COURT FILE NO.: 02-CV-21983

DATE: March 17-20, 2008

ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

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1117304 ONTARIO INC. c/o HARVEY’S RESTAURANT

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Robert Baldwin, for the Plaintiffs

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Plaintiffs

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CARA OPERATIONS LIMITED

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David R. Elliott, for the Defendant

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Defendant

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B E T W E E N:

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CARA OPERATIONS LIMITED

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Plaintiff by Counterclaim

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David R. Elliott, for the Plaintiff by Counterclaim

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1117304 ONTARIO INC. c/o HARVEY’S RESTAURANT, ANDREW PAUL SIMPSON AND RIMPI SIMPSON

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Robert Baldwin, for the Defendants by Counterclaim

Defendants by Counterclaim

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HEARD: March 17-20, 2008

KERSHMAN, J.
DECISION

(To avoid any confusion, the word “licence” and “franchise” are used interchangeably throughout this judgment and they mean the same thing.)

A. Introduction

[1] This is a claim by the Plaintiff, 117304 Ontario Inc. carrying on business as Harvey’s Restaurant, against the Defendant, Cara Operations Limited, for damages for breach of agreement whereby the Plaintiff claimed that the Defendant breached its duty of good faith and dealing with the Plaintiff, which eventually led to the Defendant terminating its Licence Agreements with the Plaintiff.

[2] In turn, the Defendant has counterclaimed against the Plaintiff and the two guarantors, Andrew Simpson and Rimpi Simpson, for non-payment of royalty fees and advertising fees, as well as other costs associated with the Plaintiff’s default under the Licence Agreements.

[3] This claim results from the opening of a Harvey’s franchise and a Church’s Chicken franchise by the Plaintiff at the same location. The operation subsequently closed. More information will follow.

B. Factual Background

[4] On April 16, 1990, Andrew Simpson made an application to the Defendant for a licence for a Harvey’s Restaurant.

[5] On March 12, 1992, the Defendant provided a proposal for a restaurant operation at Cyrville and Innes Road, which Andrew Simpson accepted. The proposal for this site was subsequently cancelled.

[6] Thereafter, Andrew Simpson, one of the Plaintiff’s shareholders, worked with Dan Koster, a representative of the Defendant, to find a suitable site for the restaurant. A site at St. Laurent Blvd. and Walkley Road (the “Walkley Site”) was located.

[7] On July 18, 1994, Andrew Simpson accepted a Letter of Intent from the Defendant for a Harvey’s licence and a Church’s Chicken licence at the Walkley Site. Mr. Simpson signed a pro forma financial statement projection (the “Pro Forma Projection”) that the Defendant prepared, as well as an Acknowledgement that the Defendant prepared.

[8] The Pro Forma Projection was a series of projections of sales and expenses for a Harvey’s operation serving Church’s Chicken. It was prepared by the Defendant and revised on June 8, 1994.

[9] The Defendant prepared an Acknowledgement for the Plaintiff’s signature. It reads in part:

By execution of this acknowledgment where indicated below the Licensee and Guarantor for the above-noted License Agreement acknowledges that prior to his execution of the said License Agreement, Cara Operations Limited, the franchisor thereunder, has expressed to him Cara’s concerns regarding the viability of the site proposed for the Subject Restaurant, and Cara’s view that this could present a certain degree of commercial risk to the financial success of the Subject Restaurant. The Licensee and Guarantor hereby acknowledges that based on his own investigations, surveys and analysis of the site of the Subject Restaurant and the market within which it will operate, he feels strongly that the Subject Restaurant will be very successful. By executing the said License Agreement, the Franchise Applicant acknowledges he is assuming the full risk for the Licensee and Guarantor and acknowledges that Cara has registered its concerns regarding the site proposed for the Subject Restaurant.

[10] On July 27, 1994, Mr. Baldwin, Plaintiff’s counsel, forwarded the signed Letter of Intent, dated July 13, 1994, as well as the signed Acknowledgment and Pro Forma Projection, to the Defendant.

Offer to Lease and Lease

[11] On March 31, 1995, Monsour Construction Limited (the “Landlord”), and the Plaintiff entered into an Offer to Lease for the premises.

[12] The square footage in the Offer to Lease indicates the terms and conditions are to be as set out in a draft lease, attached as Schedule “A”. No Schedule “A” was attached to the Offer to Lease that was provided to the Court. The Offer to Lease does not specifically set out what the square footage of the leased premises is to be.

[13] The Landlord entered into a Lease dated March 31, 1995 with the Plaintiff carrying on business under the name of Harvey’s serving Church’s Chicken for the Walkley Site. The Defendant was to be a party to the Lease Agreement, but only to the extent of Schedule “E” of the Lease. The signature bar for the signature by the Defendant was deleted by hand. Accordingly, the Lease does not appear to have been signed by the Defendant.

[14] Schedule “E” to the Lease Agreement states the following: “Cara is party to this lease solely for the purpose of enforcing its rights as set out in this Schedule “E.”

[15] Paragraph 2.2 of the Lease Agreement originally indicated the square footage to be 2,700 square feet. The “2,700” is struck out, and the number “3,000” typed in. The exact square footage was to be subject to confirmation by an architect or an engineer.

[16] Thompson and Brandt prepared an architect’s certificate for the Defendant dated October 31, 1994. The certificate shows the area to be 3,221 square feet.

[17] The Lease is for a term of twenty years. The commencement date was to be the earlier of June 1, 1995 and the date on which the tenant opened for business to the public.

[18] The minimum rent due and payable during the first five years was $51,000.00 per annum, payable in monthly instalments of $4,250.00. This rent is based on a rental of $17.00 per square foot. This is a triple net lease to the Landlord with the Tenant being responsible for its proportionate share of all expenses for the land and building.

[19] Since the actual square footage was certified at 3,221 square feet, the amount of minimum rent increased, accordingly, as set out in para. 2.2(iv) of the Lease Agreement.

Equipment Financing

[20] The parties entered into an Agency Agreement, dated May 2, 1995, to allow the Defendant to act as the Plaintiff’s agent to purchase restaurant equipment from various suppliers. At the same time, the Defendant undertook to obtain as low a price as reasonably possible for the equipment. The Defendant and the Plaintiff signed this document, and it was guaranteed by Andrew Simpson and Rimpi Simpson.

[21] The Agreement contains a provision that the Plaintiff and the guarantors were to pay for the equipment, and they would indemnify the Defendant with respect to the Agreement.

[22] The equipment was purchased and was subsequently financed through the Bank of Montreal.

[23] The Bank of Montreal granted a credit facility to the Plaintiff and Mr. and Mrs. Simpson in the amount of $515,000.00 and the breakdown of the facility is as follows:

1) Operating loan - $60,000.00;

2) Small Business Loans Act, R.S.C. 1985, c. S-11, demand loan - $250,000.00;

3) Capital demand loan - $175,000.00;

4) Letter of Credit in favour of the City of Ottawa - $5,000.00; and

5) Capital demand loan - $25,000.00.

Harvey’s Restaurant Licence Agreement.

[24] The parties also entered into two Licence Agreements.

[25] The parties entered into the first Licence Agreement for Harvey’s: the Defendant as licensor and the Plaintiff as licensee, and Andrew and Rimpi Simpson as guarantors. The term of the licence was for twenty years from the commencement date, which was estimated to be June 15, 1995. The actual commencement date was to be confirmed by letter, signed by the Defendant and the Plaintiff. Due to construction delays, the restaurant did not open until after June 15, 1995.

[26] The trading area for the Licence Agreement was set out and described in Schedule “E” to the Licence Agreement. Schedule “E” is entitled “Trading Radius” and delineates the trading radius area in red.

[27] Paragraph 1.05 of the Licence Agreement says that the Defendant would not establish a licence for another Harvey’s Restaurant Trading Radius during the first five years of the Licence Agreement. There are exceptions to the boundaries, including enclosed shopping centres, office complexes having a gross square footage in excess of 500,000 square feet, and all educational, transportation, military bases, and health care institutions.

[28] None of the exceptions applied in this case.

[29] Section 1.06(a) of the Agreement says that the Defendant could put another Harvey’s Restaurant within the Trading Radius. In such a case the Defendant could advise the Plaintiff and the Plaintiff would have the option for thirty days to apply for the rights to this operation in the Trading Radius.

[30] The Defendant actually opened another Harvey’s operation at St. Laurent Blvd. and Cyrville Road (the “Cyrville Site”) on March 29, 1999.

[31] A review of the Trading Radius in Schedule “E” of the Licence Agreement shows that the Cyrville Site was outside of the Trading Radius mentioned in the Licence Agreement.

[32] The licence fee was set at $50,000.00, and was paid.

[33] The Licence Agreement also provides for the payment of royalty and advertising payments, which were stipulated throughout the Agreement.

[34] Andrew and Rimpi Simpson both guaranteed the Licence Agreement, pursuant to para. 19.01 of the Agreement. These guarantees were joint and several and were for the full amount due and owing under the Licence Agreement.

Church’s Chicken Licence Agreement

[35] The parties also entered into a Licence Agreement, dated May 9, 1995, for a Church’s Chicken licence at the Walkley Site. Andrew and Rimpi Simpson guaranteed this Licence Agreement.

[36] The price for the licence, inclusive of product launch and GST was $8,827.50. This amount was paid by cheque, dated June 25, 1995. The licence term is for a period of seven years.

[37] Paragraph 3.1 of the Licence Agreement identifies the Trading Radius, which was to be set out in Schedule “E”. Schedule “E” of the Agreement is blank.

[38] The Plaintiff and Andrew and Rimpi Simpson signed the two Licence Agreements, and paid the fees.

[39] One of the terms of the Harvey’s Licence Agreement is that the share structure of the Plaintiff could not change without obtaining the consent of the Defendant. Andrew and Rimpi Simpson were two equal shareholders in the Plaintiff company. In August 1999, Rimpi Simpson transferred her shares to Andrew Simpson for nominal consideration with the written consent of the Defendant.

[40] The Plaintiff ran the business from June 1995 until February 21, 2002 when the Defendant terminated the Harvey’s Restaurant Licence Agreement. The Plaintiff continued to operate the restaurant until the Landlord terminated the Lease in May, 2002.

[41] The restaurant remained profitable from June 1995 until some time in 1998 or 1999, when it began operating below the breakeven projection set out in the Pro Forma Projection the Defendant provided.

[42] On January 14, 1998, Leesa Franklin, an area manager with the Defendant, prepared a memo following a conversation with Rex Fernando. I will deal with this incident in more detail below.

Hunt Club Road Location

[43] On December 5, 1996, the Defendant and Andrew and Rimpi Simpson entered into a Letter of Intent for a proposed location for a Harvey’s Restaurant at Merivale and Hunt Club Road. The Letter of Intent had numerous conditions, including that an offer to lease for the location had to be procured on or before April 30, 1997, failing which the Letter of Intent would become null and void.

[44] On May 11, 1998, Irene Fong, the Director of Financial Administration, sent a letter to Andrew and Rimpi Simpson advising that the Defendant was withdrawing the Letter of Intent for a number of reasons including the inability to locate a suitable site in the area.

Request for Financial Assistance by the Plaintiff

[45] In March 1999, the Cyrville Site opened.

[46] Between 1996 and 2002, numerous competitors opened in the area.

[47] Due to supply problems, the Defendant unilaterally terminated all Church’s Chicken Licence Agreements and offered compensation to the licensees. The Church’s Chicken licensees were provided with notice on or around July 10, 2000 that the Defendant was going to unilaterally terminate the Church’s Chicken licences

[48] Sales at the Walkley Site continued to drop after 1998-1999. The Defendant issued Notices of Default on several occasions for the default in payment of royalties, advertising and other fees. The Defendant also complained that the Plaintiff was not providing sales reports either at all or on a timely basis.

[49] The Plaintiff determined that it was having financial difficulties in April 1999. The Plaintiff requested financial assistance from the Defendant in 1999. Originally, the Defendant refused to provide any financial assistance. The Defendant eventually offered financial assistance to the Plaintiff in a letter dated October 9, 2001. The proposed assistance would reduce the amount payable by the Plaintiff by $48,264.00 from approximately $136,000.00 to $87,736.00, conditional upon such amount being paid within fourteen days. The reduced amount of $87,736.00 was not paid and, accordingly, no financial assistance was provided.

[50] The Defendant terminated the Harvey’s Licence Agreement on February 21, 2002, claiming that there were royalty and advertising arrears of $110,275.41 after the financial subsidy was applied.

[51] The Plaintiff did not pay the amount and continued to operate the restaurant.

[52] The Landlord issued a Notice of Distress dated March 19, 2002, claiming rent arrears of $57,044.53. The Plaintiff continued to operate and did not pay the rent arrears. The Landlord finally terminated the Lease on May 16, 2002. The restaurant closed.

[53] The Plaintiff commenced this action in October 2002.

[54] The Bank of Montreal obtained a judgment against the Plaintiff on March 24, 2004, in the amount of $162,842.06. No evidence was given as to whether the Bank of Montreal obtained judgment against Mr. and Mrs. Simpson.

[55] The Plaintiff at trial quantified its damages as follows:

1) $275,088.00 for damages for the value of the equipment lost, less accumulated depreciation.

2) loss of income of Mr. Simpson for: 2002 - $ 17,500.00

2003 - $ 35,000.00

2004 - $ 35,000.00

2005 - $ 35,000.00

2006 - $ 35,000.00

Total $157,500.00

3) interest on $162,842.06, being the judgment obtained by the Bank of Montreal against the Plaintiff. It is possible that the judgment was obtained against Mr. and Mrs. Simpson, but I cannot confirm that.

[56] In the Statement of Claim, the Plaintiff set out the following claims:

1) rescission of a License Agreement made between the Plaintiff as Licensee, and the Defendant, as Licensor, dated June 15, 1995, together with damages in the amount of $1,000,000.00;

2) in the alternative, damages for misrepresentation and for breach of agreement in the amount of $1,000,000.00;

3) an Interim, Interlocutory and Permanent Injunction restraining the Defendant from taking any steps to terminate the License Agreement or from exercising any remedies pursuant to the License Agreement, or otherwise;

4) damages for interest payments accrued and accruing on loans entered into with the Bank of Montreal the particulars of which will be provided at or prior to trial;

5) punitive or exemplary damages in the amount of $500,000;

6) pre-judgment and post judgment interest in accordance with the Courts of Justice Act, R.S.O. 1990, c. C-43.

7) costs of this action on a substantial indemnity basis, together with applicable Goods and Services Taxes;

8) such further and other relief as to this Honourable Court may deem just.

[57] At trial, the Plaintiff advanced a claim for lost wages on behalf of Mr. Simpson personally, in the total amount of $157,500.00 as set out above.

[58] No personal claim by Mr. Simpson has been pleaded in the Statement of Claim.

[59] In my view, the company is not entitled to make a claim personal to Mr. Simpson because the only plaintiff is the Plaintiff company.

[60] The only claims that the court will deal with at the trial are claims by the corporate Plaintiff.

[61] Accordingly, the claim for loss of wages by Mr. Simpson is not an issue before the Court.

C. Issues

[62] I am assuming that the Defendant as franchisor owed the Plaintiff as franchisee a duty of good faith and fair dealing.

[63] Based on this assumption, the issues to be decided are as follows. Assuming that there is a duty of good faith and fair dealing the Defendant owed to the Plaintiff, did the Defendant breach its duty of good faith and fair dealing to the Plaintiff:

1) to properly investigate the suitability of the Walkley Site prior to approving it;

2) to properly project the sales in the Pro Forma Projection and to identify the risks relative to the sales;

3) to assist the Plaintiff to deal with the square footage issue in the Lease;

4) to properly provide adequate training;

5) to properly conduct itself in relation to the Rex Fernando situation;

6) to treat the Plaintiff fairly in relation to operational issues of store inspections;

7) to provide financial assistance to the Plaintiff;

8) by opening the Cyrville Site when the Defendant knew that it would negatively impact on the Plaintiff’s site;

9) by terminating the Church’s Chicken Licence prior to the end of the term of the Licence;

10) by not providing compensation to the Plaintiff for the leasehold improvements and equipment when taking over the Plaintiff’s store?

[64] The issue in the counterclaim is whether the Plaintiff by Counterclaim is entitled to judgment against the Defendant by Counterclaim in the amount of $124,872.56 for unpaid royalties and other charges.

The Law on the Duty to Act in Good Faith in Franchise Relationships

[65] The standard to apply in determining whether the defendant has breached the duty of good faith is central to this case. Both parties agree that the licence agreements they entered into together were in substance franchise agreements. Further, both parties agree that franchisors and franchisees in Ontario have a duty to act in good faith in their dealings with each other. The Plaintiff does not contend that the Defendant owed it a fiduciary duty.

[66] The duty of franchisors and franchisees to act in good faith is a common law requirement that has been codified by s. 3 of the Arthur Wishart Act (Franchise Disclosure) 2000, S.O. 2000, c. 3 (“Arthur Wishart Act”). Notably, s. 2(2) of the Arthur Wishart Act imposes the duty to act in good faith on all franchise agreements before or after the coming into force of the Act, if the business in question is operated in whole or in part in Ontario.

[67] Section 3 of the Arthur Wishart Act states:

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

[68] The case law considered below provides guidance as to the meaning of the duty of good faith. In summary, the duty of good faith in franchise relationships requires the parties to act in the following manner:

• A party may act self-interestedly, however in doing so that party must also have regard to the legitimate interests of the other party.

• If A owes a duty of good faith to B, so long as A deals honestly and reasonably with B, B’s interests are not necessarily paramount.

• Good faith is a minimal standard, in the sense that the duty to act in good faith is only breached when a party acts in bad faith. Bad faith is conduct that is contrary to community standards of honesty, reasonableness or fairness (e.g. serious misrepresentations of material facts).

• Good faith is a two way street. Whether a party under a duty of good faith has breached that duty will depend, in part, on whether the other party conducted itself fairly.

[69] In the leading case of Shelanu Inc. v. Print Three Franchising Corp. 2003 CanLII 52151 (ON C.A.), (2003), 64 O.R. (3d) 533 (C.A.) (“Shelanu”), Weiler J.A. found that the duty of good faith allows a party to act in its own self-interest, while having regard to the legitimate interests of the other party. Justice Weiler stated at para. 68 of Shelanu (quoting with approval para. 33 of 978011 Ontario Ltd. v. Cornell Engineering Co. 2001 CanLII 8522 (ON C.A.), (2001), 53 O.R. (3d) 783 (C.A.)):

“Unconscionability” accepts that one party is entitled as of course to act self-interestedly in his actions towards the other. Yet in deference to that other's interests, it then proscribes excessively self-interested or exploitative conduct. “Good faith,” while permitting a party to act self-interestedly, nonetheless qualifies this by positively requiring that party, in his decision and action, to have regard to the legitimate interests therein of the other. The “fiduciary” standard for its part enjoins one party to act in the interests of the other -- to act selflessly and with undivided loyalty. There is, in other words, a progression from the first to the third: from selfish behaviour to selfless behaviour. Much the most contentious of the trio is the second, “good faith.” It often goes unacknowledged. It does embody characteristics to be found in the other two [emphasis added].

[70] Weiler J.A. continued at para. 69 of Shelanu:

There is at least one important difference between the duty of good faith and a fiduciary duty. If, for example, A owes a fiduciary duty to B, A must act only in accordance with B's interests when A exercises its powers or exercises a discretion arising out of the relationship. If, on the other hand, A owes a duty of good faith to B, A must give consideration to B's interests as well as to its own interests before exercising its power. Thus, if A owes a duty of good faith to B, so long as A deals honestly and reasonably with B, B's interests are not necessarily paramount [citations omitted].

[71] Further, at para. 70 Weiler J.A. approved of the following definition of good faith from Gateway Realty Ltd. v. Arton Holdings Ltd. 1991 CanLII 2707 (NS S.C.), (1991), 106 N.S.R. (2d) 180 (S.C.) at 191-192, aff'd 1992 CanLII 2620 (NS C.A.), (1992), 112 N.S.R. (2d) 180 (C.A.) (“Gateway Realty”), where Kelly J. stated:

The law requires that parties to a contract exercise their rights under that agreement honestly, fairly and in good faith. This standard is breached when a party acts in a bad faith manner in the performance of its rights and obligations under the contract. “Good faith” conduct is the guide to the manner in which the parties should pursue their mutual contractual objectives. Such conduct is breached when a party acts in “bad faith” - a conduct that is contrary to community standards of honesty, reasonableness or fairness.

[72] Finally, Weiler J.A. noted the duty of good faith must go both ways, stating at para. 74:

Whether or not a party under a duty of good faith has breached that duty will depend on all the circumstances of the case, including whether the party subject to a duty of good faith conducted itself fairly throughout the process.

[73] Another instructive case is Gerami v. Double Double Pizza Chicken Ltd., [2005] O.J. No. 5252 (Sup. Ct.), where Métivier J. dismissed the plaintiff franchisee’s action alleging bad faith, misrepresentation, and breach of contract. Métivier J. stated at para. 50 that the duty of good faith in a franchisor-franchisee relationship requires that “the party with more power, the franchisor, must give consideration to the franchisee’s interests as well as his own interests before exercising that power.”

Issues

1. Did the Defendant breach its duty of good faith and fair dealing to the Plaintiff by failing to properly investigate the suitability of the Walkley Site prior to approving it?

[74] The Plaintiff started the process of obtaining a Licence Agreement from the Defendant in 1990. At that time, the Plaintiff approached the Defendant about getting a Harvey’s licence. It took approximately four years to locate the Walkley Site.

[75] Andrew Simpson, one of the Plaintiff’s shareholders, worked together with Dan Koster, a representative of the Defendant, to find the site.

[76] Prior to finding this site, there was a Letter of Intent between the Plaintiff and the Defendant in relation to the Cyrville Site.

[77] The Cyrville Site Letter of Intent was terminated. A new Letter of Intent was entered into in 1994 for the Walkley Site. The Plaintiff thought the Walkley Site was a good one. From the evidence, the Walkley Site was good because it was profitable during the first three years of operation.

[78] It was only after three years that problems occurred at the Walkley Site. These problems were as follows:

1) increased competition in the area from other food vendors;

2) the termination of the Church’s Chicken licence;

3) the opening of the Cyrville Site; and

4) a reduction in sales at the Walkley Site.

[79] The Defendant had set out several concerns. Notwithstanding the Defendant’s concerns, the Plaintiff proceeded with the Walkley Site. Mr. Simpson testified that he consulted with his lawyer, Mr. Baldwin, about the Acknowledgment and other documents, when he signed the Acknowledgment and Pro Forma Projection. Mr. Baldwin returned the Acknowledgment and the Harvey’s Licence Agreement to the Defendant.

[80] The Defendant had concerns about the viability of the Walkley Site as far back as either 1994 or 1995.

[81] For example, there was a Letter of Intent from the Defendant to the Plaintiff for the Walkley Site, dated July 18, 1994, which Andrew Simpson signed. The document included the following:

Andrew Simpson does hereby confirm the foregoing proposal is acceptable to it, this 18th day of July, 1994, and acknowledges that Cara has not made, nor has Andrew Simpson relied on any representations, warranties or guaranties, express or implied, regarding the potential volume, profits or likelihood of success of the subject restaurant.

[82] As another example, the Defendant set out its concerns about the site viability in 1995 in the Licence Agreement, which the Plaintiff and the two guarantors signed.

[83] As another example, para. 1.02 of the Licence Agreement set out the Defendant’s concern with the Walkley Site.

This license relates solely to the location designated herein, and the granting thereof is subject to the terms and conditions herein contained. Without limiting the foregoing, prior to the execution of this License Agreement Cara has expressed to the Licensee Cara’s concerns over the viability of the site for the Subject Restaurant and Cara’s view that this could present a certain degree of commercial risk to the financial success of the Subject Restaurant. The Licensee acknowledges that based on its own investigations, survey and analysis of this site, it feels strongly that the Subject Restaurant will be very successful. By its execution of this License Agreement, the Licensee further acknowledges it is assuming the full risk for the Subject Restaurant and acknowledges that Cara has registered its concerns for the Subject Restaurant.

[84] The Plaintiff takes the position that the Defendant had to have regard to the legitimate interests of the Plaintiff. The Plaintiff argues that it should have been given proper warning about the perceived risks or concerns of the site operator. The Plaintiff also argues that it was the responsibility of the Defendant to represent and/or guarantee that the sales volumes and potential profits would be at a certain level and would continue for the foreseeable future.

[85] The Plaintiff argues that it was relying on the Defendant to determine whether the site was appropriate for the franchise, given the experience and expertise that the Defendant had.

[86] In my view, the Defendant would not have chosen a site that was going to fail. This would not be advantageous for its corporate image and would not give the right impression to either Harvey’s customers or to potential franchisees. In my view, the Defendant, in the interests of the franchisee and its own interests, would have chosen a site that would succeed.

[87] Mr. Simpson gave evidence that, as far as he knew, the Defendant had no concerns about the site. The Defendant approved the site, so Mr. Simpson thought it was a good one.

[88] In my view, the Defendant did have concerns about the site and these were set out in:

1) the Letter of Intent of July 18, 1994;

2) the Acknowledgement signed by Mr. Simpson; and,

3) para. 1.02 of the Harvey’s Licence Agreement.

[89] The Defendant put up several red flags as described above.

[90] If the Plaintiff had no concerns about the site,

1) why was he asked to sign the Acknowledgement;

2) why did he sign the Acknowledgement; and,

3) why did he sign the Licence Agreement containing clause 1.02 dealing with the concern about the site?

[91] The Plaintiff decided to proceed with the operation, notwithstanding these red flags.

[92] I find as a fact that the Defendant did not act in bad faith in relation to this issue and accordingly did not breach its duty of good faith.

[93] For the reasons set out above, the Plaintiff’s claim fails with respect to this ground.

2. Did the Defendant breach its duty of good faith and fair dealing to the Plaintiff by failing to properly project the sales in the Pro Forma Projection and to identify the risks relative to the sales?

[94] The definition in The Concise Oxford English Dictionary, 11th ed., s.v. “pro forma” is: “showing potential or expected income, costs, assets, or liabilities.”

[95] The word “expected” is included in the definition. While there can be an expectation of something, that expectation should not be considered a representation, warranty, or guarantee that the sales figures set out therein would in fact be achieved, now or at any time in the future.

[96] Near the bottom of the Pro Forma Projection, it clearly states that these are “projections” and they are based on “assumptions.” As stated previously, the sales volume in the Pro Forma Projection was either achieved or exceeded for the initial two to three years of operation.

[97] Mr. Simpson had the opportunity to review the Pro Forma Projection and, presumably, did review it. Mr. Simpson also had a chance to obtain outside feedback on this statement either from an accountant or some other financial advisor, should he have chosen to do so. There was no evidence that Mr. Simpson did consult with an accountant or other financial advisor.

[98] Mr. Simpson signed the Pro Forma Projection. He had legal counsel at the time that he signed it.

[99] Mr. Baldwin, Plaintiff’s counsel, returned the statement Mr. Simpson signed, together with the Acknowledgement about the viability of the Walkley Site.

[100] Projections are just that – projections. There is no guarantee of what they will be. These projections were prepared in 1994, one year before the actual store opened in the summer of 1995.

[101] In relation to the issue of “identifying the risks relative to the sales,” many people who invest in a franchise are under the impression that going into a franchise business means that they are almost guaranteed that the business risks are minimized and that profits are a certainty because they are paying a franchise fee and have the backing of the franchise organization. In my view, this is a mistaken apprehension on the part of franchisees. Things change very quickly in our society, whether it is new products being developed, or services being provided; what is hot one day is not the next day.

[102] In the Pro Forma Projection, the Defendant identifies the fact that there were risks involved in the operation.

[103] The Pro Forma Projection that Mr. Simpson signed contains a disclaimer clause at the bottom of the page. The disclaimer reads as follows:

The above projections are based on assumptions which as at the date of making the projections, are considered reasonable and realistic individually and taken together but which are inherently subject to uncertainty and variation depending on evolving events. No representation whatsoever is made that the said projected sales volumes will be attained or that operating costs will not exceed the projected level. All projections are estimated forecasts only and are in no way to be considered guarantees of the performance or profitability of the franchised location. Prospective franchisees are urged to conduct their own investigation prior to signing any franchise agreement to determine whether they might succeed and prosper as a Harvey’s/combo franchisee. No revisions to these projections shall be effective unless produced in writing, signed by an authorized representative of Cara Operations Limited and submitted to the prospective franchisee.

[104] This disclaimer is very clear. Furthermore, Mr. Simpson acknowledged having read the Pro Forma Projection and signed it.

[105] The Plaintiff argues that since Cara provided Mr. Simpson with a Pro Forma Projection showing the sales he should expect from that site, that he had relied entirely on Cara and its knowledge of the market, knowledge of the store, and knowledge of the sales of other stores, to determine that this was a good site.

[106] I do not agree with this position.

[107] The Pro Forma Projection specifically and clearly says that the Plaintiff is not relying on the representations and warranties in the Pro Forma Projection.

[108] The Plaintiff argues that it was incumbent upon the Defendant to provide accurate information in relation to sales projections, and the Plaintiff submits that it did not.

[109] The Plaintiff argues that the Pro Forma Projection does not accurately represent cash flow because there is no line item for depreciation. In my view, such a projection would not include depreciation. That would be included on an income statement as opposed to this statement.

[110] The Plaintiff’s counsel also argues that the Pro Forma Projection does recognize the cash flow for paying down the principal balance of any outstanding loans. In my view, the Plaintiff should have considered that with his own accountant or the financial advisor when reviewing the Pro Forma Projection, as opposed to assuming that it was the responsibility of the Defendant to do that.

[111] The Plaintiff admitted in his evidence that he did not ask for changes to the Licence Agreement for either Harvey’s or Church’s Chicken.

[112] According to the evidence, Mr. Simpson did not ask about changing the wording of either of the two Licence Agreements. He said that the Harvey’s Licence Agreement was “carved in stone.” He said the same thing about the Church’s Chicken Licence Agreement. Mr. Simpson said that there was a rush to get the agreements signed and returned, but there was no evidence the Plaintiff attempted to negotiate the terms of these agreements.

[113] Having read para. 1.02 of the Harvey’s Licence Agreement and the Acknowledgment, and the Letter of Intent of July 18, 1994, and having heard the oral evidence, I find as a fact that there is no representation, warranty and/or guarantee relating to the sales volume and potential profits. The documentary evidence specifically denies that there is any representation, warranty or guarantee.

[114] I find that there was no failure by the Defendant to properly project sales in the pro forma statement. I also find that there was no obligation on the part of the Defendant to identify risks relative to sales.

[115] Accordingly, for the reasons set out above, this portion of the Plaintiff’s claim fails.

3. Did the Defendant have a duty to assist the Plaintiff to deal with the square footage issue in the Lease? If it did have such a duty, did it satisfy that duty?

[116] The Plaintiff and the Landlord entered into an Offer to Lease dated March 31, 1995, for the Walkley Site. The parties subsequently entered into a Lease, dated March 31, 1995. Neither the Offer to Lease nor the Lease was guaranteed by either Andrew or Rimpi Simpson. The Lease originally had provision for the Defendant to sign. This was deleted and there was no evidence that the Defendant signed the Lease.

[117] There is a Schedule “E” to the Lease which says that Cara was only a party to the Lease solely for the purpose of enforcing its rights as set out in Schedule “E.”

[118] The Offer to Lease indicates that the square footage is as set out. I reviewed the document and found no indication of what the square footage was.

[119] It is subsequently clarified in para. 1.2 of the Lease that the leased area is 2,700 square feet. The “2,700” is struck out and the number “3,000” typed in. The Lease contains a provision that the exact area is subject to certification by an architect and/or other certified person.

[120] At trial, the Plaintiff testified that it disputed the amount of the square footage of its premises. It argues that it was paying rent for an area that was not part of its premises. The Plaintiff did not produce any certificate by any architect or other certified person as to its square footage of the area.

[121] The Plaintiff argues that the disputed area was in relation to a stairwell of approximately 221 square feet. The Plaintiff also argues that the Defendant had a duty to assist it to deal with the Landlord concerning the calculation of the square footage.

[122] I do not agree with the Plaintiff’s position. If the Plaintiff had a problem with the square footage, it should have dealt directly with the Landlord. The Offer to Lease and the Lease were between the Plaintiff and the Landlord. The Defendant was not directly involved with the Lease, except possibly as in relation to those items mentioned in Schedule “E.” The Plaintiff chose not to deal directly with the Landlord and insisted that the Defendant advocate its position. The consequences of this are seen later in May 2002, when the Landlord terminated the Lease.

[123] Clause 22.16 of the Lease provides a mechanism to deal with disputes under the Lease. All disputes between the Landlord and the parties to the Lease as to any matters set out in the Lease are governed by the arbitration provisions set out in that clause. The Defendant is not a party to the Lease, or to the arbitration clause contained in the Lease. Under the terms of the Lease, disputes are to be resolved by a mutually agreeable arbitrator, or alternatively by a three member arbitration board if the parties can not agree as to the single arbitrator. Any arbitration decision is to be final and binding upon the parties. The costs of arbitration are to be split evenly between the parties.

[124] Neither party provided evidence that the provisions of Clause 22.16 were used.

[125] The Landlord obtained an architect’s certificate which was prepared by Thompson and Brandt dated October 31, 1994. It calculated the leased area at 3,221 square feet.

[126] Plaintiff’s counsel admitted that there was no documentation before the Court disputing the square footage. Throughout the trial, two different square footages were given: 3,231 square feet and 3,221 square feet.

[127] Having reviewed the documents, I find as a fact that the square footage for the leased premises was 3,221 square feet. The minimum rent for the property was $17.00 per square foot, plus additional rents for various items including hydro, realty taxes, and common element expenses.

[128] I find as a fact that the Defendant was not a party to the Lease or if it was, it was only a party in relation to Schedule “E” and did not have a duty to deal with the Landlord or the disputed square footage.

[129] I find that the Plaintiff did not deal with the issue of the square footage of the leased area in accordance with the terms of the Lease.

[130] Accordingly, this portion of the Plaintiff’s claim must fail.

4. Did the Defendant breach its duty of good faith and fair dealing to the Plaintiff by failing to properly provide adequate training?

[131] The issue with respect to training is limited to accounting and managerial training. There was no issue raised at trial of failure on the part of the Defendant to provide adequate operational training. It was satisfactory.

[132] Andrew Simpson testified that he received eight to twelve weeks of training in several Harvey’s locations. Rimpi Simpson testified that she did not take the training from the Defendant as she had two young children to care for. She testified that she trained at the Walkley Site, approximately six months after it opened, through her husband, Andrew Simpson.

[133] When applying with the Defendant, Mr. Simpson filled out an application form, which is part of Exhibit 2, Vol. 2, Tab 6 at this trial. At that time, in April 1990, he listed his occupations as:

1. Manager of ICI (paint store distributor), 1405 Bank St, Ottawa, Ontario.

2. Manager of Second Cup, Rideau Centre, Ottawa, Ontario.

[134] He described his duties as follows:

I am presently responsible for (approx.) eight employees. My duties include: payroll input, organize work schedules, employee reviews, serving customers, inventory control, banking (deposits, etc.) opening and closing procedures.

[135] He also indicated his business experience as follows:

COMPANY ADDRESS POSITION

Simpson’s [Hardware] 484 Rideau Street Manager

Bagelmania Rideau Center Manager

ICI (Current) 1405 Bank Street Manager/full time

Second Cup (Current) Rideau Center Manager/part time

[136] Mrs. Simpson testified that she had obtained a two-year business degree at Algonquin College. She also testified that prior to working at Harvey’s, she had worked in a bank for eight years as a teller and a commercial teller. She testified that she worked at Loeb’s in marketing for eight years.

[137] The Plaintiff claims that it was not given adequate training in the area of accounting and managerial voids. These problems occurred when Mr. Rex Fernando was in the Plaintiff’s employ as a manager.

[138] The evidence from Andrew Simpson is that the total amount of money lost through cash missing or voids while Mr. Fernando was manager was approximately $1,000.00. While I understand the Plaintiff was concerned that there was no training on missing cash or voids, I am unable to see how the loss of money was the Defendant’s responsibility.

[139] There was no evidence given that there were any managerial or accounting problems either before or after the Rex Fernando situation, i.e. nothing before January 1998 and nothing after November 1998.

[140] From the evidence given, managerial problems started and ended with the Rex Fernando situation.

[141] The Plaintiff argues that sales declined in part because of the Rex Fernando situation and the lack of adequate training. In my view, this is incorrect. This incident happened while the business was profitable, not when it was unprofitable. The non-payment of royalties does not appear to have had anything to do with the Rex Fernando situation either. Royalties and advertising were based on sales. The evidence of Mr. Simpson was that there was $1,000.00 missing, and in my mind perhaps there was $1,000.00 of unrecorded sales, but that appears to be the total amount of the loss.

[142] The Defendant argues that adequate training was provided. The Plaintiff testified that he received a minimum of eight weeks training in several of the Defendant’s locations.

[143] The Defendant argues that if there had been a lack of training, the store would not have been successful for the first three years.

[144] Lastly, the Defendant argues that there was no documented evidence of training deficiencies, since the Plaintiff subsequently learned how to do cash voids from the Defendant’s auditor.

[145] There is no evidence of loss of staff because of lack of training. There is no evidence of loss of business directly attributed to a lack of training.

[146] I find that the duty of the Defendant to provide adequate training was met. In the event that there was a gap in the training the Defendant provided, I find that the gap was so insignificant that it did not affect the overall operation of the restaurant.

[147] I also find that the missing $1,000 cannot be attributed to the Defendant as the loss was not a direct result of the Defendant’s training or lack thereof.

[148] Accordingly, this part of the Plaintiff’s claim fails.

5. Did the Defendant breach its duty of good faith and fair dealing to the Plaintiff to properly conduct itself in relation to the Rex Fernando situation?

[149] Rex Fernando worked for the Plaintiff for approximately one year in a managerial position.

[150] At some point in time, Fernando had concerns about the Plaintiff’s operation. He approached Leesa Franklin, an area manager for the Defendant, directly and expressed his concerns to her.

[151] During a meeting held without the Plaintiff’s knowledge, Fernando made about allegations against the Plaintiff and Rimpi and Andrew Simpson. Ms. Franklin decided initiate her own investigation. The investigation included a memo from Leesa Franklin to Edwin Falzon, an employee of the Defendant, dated January 14, 1998, which set out concerns of an operational nature.

[152] For reasons known only to Leesa Franklin, she decided to take matters into her own hands and interviewed Rex Fernando without advising the Plaintiff of what she was doing.

[153] Thereafter, she wrote an internal memo to the Defendant, dated January 14, 1998, setting out her position with respect to the matter. The last few paragraphs of the memo read as follows:

I can verify that Mrs. Simpson has had serious “run ins” with John Donnelly, Dave Diehl (RDS), Sue Oppedisano, guests and myself on occasion. In all instances she has demonstrated an explosive temper which I compare to a “flying into a rage”. She can be very charming when she wants something; however, she is unmanageable when things do not go her way. I liken her personality to a “Jekyll and Hyde” character. I can also verify that the Simpson’s [sic] had violated operational procedures since I have documented serious pre-cooking of product. Recently I have observed the continued violation of the no pre-cooking policy. However, I had no idea of the extent of their alleged unacceptable business practices.

I find no excuse for this behaviour and feel that we must take this issue very seriously and conduct a thorough investigation as soon as possible. If these allegations prove truthful, we should do everything within our power to remove them as franchisees. I realize there are legal issues; however, due to the seriousness of the issues and the destructive personality of Mrs. Simpson I do not feel that this couple can be rehabilitated. I am also concerned for the jobs of existing employees and management who continue to work with the Simpson’s [sic] once this issue is in the open. Although most of the issues seem to directly involve Rimpi Simpson, Andy Simpson must also accept equal responsibility. He is a partner in the operation and he has always fully supported his wife’s actions.

Submitted for your review and consideration.

[154] The Plaintiff argues that this situation damaged the relationship between the Plaintiff and the Defendant.

[155] The Plaintiff argues that based on the evidence, Rex Fernando identified minimal or trivial items that could have been easily addressed by sitting down with the Simpsons and addressing operational issues, instead of going to Leesa Franklin, who in turn prepared the memo.

[156] The Plaintiff alleges that Rex Fernando was stealing from them. The evidence before the court was that the maximum was $2,000.00 in total.

[157] The Rex Fernando situation lasted from January 1998 through to November 1998.

[158] A meeting was held on November 3, 1998, between the Plaintiff and representatives of the Defendant. Subsequently, a letter dated November 6, 1998, was written by Mr. Marcel Laverdière, General Manager for the Defendant, to the Simpsons, setting out three issues which had been of concern to the Defendant, as follows:

1) payment for statutory holidays;

2) dealing with cash shortages; and

3) rinsing of hamburgers.

[159] The Defendant took the position in that letter that the aforesaid three issues had since been resolved and that the matter was at an end.

[160] Mr. Simpson testified that he felt that his and his wife’s reputations had been severely tarnished and that they were not perceived as good franchisees.

[161] Mr. Laverdière gave evidence that Rimpi Simpson requested that Leesa Franklin no longer be the area manager involved in dealing with the Plaintiff. Mr. Laverdière had advised her that this was not possible. He felt that the relationship between the Simpsons and Ms. Franklin could be resolved so that they could work together again.

[162] While I agree that Leesa Franklin’s behaviour in this matter was inappropriate, I do not see how it would affect the relationship between the Plaintiff and the Defendant. The evidence before the court was that the operational issues began and ended with the Rex Fernando situation.

[163] What Leesa Franklin stated in her memo was in some parts unprofessional and less than appropriate. In particular, on page 9, referring to Mrs. Simpson, she wrote:

She can be very charming when she wants something; however, she is unmanageable when things do not go her way. I liken her personality to a “Jekyll and Hyde character.”

[164] The Plaintiff argues that the Rex Fernando situation resulted in the Plaintiff being stigmatized as being “a bad operator”.

[165] The duty the Defendant owed to the Plaintiff, as set out in Gateway Realty, supra, was to exercise its rights under the Licence Agreement honestly, fairly, and in good faith. This standard is breached when a party acts in a bad faith manner in the performance of its rights and obligations under an agreement.

[166] The Plaintiff’s position is that the memo labelled the Plaintiff a bad operator, which tainted the relationship between the Plaintiff and the Defendant, which in turn led to the loss of the proposed Hunt Club franchise.

[167] In my view, Franklin prepared and distributed the memo based on allegations made by Rex Fernando about the conduct of the Plaintiff’s operation. That memo was prepared for internal use by the Defendant. The memo drew certain conclusions. It was distributed to other employees of the Defendant for the purpose of solving problems.

[168] In my view, it was proper for the employees of the Defendant to engage in frank discussions, draw tentative conclusions, and make proposals on how to deal with the problems.

[169] In my view this is not a breach of the duty of good faith and fair dealing.

[170] By November 1998, the Defendant concluded that the problems had been resolved.

[171] I am of the view that the Rex Fernando situation did not label the Plaintiff and the Simpsons as bad operators. The sales at the Plaintiff’s location were down. Being a bad operator within the Harvey’s family would not affect store sales. Sales would be generated from customers who knew nothing about the Rex Fernando situation.

[172] The Plaintiff also argues the reason that the proposal to run the Merivale-Hunt Club location was terminated because of the letter of May 11, 1999 from Irene Fong, in which she notes “...our current uncertainty about your ability to operate a second restaurant at this time given the concern we have expressed to you regarding the operation of the existing restaurant at St. Laurent and Walkley as outlined to you dated March 31, 1998.”

[173] The Plaintiff acknowledges that this was not the only reason why it did not get the Merivale location, but argues that it was a significant reason.

[174] The Defendant argues that it had a right to investigate the allegations Mr. Fernando made, and that there is no evidence that the investigation was conducted in bad faith. In addition, the Defendant argues that there is no evidence that the issues surrounding the Rex Fernando situation persisted or impacted the Plaintiff’s operation in any material manner going forward.

[175] In reality, while the Rex Fernando situation was one reason for the Plaintiff not getting the Hunt Club site, the major reason was that the Defendant was unable to locate a suitable site in the area. Without a suitable site, there could be no Harvey’s operation at that location.

[176] In my view, the operational issues existed in relation to the Rex Fernando affair from January 1, 1998 to November 1, 1998, for a total of eleven months. After that, there were no further operational issues with respect to this, and the matter was over.

[177] I do not see how the issue of acting in good faith and fair dealing under the Arthur Wishart Act can apply here, save and except for Leesa Franklin having made a bad decision to deal with Rex Fernando without the knowledge of the Plaintiff.

[178] The Rex Fernando situation raises three issues:

1. payment of statutory holidays;

2. the deduction of cash shortages for wages; and

3. the rinsing of improperly garnished hamburgers.

[179] The Plaintiff argues that this was a default under the Licence Agreement. When asked whether a Notice of Default had been sent by the Defendant because of these two issues, Mr. Simpson’s answer was “no.” Obviously, the Defendant did not feel that these issues were sufficient enough to issue a Notice of Default.

[180] Mr. Laverdière, the Director of Operations of the Defendant, testified that after November 1998, the location was not a problem restaurant. As far as Mr. Laverdière was concerned it was an “average to good” restaurant and there were no operational concerns.

[181] I agree with the Defendant that the issues related to the Rex Fernando situation did not affect the Plaintiff’s operations in any material way.

[182] In my view, Leesa Franklin made an error in dealing with this matter. She should have involved the Plaintiff and the Simpsons from the very beginning in this matter. For whatever reason, she did not. Mr. Laverdière acknowledged that Ms. Franklin made an error in contacting and dealing with Mr. Fernando first instead of dealing with the Simpsons first.

[183] The Defendant argues that the only relevant question that arises from this issue is whether the Defendant’s investigation of the Rex Fernando situation was conducted in bad faith, poisoning the Plaintiff’s relationship with the Defendant, and causing the Defendant to treat the Plaintiff in a way that substantially removed the benefits bargained for under the Licence Agreement. The Defendant argues that the evidence is not capable of supporting this conclusion.

[184] I find that there is no evidence that the Defendant treated the Plaintiff unfairly.

[185] There is simply no evidence that the issues surrounding the Rex Fernando situation impacted the Plaintiff in any material way going forward. The Plaintiff did not suffer the stigma of a “bad operator”. The evidence from Mr. Laverdière and the evidence from the store reports was that the Plaintiff’s store operated on an “average to good” level.

[186] I accept the Defendant’s argument that it did not deal in bad faith with respect to the Rex Fernando situation.

[187] Accordingly, this portion of the Plaintiff’s claim fails.

6. Did the Defendant breach its duty of good faith and fair dealing to the Plaintiff by failing to treat the Plaintiff fairly in relation to operational issues of store inspections?

[188] The Plaintiff argues that the failure to treat the Plaintiff fairly with respect to operational issues related to the store inspections was a breach of the duty owed by the Defendant to the Plaintiff.

[189] The Plaintiff argues that the operational issues were never settled and that they continued throughout the relationship between the Plaintiff and the Defendant.

[190] The Defendant argues that the store inspections were acceptable. It says that there was a report on December 1, 2000 with a rating of 85 percent; December 7, 2001, 63 percent and February 14, 2002 is 92 percent.

[191] Mr. Laverdière described the Plaintiff’s operation as being an “average to good store.” The Defendant argues that there was no mention of operational issues in any Notice of Default, not even in the Notice of Termination.

[192] The Defendant also argues that there was no lingering stigma from the Rex Fernando situation that affected the store operations.

[193] I do not see how the Defendant failed to treat the Defendant fairly with respect to operational issues. The store was classified as “average to good.” Neither the Notices of Default nor the Notice of Termination mentioned anything about store inspections. For the most part, the defaults were in payment of royalties and other fees as well as missing reports.

[194] For the reasons set out above, this portion of the Plaintiff’s claim fails.

7. Was there an obligation by the Defendant to provide financial assistance to the Plaintiff? Did the Defendant fail to provide the financial assistance?

[195] The Plaintiff argues that the Defendant had provided financial assistance to other franchisees in the past and that it was entitled to financial assistance. The Plaintiff also argues that the Defendant should have assisted the Plaintiff because sales were below the breakeven point as set out in the Pro Forma Projection. The Plaintiff did not submit any evidence or documents showing that there was a requirement for the Defendant to provide financial assistance to the Plaintiff. At trial, Mr. Simpson said other franchise operations had been provided financial assistance. No evidence was given as to what the circumstances were when financial assistance was provided.

[196] The Plaintiff gave evidence that it requested financial assistance from the Defendant and persisted with this request. These requests started in 1999. By letter dated October 9, 2001, the Defendant agreed to provide retroactive financial subsidies. At that time, the Defendant calculated there was $168,638.88 owing by the Plaintiff for royalties and advertising fees. The Defendant offered subsidies totalling $48,264.00, inclusive of GST. This amount was later revised in February 2002 to $57,363.17. The breakdown is as follows:

Year Sales ($) Credit Amount

1998/99 935,703.98 11,696.30 Royalty Charges @ 5% per subsidized terms s/b 3.75% = 1.25%

1999/00 925,823.86 11,572.80 Royalty Charges @ 5% per subsidized terms s/b 3.75% = 1.25%

2000/01 939,735.51 11,746.69 Royalty Charges @ 5% per subsidized terms s/b 3.75% = 1.25%

2001/02 743,786.08 18,594.65 Royalty Charges @ 5% per subsidized terms s/b 2.50% = 2.50%

53,610.44

GST 3,752.73

Total $57,363.17

[197] The subsidies totalled $57,363.17, inclusive of GST. Had the Plaintiff accepted the subsidy, there would still be arrears of royalties of at least $110,000.00 as of February 2002. The Plaintiff did not appear to have enough financial resources to pay this amount. The Plaintiff did not provide any evidence that it could pay this amount. In any event, the Plaintiff’s actions of not paying the amount showed that its financial situation was precarious.

[198] At one point, a letter was sent by the Defendant to the Plaintiff offering to buy the store for $65,000.00. Unfortunately, the terms of the Defendant’s buy-out were unclear. Some of the unanswered questions about this purchase were as follows:

a) Was the $65,000.00 to include the elimination of the royalties and advertising fees in whole or in part?

b) Was the $65,000.00 to be paid to the Plaintiff with the Defendant assuming the Lease and the equipment loan?

[199] Unfortunately, there are very few specifics set out in the letter by the Defendant of what this transaction contemplated and how it would be completed.

[200] In addition, the Defendant gave evidence that it purported to send over a potential buyer and/or buyers to the Plaintiff to purchase the franchise. Unfortunately, the Defendant did not call the Plaintiff to advise that the Defendant was making referrals of potential buyers. Mr. Simpson testified that when he did receive a telephone call from a potential buyer, he did not provide much information to the potential buyer and the Plaintiff did not take the matter any further. He said that he had not received any indication from the Defendant that potential buyers were being referred by it to the Plaintiff. One phone call from the Defendant might have changed that; unfortunately, no one from the Defendant made the call.

[201] I find that there was no contractual obligation for the Defendant to provide financial assistance to the Plaintiff. In addition, I find that there was no other obligation that the Defendant was to provide financial assistance to the Plaintiff.

[202] Accordingly, this part of the Plaintiff’s claim must fail.

8. Did the Defendant breach its duty of good faith and fair dealing by opening the Cyrville Site when the Defendant knew that it would negatively impact on the Plaintiff’s site?

[203] According to the Pro Forma Projection, the weekly breakeven point was $18,186.00.

[204] As stated previously, and according to the Plaintiff’s figures, the Walkley Site was profitable from the store opening in June 1995 through to about week 38 of the 1998-1999 year. In my view, the store was profitable until approximately September 1998.

[205] After that time, sales dropped consistently below the projected breakeven point.

[206] The Cyrville site was opened in March 1999.

[207] There is a chart in Exhibit 3, Vol. 1, Tab 25 that sets out major occurrences during the lifetime of this franchise in the area of the Walkley Site. The following is a summary of matters that occurred during the relevant time period are as follows:

1) McDonald’s Walkley Road opens approximately August, 1996;

2) Taco Bell/Pizza Hut Combo opens approximately March 28, 1996;

3) Licks opens approximately June 1998;

4) Harvey’s Cyrville Site opens March 29, 1999;

5) Tim Horton’s Innes Road opens approximately April, May, 1999;

6) Wendy’s/Tim Horton’s Walkley Road opens approximately December 2000;

7) The Church’s Chicken product stops being sold during week 17, approximately August 2001;

8) McDonald’s Innes Road opens March 5, 2002;

9) Harvey’s Walkley Road closes May 16, 2002.

[208] In 1996, shortly after the Plaintiff opened the Walkley Site, the Defendant prepared an impact study of the Cyrville Site. The study indicated that there would be a 3.9 percent impact by the Cyrville Site on the sales of the Walkley Site.

[209] The Defendant had a duty of good faith and fair dealing to ensure that it did not open up a new location within the Plaintiff’s Trading Radius as set out at the Harvey’s Licence Agreement, subject to certain exceptions, none of which applied in this case.

[210] The Defendant did not breach the duty of good faith and fair dealing. The Licence Agreement specifically set out the Trading Radius. The new location did not contravene the terms of the Licence Agreement.

[211] The Cyrville Site was clearly outside the protected area of the Plaintiff. This is confirmed in the Licence Agreement, and it is further confirmed by Exhibits 5 and 8, which show the Cyrville Site in relation to the Walkley Site. I find that the Defendant was fully within its rights to open the store at the Cyrville Site, as it was outside the protected trading radius area and was allowed by the Licence Agreement.

[212] Accordingly, for the reasons set out above, this part of the Plaintiff’s claim must fail.

9. Did the Defendant breach its duty of good faith and fair dealing by terminating the Church's Chicken Licence prior to the end of the term of the Licence?

[213] The Licence Agreement between the Defendant and the Plaintiff to sell Church’s Chicken was for a period of seven years, from the summer of 1995 to the summer of 2002.

[214] Due to supply problems and batter issues, the Defendant unilaterally pulled the Church’s Chicken product, thereby terminating the Church's Chicken licence about five years into the seven-year agreement.

[215] In a memo of July 10, 2000, the Defendant offered compensation to the franchisees for the early termination of their Church's Chicken licence. The amount of compensation was predetermined by the Defendant. The compensation was set at a credit equal to $7,500.00 plus $2,500.00 for ever year, if any, remaining under the initial seven-year Lease Agreement up to a maximum remaining of $20,000. In this case, assuming there were two full years remaining in the Church’s Chicken’s Licence Agreement, the credit would be approximately $12,500.00. The memo specified that “these credits must be applied firstly, towards rejuvenation requirements; and secondly towards outstanding financial obligations to Harvey’s, if any.”

[216] Based on the evidence before the Court as to the quantum of arrears owed by the Plaintiff to the Defendant, any credit from the Defendant would be credited towards the outstanding debt to the Defendant of $12,500.00. No evidence was given at trial that there were any rejuvenation requirements at the Walkley Site. In any event, the franchisees had to opt in to obtain the rebate from the Defendant. There is no evidence whether the Plaintiff opted in for the rebate or not. Notwithstanding this, I find that the Defendant’s offer to Church’s Chicken Licence holders was a “take it or leave it” proposition. In my view, the quantum being offered by the Defendant was less than fair.

[217] It was the Plaintiff’s evidence that the cost of the equipment for Church’s Chicken was $60,000.00 and the franchise fee was $7,000.00 plus GST. The total was $71,690.00 inclusive of GST.

[218] In accordance with s. 3(2) of the Arthur Wishart Act, there was a duty on the Defendant to act in good faith in relation to the Church’s Chicken Licence Agreement. It did not do so. The Defendant had supply problems and withdrew the product from the market. It offered an arbitrary amount for compensation to franchisees.

[219] The withdrawal of this product led to the unilateral termination of this Licence Agreement.

[220] The Plaintiff acted in good faith in relation to this Licence Agreement.

[221] Accordingly, the Defendant breached its duty of fair dealing.

[222] Based on the aforesaid, I find that the Defendant did breach its duty of fair dealing with respect to Church’s Chicken Licence. The Plaintiff should be entitled to damages.

[223] The Plaintiff’s damages would include the inability to use the equipment and the loss of profit.

[224] In relation to the inability to use the equipment, the total cost of the equipment and franchise fee was $71,690.00. The term of the licence was seven years. If the $71,690.00 is divided by seven on a straight-line depreciation basis, the depreciation would be $10,240.00 per year. As there were approximately two years left in the Licence Agreement, the total amount of damages for the inability to use the equipment is $20,480.00. I find that the Plaintiff is entitled to damages of $20,480.00 for the lost use of the equipment and the franchise fee.

[225] The burden is on the Plaintiff to show that there was a loss of profit on a balance of probabilities. There is very little evidence as to the loss of profit. The entire business, including Harvey’s and Church’s Chicken was profitable for approximately three years. The operation as a whole became unprofitable for about two years.

[226] In my view, the Plaintiff has not met the burden on a balance of probabilities of how much the loss of profit would be for the Church’s Chicken portion of the operation.

[227] Accordingly, no damages are awarded for the loss of profit.

[228] I find that the Plaintiff is entitled to judgment against the Defendant for $20,480.00 for this portion of the claim.

10. Was the Defendant required to provide compensation to the Plaintiff for the leasehold improvements and equipment?

[229] The Defendant terminated the Harvey’s Licence Agreement by letter dated February 21, 2002. The termination was effective February 21, 2002. Notwithstanding the termination, the Plaintiff continued to operate the store until May 16, 2002, when the Landlord terminated the Lease, due to the Plaintiff being in default of various provisions of the Lease. It was the Landlord terminating the Lease that actually closed the restaurant operation.

[230] The store remained closed for approximately eight weeks at which time the Defendant opened the location as a corporate store.

[231] After the Lease was terminated, the Defendant made arrangements with the Landlord to go into possession and lease the premises. There was no evidence given as to how much, if any, the Defendant paid with respect to the rent arrears. The evidence is that at the time of the termination there were arrears under the Lease of approximately $55,000.00.

[232] There was evidence by way of a photocopy of a cheque stub, number 199463, from the Defendant dated June 25, 2002, that it had paid $58,650.00 to the Bank of Montreal for the equipment, as the equipment was secured in favour of the bank.

[233] In my view, the payment of $58,650.00 by the Defendant to the Bank of Montreal is not an indication of how much money the Plaintiff owed to the Bank of Montreal, but rather the fair market value of the security at that time.

[234] The Plaintiff argues that it should be entitled to compensation from the Defendant for the equipment that the Defendant purchased from the Bank of Montreal. It is my understanding that the Plaintiff argues that the Defendant was receiving the benefit of buying the equipment at a lower price than the depreciated value of the equipment.

[235] I fail to understand the Plaintiff’s argument as to why the Plaintiff would be entitled to receive compensation for the equipment. It owed money to the Bank of Montreal for the equipment.

[236] In addition, the Plaintiff owed rent arrears of approximately $55,000.00 and royalty fees of $124,782.56. There does not appear to be any logical reason why the Defendant should be liable to the Plaintiff for the payment for leasehold improvements. The leasehold improvements became part of the leased premises. The equipment was secured in favour of the Bank of Montreal. If the equipment had been free and clear there still would have been the Landlord’s priority to the equipment proceeds to pay rent arrears.

[237] The duty the Defendant owed to the Plaintiff under the Licence Agreement, as set out in Gateway Realty, supra, was to act honestly, fairly, and in good faith. This standard is breached when a party acts in a bad faith manner in the performance of its rights and obligations under a licence.

[238] The Plaintiff originally owned the equipment. It was secured in favour of the Bank of Montreal.

[239] The Plaintiff was in arrears under its lease with the landlord. The Plaintiff was in arrears under the Licence Agreement with the Defendant.

[240] The landlord terminated the Lease and closed the Plaintiff's operations.

[241] The Defendant purchased the equipment from the Bank of Montreal for $58,650.00. I have assumed that the Bank of Montreal sold the equipment in a commercially reasonable manner for fair market value.

[242] I see no evidence of how the Defendant breached its duty of good faith and fair dealing to provide compensation to the Plaintiff for the leasehold improvements of the equipment. There was no duty owed by the Defendant to the Plaintiff under the Licence Agreement or elsewhere in relation to this portion of the Plaintiff’s claim.

[243] Accordingly, for the reasons set out above, this portion of the Plaintiff’s claim fails.

Summary of Plaintiff’s Claim

[244] In relation to the Plaintiff’s entire claim, I am satisfied that the Plaintiff was able to prove a breach of good faith only in relation to the termination of the Church’s Chicken Licence.

[245] The breach will entitle the Plaintiff to damages that I fix at $20,480.00.

D. The Counterclaim

Issue: Is the Defendant entitled to judgment against the Plaintiff in the sum of $124,872.56 as set out in its counterclaim?

[246] The Defendant counterclaimed the sum of $124,872.56 for royalty fees, advertising and other fees.

[247] Mr. Nevio Leon, the Director of Financial Reporting at the Defendant company, testified that the Plaintiff had not paid these amounts, and royalties were still outstanding. He testified that he had reconciled all of the cheques the Plaintiff provided except for one, which was cheque number 2225 for $1,698.67.

[248] The accounting was set out at Tab 2, volume 2, Tab 64; in addition, Exhibit 9 was produced by the Defendant as a reconciliation of the cheques received by or on behalf of the Plaintiff.

[249] Assuming cheque number 2225 is taken into account, this would reduce the claim from $124,782.56 to $123,083.93.

[250] The Plaintiff disputes the quantum the Defendant claimed in its counterclaim. At the beginning of trial, I ruled that if the cheques showed payments, that they could be credited towards any amount the Defendant claimed in its counterclaim.

[251] A series of cheques were provided, totalling $44,304.86. The Plaintiff says that these cheques have not been applied against the outstanding amount claimed by Church’s Chicken.

[252] The Plaintiff argues that the Defendant is responsible for proving the damages in the counterclaim. The Plaintiff argues that the Defendant failed to call anyone with direct knowledge of the Plaintiff and their operation. The Plaintiff claims that this leaves the evidence of payment uncontradicted.

[253] The Defendant did not produce a statement of account in a traditional format. Rather, the Defendant produced a statement of account that only showed the weeks for which payment was outstanding. According to the Defendant, this amounted to $124,872.56.

[254] Mr. Nevio Leon, the Director of Financial Reporting at the Defendant company, provided evidence at trial the outstanding balance by the Plaintiff to the Defendant was $124,782.56. The Plaintiff did not challenge this figure, except that the Plaintiff claimed that there were amounts that were not properly credited towards the outstanding amount the Plaintiff claimed in the counterclaim.

[255] The Defendant argues that the Plaintiff did not dispute the amount owing in the Church’s Chicken claim prior to trial.

[256] I have reviewed the pleadings and while there is no specific reference to the Plaintiff disputing the amount claimed, I am satisfied that the wording of the Statement of Defence to the counterclaim would allow the Plaintiff to dispute the amount the Defendant is claiming.

[257] The evidence the Defendant produced did not provide sufficient evidence to show whether the cheques at Exhibit 9 had been accounted for in their Statement of Account.

[258] There shall be judgment on the counterclaim in the amount of $80,477.70.

[259] I am prepared to allow the Defendant to provide further evidence to clarify its position should it wish to do so in a traditional accounting format. The Defendant shall provide this evidence within fifteen days after the release of this judgment, failing which the judgment on the counterclaim will stand at $80,477.70. If the Defendant does provide the evidence, then the Plaintiff shall have fifteen days to provide me with written submissions, if any, about the evidence the Defendant provided. If further evidence is provided, I will deal with it at a later date by further written reasons.

Conclusion

[260] For the reasons set out above, I find that in relation to the claim, the Plaintiff shall have judgment against the Defendant for the sum of $20,480.00.

[261] Subject to what I have indicated above in relation to the amount of the disputed payments ($44,304.86 - $1,698.63 = $42,606.23), I find that the Defendant shall have judgment against the Plaintiff in the amount of $80,477.70 in relation to the counterclaim.

[262] Both parties are entitled to prejudgment interest in accordance with the interest rates claimed in the Statement of Claim and the Counterclaim, respectively.

Costs

[263] If the parties are unable to agree on the issue of costs, the parties shall provide written submissions of no more than two pages in length excluding the Costs Outline. Counsel for the Defendant shall provide costs submissions within fourteen days of this date. Counsel for the Plaintiff shall respond within twenty-eight days of this date.

___________________________

Justice S. Kershman

Released: November 3, 2008

COURT FILE NO.: 02-CV-21983

DATE: March 17-20, 2008

ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

1117304 ONTARIO INC. c/o HARVEY’S RESTAURANT

Plaintiff

- and –

CARA OPERATIONS LIMITED

Defendant

B E T W E E N:

CARA OPERATIONS LIMITED

Plaintiff by Counterclaim

- and –

1117304 ONTARIO INC. c/o HARVEY’S RESTAURANT, ANDREW PAUL SIMPSON AND RIMPI SIMPSON

Defendants by Counterclaim

DECISION

KERSHMAN, J.

Released: November 3, 2008