees are being threatened with legal action and being pushed into participating in the delivery program by misleading and incomplete information.

[72] The franchisees submit that the requirement to participate in the delivery program and, for that matter, any requirement to participate in promotions, must be considered in light of Quizno’s Canada’s duties of good faith and fair dealing under s. 3 of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3, which states:

Fair dealing

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

(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.

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

[73] There are also controversies about the impact, if any, of the three franchisees having not participated in the delivery program to date. More precisely, it is disputed whether Quizno’s Canada has actually suffered irreparable harm by the franchisees non-participation in the delivery program.

[74] However, not disputed is that the franchisees have not yet participated in the delivery program and that on December 1, 2008, Quizno’s Canada served each of the them with a notice of default regarding their failure to implement the delivery program. Further notices were sent on December 19, 2008.

[75] In December 2008 through January 2009, Quizno’s Canada required all its franchisees to participate in the “$5 Large Everyday Value Subs Promotion.”

[76] On January 23, 2009, relying on sections 11.1 and 12.1 of the franchise agreement, Quizno’s Canada sent the three franchisees notices of default for an alleged failure to participate in the “$5 Large Everyday Value Subs Promotion.” The franchisees’ position with respect to their alleged failure to participate in this promotion is set out in paragraph 131 of their factum, which states:

131. The defendants were in fact offering the new sandwiches introduced by the “Event 1” campaign and following every aspect of the campaign save one. The only aspect which they did not follow was the price. The defendants asserted, through their counsel, that they were not required to do so under the stores’ franchise agreements. Quiznos was fully aware of this legal position and the basis for it. It sought no legal determination on whether or not it could oblige the defendants to comply with the price in the absence of such an obligation in the franchise agreement.

[77] I pause and digress here to note with respect to the last sentence in paragraph 131 that the franchisees also did not seek a legal determination about whether they were obliged to fully comply with the promotion. I will return to this topic in the concluding section of these Reasons for Decision.

[78] Returning to the narrative, on January 28, 2009, Quiznos served all three franchisees with written notice that the franchisees were in default for under-proportioning sandwiches.

[79] Thus in the last year and a half, notices of default have been served with respect to allegations of: (1) selling under-portioned sandwiches to customers; (2) failing to participate in promotions; and (3) failing to provide the delivery service as directed by Quizno’s Canada.

[80] On February 4, 2009, relying on sections 18.2 (k) and 18.3 of the franchise agreements, Quizno’s Canada served the three franchisees with written notices of termination. Sections 18.2 (k) and 18.3 state:

18.2 Termination by QCC – Effective Upon Notice. QCC shall have the right, at its option, to terminate this Agreement and all rights granted Franchisee hereunder, without affording Franchisee any opportunity to cure any default, effective upon receipt of notice by Franchisee, upon occurrence of any of the following events:

(k) Repeated Noncompliance. If Franchisee has received three notices of default under this agreement from QCC within a 12-month period, regardless of whether the defaults were cured by Franchisee;

18.3 Termination by QCC – Thirty Days Notice. QCC shall have the right to terminate this Agreement effective upon 30 days prior written notice to Franchisee, if Franchisee breaches any other provision of this Agreement, including but not limited to, if Franchisee fails to substantially comply with the Operations Manual, and fails to cure the default during such 30-day period. In that event, this Agreement will terminate without further notice to Franchisee, effective upon expiration of the 30 day period. Notwithstanding the foregoing, if the breach is curable, but is of a nature which cannot reasonably be cured within such 30-day period and Franchisee has commenced and is continuing to make good faith efforts to cure the breach during such 30-day period, Franchisee shall be given an additional reasonable period of time to cure the same, and this Agreement shall not terminate.

[81] Each of the notices of termination state:

You are hereby advised that Franchisee’s rights under the Agreement are terminated, effective immediately, pursuant to section 18.2 (k) for repeated noncompliance, and pursuant to section 18.3 for failure to timely cure defaults relating to failure to offer delivery services, failure to adhere to Quizno standards and specifications, and failure to participate in promotional campaigns and other advertising and marketing programs.

[82] On February 7, 2009, Ms. Jane Fisher visited the Dundas St. Restaurant with her son. She eventually lodged a complaint as a result of what happened on this visit when she was advised apparently rudely that the “$5 Dollar after 5 Promotion” was not available unless she wanted a turkey or tuna sub, which she did not.

[83] Around this time, it was arranged that I should hear Quizno’s Canada’s motion and although I had already set a schedule for the hearing of the interlocutory motion, the lodging of Ms. Fisher’s complaint prompted Quizno’s Canada to seek an interim order. Thus, based on the record placed before me on February 18, 2009, I ordered that an independent observer be present for any further inspections by Quizno’s Canada. No further inspections occurred, and the parties completed cross-examinations and filed their material for Quizno’s Canada’s motion.

[84] Ms. Fisher also swore an affidavit for Quizno’s Canada’s motion. In that affidavit, she repeated her complaint. She was not cross-examined, and the only aspect of her evidence that is seriously disputed is whether she was rudely directed to go somewhere else to purchase a sandwich for her son. For present purposes, I do not find it necessary to make any findings about her evidence beyond saying that it confirms the evidence that the franchisees do not comply fully with Quizno’s Canada’s promotions. The franchisees’ position, however, remains that they are free to participate in promotions as they may be inclined without breach of the franchise agreement.

[85] For the interlocutory motions, in addition to the parties providing disputed evidence about the alleged breaches of the franchise agreement, there was quite a bit of evidence about the metrics of sandwich construction and about the anticipated profitability of Quizno’s Canada’s delivery program. Further, as already mentioned in the introduction to these Reasons for Decision, both parties provided evidence and argument about irreparable harm and about the balance of convenience, of which matters I will say more below.

The Competing Requests for Interlocutory Injunctions

[86] I turn now to the matter of applying the law to the circumstances of the case at bar and the competing requests for interlocutory injunctions.

[87] As I stated in the introduction and overview, I have decided to dismiss the franchisees’ request for interlocutory relief and to grant Quizno’s Canada’s motion, as requested. I will expand upon my reasons for these conclusions but a simplification of them is that applying the test for an interlocutory injunction, Quizno’s Canada satisfies the first element of the test with respect to the alleged breaches connected with the promotions and the delivery program, although not with respect to the under-proportioning allegations, and, in my opinion, it also satisfies the second and third elements of irreparable harm and the balance of convenience.

[88] More particularly, having considered the evidence filed on this motion, I conclude that Quizno’s Canada has a strong prima facie case of establishing that: (a) without advising Quizno’s Canada, the franchisees implemented their own version of the “$5 after 5PM Promotion,” in which they did not follow the specifications of Quizno’s Canada as to product offering and pricing; (b) without advising Quizno’s Canada, the franchisees implemented their own version of the “$5 Large Everyday Value Subs Promotion,” in which they did not follow the specifications of Quizno’s Canada as to product offering and pricing; (c) without advising Quizno’s Canada, the franchisees did not implement other promotions specified by Quizno’s Canada; and, (d) the three franchisees have not implemented the delivery program.

[89] Further, I conclude that Quizno’s Canada has shown a serious issue that the franchisees have breached the franchise agreements by under-proportioning sandwiches. Put another way, the quality of the evidence is such that I am not satisfied that Quizno’s Canada has shown a strong prima facie case that the franchisees have breached the franchise agreement by under-proportioning sandwiches, but it has shown a serious issue for trial. Therefore, putting aside the matter of under-proportioning, I conclude that Quizno’s Canada has a strong prima facie case that the franchisees have breached their franchise agreements.

[90] In reaching my conclusions about the strength of the case of Quizno’s Canada, I have considered the franchisees’ argument that they have a strong defence and counterclaim arising from their interpretation of the franchise agreements and from the effect of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3. In my opinion, however, the strength of their defence and counterclaim does not go so far as to negate that Quizno’s Canada has established a strong prima facie case about the promotions and the delivery program (or that it has shown a serious issue for trial about the under-proportioning of sandwiches).

[91] To be clear, in determining that the franchisor has shown a strong prima facie case, I am obviously not deciding the case on the merits and I am not saying or predicting that the franchisees’ defence or counterclaim will necessary fail. Rather, I am just recognizing the reality that the franchisees have already conceded that: (a) they have not fully complied with several promotions; and (b) they have not implemented the delivery program.

[92] The promotions and the delivery program were mandated for all franchisees and the alleged breaches by the franchisees are independent of any credibility issues involving Quizno’s Canada being motivated to isolate or retaliate against allegedly defiant franchisees or to interfere with the interests of franchisees in the class proceedings. And, at least, in the case of the delivery program, there appears to be express contract language that supports the position of the franchisor. In the case of the promotions, without deciding the point, there is a reasonably strong argument that the existing language of the franchise agreement requires a franchisee to comply with the standards and specifications of the promotions as set by the franchisor.

[93] In my opinion, the franchisor will suffer irreparable harm if an interlocutory injunction is not granted and for the reasons discussed further below the balance of convenience favours granting an interlocutory injunction. It would appear that the franchisees would not be able to satisfy a damages award against them and, in any event, the irreparable harm suffered by the franchisor goes to its goodwill, its reputation, and its responsibility to the franchisees of the chain to maintain the integrity of the franchise system. Damages would not adequately address these harms.

[94] For their part, the franchisees satisfy the first element of showing a serious issue to be tried that Quizno’s Canada has wrongly terminated the franchise agreements.

[95] And I am satisfied that the franchisees will suffer irreparable harm unless they are granted an interlocutory injunction that maintains the status quo and suspends the termination. The termination of a franchise, the loss or reputation and the loss of goodwill may constitute irreparable harm: TDL Group Ltd. v. 1060284 Ontario Ltd., [2001] O.J. No. 3614 (Div. Ct.); Erinwood Food Sales Ltd. v. Ford Motor Co. of Canada, [2005] O.J. No. 1970 (S.C.J.); 674834 Ontario Ltd. (c.o.b. Coffee Delight) v. Culligan, [2007] O.J. No. 979 (S.C.J.); 1323257 Ontario Ltd. (c.o.b. Hyundai of Thornhill) v. Hyundai Auto Canada Corp., [2009] O.J. No. 95 (S.C.J.).

[96] The franchisees’ request for an injunction, however, fails the balance of convenience test, especially when the comparative strength of their defence is compared with Quizno’s Canada strong prima facie case that there have been one or more breaches of the franchise agreements.

[97] On the elements of irreparable harm and the balance of convenience, there is also the factor that if the interlocutory injunction is denied but Quizno’s Canada succeeds at trial, then damages from the franchisees are likely not recoverable but the irreparable harm from the breaches will remain. In contrast, if the interlocutory injunction is granted and Quizno’s Canada fails at trial, although the franchisees will have suffered irreparable harm, an award of damages and the enforcement of the undertaking as to damages would go some distance in providing a worthwhile remedy for the wrongful termination of their franchise agreements.

[98] Still on the elements of irreparable harm and the balance of convenience, notwithstanding that the Divisional Court has conditionally certified the class action, I do not see the class members suffering irreparable harm from the circumstance that their representative plaintiff’s franchise has been terminated. Mr. Johnson’s franchise can remain a representative plaintiff, and he can direct class counsel in the class action to lead the evidence about the costs of goods and the franchisees’ experience of profits and losses whether or not he is a current franchisee. While I do not diminish the important role of representative plaintiff, there is also the reality that class counsel has an equal or greater incentive to vigorously lead the class in its pursuit of justice.

[99] If the case at bar were just about alleged breaches of a franchise agreement with respect to the amount of meat, etc. on submarine sandwiches, then notwithstanding the franchisor’s arguments that any under-proportioning by a franchisee(s)s goes to the heart of its goodwill, reputation, and enterprise, nevertheless, I would have found that the franchisor would not suffer irreparable harm if an injunction were not granted, and I further would have found that the balance of convenience did not favour the franchisor. A zero-tolerance to perhaps inadvertent or only occasional harm caused by a breach of a franchise agreement by an individual franchisee or a small number of franchisees in a national franchise chain sets the bar much too low for irreparable harm and the balance of convenience.

[100] However, this is not a case just about a breach of the product standards set by the franchisor, which is a serious enough matter; it is about the marketing and manner of operation of the franchise system. In Franchise Law (Irwin Law: Toronto, 2005), at p. 325, Frank Zaid describes the nature of a franchise agreement, as follows:

The essence of a franchise agreement is that the franchisor licenses to the franchisee the rights to use the franchisor’s trade marks and business system under specific controls and standards, for a stated period of time, in exchange for financial consideration. The franchisee has access to the franchisor’s confidential information and know-how, and learns to operate the franchised business using the franchisor’s standards and specifications.

[101] By notoriously deciding to go its own idiosyncratic way in participating in promotions and by not participating in the delivery system, the franchisees challenge who has control over: the methods and systems of the franchisor (section 2.2); the content of and compliance with the operations manual (section 8.1); compliance with business operations (section 11.1) and the specifications of advertising and promoting the restaurants (section 12.1). These are matters fundamental to the integrity of the franchise system, and as noted in Kentucky Fried Chicken of Canada v. Scott’s Food Services Inc., [1977] O.J. No. 3773 (Gen. Div.) at p.15, rev’d on other grounds, [1998] O.J. No. 4368 (C.A.); 1017933 Ontario Ltd. v. Robin’s Foods Inc., [1988] O.J. No. 1110 (Gen. Div.) at para. 43:

The most precious possession of a franchisor is its trademark and systems. The practice is to protect those interests in the terms of contracts with the franchisees for the benefit of the franchisor and other franchisees.

[102] In Second Cup Ltd. v. Ahsan, [2001] Q.J. No. 1763 (Q.S.C.), Justice Zerbisias stated at para. 60:

60. Where a member of the franchise chain fails to uphold the policies, standards, and operating methods and system to which all of the franchisees have subscribed by executing their franchise agreement, and upon which they rely to advance their mutual interests, it is incumbent upon the franchisor to take measures against the infringing party to force it to cease from tarnishing the reputation of the chain and from diminishing the value of the trademark and the banner. The franchisor must act to protect the integrity of the chain.

[103] Both parties elevate the contest in this case to a battle about who is in charge of the franchise system. The franchisees do so by connecting the dispute in this case with a pursuit for justice for the members of Denver Subs and the class members of a class action and by demanding that the franchisor prove a business case for the delivery system. The franchisor does so by alleging and providing some evidence that the franchisees’ conduct has already affected the franchisor’s relationship with other franchisees and has interfered with its role as franchisor because other franchisees are following the lead of Mr. Johnson in refusing to implement the delivery system.

[104] The dispute in this case is not a localized dispute. It is about the franchisor’s management rights across the chain of franchises, and this circumstance influences the calculus of irreparable harm and the balance of convenience. In my opinion, given the matters at stake and the strength of their comparative cases and the ineffectiveness of a damages award at trial should the franchisor succeed, the balance of convenience favours granting the franchisor an interlocutory injunction subject to the usual undertaking as to damages.

Concluding Comments

[105] For the above reasons, I grant the franchisor’s motion and dismiss the franchisees’ countermotion.

[106] In concluding, I wish to return to my observation, made earlier, that neither party in this case sought a judicial determination of whether the franchise agreement requires the franchisees to comply fully with promotions, including the pricing of their products as directed, or whether the franchise agreement requires the franchisees to participate in a delivery program.

[107] I believe that these questions could and should have been resolved by application pursuant to Rule 14 of the Rules of Civil Procedure. An application can resolve a dispute about contract interpretation. In the case at bar, I appreciate that the dispute about under-proportioning is not a matter of contract interpretation, but it was my impression that the tipping point for the termination notices was the franchisees’ refusal to participate in the delivery program.

[108] In the case at bar, the dispute about the rights of the franchisor and the franchisees are fundamentally issues of contract interpretation and the factual nexus necessary to decide these issues of contract interpretation would not, in my opinion, be controversial or beyond the parameters of what can be determined by application. For instance, in a proceeding by application, it would not be necessary to determine whether imposing a delivery program was genuinely a prudent or a harmful business decision but the issue would be whether and to what extent as a matter of contract interpretation a decision by the franchisor to require a delivery program was within the scope of the franchisor’s rights and the franchisees’ obligations under the franchise agreements.

[109] Rather than just getting the opinion of their lawyers about the interpretation of the franchise agreements, the parties had the resource of obtaining a binding court ruling interpreting the franchise agreements. The parties could then, as lawyers like to say, govern themselves accordingly. The court ruling could have been obtained without the risk of either party being in breach of the franchise agreements.

[110] An early judicial or arbitral determination avoids either party having to suffer irreparable harm by the granting or the refusing to grant an interlocutory injunction. Other franchisees and other franchisors might take a lesson from what happened in the case at bar and if they find themselves with a similar type of problem, they might consider obtaining a court ruling before taking steps that may be found to be breaches of the franchise agreements.

[111] For the record, I also note that during the argument of the motions, I suggested to the parties the alternative of placing the three Oakville restaurants under a trusteeship or receivership pending the trial. The trustee or receiver, who might be another franchisee in the chain, would maintain the current employment contracts and manage the restaurants in accordance with the current franchise agreements, thus avoiding irreparable harm to either party pending the trial. Neither side was interested in this suggestion.

[112] Finally, there is the matter of costs. Subject to receiving submissions from the parties, my view at present is that the costs of both the motions and the counter-motion should be in the cause, so that the costs of the motions correspond with the parties’ success or failure after a trial where the merits of their competing claims will actually be determined.

[113] If costs are sought, then the parties’ submissions should be in writing beginning with the franchisor within 20 days of the release of these Reasons for Decision followed by the franchisees submissions within a further 20 days.

____________________

Perell, J.

Released: April 28, 2009

COURT FILE NO.: CV-09-7997-00CL

DATE: April 28, 2009

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

QUIZNO’S CANADA RESTAURANT CORPORATION and QUIZNO’S CANADA REAL ESTATE CORPORATION

Plaintiffs

- and -

1450987 ONTARIO CORP., 2036249 ONTARIO INC., 2036250 ONTARIO INC., THOMAS JOHNSON and DOUGLAS JOHNSON

Defendants

____________________________________

REASONS FOR DECISION

___________________________________

Perell, J.

Released: April 28, 2009