Ontario Supreme Court

Shelanu Inc. v. Print Three Franchising Corp.

Date: 2000-10-31

Shelanu Inc., Plaintiff

and

Print Three Franchising Corporation, Defendant

Print Three Franchising Corporation, Plaintiff by counterclaim

and

Shelanu Inc., Brian Deslauriers and Mary Deslauriers, Defendants by counterclaim

Ontario Superior Court of Justice Nordheimer J.

Heard: September 18-22, 25-28, October 5, 6, 2000

Judgment: October 31, 2000[1]

Docket: 97-CV-130338CM

F. Scott Turton, for Plaintiff/Defendants by Counterclaim.

Elliot S. Birnboim, for Defendant/Plaintiff by Counterclaim.

Nordheimer J.:

1 This action involves a claim by the plaintiff, a former franchisee of the defendant, for a declaration that the franchise agreement was at an end as at May 8, 1997, repayment of all royalties paid by the plaintiff subsequent to May 8, 1997, payment of overdue royalty rebates, and certain other relief. In essence, the plaintiff alleges that, as a result of failures by the defendant amounting to a fundamental breach of the franchise agreement, the plaintiff was entitled to terminate the franchise agreement before the expiration of its term. In response, there is a counterclaim by the defendant in which it seeks damages from the plaintiff in the amount of $2,056,500.00 for breach of contract and an injunction requiring the plaintiff to comply with the termination provisions of the franchise agreement. The defendant also seeks a declaration that the lease for the franchised premises at 60 Bloor Street West in Toronto is an asset belonging to the defendant or, alternatively, seeks damages for the loss of that lease. The defendant adds Brian Deslauriers and Mary Deslauriers as defendants by counterclaim on their guarantee of the plaintiff’s obligations under the franchise agreement.

2 The defendant began in the early 1970’s. It was founded by Jack Banks who was, and is, the owner of the defendant. Mr. Banks started by acquiring one print store and then two others. He eventually combined these three stores under the Print Three name. Subsequently, he started to franchise Print Three outlets in addition to the corporate stores which the defendant owned. At a later point in time, there was some complaint forthcoming from the franchisees that the corporate stores unfairly competed with them with the result that Mr. Banks in due course agreed to convert the corporate stores into franchised outlets. Over the years, the defendant grew to the point where, in 1989, there were approximately 100 franchised outlets.

3 The plaintiff is owned by Brian Deslauriers and Mary Deslauriers. In 1987, Brian Deslauriers purchased a Print Three franchise located at 239 Bloor Street East in Toronto and Mary Deslauriers purchased a Print Three franchise located in Markham. This was the first time that either Mary Deslauriers or Brian Deslauriers had been involved in a franchise operation. One year later, Mary Deslauriers sold the franchise that she owned and returned to her previous employment with Xerox Learning Centers. However, Brian Deslauriers continued to operate his franchise, BCD Comprint Inc., which became relatively successful.

4 At the time that Brian and Mary Deslauriers acquired their Print Three franchises in 1987, Brian Deslauriers had been working for a computer company. In that context, Brian Deslauriers had become familiar with desktop publishing. He thought that desktop publishing would revolutionize the production of documents and consequently thought that it was a field that he should get into. Brian Deslauriers looked at a number of franchise opportunities with particular emphasis on companies who were interested in desktop publishing. He concluded that Print Three was the only company that shared his vision, in part because Print Three seemed to be working towards digital printing and because it also said that it was committed to being at the leading edge of printing technology. It was for these reasons that Brian and Mary Deslauriers acquired their Print Three franchises.

5 As part of his franchise acquisition, Brian Deslauriers was required to purchase a software package called Office Publisher which was produced by another company owned by Jack Banks. In his training on this software, Brian Deslauriers found it to be incredibly slow. In the end result, notwithstanding that he had been required to purchase this software, Brian Deslauriers decided to purchase a Macintosh computer system with off-the-shelf software. It was the Macintosh system that Brian Deslauriers used in his franchise for the desktop publishing function. Brian Deslauriers advised the defendant of his decision in this regard, and while it appears that the defendant was not particularly happy about it, it also appears that nothing further was said about the matter.

6 In 1989, Brian Deslauriers was approached by the Lerers who owned two Print Three franchises through the plaintiff. These franchises were located respectively at 60 Bloor Street West and 200 Bloor Street West in Toronto. The Lerers asked Brian Deslauriers if he would be interested in purchasing their franchises. The Lerers’ franchises were successful operations but Brian Deslauriers thought that the success he was enjoying in his franchise with desktop publishing could increase the profitability of the Lerers’ franchises. Brian Deslauriers spoke to Mary Deslauriers about purchasing the Lerers’ franchises. Mary Deslauriers was not initially receptive to the idea because the price to purchase the two franchises ($760,000.00) would result in a significant debt load being incurred. Indeed, Mary Deslauriers said that she hoped that Brian Deslauriers would not be able to obtain bank financing for the purchase but in fact Brian Deslauriers was able to obtain such financing. After some considerable discussion, Brian Deslauriers convinced Mary Deslauriers that the purchase was a good idea. Consequently, Brian and Mary Deslauriers acquired the Lerers’ franchises through the purchase of the shares of the plaintiff company.

7 With the acquisition of the plaintiff company, Mary Deslauriers left her job with Xerox and began working full-time for the plaintiff. Brian Deslauriers was already working full-time in his franchise. Brian Deslauriers was very clear in his evidence that central to his decision, both to purchase his original franchise and to purchase the two additional franchises, was his belief that Print Three was an expanding operation and that it was also committed to remaining at the forefront of technological advances in the printing industry. Indeed, in and around the time of the purchase of the Lerers’ franchises, the defendant had expanded its operations into the United States. Brian Deslauriers viewed this as an encouraging sign.

8 Initially, the franchises benefited from Brian Deslauriers’ commitment to digital printing and desktop publishing. However, by late 1990 and certainly into 1991, the competition had adopted digital printing and desktop publishing such that the competitive advantage, which the plaintiff enjoyed, disappeared to a large degree. Brian and Mary Deslauriers therefore concentrated on other ways of keeping their business competitive, including the purchase of leading-edge technology such as the Docutech, which was a brand new machine that Xerox had just brought to the market. There was, however, a considerable cost associated with purchasing such technology. For example, at the time, a Docutech cost something in the order of $200,000.00. Consequently, the debt load of the franchises owned by Brian and Mary Deslauriers increased at the same time that Canada was moving into a recession.

9 The advent of the recession made business very difficult. In the early 1990’s, the number of Print Three franchises shrunk. All of the United States franchises disappeared as did a number of franchises elsewhere in Canada. By 1995, the number of franchises had dropped to approximately fifty. During this same time, Brian and Mary Deslauriers’ franchises were also suffering.

10 In order to improve their business fortunes, Brian and Mary Deslauriers approached Jack Banks about the possibility of closing the franchise outlet at 200 Bloor Street West. Mr. Banks agreed to let Brian and Mary Deslauriers close that franchise outlet. The only requirement that Mr. Banks asked for was that, because there might be a problem with the lease for the outlet, Brian and Mary Deslauriers had to agree to absorb any legal fees associated with terminating the lease. Mary Deslauriers sent a letter to Mr. Banks dated September 30, 1991 confirming their agreement to do so. As matters transpired, this was the only documentation that was required to terminate that franchise outlet. As of this time, Brian and Mary Deslauriers then had two franchise outlets, one at 60 Bloor Street West and one at 239 Bloor Street East.

11 Over the next couple of years, Brian and Mary Deslauriers continued to struggle with the business fortunes of their outlets. They eventually decided to close the outlet at 239 Bloor Street East and turn it into a production facility for the 60 Bloor Street West outlet. Brian and Mary Deslauriers approached Mr. Banks about closing the outlet at 239 Bloor Street. They told Mr. Banks about their plans to convert the operation into a production facility and locate it in office space at 80 Bloor Street West which was the closest space they could obtain to the 60 Bloor Street West outlet. During these discussions, Mr. Banks raised the possibility that Brian and Mary Deslauriers might wish to go one step further and combine their operations into one franchise which would result in their relinquishing the territory associated with the 239 Bloor Street East location. Mr. Banks pointed out that if they chose to accept this suggestion, however, he would feel free to put a new outlet or new franchisee into the 239 Bloor Street location. Brian and Mary Deslauriers were reluctant to agree to this proposal since they were afraid that if Mr. Banks put a new franchisee into the 239 Bloor Street location, it would adversely affect their customer base and, therefore, their business fortunes. Mary and Brian Deslauriers therefore declined Mr. Banks’ offer.

12 Notwithstanding their rejection of Mr. Banks’ proposal to become one franchise, Mr. Banks did accept and permit Brian and Mary Deslauriers to close the 239 Bloor Street location as a franchise outlet. Brian and Mary Deslauriers leased space at 80 Bloor Street West, moved the 239 Bloor Street operations to that space and turned it into a production facility for the 60 Bloor Street location as they had planned. While Brian and Mary Deslauriers offered to let the defendant directly lease the space at 80 Bloor Street West, the defendant never pursued that opportunity with the result that Brian and Mary Deslauriers leased the space directly. Some time later, Brian and Mary Deslauriers were able to move the production facility into space on one of the floors in 60 Bloor Street West such that it was then located in the same building as the retail outlet which was located on the concourse level.

13 Brian and Mary Deslauriers continued to concentrate on their remaining business. They added different features to their business including order entry, mailing lists, contact systems and direct marketing. Independent of the defendant, Brian and Mary Deslauriers were asked to join the worldwide publishing network - an association of people involved in the printing industry.

14 Two years after the closure of the 239 Bloor Street outlet, Brian and Mary Deslauriers were still struggling to make their business successful. As a consequence, they came to a different view regarding the earlier proposal made by Mr. Banks about combining their operations into one franchise. They decided that they had to fully integrate their operations in order to achieve success. They therefore approached Mr. Banks to see if they could take advantage of his earlier offer. On January 13, 1995, Brian and Mary Deslauriers met with Mr. Banks. It was, on all accounts, a brief meeting. They reminded Mr. Banks of his earlier offer to allow them to operate as one franchise and inquired if they could now do so. According to both Brian and Mary Deslauriers, Mr. Banks agreed to allow them to operate as one franchise but asked that they confirm their agreement in this regard to the defendant’s legal counsel, Eleesha Swartz. Brian and Mary Deslauriers were ecstatic as a result of this agreement. On January 16, 1995, Mary Deslauriers sent the confirming letter to Ms. Schwartz. That letter states:

This is to confirm our discussion of Friday, January 13, 1995 with Jack Banks, that we would like to operate our business as one franchise, that being the franchise located at 60 Bloor Street West. Therefore, we are hereby canceling our licensing agreement for the franchise formerly located at 239 Bloor Street East (location #73). We will then submit royalties for all revenues on one report. If possible, we would like this change to be effective January 1, 1995.

15 Commencing with their January, 1995 royalty payment (made in early February, 1995), Brian Deslauriers and Mary Deslauriers started reporting as one franchise. When their January, 1995 royalty statement was received by the defendant, one of its employees, Ms. Krebs, called Mary Deslauriers and told her that one royalty statement was missing. Mary Deslauriers advised Ms. Krebs that only one royalty statement was now necessary because of the agreement they had reached with Mr. Banks which permitted them to operate and report as one franchise. Ms. Krebs said she would speak to Mr. Banks and get back to Mary Deslauriers. Subsequently Ms. Krebs called Mary Deslauriers again and advised her that Mr. Banks might require a new franchise agreement to be signed. Mary Deslauriers expressed surprise at this information and said that she would speak to Mr. Banks about it. Mary Deslauriers subsequently left at least two telephone messages for Mr. Banks asking why a new agreement would be necessary since they had already signed a franchise agreement. Mr. Banks, however, never returned any of Mary Deslauriers’ calls and the issue of whether a new franchise agreement would be needed was not raised again. On April 6, 1995, Mary Deslauriers sent a letter to Ms. Krebs with the plaintiff’s royalty cheque for March, in which she said:

We are again submitting as one centre, as per our agreement with Jack.

16 Around this time frame, there was a significant dispute going on between the franchisees and the defendant regarding a new advertising initiative involving the Air Miles program. While I will return to this issue subsequently, I mention it at this point to explain the context of a telephone call which Mary Deslauriers received from Jack Banks on May 8, 1995. In this telephone conversation, Mr. Banks was extremely angry. Mary Deslauriers’ note of the telephone conversation is as follows:

He cannot believe that, after he helped us out financially when we were in trouble, we would ‘incite the network against him’. It doesn’t matter about the other ‘fucking assholes’, but he cannot believe that we would go against him, since he helped us out, even if he was dead wrong, we should support him. He has to pay $48,000 to AirMiles on May 10. Every franchise that did not pay the 3% for April, Jack is going to go after, and he’s going to close them down. And he’s going to write a letter to us saying that he will never help us out again. That he wanted to tell me all of this personally. That’s the way he sees the world - he helped us out, so we should now support him, even if he is dead wrong.

17 On May 11, 1995, Jack Banks sent a letter to Mary and Brian Deslauriers which concluded with the following statement:

Therefore, I am in informing you that I am denying your request to terminate one of your franchise agreements and to consolidate your two centres.

18 Thereafter, the relationship between the plaintiff and the defendant began to further deteriorate. The defendant withheld payment of the royalty rebates due to the plaintiff for the third quarter of 1985. The express reason for this withholding was in relation to the conduct of the plaintiff in taking Air Miles onto its own corporate card for its own use. The defendant also withheld payment of the royalty rebates due to the plaintiff for the fourth quarter of 1985 although the reason for withholding rebates for this quarter is unclear.

19 In August, 1996, there was an announcement by the defendant that Bob Davis had become the new president of the defendant. Mr. Davis was a former franchisee and was known to Brian and Mary Deslauriers. At this time, there was still an outstanding issue between the parties arising out of the withholding of the royalty payments for the third and fourth quarters of 1985. Also, by this time, the defendant had withheld the royalty rebates due to the plaintiff for the second quarter of 1996 also without explanation.

20 A meeting was set up between Bob Davis and Brian and Mary Deslauriers to discuss these issues. The meeting occurred on October 3, 1996. It got off to a bad start when Mr. Davis began by asking to see the plaintiff’s production facility. Brian Deslauriers was upset by this request as it seemed to him that Mr. Davis was not prepared to deal with the outstanding issues. After some back and forth, matters settled down and a discussion occurred with respect to the outstanding issues. During the course of these discussions, Brian and Mary Deslauriers explained the agreement they had reached with Jack Banks in January, 1995 to operate as a single franchise. Mr. Davis said that he would speak to Mr. Banks and get back to them. Toward the end of this meeting, Mr. Davis handed over a cheque for the royalty rebates due for the second quarter of 1996. Mr. Davis also told Brian and Mary Deslauriers that he had two further cheques available at his office in payment of the royalty rebates for the third and fourth quarters of 1995 which they could arrange to pick up.

21 On October 8th 1996, Brian Deslauriers sent a letter to Bob Davis, which Mr. Davis had requested, in which Brian Deslauriers again outlined the January, 1995 agreement with Jack Banks. On October 9, 1996, Mr. Davis wrote a letter to Brian and Mary Deslauriers in which he stated that they were in violation of their franchise agreement as a result of having refused to allow him to see the production facility. Brian Deslauriers was surprised when he received this letter. Brian Deslauriers responded to this letter by advising Mr. Davis that he could visit the production facility at any time that was convenient to him. Mr. Davis did not in fact visit the production facility until January 16, 1997. When he did, according to Brian Deslauriers, Mr. Davis spent no more than three or four minutes looking at it. A meeting was also held on that day between Brian Deslauriers, Mary Deslauriers and Bob Davis. Brian Deslauriers had earlier sent to Mr. Davis a chart setting out the outstanding royalty rebates that the plaintiff said it was entitled to based on the agreement with Mr. Banks which permitted the plaintiff to operate as one franchise. At the meeting, Mr. Davis advised Brian and Mary Deslauriers that he had not reviewed the chart although it had been in his hands for some time.

22 On January 24, 1997, Bob Davis sent a letter to Brian Deslauriers in which Mr. Davis stated that he had decided that their operations would continue to be treated as two stores for royalty rebate purposes. The letter makes no mention of the January 13, 1995 agreement. It was around this time that Brian Deslauriers says that he began to lose faith that the difficulties between the plaintiff and the defendant would ever be resolved. On May 2, 1997 the plaintiff sent a letter to the defendant reciting what it saw as a number of breaches of the franchise agreement by the defendant and concluded as follows:

The conduct of Print Three Franchising Corp. has, in our opinion, constituted so serious a breach of its obligations to Shelanu Inc., as to release Shelanu Inc. from any further obligations under the franchise agreement. It is our preference that you will agree that the franchise agreement is terminated effective May 8, 1997. We would then proceed with an orderly finalization of accounts, cessation of the use of the Print Three logos, and other appropriate details. However, if you are not in agreement with our position, then we will submit the matter to the courts for their determination and request you to indicate how you wish to conduct business pending their determination.

23 The defendant did not accept the plaintiff’s position. This action was commenced on August 20, 1997. Notwithstanding the litigation, however, the plaintiff continued to operate as a Print Three franchise and paid royalties to the defendant until the franchise agreement ended in accordance with its terms on October 16, 1999. I will say at this juncture that, regardless of whatever conclusions I may reach respecting the legal position of the parties in terms of the outcome of this proceeding, this conduct by the plaintiff demonstrates, in my view, a most commendable and professional approach to the difficult situation that existed.

Analysis

24 With that recitation of the general background to this matter, I turn to the complaints which the plaintiff had with the conduct of the defendant which it says entitled it to consider the franchise agreement at an end. However, before doing so, I believe it is helpful to make some observations on the nature of the franchisor/franchisee relationship generally.

25 The Court of Appeal held in Jirna Ltd. v. Mister Donut of Canada Ltd. (1971), [1972] 1 O.R. 251 (Ont. CA.); affirmed (1973), 1973 CanLII 31 (S.C.C.), [1975] 1 S.C.R. 2 (S.C.C.), that the relationship between a franchisor and a franchisee would not normally be characterized as a fiduciary one. In conformance with that general view, I do not find that there is any evidence here that would take this particular relationship to the level of a fiduciary one. At the same time, however, it is evident to me that the relationship between a franchisor and a franchisee is something more than a pure commercial arrangement between arm’s length parties who can only look to their own selves for the protection of their respective interests. I tend to agree with counsel for the plaintiff that the franchisor/franchisee relationship is more akin to that of a partnership. It is certainly, in my view, a relationship to which the duty of utmost good faith should apply in terms of the dealings between the franchisor and the franchisees. I note that Fleury, J. reached the same conclusion in Perfect Portions Holding Co. v. New Futures Ltd. (June 29, 1995), Doc. Welland 166/91 (Ont. Gen. Div.) at para. 14.

26 On the point of the good faith obligations existing between franchisor and franchisee, I note the requirements contained in the new Ontario statute regarding franchises, namely, the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3. Section 3 of that Act states:

(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.

The requirements set down by the Wishart Act are of importance to this action because of the provision contained in section 2(2) of the Act which gives the statute retroactive effect. Section 2(2) states:

(2) Sections 3 and 4, clause 5(7)(d) and sections 9, 11 and 12 apply with respect to a franchise agreement entered into before the coming into force of this section, and with respect to a business operated under such agreement, if the business operated by the franchisee under the franchise agreement is operated or is to be operated partly or wholly in Ontario.

Sections 2 and 3 of the Act were proclaimed in force on July 1, 2000.

27 As I have said, absent the Wishart Act, I would still have concluded that there was an obligation of the parties to a franchise relationship to act in good faith one to the other. It follows from that conclusion that conduct by a franchisor or by a franchisee which demonstrates bad faith, or manifests an intention not to conduct itself fairly in its dealings with the other, would give rise to a claim for damages by the other party or would, in cases of more serious conduct, give rise to a right in the other party to terminate the franchise agreement. This principle is aptly stated by Kelly J. in Gateway Realty Ltd. v. Arton Holdings Ltd. (No. 3) 1991 CanLII 2707 (NS S.C.), (1991), 106 N.S.R. (2d) 180 (N.S. T.D.); aff’d. 1992 CanLII 2620 (NS C.A.), (1992), 112 N.S.R. (2d) 180 (N.S. CA.), at 191‑192:

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.

28 Having made those general observations, I return to the complaints advanced by the plaintiff. Those complaints are as follows:

(a) the defendant’s failure to expand the franchise network and be at the leading edge of technological developments;

(b) the establishment by the defendant of an allegedly competing franchise operation called Le Print Express;

(c) the breach of the January 13, 1995 agreement;

(d) the breach of the understanding regarding the operation of the Air Miles program, and;

(e) the failure to pay royalty rebates when due.

The franchise network

29 The plaintiff alleges that the defendant has failed in its obligations under the franchise agreement to continue to expand the franchise network as well as to be at the leading edge of technology in the printing industry. On the first point the evidence establishes that in 1989 there were approximately one hundred franchises in the Print Three network. Over the next few years the number of franchises shrunk to the point that by August, 1995 there were approximately fifty franchises. By November, 1997, there were less than fifty. Brian Deslauriers in his evidence accepted that this shrinkage was not intentional on behalf of the defendant. On balance I accept that this shrinkage was largely the result of the prevailing economic conditions. I note, however, that the number of franchises has not materially changed to this date notwithstanding that economic conditions have changed significantly.

30 There is nothing in the franchise agreement which requires the defendant to maintain a certain level of franchises. While I accept that there may have been promises made to the plaintiff regarding the plans of the defendant to expand, I cannot find that the failure of those plans to materialize can fairly be characterized as a breach of the franchise agreement or any representation surrounding the agreement. In my view, they would be more fairly characterized as goals that have not been achieved. I do not consider that the failures of the defendant in this regard could possibly operate to relieve the plaintiff of its obligations under the franchise agreement nor do I consider that those failures could rise, in such circumstances, to the level of misrepresentations.

31 On the issue of technology, I will say that the evidence leaves me with considerable doubt as to the actual efforts made by the defendant to ensure that the franchisees were provided with the opportunity to maintain their operations at the leading edge of the technology available at any given point in time. Certainly it appears that whatever advances in technology occurred in the plaintiff’s operations were the result of the efforts of Brian Deslauriers with virtually no assistance from the defendant. At the same time, however, it appears that the plaintiff’s operations were more technologically advanced than were those of the vast majority of franchisees.

32 There is evidence that the defendant provided its franchisees with information, articles and other similar materials regarding technological advancements that were occurring. There is evidence that the defendant worked with suppliers, such as Xerox, Kodak, Canon and the like, to obtain favourable prices on equipment and there is evidence that the defendant provided some assistance in dealing with such suppliers when equipment problems arose. While I might describe the contribution of the defendant here as approaching the bare minimum that a franchisee ought to expect from a franchisor in return for their royalty payments, in the end result, I am not satisfied on the evidence that the failures of the defendant on this issue were so great as to constitute a breach of its obligations under the franchise agreement.

33 In my view, the evidence in this case on this issue is much akin to that considered by Mossip J. in Khagen Investments Ltd. v. 710497 Ontario Ltd. (May 20, 1999), Doc. Brampton C4333/91 (Ont. S.C.J.) at para. 85:

Specifically, I find that although the plaintiff complained that the level of training, support, and promotion provided by the corporate head office to his franchise was completely unsatisfactory, there was no evidence presented at trial as to the standard of such service given to other franchises, or whether the delivery of these services, assuming it was the same as the level given to the plaintiff, resulted in the failure of other franchises.

34 I conclude therefore that these issues cannot justify the plaintiff’s position that it was entitled to treat the franchise agreement as at an end as at May 8, 1997.

Establishment of Le Print Express

35 In or around October, 1990 the defendant set up a different form of franchise operation which was originally known as Print Three Express but subsequently became known as Le Print Express. As I understand the concept, these outlets were to be smaller and were to intended to cater to individual consumers or smaller customers. Also, the cost to obtain a Le Print Express franchise was considerably lower than that necessary to obtain a Print Three franchise. Further, Le Print Express assisted potential franchisees in financing the purchase of a franchise thereby making it easier for individuals to join the network.

36 The plaintiff complains that the establishment of this other concept involved the defendant in establishing businesses which competed with the existing Print Three franchises. By way of example of this competitive impact, Brian Deslauriers said that the plaintiff received flyers from Le Print Express outlets soliciting the plaintiff’s business. The plaintiff also complains that the establishment of this competing concept meant that the defendant’s efforts were directed at this new concept as opposed to being directed at promoting the existing Print Three franchise network. There was therefore a diversion of resources to the detriment of the Print Three franchisees.

37 It is clear from the evidence that virtually every employee of the defendant also worked for Le Print Express. It should be self-evident that to the degree that those employees spent time promoting and running Le Print Express, they were not devoting their time and energies to the defendant. I note in this regard that the number of employees within the defendant remained essentially the same over these years so it was not as if the affairs of Le Print Express were being handled by new staff members or that the total manpower available was increased to offset these new demands.

38 It seems to me to be intrinsically troublesome for a franchisor to develop a concept for a new franchise operation that will operate in competition with its existing franchise operation. Even though the Le Print Express franchises were directed at a specific segment of the industry, I am satisfied that they not only would, but did, take work and customers from existing Print Three franchises. As a consequence, in my view, the establishment of such an enterprise by the very person who owned and controlled the defendant was fundamentally at odds with the defendant’s obligations, including the obligation to deal in good faith, to its franchisees. The defendant could not properly and fairly institute this new concept without at least obtaining the agreement of the existing Print Three franchisees to this crucial change to their contractual relationship which, of course, the defendant made no attempt to do. The establishment of the Le Print Express franchises fundamentally altered the nature of the Print Three franchise network and impacted directly on the business environment in which the Print Three franchisees operated.

39 The evidence makes it clear that once the principal of the defendant decided on this new concept, in essence the defendant, through its existing officers and employees, devoted considerable energies to its development. I have already noted that staff time was devoted to the establishment and operation of the Le Print Express franchises. In addition, the Le Print Express franchisees were allowed to participate in the same activities, such as the advertising program, that were being offered to the Print Three franchisees. Clearly the result of this endeavour was a redirection of time, effort, and monies from the Print Three franchises to the Le Print Express franchises with a consequent detrimental impact on the benefits that would have accrued to the Print Three franchises from the expenditure of that time, effort and money on their franchise network.

40 I conclude, therefore, that the establishment of the Le Print Express franchises constituted an act of bad faith by the defendant and a breach by the defendant of the reasonable commercial standards that must underlie the relationship between the defendant and its franchisees.

January 13, 1995 agreement

41 The evidence as to the January 13, 1995 agreement from the plaintiff’s side is clear. Brian and Mary Deslauriers are firm that they reached the agreement at a meeting with Jack Banks on January 13, 1995 and confirmed it in writing to Ms. Swartz on January 16, 1995. Mary Deslauriers also confirmed it to Ms. Krebs when Ms. Krebs called about the royalty statements in February, 1995. Further, the letter of April 6, 1995 also confirms the existence of the agreement.

42 Andrew Hrywnak was at the meeting on January 13, 1995. In his evidence, Mr. Hrywnak said that all that Mr. Banks agreed to do was to consider the Deslauriers’ request. On this matter, I prefer the evidence of Brian and Mary Deslauriers to that of Mr. Hrywnak. First, from the evidence before me, it does not strike me that Mr. Banks was the type to postpone decisions. Secondly, in light of the fact that Mr. Banks had previously suggested this course of action - a fact that is not contradicted by any evidence from the defendant - I have difficulty believing that Mr. Banks would have needed time to decide the issue one way or the other. Thirdly, the letter written to Ms. Swartz on January 16, 1995, is not stated in terms of a request. It specifically says that the Deslauriers are confirming their discussion with Mr. Banks and are “hereby canceling” the franchise agreement for 239 Bloor Street East. Fourthly, if the matter was simply left as a request that was under consideration, Mr. Banks’ request that a letter be sent to the defendant’s solicitor would appear to me to be an unnecessary step. There would be no reason to advise Ms. Swartz of the request since she was not deciding the matter. There would, however, be a good reason to advise her of an agreement that had been made which would alter existing contractual relationships involving the defendant.

43 Perhaps most importantly on this point, however, is the failure of the defendant to call Mr. Banks as a witness and to elicit his version of the events of January 13, 1995. I am entitled to draw an adverse inference from the failure to call a witness whose evidence is material to a point in dispute - see, for example, Vieczorek v. Piersma reflex, (1987), 58 O.R. (2d) 583 (Ont. C.A.). The principal is succinctly stated in Sopinka, Lederman, Bryant, The Law of Evidence in Canada (Toronto: Butterworths Canada, 1999) at p. 297:

In the same vein, an adverse inference may be drawn against a party who does not call a material witness over whom he or she has exclusive control and does not explain it away. Such failure amounts to an implied admission that the evidence of the absent witness would be contrary to the party’s case, or at least would not support it.

44 Mr. Banks is the owner of the defendant. He was the president of the defendant on January 13, 1995. He was entirely within the control of the defendant to call as a witness. I therefore draw the inference from the defendant’s failure to call Mr. Banks as a witness that his evidence would not have supported the defendant’s contention that no agreement was reached on January 13, 1995.

45 In the same vein, although less significantly on this point, is the failure of the defendant to call Charlotte Krebs to contradict Mary Deslauriers on her description of the telephone calls in February, 1995. Again, no reason was offered as to why Ms. Krebs was not called as a witness. Once again, I draw the inference adverse to the defendant that Ms. Krebs would have confirmed Mary Deslauriers’ evidence in this regard.

46 The defendant says, in the alternative, that any such agreement, even if found to exist, is unenforceable because (i) it was not reduced to writing as required by the clause 20 of the franchise agreement, (ii) there was no consideration for the agreement and (iii) there is no privity of contract. On the first point, the evidence shows that the defendant did not require any formal written documentation when the plaintiff closed either the 200 Bloor Street West location or the 239 Bloor Street East location. It is apparent to me that neither of the parties had been insisting on their strict legal rights at, or before, this time. Therefore, it is not open to the defendant to now insist on compliance with those strict legal rights. As Lord Denning said in Rickards Ltd. v. Oppenheim, [1950] 1 K.B. 616 (Eng. C.A.) at p. 623:

By his conduct he evinced an intention to affect their legal relations. He made, in effect, a promise not to insist on his strict legal rights. That promise was intended to be acted on, and was in fact acted on. He cannot afterwards go back on it.

47 On the second point, I do not agree that there was a lack of consideration for the agreement. The defendant was assisting one of its franchisees to improve its financial situation. It is evident to me that it was in the best interests of the defendant, in addition to being in the obvious interests of the plaintiff, to ensure the financial health of one of its franchisees. Further, the defendant obtained the release of the territory related to the 239 Bloor Street East location which it could then sell to a new franchisee. The adequacy of the consideration is not the issue. It is sufficient if there is some consideration and I find that there was some consideration for this agreement.

48 Lastly, the thrust of the defendant’s submission that there was no privity of contract is not clear to me. Both Brian and Mary Deslauriers were present at the meeting, so technically representatives of both the plaintiff and of the other franchisee, BCD Comprint Inc., were present to reach the agreement. If the issue is the right to enforce the agreement, the decision to allow the two franchises to operate as one was principally to the benefit of the plaintiff who then acquired all of the customers of BCD Comprint Inc. and who then commenced to alone report and pay royalties to the defendant. It would be in the plaintiff’s principal interest to enforce this agreement. In any event, assuming the agreement is between the plaintiff and BCD Comprint Inc. on the one hand and the defendant on the other, I am not aware of any reason why only one party to the agreement cannot seek to enforce it.

49 Lastly, there was some suggestion throughout the evidence that, in some manner, Brian and Mary Deslauriers had misled the defendant regarding their financial situation when they made the request to operate as one franchise. The evidence does not establish any such misleading. It is also not clear that this was the basis upon which Mr. Banks first suggested this option. Finally, if this was a critical factor to the defendant’s decision, it had the right under the franchise agreement to obtain financial statements for the plaintiff and BCD Comprint Inc. and it made no effort to do so. I find the suggestion that the Deslauriers misled the defendant at or before the January 13, 1995 meeting to be without merit.

50 I therefore find that there was an agreement reached at the January 13, 1995 meeting which permitted the cancellation of the franchise agreement for the 239 Bloor Street East location and which permitted the production operations of BCD to be combined with the retail operations of the plaintiff and then to be reported as one entity. There was consequently no request for Jack Banks to consider, and deny, in May, 1995 as he purported to do in his May 8, 1995 telephone call to Mary Deslauriers. Similarly it was not an open issue to be determined by Bob Davis in October, 1996. The subsequent actions of the defendant in attempting to resile from the January 13, 1995 agreement, and the withholding of royalty rebates on that basis, are not only a clear breach of that agreement but, in the circumstances as I find them, also evince a lack of good faith dealing by the defendant.

Air Miles program

51 The franchise agreement provides for an annual three percent advertising fee to be paid by the franchisees. The franchise agreement provides in clause 9, in part, that:

The advertising fees paid directly to the Franchisor are intended to reasonably compensate Franchisor for the actual cost of advertising and promotional campaigns; provide reasonable and adequate compensation for Franchisor’s personnel engaged in the preparation, purchase and arrangement of advertising activities; and to reimburse Franchisor for any fees paid to advertising agencies and other organizations.

52 In February, 1991, the defendant offered to suspend the advertising fee if there was agreement by 100% of the franchisees. The franchisees unanimously agreed through a vote and, therefore, the advertising fee was suspended. This situation continued through 1994. The principle, if not the sole, reason for the suspension of the advertising fee was the existence of the recession. By 1994, the recession had eased and the defendant proposed to reinstate the three percent advertising fee. At this time, the defendant also proposed to enter into the Air Miles program. At the franchisees’ convention in November, 1994, it was proposed that the franchisees would vote on the reinstatement of the three percent advertising fee. While the defendant contends that the vote was only to be as between the Air Miles program or some other advertising program, the memorandum of September 23, 1994 which was sent to all franchisees (exhibit #11) implies that the vote was to be on the reinstatement of the advertising fee itself. That such a “misconception” existed is confirmed in a later memorandum dated December 8, 1994 (exhibit #2, tab 2) from Mr. Banks to all franchisees. However, it seems to me that not much turns on this misunderstanding since the defendant was, under the franchise agreement, entitled to the advertising fee and its earlier agreement to suspend the fee was, in my view, capable of being rescinded whenever the defendant chose to do so.

53 Of more importance on this issue, was the representation, made at the time that the proposal to embark on the Air Miles program was put before the franchisees, that the entire three percent advertising fee had to go to the Air Miles program in order for Print Three to qualify to be part of that program. On the documents adduced in evidence, it is clear to me that this representation was false. The contract between the defendant and Loyalty Management regarding the operation of the Air Miles program (exhibit #3, tab 23) shows that the minimum monthly payment required for the program was considerably less than would be generated by the three percent advertising fee on a monthly basis[2]. This is of importance because it is also clear that one of the reasons why the franchisees were reluctant to agree to participate in the Air Miles program was due to the fact that it would consume all of the advertising fees. Another reason was the belief held by some of the franchisees, including the Deslauriers, that they would never be able to distribute to their customers all of the air miles which the franchisees would receive for their advertising fees. In other words, all of the advertising fees would be going into the Air Miles program but all of the benefits of that program would not be capable of being used for the franchisees’ business.

54 In order to get over that opposition, Brian Deslauriers says that, at the convention, the defendant promised the franchisees that any air miles purchased under the program, and not distributed by the franchisees to their customers, could be used by the franchisees for their own purposes including personal travel. Mr. Hrywnak, who was also at the convention, does not recall any such discussion. I have concluded that such a representation was made at the meeting and that it was acted upon by the franchisees in approving the participation of Print Three in the Air Miles program. I base this finding not only on the firm evidence of Brian Deslauriers, which I accept over the lack of recollection evidenced by Mr. Hrywnak, but also on the contemporaneous documents. For example, the air miles form (exhibit #12) which franchisees had to complete and submit to the defendant refers to the undistributed air miles being transferred to the “Corporate Centres Account” meaning the individual store account. Further, Mr. Hrywnak’s letter of May 2, 1995 (exhibit #2, tab 25) states:

The AIR MILES are yours for you to use for promotion, staff incentives or any way you see fit. [emphasis added]

This language is also found in Mr. Hrywnak’s memorandum of April 27, 1995 to all franchisees. Finally, the operations manual for the program, distributed by Mr. Hrywnak on behalf of the defendant (exhibit #2, tab 20), states at page 1-15:

We will then at that time have your personal AIR MILES™ transferred into your account. [emphasis added]

55 Shortly after the Air Miles program began, the defendant changed these arrangements and moved to hold all undistributed air miles for each outlet to be used only on approval by the defendant. It appears that this directive emanated from Mr. Banks. While it was stated at the time that these undistributed air miles would be placed into separate accounts for each of the franchisees concerned, it appears from the evidence that, in fact, the undistributed air miles were held by the defendant in accounts that were, for reasons which are inexplicable to me, in the personal names of certain of its employees, including Mr. Hrywnak. Later in the piece, the defendant made a further unilateral change to the program by which it chose to create a “bank” of all undistributed air miles which could be drawn upon by any franchisee but only on approval of the defendant. The evidence establishes that no such “bank” was ever created by the defendant. I find that the conduct of the defendant in this regard was in clear breach of the representations made to the franchisees and upon which they agreed to participate in the Air Miles program.

56 In addition to the problems with the permitted uses for the undistributed air miles, another serious dispute arose between the franchisees and the defendant regarding the appropriate start date for the payment of the three percent advertising fee. It was originally anticipated that the Air Miles program would begin on April 1, 1995. In fact, due to the delay in the installation of the necessary machines in each outlet, the program did not get fully underway until May, 1995. The members of the franchisee committee objected to making the three percent advertising fee payment for April, 1995, when the full program was not operating. It is clear that there were heated discussions within the franchisee committee regarding this issue at the meeting of the franchisee committee on April 17, 1995. Brian Deslauriers was a member of the franchisee committee and Mr. Hrywnak attended the meetings on behalf of the defendant. Brian Deslauriers says that Mr. Hrywnak eventually accepted the franchisees’ concerns and consequently agreed to have the advertising fee commence as of May 1, 1995. Mr. Hrywnak denies that he made such a commitment. Mr. Hrywnak says that he did not have the authority to make such a commitment and that all of the franchisees present would have known that. Mr. Hrywnak says that all he agreed to do was raise the issue with Jack Banks and that he subsequently advised the franchisee committee at their meeting of April 25, 1995 that Mr. Banks had decided that the fees would be collected as of April 1, 1995.

57 I do not accept the evidence of Mr. Hrywnak in this regard for two principal reasons. First, the minutes of the committee meeting on April 17, 1995 which were circulated by Mr. Hrywnak himself, suggest that the May commencement date had been agreed since the minutes state: “Start program May 1st no questions”. Secondly, when Mr. Hrywnak subsequently advised the franchisees at the meeting of April 25, 1995 of the reversal of that decision and that the fees would in fact start on April 1, 1995, he based the decision to require the earlier payment on the fact that the defendant had already made commitments to Loyalty Management which had to be paid. If such commitments had been made, then it is strange that Mr. Hrywnak did not mention this very pertinent fact to the franchisees at the April 17 meeting. I must assume that Mr. Hrywnak knew about these commitments since he said that he was the sole person within the defendant who negotiated the program and dealt with Loyalty Management. If these commitments were going to be an obstacle to postponing the payment of the advertising fees by a month, then one would have expected Mr. Hrywnak to mention this fact at the April 17, 1995 meeting. I also note that the documents produced at trial show that the only invoice that was outstanding from the defendant to Loyalty Management prior to May 1, 1995 was one dated March 10, 1995. This invoice was for the sum of $3,450.00 and, Mr. Hrywnak admitted in cross-examination, was being actively disputed by the defendant. In point of fact then, there were no commitments at this time that had to be paid. Consequently, I find the subsequent explanation of the defendant, that the advertising fee had to be paid as of April 1, 1995 because of costs that had been incurred to institute the Air Miles program, to be disingenuous and an after the fact attempt to justify a clear breach of the agreement made at the April 17 meeting.

58 Based upon the representations made which caused the franchisees, and certainly the plaintiff, to enter into the Air Miles program, I find that the plaintiff was entitled to receive the full amount of any undistributed air miles to use as it saw fit. The defendant was not entitled to unilaterally change the terms and conditions upon which the plaintiff agreed to participate in the Air Miles program. The defendant’s actions in so doing are a breach of the representations made and acted upon by the plaintiff. It also amounts to a conversion by the defendant of property which belonged to the plaintiff. Accordingly, the plaintiff is entitled to damages equivalent to the value of the undistributed air miles earned by its franchise through to the end of the program.

Royalty rebates

59 Under the franchise agreement, a franchisee is entitled to a rebate of the royalties paid based upon the achievement of a certain level of sales within the franchise. However, the franchisee is only eligible to receive these royalty rebates, according to clause 3C of the franchise agreement:

…if he or she has fully complied with all the terms and conditions of this agreement during the pertinent time period.

60 The royalty rebates are paid on a quarterly basis. The defendant failed to pay royalty rebates to the plaintiff, to which the plaintiff was otherwise entitled, for the last two quarters in 1995. These rebates were in fact paid approximately one year later at the time that Mr. Davis met with Brian and Mary Deslauriers. The defendant relies on the alleged improper taking of Air Miles by the plaintiff onto its corporate card for its own use as the basis for its right to withhold these royalty rebates. However, as I have already found, it was the defendant who was in the breach of the agreement surrounding the Air Miles program and not the plaintiff. It is therefore clear that the plaintiff was entitled to these rebates and there was no legitimate basis for the defendant’s failure to pay them when they were due. This conclusion is tacitly acknowledged by the fact that Mr. Davis paid these royalty rebates to the plaintiff shortly after he met with Brian and Mary Deslauriers in October, 1996. The improper withholding of these royalty rebates by the defendant was a breach of the terms of the franchise agreement.

61 The defendant also failed to pay the royalty rebates due to the plaintiff for the fourth quarter of 1996. Mr. Davis says that he decided not to pay these royalty rebates because the plaintiff refused to permit him to inspect the production facility at 60 Bloor Street West when he met with Brian and Mary Deslauriers on October 3, 1996. There is no dispute that Mr. Davis was refused such an inspection. It is also clear that, on a strict reading of the franchise agreement, Mr. Davis was entitled, and ought to have been permitted, to conduct such an inspection. The franchise agreement states, in clause 5G, that the franchisee must:

Permit Franchisor’s representative or representatives to enter upon the Franchise Owner’s premises at anytime during normal working hours or at any other time that is mutually agreed upon between Franchisor and Franchise Owner.

A similar requirement is contained in clause 7B of the franchise agreement.

62 However, it is clear that neither party up to this point in time had insisted on strict compliance with the terms of the franchise agreement. By way of example, it does not appear that the defendant ever provided to the franchisees an accounting of the advertising fees as required by clause 9 of the franchise agreement. By way of another example, the franchise agreement requires the franchisees to annually submit financial statements. However, the plaintiff never submitted such financial statements until Mr. Davis became President and made a specific request for them. The plaintiff then immediately sent the statements to the defendant. It seems to me, as a consequence of this past conduct, that the plaintiff was entitled to some form of notification of any intention by the defendant to strictly rely on its rights in regard to this inspection issue. I also do not accept that Mr. Davis made an issue of the refusal at the time, including advising Brian and Mary Deslauriers that they were in breach of the franchise agreement, as he now claims that he did. In such circumstances, I do not accept that the defendant was entitled to rely on cause 3C of the franchise agreement to withhold this royalty rebate payment. Certainly the defendant was not entitled to continue to withhold this royalty rebate payment pass the point, some three weeks later, when the plaintiff made it clear to Mr. Davis that he could inspect the production facility at any time of his choosing. The actions of Mr. Davis in this regard strike me as heavy-handed and completely out of proportion to the alleged violation of the franchise agreement.

63 The defendant also subsequently failed to pay the royalty rebates to which the plaintiff was entitled for the entire time from April, 1998 to October, 1999. These royalty rebates have not been paid to this day. The failure to pay these royalty rebates are based on different grounds, however. The defendant says that it was entitled to withhold payment of the royalty rebates because the plaintiff failed to honor its obligation to place an advertisement in the Yellow Pages.

64 Clause 9 of the franchise agreement which deals with advertising has as a requirement that franchisees must advertise in the Yellow Pages. Clause 9 further states that:

If Franchise Owner selects a location where more than one Franchise Owner is placing the required Yellow Pages advertisement in the same telephone book, then the Yellow Page ad must be on a collective basis.

65 There was considerable correspondence in the early part of 1998 with respect to having the plaintiff participate in a group advertisement in the Yellow Pages. It is clear that the plaintiff did not want to do so. However, when at one point it appeared that the plaintiff was being told that it had to do so as part of its obligations under the franchise agreement, it then agreed to participate. The plaintiff was, however, subsequently advised that it did not have to participate in the group advertisement in order to satisfy its obligations under its franchise agreement as long as it placed a one line advertisement in the Yellow Pages. Upon receiving the subsequent advice, the plaintiff then declined to participate in the group advertisement.

66 Unfortunately when the Yellow Pages were published, the plaintiff’s telephone numbers were not properly identified. The plaintiff’s fax number appeared underneath the name of another franchisee which apparently caused some confusion for that other franchisee. As well, the plaintiff’s telephone number was listed simply as “production” instead of “60 Bloor Street West” and was listed in juxtaposition to yet another franchisee apparently resulting in further confusion.

67 The franchise agreement, again read strictly, required the plaintiff to participate in the group advertisement. However, the correspondence makes it clear that the defendant waived that requirement. It is equally clear, nonetheless, that the plaintiff had to place a one line advertisement in the Yellow Pages. On the evidence I am satisfied that the plaintiff made reasonable and good faith efforts to comply with that requirement. Regrettably, these errors appear to have occurred as the result of some miscommunication between the plaintiff’s advertising contacts and the publisher of the Yellow Pages. There is certainly nothing to suggest that these errors were the result of a deliberate attempt by the plaintiff to cause problems. When the errors were discovered, the plaintiff authorized Mr. Davis to speak to its contact at the Yellow Pages so that he could satisfy himself of the legitimate efforts which the plaintiff had made to place its advertisement in the Yellow Pages. Mr. Davis investigated the matter yet he cannot point to anything which could fairly place the blame for the situation on the plaintiff. Also, while Mr. Davis says that the two other franchisees who were affected by the errors were very upset by them, neither of these franchisees were called as witnesses to give direct evidence on the nature and magnitude of the problems that are alleged to have arisen from the errors. It appears to me therefore that the defendant’s refusal to pay royalty rebates based upon this issue once again demonstrates a heavy-handed and disproportionate reaction to what was clearly an unfortunate but innocent, and seemingly inconsequential, error.

Summary

68 The actions of the defendant in its breach of the January 13, 1995 agreement, its unilateral changes to the Air Miles program and its wrongful withholding of royalty rebates are all breaches of the terms of the franchise agreement. However, they also reveal an attitude of the defendant generally toward this franchisee, at least, and toward its obligations under the franchise agreement, which demonstrates an intention by the defendant that it was not going to be bound by, nor honour, its obligations under the franchise agreement unless it suited its purpose to do so. Indeed, it is evident to me that Mr. Banks viewed the franchise network much like a personal fiefdom over which he was entitled to rule with absolute and unfettered authority. The franchisees were expected to follow his directives and decisions without question and certainly without opposition. It is also clear that any franchisee who had the temerity to question the decisions of the defendant could expect to have the full weight of the defendant brought down upon its head as Mr. Banks made clear to Mary Deslauriers in the May 8, 1995 telephone conversation.

69 Another example of this attitude is reflected in Mr. Banks’ handling of the franchisee committee. When certain members of that committee raised objections with respect to actions taken by the defendant and insisted on a meeting with Mr. Banks, he promptly notified all franchisees that those members had “resigned” from the committee and then replaced them with members of his own choosing.

70 This attitude appears to pervade the defendant’s organization because it is evident again in the conduct of Mr. Davis toward Brian and Mary Deslauriers when he became president of the defendant. I have already made my observations above regarding the actions of Mr. Davis which I found to be heavy-handed and completely out of proportion to the alleged violations of which he considered the plaintiff to be guilty. Again, however, they reflect the same autocratic approach to dealing with the franchisees. I earlier said that the relationship between franchisor and franchisee was, in my view, akin to that of a partnership. A partnership requires, among other things, mutual respect. There must also be the opportunity and outlet for all parties to be able to air their views and express their opinions without fear of recriminations being arbitrarily imposed. In my view, the evidence taken as a whole shows that the defendant lacked a basic understanding of, and respect for, the fundamentals of the relationship which manifested itself in a lack of good faith in its dealings with the franchisees generally but certainly with respect to its dealings with the plaintiff.

71 I have concluded that the various failings and breaches of the franchise agreement by the defendant constitute a fundamental breach of the franchise agreement. As Gonthier J. said in Farber c. Royal Trust Co. (1996), 1997 CanLII 387 (S.C.C.), [1997] 1 S.C.R. 846 (S.C.C.) at p. 863:

In cases of constructive dismissal, the courts in the common law provinces have applied the general principle that where one party to a contract demonstrates an intention no longer to be bound by it, that party is committing a fundamental breach of the contract that results in its termination. [emphasis added]

72 Consequently, I find that the plaintiff was entitled to terminate the franchise agreement as at May 8, 1997 and is entitled to a declaration to that effect. Following on that conclusion, the plaintiff is entitled to the repayment by the defendant of all royalty payments made since May 8, 1997 as well as the repayment of all advertising fees paid since that date. In addition, given the breach of the January 13, 1995 agreement, the plaintiff is also entitled to be paid by the defendant those royalty rebates that arise from treating the two locations as a single franchise as of January 1, 1995.

73 Finally, the plaintiff also sought repayment of one-half of the royalties that it paid from the beginning of 1993 to the date of termination of the franchise agreement. This claim is based on what the plaintiff alleges are the failures of the defendant to provide the support and other resources to which the plaintiff was entitled for its payment of the 6% royalty. I have already dealt with these alleged failings by the defendant. As I said earlier, while the actions of the defendants leave much to be desired in terms of the actual contributions and support that it made to its franchisees, I am not satisfied that those actions were such as to give rise to a claim for damages by the plaintiff as is reflected in its claim for return of one-half of the royalties paid. I therefore dismiss this aspect of the plaintiffs claim.

74 The plaintiff is therefore entitled to recover against the defendant the following amounts:

(i) $48,855.26 for the converted air miles;

(ii) $199,622.00 for royalties paid since May 8, 1997;

(iii) $59,870.00 for advertising fees paid since May 8, 1997;

(iv) $60,812.98 for the royalty rebates due based on the two locations being treated as a single franchise.

The counterclaim

75 It follows from my findings above, that the plaintiff was not in breach of the franchise agreement during its currency. However, there are still issues raised by the defendant regarding the conduct of the plaintiff after the termination of the franchise agreement which must be dealt with.

76 The defendant complains that, even if the plaintiff legitimately terminated the franchise agreement, the plaintiff breached its obligations under the termination provisions of the franchise agreement. In particular, the defendant complains that the plaintiff did not assign the telephone number for the location to the defendant in accordance with clause 15D of the franchise agreement, did not assign the lease for the premises to the defendant in accordance with clause 15F of the franchise agreement and did not honour the non‑competition provision contained in clause 16 of the franchise agreement.

77 All of these issues can be dealt with collectively and with relative brevity. In my view, given the defendant had fundamentally breached the franchise agreement, as I have found it did above, the defendant cannot require the plaintiff to honour other terms of the franchise agreement. Brian and Mary Deslauriers have invested 10 years of their lives in the plaintiff. It would be fundamentally unfair if the defendant could breach the terms of the franchise agreement, to the extent that it would justify the plaintiff treating the franchise agreement as being at an end and yet, at the same time, require the plaintiff to honour its obligations under the franchise agreement. I note that requiring the plaintiff to conform to the requirements of the termination provisions of the franchise agreement would have the very real effect of severely curtailing, if not shutting down entirely, the plaintiff’s business. As Lambert J.A. said in Zippy Print Enterprises Ltd. v. Pawliuk (1994), 1994 CanLII 1756 (BC C.A.), [1995] 3 W.W.R. 324 (B.C. C.A.) at p. 334:

The principle has been said to be a particular application of a more general principle that a party cannot obtain an advantage from the party’s own wrongful act. As to what is meant in the context of the application of the principle by the concept of ‘wrongful acts’, there is a helpful discussion by Mr. Justice Russell in Re Meyrick’s Settlement; Meyrick v. Meyrick, [1921] 1 Ch. 311 at 316-19. It is not every event brought about by the act of a party which prevents that party from relying on the event to invoke a termination clause. There must be something about the nature of the act or the event which would make it unjust to permit the party whose act brought about the event to rely on that event. [emphasis added]

78 Although it is not necessary in light of my other findings, I will add one further comment regarding the lease of the premises at 60 Bloor Street West. The defendant asserted that the plaintiff had taken the lease unto itself as part of a “premeditated” plan or “preemptive” strike. In fact, it appears that the plaintiff arranged the lease directly with the landlord of the premises because the defendant had not taken any steps to negotiate for a new lease for the premises (there being no right to renew in the existing lease). The plaintiff was also aware that the corporate entity which normally held leases for the defendant was subject to a number of judgments at least one of which had lead the plaintiff to receive a garnishment notice from a judgment creditor. Add to this the fact of Mr. Banks’ telephone call of May 8, 1995 to Mary Deslauriers and it is not at all surprising to me that the plaintiff would take steps to secure the premises in which its business operated. The plaintiff certainly could not have any confidence that the defendant would protect its position. I also note that while the defendant made much in its evidence about this space having originally been a corporate store and having been in the Print Three network since the early 1970’s, it does not appear that the defendant ever took much, if any, interest in the status of the lease of the premises until the problems with the plaintiff came to a head. Even then it took Mr. Davis months to pursue the issue with the landlord. There is simply no evidence before me that would substantiate the defendant’s allegations that this was all part of some scheme by the plaintiff.

79 Given the defendant’s conduct, it cannot enforce, nor can it require the plaintiff to honour, the restrictive terms contained in the termination provisions of the franchise agreement. The defendant’s counterclaim cannot therefore succeed.

80 In the event that I am found to be an error in my conclusions in this regard, I must review the damages claimed by the defendant. The defendant produced a chart of its damage claim (exhibit #6, tab 24) which sets out the component parts of its claim, assuming that the defendant does not obtain the injunctive relief that it seeks, as follows:

Loss of 6% royalty for 10 years

$450,000.00

Loss of one new or renewed franchise

$260,000.00

Loss of 1% advertising fees for 4 years

$64,000.00

Loss of 3% advertising fees for 6 years

$288,000.00

Cost of equivalent signage

$180,000.00

Fee waived for Kim franchise

$64,500.00

Min. value of plaintiff for sale as a “turn key” business

$750,000.00

Total

$2,056,500.00

81 There are, in my view, a number of problems with the defendant’s damage claim. The loss of the 6% royalty and the loss of the advertising fees[3] for ten years assumes that the plaintiff would have continued to be a franchisee or that another franchisee would have been found for the plaintiff’s location. While that assumption is fair enough, the claim must be subject to a duty to mitigate, that is, the defendant had an obligation to mitigate its damages by locating another franchise in the same area or territory where the plaintiff was continuing to operate. Indeed, the plaintiff did exactly that when it sold a franchise to Mr. Kim, an existing franchisee, to operate a franchise outlet on Cumberland Street which is just north of the plaintiff’s location. However, the plaintiff has failed to account for the royalties received or to be received from this location which it seems to me have to be offset against the claims for lost royalties and lost advertising fees from the plaintiff.

82 As a result of this issue coming up during the closing submissions, counsel for the defendant asked that he be allowed to file a chart summarizing those royalties and advertising fees so that they could be deducted from the royalties and fees claimed. I gave permission to counsel for the defendant to do so only after the information to be provided was checked by counsel for the plaintiff. I have now received that chart which shows that the defendant had received $7,036.47 in royalties and advertising fees for five months ending with June, 2000. What has not been provided is a projection of what the defendant will receive in the future from this franchise which must also be deducted from the royalties and fees claimed. Although I have only five months of information on the Kim franchise, it shows that the royalties and advertising fees have been steadily increasing. I must therefore somewhat arbitrarily select an amount to represent the future royalties and fees to be received from this franchise so that the total current and future royalties and fees can be deducted from the amount claimed. I believe that it is fair to assume that the royalties and fees to be received from the Kim franchise would be at least one-half of the royalties and fees that the defendant claims it would have received from the plaintiff. On that basis I would have awarded the defendant $225,000.00 for royalties lost and $176,000.00 for advertising fees lost.

83 The claim for one new or renewed franchise is based solely on the evidence of Mr. Davis that the actions of the plaintiff have had a negative impact on existing and potential franchisees such that he believes that the defendant has lost the opportunity to gain at least one new franchisee or will lose a renewal by an existing franchisee as a consequence. Mr. Davis’ evidence in this regard is nothing more than sheer speculation. No evidence was called from existing franchisees, or any one who was considering becoming a franchisee, to support this alleged negative effect. The evidence is simply insufficient to sustain such a claim. Also, this is not a situation where the damages are of a kind that are inherently difficult to assess and therefore the court must simply do its best to arrive at a fair figure. This type of damage is capable of proof on proper evidence being tendered to that effect. As Mr. Justice Finlayson said in Martin v. Goldfarb 1998 CanLII 4150 (ON C.A.), (1998), 41 O.R. (3d) 161 (Ont. C.A.); leave to appeal to S.C.C. dismissed February 18, 1999 (L’Heureux-Dubé, Gonthier and Bastarche JJ.) S.C.C. File No. 26916 [reported at: (1999), 239 N.R. 193 (note) (S.C.C.)], at p. 187:

That is not to say, however, that a litigant is relieved of his or her duty to prove the facts upon which the damages are estimated. The distinction drawn in the various authorities, as I see it, is that where the assessment is difficult because of the nature of the damage proved, the difficulty of assessment is no ground for refusing substantial damages even to the point of resorting to guess work. However, where the absence of evidence makes it impossible to assess damages, the litigant is entitled to nominal damages at best.

If the defendant had been successful on its counterclaim, I would not have awarded any amount for damages under this heading.

84 The claim for the cost of equivalent signage is based on the defendant’s contention that the loss of the Print Three name on the outlet at 60 Bloor Street West has cost the defendant beneficial exposure in a well-travelled shopping concourse area in a busy section of Toronto which is close to the busiest stop on the Toronto subway system. While I can accept that there would be some beneficial effect to having the Print Three name on an outlet that passersby would be able to see, again the evidence here is inadequate to establish any quantifiable loss by the defendant arising therefrom. There is no evidence before me as to how many potential customers, if any, would choose to send their printing to the defendant over its competitors because of seeing the Print Three name on the plaintiff’s outlet. There is no evidence before me of the amount of business that any such customers might provide to the defendant. There is no evidence before me as to whether the loss of the Print Three name on the plaintiff’s outlet has been mitigated by the presence of the Print Three name on the Kim outlet on Cumberland Street and, if so, to what degree. Again, the evidence is insufficient to establish an actual loss or the amount of any such loss. The cost of putting up signs is certainly not the proper measure of any loss. Again, if the defendant had been successful on its counterclaim, I would not have awarded any amount for damages under this heading.

85 The waiver of the franchise fee for Mr. Kim to open the franchise on Cumberland is a legitimate head of damages. I have already said that the defendant was under a duty to mitigate and it did so by being able to get Mr. Kim to open a franchise in the plaintiff’s territory. Mr. Davis says that he had to agree to waive the franchise fee to convince Mr. Kim to open this franchise. There is no evidence to contradict Mr. Davis’ contention in this regard and I therefore accept that the defendant had to give up this fee as a cost of mitigating its damages. It is therefore entitled to claim that loss from the plaintiff.

86 Lastly, is the claim for the loss of the ability to sell the plaintiff’s business as a “turn key” operation. The central problem with this claim is that I do not see where the defendant obtains the right to sell the plaintiff’s business on the termination of the franchise agreement. All of the assets of that business would be the property of the plaintiff with the exception of the name and the telephone number. All of the equipment, furniture, employees and the like remained with the plaintiff. Indeed, subject to the provisions of the non-competition provision, the plaintiff was entitled at the expiration of the franchise agreement to continue its business outside of the prohibited geographic area. Also, the evidence as to the value of the plaintiff’s business under this head of damages is based entirely on what Brian and Mary Deslauriers paid for the Lerers’ franchises in 1989. Mr. Davis says that since Brian and Mary Deslauriers paid the Lerers $750,000.00 for their two franchises in 1989, the plaintiff must have been worth at least that much in 1999.

87 With respect, that assumption does not follow logically. There has been a passage of ten years between these two events. In that time, two franchise outlets have become one. The defendant has itself shrunk in size and has moved from what was becoming an international operation of a kind into what appears to be very much a strictly Ontario operation. Further, new competitors, such as Kinko’s, have arrived on the scene. There are now a number of Le Print Express outlets in existence. It is quite likely that, if the plaintiff was required to abide by the geographic restrictions in the non-competition clause, it still would have continued to do business outside of the prohibited area. How that situation would have affected the value of the 60 Bloor Street outlet is unknown. Given all of these factors, and there may be well be others, one cannot simply assume that the value of the business is at least as much as it was in 1989. Indeed, one cannot assume that the value of the outlet would bear any relationship to the purchase price paid in 1989. The evidence is simply insufficient to sustain this claim. Further, whatever damages might be incurred by the defendant from the loss of the plaintiff’s outlet appear to me to be covered by the lost royalties and advertising fees which I have assessed above less what the defendant has mitigated by obtaining the Kim outlet on Cumberland Street. As a result, if the defendant had been successful on its counterclaim, I once again would not have awarded any amount for damages under this heading.

88 The defendant also seeks permanent injunctive relief by which it seeks an order requiring the plaintiff to assign the lease for 60 Bloor Street West, to deliver vacant possession of those premises, to transfer the telephone numbers for the business, to deliver up its customer list and to refrain from being involved in any competing business within the geographic area stipulated in the franchise agreement.

89 This claim can also be dealt with briefly. It is a fundamental principle that in order to obtain injunctive relief the party seeking such relief must come to court with “clean hands”. It should be obvious from the findings I have made above that I do not consider the defendant to have “clean hands”. The actions of the defendant preclude it from invoking the equitable jurisdiction of this court even if the defendant could establish that there had been a breach of the termination provisions of the franchise agreement.

90 In summary, then, I would assess the defendant’s damages on the counterclaim as follows:

Loss of 6% royalty for 10 years

$225,000.00

Loss of one new or renewed franchise

$0

Loss of 1% advertising fees for 10 years

$176,000.00

Cost of equivalent signage

$0

Fee waived for Kim franchise

$64,500.00

Min. value of plaintiff for sale as a “turn key” business

$0

Total

$465.500.00

91 I would not have allowed the defendant’s claim for declaratory and injunctive relief.

92 Lastly on the defendant’s counterclaim, there is an allegation that the plaintiff has acted to transfer assets out of the plaintiff into BCD Comprint Inc. in an apparent attempt to judgment proof the plaintiff. It is alleged in some obscure way that this conduct is contrary to the security provisions contained in the franchise agreement. First, there is no requirement in the franchise agreement that the plaintiff has to maintain a certain level of assets or liquidity. Secondly, one only has to look at the financial statements of the plaintiff to see that any suggestion that the plaintiff was attempting to judgment proof itself does not accord with the realities of the plaintiff’s financial position. There is simply no substance to this allegation.

Conclusion

93 For the reasons expressed above, I find in favour of the plaintiff. I grant the plaintiff a declaration that the franchise agreement was at an end as at May 8, 1997 and award the plaintiff damages in the total amount of $369,160.24 comprised of the following amounts:

(i) $48,855.26 for the converted air miles;

(ii) $199,622.00 for royalties paid since May 8, 1997;

(iii) $59,870.00 for advertising fees paid since May 8, 1997;

(iv) $60,812.98 for the royalty rebates due based on the two locations being treated as a single franchise.

The plaintiff is entitled to prejudgment interest thereon which I fix at the rate of 5% from May 8, 1997 to the date hereof.

94 Given the numerous competing claims advanced and the volume of documentation placed into evidence in this proceeding, I recognize the possibility that I may have taken an incorrect figure out of all of the material in terms of the categories of damages I have awarded. If it is apparent to counsel that I have made such an error, they may certainly draw that fact to my attention.

95 Finally, the parties may make submissions on the appropriate disposition of the costs of the action. The plaintiff shall file its submissions within 10 days of the date of the release of these reasons and the defendant shall file its responding submissions within 10 days thereafter.

Action allowed; counterclaim dismissed.

[1] Additional reasons at 2000 CanLII 22683 (ON S.C.), (2000), 11 B.L.R. (3d) 100 (Ont. S.C.J.).

[2] I have avoided putting the precise dollar figures in my reasons because it would nullify the effect of a very limited sealing order I granted over certain of the exhibits at trial. I granted the order at the request of counsel for Loyalty Management because I was satisfied that the revelation of those financial terms, specifically the minimum monthly fee payable, would prejudicially impact on the business affairs of Loyalty Management.

[3] The difference between 1 % and 3% is apparently the result of the fact that the defendant has reduced the advertising fees that franchisees have to pay to 1% for the four year period from 1999 to 2003.