Shelanu Inc. v. Print Three Franchising Corporation, 2003 ONCA 52151

Shelanu Inc. v. Print Three Franchising Corporation Print Three Franchising Corporation v. Shelanu Inc. et al. [Indexed as: Shelanu Inc. v. Print Three Franchising Corp.]

64 O.R. (3d) 533

[2003] O.J. No. 1919

Docket No. C35392

Court of Appeal for Ontario,

Weiler, Austin and Laskin JJ.A.

May 20, 2003

Contracts -- Breach of contract -- Fundamental breach -- Breach of duty of good faith -- Entire agreement clause -- Exclusionary clauses -- [page534] Dispute between franchisor and franchisee -- Franchisee entitled to enforce oral agreement about royalty rebates -- Oral agreement not precluded by exclusionary clauses in franchise agreement -- Where parties have by their conduct amended their written agreement so that it no longer represents their intention, court will refuse to enforce written agreement -- Franchisor breaching contract and breaching duty of good faith -- Breaches not excusing franchisee from future performance of agreement -- Both franchisor and franchisee entitled to damages for breach of contract.

In 1987, BCD Print Inc. ("BCD"), a company owned by Brian Deslauriers, purchased a copy and print store franchise from the defendant Print Three Franchising Corporation ("Print Three") for 239 Bloor Street East in Toronto, and in 1989, Deslauriers and his wife, purchased the shares of the plaintiff Shelanu Inc. ("Shelanu"), which had outlets at 60 and 200 Bloor Street West.

The franchise agreement for Print Three Outlets provided for the payment of royalties to Print Three with royalty rebates depending upon the volume of sales. The franchise agreement contained three exclusionary clauses: paragraph 20 provided that delay exercising a right was not a waiver; paragraph 26 provided that there was no waiver or amendment to the agreement unless signed by all parties; and paragraph 27 was an entire agreement clause providing that the written agreement constituted the entire agreement between the parties with respect to all matters.

In 1991, the 200 Bloor Street outlet was closed without written formalities. In 1993, the 239 Bloor Street West outlet was closed, and its operation was moved eventually to 60 Bloor Street, again without written formalities. In January 1995, pursuant to an oral agreement with Print Three, the BCD franchise was cancelled, and Shelanu began reporting its sales as a single franchise, which would entitle it to a greater royalty rebate under the franchise agreement than was the case when sales were divided between BCD and Shelanu.

By letter on May 2, 1997, Shelanu purported to terminate the franchise agreement, and in August 1997, it sued Print Three for damages. Print Three counterclaimed. Despite the litigation, Shelanu continued to remit royalty payments on the basis of one franchise. It continued to use the Print Three name on its store. The franchise agreement expired naturally in December 1999.

The trial judge held that the 1995 oral agreement was enforceable. He held that Print Three had breached its contractual obligations and a duty of good faith in four respects, that is: (1) by attempting to rescind the agreement; (2) by unilaterally changing the terms of an Air Miles program; (3) by its failures to make royalty payments; and (4) by allowing the establishment of a Le Print Express franchise, a new franchise concept that would operate in competition with its existing franchise operation. In relation to the first three breaches, the trial judge awarded damages for breach of contract. He did not award separate damages for the breach of the duty of good faith. The trial judge held that the breach entitled Shelanu to terminate the franchise agreement, and he dismissed the counterclaim, although he assessed damages. Print Three appealed. Shelanu cross-appealed on the trial judge's assessment of damages with respect to the counterclaim.

Held, the appeal and cross appeal should be allowed. [page535]

The oral agreement was enforceable and not precluded by the exclusion clauses in the franchise agreement, which had the purpose of limiting the parties' duties to each other to what was reduced to writing and to exclude other duties. In construing an exclusion clause, the issue is whether it covers the alleged occurrence or breach in question. If the clause covers the alleged occurrence or breach, then it is enforceable unless it would be unconscionable or unless the clause is unfair, unreasonable or otherwise contrary to public policy. In the immediate case, the terms of the oral agreement did not conflict with the franchise agreement. Paragraph 20 did not apply because Shelanu was not in breach and the paragraph by its language did not apply to the oral agreement. Paragraph 26 did not apply to Shelanu as there was no change in its obligations relating to the terms of its franchise agreement. With respect to BCD, para. 26 did not apply because there was no waiver or amendment to its franchise agreement; rather, there was a surrender and termination by agreement of the parties. Paragraph 26 did not contemplate what actually occurred. Paragraph 27, the entire agreement clause, did not apply. It could not be said that the entire agreement clause was intended to cover any and all future contractual relations between Shelanu and Print Three.

Since the exclusion clauses did not apply, it was, strictly speaking, unnecessary to address whether the court should exercise its discretion not to enforce the exclusion clauses; however, since the point was fully argued, it should be considered. Where parties have, by their conduct amended their written agreement so that it no longer represents their intention, the court will refuse to enforce the written agreement. To do otherwise is to not give effect to the intentions of the parties, and the writing should not be enforced if it no longer represents the intention of the parties. Enforcing an exclusion clause that is contrary to the reasonable expectation and understanding of the parties would be unfair and unreasonable. Therefore, even if the exclusion clauses applied, the trial judge was entitled to refuse to enforce paras. 20, 26 and 27 of the agreement. The trial judge did not err in finding that Shelanu was entitled to enforce the agreement against Print Three. Therefore, Shelanu was entitled to damages as found by the trial judge.

The trial judge was correct in concluding that Shelanu had breached a duty of good faith. In some instances, a duty of good faith may arise out of the nature of the relationship or the circumstances created by the other party. In the Supreme Court of Canada judgment of Wallace v. United Grain Growers Ltd., a duty of good faith was found to exist in employment contracts, where there typically is a power imbalance between employer and employee. The situation for franchisees was similar. It was unusual for a franchisee to have equal bargaining power to the franchisor. The franchise contract is usually a contract of adhesion. Further, the franchisee is dependent on the franchisor for information and is subject to training and continuing supervision and inspections. Courts have recognized that a duty of good faith exists at common law in the context of a franchisor-franchisee relationship. In the immediate case, the trial judge did not hold Print Three to a higher standard than that imposed by the duty of good faith, namely the duty of a fiduciary. When exercising its powers or discretions, a fiduciary must act only in accordance with the interests of the beneficiary. In contrast, a contracting party under a duty of good faith, in exercising its powers or discretions must give consideration to the interests of the other contracting party as well as its own interests. The trial judge knew the distinction and did not hold Print Three to a fiduciary standard. 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 the duty conducted itself fairly. There was evidence [page536] upon which the trial judge could hold that there had been breaches of a duty of good faith with respect to the payment of royalty rebates and its advertising program. However, the trial judge committed a palpable and overriding error in concluding that the establishment of the Le Print Express business was a breach of a duty of good faith.

The remaining breaches of the agreement did not support the trial judge's conclusion that there had been a fundamental breach of the agreement entitling Shelanu the right to treat the franchise agreement at an end. For a fundamental breach, the test is restrictive, namely, whether the breaching party's conduct deprived the other party of substantially the whole benefit of the contract. In the immediate case, the trial judge failed to consider the fact that Shelanu continued to use the name of Print Three and continued to have an exclusive territory. To measure whether the innocent party should be excused from future performance, the following factors may be applied: (a) the ratio of the party's obligation not performed to the obligation as a whole; (b) the seriousness of the breach to the innocent party; (c) the likelihood of repetition of such breach; (d) the seriousness of the consequences of the breach; and (e) the relationship of the part of the obligation to the whole obligation. Applying these factors to the breaches of Print Three in this case, Shelanu was not entitled to treat the agreement at an end. Shelanu was not deprived of substantially the whole of the benefit of its agreement with Print Three. Consequently, Shelanu was not entitled to recover the $199,622 royalties paid by it since May 8, 1997 nor $59,870 in advertising fees. It was, however, entitled to receive credit for royalty rebates.

There being no fundamental breach excusing Shelanu from future performance, Print City was entitled to succeed on its counterclaim, although the trial judge's assessment of the damages was incorrect. Shelanu was liable for damages for one year. It was liable to pay an amount equal to the loss of one franchise fee, namely $64,500 for failing to surrender its customer list, telephone and fax numbers. It was liable for loss of revenue and loss of advertising fees for one year at $29,700 in addition to the franchise fee for a total of $94,200. The appeal and cross-appeal should be allowed accordingly.

APPEAL from a judgment of Nordheimer J. (2000), 2000 22788 (ON SC), 11 B.L.R. (3d) 69, [2000] O.J. No. 4129 (QL) (S.C.J.) for damages for breach of a franchise agreement.

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Benjamin Zarnett and Elliot S. Birnboim, for appellant. F. Scott Turton, for respondents.

The judgment of the court was delivered by

WEILER J.A: --

I. INTRODUCTION

[1] Print Three is a franchisor of copying and print stores. Shelanu was a Print Three franchisee owned by Brian Deslauriers and his wife, Mary. Shelanu alleged that Print Three breached its obligations as a franchisor and, in addition to claiming damages, alleged that it was entitled to be released from further performance of its obligations as a franchisee from the date it gave notice of termination of the franchise agreement (the "agreement"). Print Three denied any breach of its obligations and counterclaimed for damages. Nordheimer J. held in favour of Shelanu with respect to both damages and fundamental breach and dismissed Print Three's counterclaim. Despite this finding, he assessed the damages under the counterclaim.

II. OVERVIEW

[2] Print Three's appeal raises three main issues. The first issue is whether the trial judge erred in holding that Print Three breached any of its obligations to Shelanu. In connection with this issue, Print Three alleges that the trial judge erred in holding that it breached an oral agreement entered into after the written franchise agreement. The effect of the oral agreement was to entitle Shelanu to a greater royalty rebate under the agreement. Print Three submits that the oral agreement is unenforceable due to the existence of an entire agreement clause and other clauses excluding oral amendments and waivers not in writing in the agreement (collectively referred to, for ease of reference, as the exclusion clauses) and due to lack of consideration. The second issue is whether the trial judge erred in holding that the parties owed each other a duty of good faith and that Print Three breached that duty by allowing for the [page540] establishment of a Le Print Express franchise. If Print Three did breach its obligations to Shelanu, the third issue is whether the breach was so fundamental that Shelanu was released from further performance of the agreement from the date it gave notice of termination of the agreement.

[3] In the event that Shelanu was not released from further performance of its obligations as a franchisee, I must consider Shelanu's cross-appeal of the trial judge's assessment of damages under Print Three's counterclaim.

[4] With respect to the first issue, based on the twofold approach I adopt, I would hold that the subsequent oral agreement is enforceable despite the existence of the exclusion clauses. First, I determine whether these clauses apply to the subsequent oral agreement and I conclude that they do not. I would also uphold the trial judge's finding that there was consideration for the oral agreement. Second, because the appellant has not appealed the trial judge's finding that the oral agreement exists and there is no dispute as to its terms, I find that the subsequent oral agreement represents the intentions and legitimate expectations of the parties and, in these circumstances, should prevail.

[5] With respect to the second issue, the trial judge recognized a common law and statutory duty of good faith between Print Three and Shelanu. I would hold that the trial judge did not err in recognizing the existence of a duty of good faith at common law. For reasons I will specify later, the circumstances giving rise to the duty of good faith that the Supreme Court recognized in the employment context in Wallace v. United Grain Growers Ltd. (c.o.b. Public Press), 1997 332 (SCC), [1997] 3 S.C.R. 701, 152 D.L.R. (4th) 1 are equally present in the franchisor franchisee relationship here. Print Three had a duty of good faith in the sense that it had an obligation to have regard to Shelanu's legitimate interests and to deal promptly, honestly, fairly and reasonably with Shelanu. I would also hold that the trial judge did not impose a higher, fiduciary duty on Print Three.

[6] Given my conclusion, it is unnecessary to decide whether the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3, which applies to existing franchises, is applicable in this case where the acts in issue took place prior to the coming into force of the Act.

[7] I agree with the trial judge that Print Three breached its obligations to Shelanu with respect to payment of royalty rebates and its advertising program. I disagree, however, with the trial judge's conclusion that the establishment of the Le Print Express business was a breach of Print Three's duty of good faith towards [page541] Shelanu. The trial judge committed a palpable and overriding error in coming to that conclusion.

[8] With respect to the third issue, fundamental breach, having regard to my conclusion that the establishment of the Le Print Express franchise was not a breach of Print Three's obligations towards Shelanu and to the fact that Shelanu continued to derive the benefit of the use of Print Three's name and an exclusive territory after it purported to terminate the agreement, I would hold that the trial judge erred in excusing Shelanu from further performance under the agreement.

[9] In relation to the cross-appeal respecting damages, though I have concluded that Shelanu was not excused from further performance under the agreement, I would hold that the trial judge committed an error in principle in holding Shelanu liable for damages over a period of ten years, or the life of a franchise agreement. Instead, based on Shelanu's breach of its one-year non-competition clause, I would hold Shelanu liable for damages for one year. I would agree with the trial judge that Shelanu is liable to pay Print Three an amount equal to the loss of one franchise fee -- namely $64,500 -- for failing to surrender its customer list, telephone and fax numbers at the end of the agreement. In accordance with the figures used by the trial judge, I would assess the damages to Print Three for loss of revenue and loss of advertising fees for one year at $29,700 in addition to the franchise fee of $64,500 for a total of $94,200. My reasons follow.

III. LEGAL ISSUES

[10] The decision of the trial judge is reported at 2000 22788 (ON SC), [2000] O.J. No. 4129 (QL), 11 B.L.R. (3d) 69 (S.C.J.) and, therefore, a brief outline of the facts relating to the alleged breaches will suffice to appreciate the legal arguments and these reasons.

1. Enforceability of the Oral Agreement

A. Facts

[11] In 1987, BCD Print Inc., a company owned by Brian Deslauriers, purchased a Print Three franchise for a location at 239 Bloor Street East in Toronto. BCD is not a party to this action, although it is a party to the oral agreement.

[12] Two years later, Brian Deslauriers and his wife, Mary, purchased the shares of Shelanu Inc., which had two Print Three franchises at 60 and 200 Bloor Street West. They entered into two new franchise agreements with Print Three for each of these locations and gave a personal guarantee of the debts of Shelanu. [page542] In September 1991, there was a downturn in the economy and, with the oral agreement of Jack Banks, the principal behind Print Three, Shelanu closed the operation at 200 Bloor Street West. Paragraph 26 of the franchise agreement required that any change to the terms or covenants of the agreement be in writing. No such documentation was ever requested or required by Print Three when the 200 Bloor Street West location was closed.

[13] Over the next few years, the Deslauriers continued to struggle with their businesses and eventually BCD closed the 239 Bloor Street East location and moved it to 80 Bloor Street West. Pursuant to the written franchise agreement, Print Three was to lease the space but was not interested in doing so. BCD leased the space directly at 80 Bloor Street West and used it as a production facility for Shelanu's business. Print Three did not object. Instead, Banks orally offered to let the Deslauriers surrender BCD's franchise but said that, if they did, he would feel free to put a new franchise in at 239 Bloor Street East. Afraid of the competition, the Deslauriers declined Banks' offer at this time.

[14] On January 13, 1995, two years after the closure of the 239 Bloor Street East outlet, the Deslauriers met with Banks and asked him if they could surrender the BCD franchise. (By this time BCD had moved into space at 60 Bloor Street West, above the premises occupied by Shelanu). He agreed but asked that they confirm this agreement with his legal counsel. Three days later, Mary Deslauriers wrote a letter on BCD letterhead as follows:

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 St. W. Therefore, we are hereby cancelling 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] The reference to submitting royalties is a reference to Shelanu's obligation to pay Print Three a monthly royalty of six per cent of gross sales pursuant to para. 3 of the franchise agreement.

[16] The franchise agreement provided that a percentage of the royalties paid was to be remitted to the franchisee based on the franchisee's aggregate sales each quarter. As certain gross sales levels were met, the percentage of royalties rebated increased. As two franchises, the sales were split between BCD and Shelanu with the result that gross sales levels would be lower for both [page543] franchises and, consequently, the percentage royalty rebate owed by Print Three would be lower. Conversely, if Shelanu reported all sales, gross sales levels would be higher and the royalty rebate would be at a higher percentage.

[17] In early February 1995, the Deslauriers reported as one franchise, Shelanu, and sent the royalty statement based on sales for the month of January. Charlotte Krebs, a Print Three employee, called Mary Deslauriers and told her that one franchise report was missing. Mary Deslauriers told her of the agreement reached with Banks. Subsequently, Krebs called Mary Deslauriers again and said that Banks might require a new franchise agreement to be signed. Mary Deslauriers was surprised at this and said she would speak to Banks. Although Mary Deslauriers called and left messages for Banks asking why a new agreement would be necessary, he never returned her call, and the question of a new franchise agreement was not raised again.

[18] On April 6, 1995, Mary Deslauriers sent a letter to Krebs enclosing Shelanu's royalty cheque for March as one franchise. The letter stated in part:

Since your inquiry, we have left several messages for Jack to see if he has any concerns about this. We have not heard back from him, so we assume that we are and have been since January, one franchise. We are therefore looking forward to a Royalty Rebate for this quarter accordingly.

[19] Around this time a dispute arose between Print Three and many of the franchisees regarding advertising. This dispute is the subject of an issue called the Air Miles program that I will discuss later. The fact that the Deslauriers sided with the other franchisees on this issue angered Banks. On May 8, 1995, Banks expressed some of this anger during a telephone conversation with Mary Deslauriers. According to Mary Deslaurier's note, he stated, among other things"Every franchise that did not pay the 3 per cent for April [for the Air Miles advertising program], Jack [Banks] 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 . . .". Following this conversation, Banks wrote a letter to the Deslauriers purporting to deny the "request to terminate one of your franchise agreements and to consolidate your two centres".

[20] The quarter following the phone call (July to September 1995) was the first time the royalty rebate was withheld. Print Three also withheld the royalty rebate for the fourth quarter (October to December 1995). [page544]

[21] The royalty rebates remained an outstanding problem. Print Three also withheld royalty rebates for the second quarter of 1996 without explanation. On October 3, 1996, a meeting took place between Bob Davis, a former franchisee who had become president of Print Three, and the Deslauriers to deal with the issue of royalty rebates. Davis asked to see the production facility now located on the 12th floor of 60 Bloor Street West and Brian Deslauriers refused to show it to him. He wanted to discuss the unpaid rebates. Towards the end of the meeting, Davis handed over a royalty rebate cheque for the royalty rebates due for the second quarter of 1996 apparently on the basis of there being two franchises. On October 7, 1996, the royalty rebates for the third and fourth quarters of 1995 were also paid on the basis that there were two franchises. On October 8, at Davis' request, Brian Deslauriers sent a letter to Davis again outlining the 1995 agreement he had with Banks. The next day Davis replied, stating they were in breach of the franchise agreement for refusing to allow him to see the production facility, and, as a result, were not entitled to any royalty rebate. The amount of this rebate was $2,241 or $8,947, depending upon whether the January 13, 1995 agreement was enforceable (i.e. depending on whether they were reporting as one or two franchises). Brian Deslauriers wrote back saying Davis could see the production facility any time it was convenient for him. This visit took place on January 16, 1996 and lasted only a few minutes. On January 24, 1996, Davis sent a letter to Brian Deslauriers indicating that he had decided he would continue to treat their operation as two stores for rebate purposes.

[22] On May 2, 1997, Shelanu wrote a letter alleging a number of breaches of the franchise agreement and purporting to terminate the franchise agreement with Print Three. In August 1997, Shelanu commenced an action against Print Three for royalty rebates it claimed were owing. Despite the litigation, Shelanu continued to remit royalty payments on the basis of one franchise. Shelanu also continued to use the name Print Three on its store until October 16, 1999. The franchise agreement expired naturally in December 1999.

[23] Neither Banks nor Krebs testified at trial.

B. The findings of the trial judge

[24] Since neither Banks nor Krebs testified, the trial judge inferred that their evidence would not have supported the defence position respecting the lack of any oral agreement. From this inference, and the evidence as a whole, the trial judge found [page545] that an oral agreement was reached in January 1995 in which Print Three agreed to cancel BCD's franchise for the 239 Bloor Street East location and to allow BCD to combine its production operations with the retail operations of Shelanu. Because an oral agreement had been reached in January 1995, Banks' letter of May 1995 and Davis' letter in January 1996, unilaterally refusing to treat the production facility and the store at 60 Bloor Street West as one location, had no effect.

[25] The trial judge rejected the appellant's argument that the agreement was unenforceable. He found that the defendant did not require any formal written documentation when Shelanu terminated the franchise at the 200 Bloor Street West location or when BCD closed the 239 Bloor Street East location and moved it to 80 Bloor Street West and, consequently, it was not now open to Print Three to insist on strict compliance with its rights under the written agreement.

[26] With respect to the issue of consideration, the trial judge found that this was a three-party agreement and that there was consideration flowing to Print Three from both BCD and Shelanu. From BCD, Print Three obtained the release of the territory related to the 239 Bloor Street East location that it could then sell to a new franchisee. From Shelanu, Print Three received the benefit of Shelanu's improved financial situation. Presumably, the trial judge meant that Print Three received the benefit of increased royalties from Shelanu resulting from its increased sales which, in turn, were derived from the synergies of combining BCD's and Print Three's operations into one. On the issue of privity, the trial judge found that the representatives of both BCD and Shelanu, the Deslauriers, were present with Print Three's representative, Banks, at the meeting where the agreement was reached. He saw no reason why Shelanu -- one of the parties to the agreement and its principal beneficiary -- could not enforce it.

[27] The evidence respecting the making of the oral agreement and its existence were explored extensively at trial. On appeal, the appellant accepts the finding of the trial judge that there was an oral agreement in January 1995, but submits that the trial judge erred in law in holding that this oral agreement was enforceable.

[28] The paragraphs in the written franchise agreement which the appellant submits are contrary to the oral agreement are para. 20 (delay in exercising a right or breach of default is not waiver of right), para. 26 (no waiver, amendment or change of any terms unless signed by all parties) and para. 27 (this [written] agreement constitutes the entire agreement between the parties with respect to all matters herein). [page546]

[29] Simply put, the appellant's position is that the parties' bargain is to be equated with the document they have signed.

C. Analysis

(i) Exclusion clauses: interpretive approach

[30] Before deciding not to enforce the exclusion clauses, the trial judge did not specifically consider whether they applied to the oral agreement. This seems to me to be a necessary first step. Once a determination has been made that the exclusion clauses apply, the court can then consider whether they should be enforced.

[31] Paragraphs 20, 26, and 27 are not limitation or exclusion clauses in the traditional sense that they limit or exclude liability for damages for breach of contract or for a tort connected to the contract. Their purpose is, rather, to limit the parties' duties to each other to what has been reduced to writing and, as a corollary, to exclude any other duties. More specifically, an entire agreement clause seeks to exclude liability for statements other than those set out in the written contract and is sometimes referred to as an exclusion clause. See H.G. Beale et al., eds., Chitty on Contracts, 28th ed. (London: Sweet & Maxwell, 1999), vol. 1 at 12-102; Kenyon, Son & Craven Ltd. v. Baxter Hoare & Co. Ltd., [1971] 1 W.L.R. 519 (Q.B.) at p. 522; Betker v. Williams (1991), 1991 1160 (BC CA), 86 D.L.R. (4th) 395, 63 B.C.L.R. (2d) 14 (C.A.); Zippy Print Enterprises Ltd. v. Pawliuk (1994), 1994 1756 (BC CA), 100 B.C.L.R. (2d) 55 (C.A.). Further, in construing an entire agreement clause, in Beer v. Townsgate I Ltd. (1997), 1997 976 (ON CA), 36 O.R. (3d) 136, 152 D.L.R. (4th) 671 (C.A.) at p. 147 O.R., this court resorted to the reasoning typically associated with an exclusion clause that limits liability for damages.

[32] The approach that I am adopting here is consistent with the approach to construing and enforcing exclusion or limitation clauses relating to damages as stated in Hunter Engineering Co. v. Syncrude Canada Ltd., 1989 129 (SCC), [1989] 1 S.C.R. 426, 57 D.L.R. (4th) 321. Dickson C.J., with whom La Forest J. concurred, held that exclusion clauses are not inherently unreasonable. In construing an exclusion clause, the issue to be addressed is whether, as a matter of construction, the exclusion clause covers the alleged occurrence or breach in question. Exclusion clauses are to be approached with the aid of the cardinal rules of contractual construction: they must be read contra proferentem and clear words are necessary for the exclusion clause to apply. See Photo Production Ltd. v. Securicor Transport Ltd., [1980] A.C. 827, [1980] 1 All E.R. 556 (H.L.) per Lord [page547] Wilberforce at p. 846 A.C., cited by Dickson C.J. at p. 458 S.C.R. of his judgment.

[33] When the exclusion clause covers the alleged occurrence or breach, the question is whether to enforce the exclusion clause. Where the court is of the opinion extreme unfairness would result from the enforcement of an exclusion clause, such as, for example, where there was inequality of bargaining power, this concern should be addressed directly through the doctrine of unconscionability. Dickson C.J. held that courts should no longer use the term fundamental breach to avoid the operation of an exclusion clause as this term is confusing. The approach of directly addressing the concerns respecting enforcement of the exclusion clause would allow the courts to focus expressly on the real grounds for refusing to enforce a contractual term agreed to by the parties.

[34] The other major opinion in Hunter Engineering, supra, is that of Wilson J. with whom L'Heureux-Dubé J. concurred. Wilson J. held that the court's responsibility did not end with construing the contract to ascertain the bargain that the parties had made. She was of the opinion that the court had a responsibility to assess the reasonableness of enforcing the exclusion clause in the contract in light of subsequent events. The doctrine of unconscionability did not suffice to relieve a party from the effect of an exclusion clause that operated unfairly because it was traditionally restricted to inequality of bargaining power and the circumstances existing at the time the contract was made: see Hunter Engineering, supra, at pp. 511-18 S.C.R. See also N. Rafferty"Developments in Contract and Tort Law: The 1999-2000 Term" (2000) 13 S.C.L.R. (2d) 125 at pp. 141-43.

[35] In Guarantee Co. of North America v. Gordon Capital Corp., 1999 664 (SCC), [1999] 3 S.C.R. 423, 178 D.L.R. (4th) 1, the Supreme Court of Canada ". . . interpreted Hunter Engineering in such a way as to indicate that there was little distinction between the approaches of Dickson C.J. and Wilson J." respecting the enforceability of exclusion clauses: Rafferty, supra, at p. 143. I agree. At para. 52 of the reasons in Gordon Capital, supra, Iacobucci and Bastarache JJ. stated:

The only limitation placed upon enforcing the contract as written . . . would be to refuse to enforce an exclusion of liability in circumstances where to do so would be unconscionable, according to Dickson C.J., or unfair, unreasonable or otherwise contrary to public policy, according to Wilson J.

[36] With this framework for contractual interpretation in mind, I will now turn to the agreements in issue with a view [page548] to determining whether the paragraphs in issue apply to the oral agreement.

(ii) Does the tripartite oral agreement conflict with the wording of the exclusion clauses in the franchise agreement?

[37] Paragraph 3B of the agreement requires the franchise owner to pay a continuing royalty -- amounting to six per cent of all monthly gross sales -- for the use of the franchisor's on-going assistance, trademarks and know-how. Regardless of whether Shelanu operated as one franchise or as two, it had to pay Print Three six per cent of all monthly gross sales. It was in relation to the royalty rebate provided for in the agreement that the dispute arose. In this regard the wording of the agreement is again instructive. Paragraph 3C states that the rebate on quarterly gross sales from $81,501 to [$]135,850 is 33 and 1/3 per cent. On sales between $135,851 and $190,190, the rebate is 66 and 2/3 per cent, and on sales over $190,191 it is 100 per cent. The next relevant sentence is:

The foregoing royalty rebate calculation assumes Franchise Owner has just one (1) location.

If the franchisee has two locations, gross sales must attain $163,001 before the rebate of 33 1/3 [per cent] of gross sales is payable.

(Emphasis added)

[38] Paragraph 5 requires the franchise owner to operate only at the location specified in the agreement. The address indicated for Shelanu's approved location is 60 Bloor Street West, Toronto, Ontario. With respect to Shelanu's franchise agreement, nothing changed in January 1995; it was operating as a single franchise out of a single location, namely 60 Bloor Street West. Consistent with the oral agreement reached with Jack Banks on January 13, 1995, BCD had cancelled its franchise with Print Three. BCD effectively merged with Shelanu; however, Shelanu's franchise did not change. It continued to operate as a single franchise under the terms of the franchise agreement. The oral agreement reached was not inconsistent with para. 5.

[39] I will now consider whether the paragraphs in issue are inconsistent with the alleged oral agreement.

[40] Paragraph 20 states:

No delay or omission to exercise a right, power or remedy accruing to one party on any breach or default of this Agreement shall be construed as a waiver of such right, power or remedy of said party nor will it prevent Franchisor from thereafter enforcing strict compliance with any and all of the terms and conditions herein set forth. [page549]

[41] The words "right, power or remedy" are not used in a vacuum but relate to "any breach or default of this Agreement". Para. 20 has no application because Shelanu was not in breach of its agreement and because para. 20 does not apply to the three-party oral agreement that was reached. It applies only to "this Agreement", that is, the written franchise agreement between Print Three and Shelanu.

[42] The appellant also relies on paras. 26 and 27 of the franchise agreement between Shelanu and Print Three. Paragraph 26 is as follows:

No waiver, amendment or change of any of the terms or covenants of this Agreement or non-compliance therewith, shall be binding or effective unless effected by a notice signed by any and all parties hereto. The Franchise Owner shall execute such further and other documents, including, without limitation a registered user agreement in respect of the Mark, as may be required from time to time, by the franchisor, to carry out the full intent and purpose of this Agreement.

[43] Again the words"waiver amendment or change" are not used in a vacuum. They are tied to "any of the terms or covenants of this Agreement". Shelanu owned one franchise and there was no change in its obligations relating to the terms or covenants of that agreement. This is indirectly acknowledged in para. 36 of the appellant's factum which states"Nothing about Print Three observing or not observing the January 13, 1995 Agreement could be a breach of Shelanu's Franchise Agreement."

[44] The oral agreement would only be enforceable if it was valid and binding on all three parties, including BCD. BCD's written franchise agreement with Print Three contained the same wording as Shelanu's. In considering the enforceability of the tri-partite agreement I will also therefore consider whether the exclusion paragraphs applied to BCD. Paragraph 20 of the written agreement between BCD and Print Three also applies only to the two parties and would not apply to the three party oral agreement that was reached. I turn now to consider whether, as against BCD, the words"waiver, amendment or change" in para. 26 would apply. The surrender of the franchise was not a waiver or amendment to BCD's franchise agreement as both these words envisage the continuation of some aspect of the franchise agreement and not, as is the case here, its surrender and termination by agreement of the parties. As Cory J. held in Schmidt v. Air Products of Canada Ltd., 1994 104 (SCC), [1994] 2 S.C.R. 611, 115 D.L.R. (4th) 631 at para. 66 in concluding that a power to amend a trust did not include the power to revoke it". . . amendment means change not cancellation which the word revocation connotes". Similarly, in this case, we are dealing with a revocation of [page550] a franchise licence, not an amendment or change to the licence. Further, in interpreting the Patent Act, R.S.C. 1985, c. P-4, in Harvard College v. Canada (Commissioner of Patents), 2002 SCC 76, [2002] S.C.J. No. 77 (QL), at para. 161, McLachlin C.J.C. on behalf of the majority, stated:

It is a well-known principle of statutory interpretation that the meaning of questionable words or phrases in a statute may be ascertained by reference to the meaning of the words or phrases associated with them (P.-A. Côté, The Interpretation of Legislation in Canada (3rd ed. 2000), at pp. 313-14.). Also, a collective term that completes an enumeration is often restricted to the same genus as those words, even though the collective term may ordinarily have a much broader meaning (at p. 315).

[45] The principles which govern the interpretation of contracts are essentially the same as for statutory interpretation: River Wear Commissioners v. Adamson (1877), 2 App. Cos. 743, [1874-80] All E.R. Rep. 1 (H.L.) at pp. 763-65 App. Cos. adopted by L'Heureux-Dubé J. in dissent but not on this point in Manulife Bank of Canada v. Conlin, 1996 182 (SCC), [1996] 3 S.C.R. 415, 139 D.L.R. (4th) 426 at para. 40 and also Manitoba (Hydro-Electric Board) v. John Inglis Co., 1999 18647 (MB CA), [1999] M.J. No. 506 (QL), 181 D.L.R. (4th) 470 (C.A.). Applying these principles of interpretation to the phrase"waiver, amendment or change" in this case, the word change would be construed as including a change that would nevertheless result in the continuation of the agreement not, as here, its revocation and termination. The paragraph does not contemplate what occurred pursuant to the oral agreement, namely, a surrender and revocation of the franchise for 239 Bloor Street East by mutual agreement. Paragraph 26 in BCD's agreement does not conflict with the oral agreement.

[46] Paragraph 27 of the agreement reads as follows:

This agreement constitutes the entire Agreement between the parties with respect to all of the matters herein and its execution has not been induced by, nor do any of the parties hereto rely upon or regard as material, any representation or right not incorporated herein. Any representations, inducements, promises, and agreements, oral or otherwise not contained herein shall have no force or effect in the construction of the rights and obligations of the parties created by this Agreement.

[47] Paragraph 27 deals "with . . . all of the matters herein" and states that any oral or other representations have no force or effect in the "construction of the rights and obligations of the parties created by this Agreement". The rights and obligations of the parties to the oral agreement, namely, BCD, Shelanu and Print Three are, as I have said, not "matters herein" and were not "created" by the franchise agreement between Shelanu and Print Three or, for that matter, BCD and Print Three. [page551]

[48] Further, the ordinary meaning of the language used in para. 27 is that the written agreement represented the entire agreement between the parties at the time it was signed. J. Beatson, in Anson's Law of Contract, 27th ed. (Oxford: Oxford University Press, 1998) at pp. 494-95 states:

A simple contract, . . . whether in writing or not, may be varied by a subsequent agreement either written or oral. This in no way conflicts with the rule that extrinsic evidence is not admissible to vary or add to the contents of the written document, for that principle merely refers to the ascertainment of the original intention of the parties.

(Emphasis added)

[49] Indeed, an exception to the parol evidence rule is the existence of any subsequent oral agreement to rescind or modify a written contract provided that the agreement is not invalid under the Statute of Frauds: Ellis v. Abell, [1884] 10 O.A.R. 226 (C.A.) at para. 85.

[50] Clauses such as the entire agreement clause in issue here are normally used to try to exclude representations made prior to the signing of the written agreement. See P.M. Perell"A Riddle Inside an Enigma: The Entire Agreement Clause" (1998) Advocates' Q. 287. Nothing in para. 27 suggests that an oral agreement to surrender the franchise several years later would be of no effect. It cannot be said the entire agreement clause was clearly intended to cover any and all future contractual relations between Shelanu and Print Three. See Turner v. Visscher Holdings Inc., [1996] B.C.J. No. 998 (QL), 23 B.C.L.R. (3d) 304 (C.A.). The fact that Print Three and Shelanu entered into and acted upon an oral agreement respecting the surrender of the franchise at 200 Bloor Street West indicates this was not the case. Indeed, J.M. Perillo, ed., Corbin on Contracts (St. Paul, MN: Western Publishing Co., 1993) states at para. 1295 that an express provision in a written contract forbidding oral variation of the terms of a contract or its discharge is generally unsuccessful with respect to subsequent agreements. The reason he gives is that:

Two contractors cannot by mutual agreement limit their power to control their legal relations by future mutual agreement. Nor can they in this manner prescribe new rules of evidence and procedure in the proof of facts and events.

[51] Paragraph 27 has no application either.

[52] The wording of the exclusion paragraphs does not conflict with the subsequent tri-partite oral agreement of January 13, 1995 and does not prevent effect being given to this oral agreement. [page552]

(iii) Discretion not to enforce the exclusion clauses

[53] In view of my conclusion above, it is not strictly necessary for me to address the enforceability of the exclusion clauses. However, given the trial judge's conclusion and the extent of argument on the question of whether he erred in refusing to give effect to the clauses, I will consider this issue.

[54] At the trial, the existence of the oral agreement and thus the intention of the parties was in issue. The trial judge relied on the parties' subsequent course of conduct to infer that they did not intend to continue to be bound by the exclusion clauses in the agreement. The trial judge found that Print Three had orally agreed to the surrender of a franchise by Shelanu on a previous occasion, and had allowed Shelanu to change locations and to lease space directly without anything being in writing. Where the parties have, by their subsequent course of conduct, amended the written agreement so that it no longer represents the intention of the parties, the court will refuse to enforce the written agreement. This is so even in the face of a clause requiring changes to the agreement to be in writing. See Colautti Construction Ltd. v. City of Ottawa (1984), 1984 1969 (ON CA), 46 O.R. (2d) 236, 9 D.L.R. (4th) 265 (C.A.), per Cory J.A.

[55] On appeal, the appellant has conceded the existence of the oral agreement and its terms but asks this court to enforce the written agreement instead. That submission, in effect, asks this court not to give effect to the intention of the parties. Such a submission is contrary to the classical theory of contract interpretation which emphasizes that courts should ascertain and give effect to the intention of the parties: R. Sullivan"Contract Interpretation in Practice and Theory" (2000) 13 S.C.L.R. (2d) 369.

[56] Sullivan states, at p. 378, that"if a conflict arises between the intention of the parties as inferred from the totality of the evidence on the one hand and the meaning of the text on the other, intention should win." Professor Waddams has also argued that if a party knows or has reason to know that a written contract on which that party relies does not represent the intention of the other party, it should not be enforced. See S.M. Waddams, The Law of Contracts, 3rd ed. (Toronto: Canada Law Book, 1993) at paras. 328-29.

[57] The rationale of Sullivan and Waddams is similar, namely, that in addition to certainty, legal values such as fairness, equity and justice underlie contractual interpretation and enforcement. Before the court allows the coercive power of the state to be used to serve the private interests of a party to a contract, [page553] the court will want to ensure that the contract does not offend these legal values.

[58] I would also note that the agreement that we are dealing with is a franchise agreement. A franchise agreement is a type of contract of adhesion, that is, a type of contract whose main provisions are presented on a "take it or leave it basis". In such situations, the case for holding that an exclusion clause represents the intention of the signer and that the signer should be bound by it is weaker because there is usually an inherent inequality of bargaining power between the parties. See Waddams, supra, at para. 342. Examples of cases involving contracts of adhesion where this court has refused to apply an exclusion clause because it did not accord with the intention or reasonable expectations of the parties include: Beer v. Townsgate I, supra; Solway v. Davis Moving & Storage Inc. (2002), 2002 21736 (ON CA), 62 O.R. (3d) 522, [2002] O.J. No. 4760 (QL) (C.A.) at para. 21; and Zurich Insurance Co. v. 686234 Ontario Ltd. (2002), 2002 33365 (ON CA), 62 O.R. (3d) 447, [2002] O.J. No. 4496 (QL) (C.A.). See also Mellco Developments Ltd. v. Portage la Prairie (City), 2002 MBCA 125, [2002] M.J. No. 381 (QL), 222 D.L.R. (4th) 67 (C.A.).

[59] Enforcing an exclusion clause that is contrary to the reasonable expectation and understanding of the parties in these circumstances would not be fair or reasonable and would also come within the exception enunciated in Gordon Capital, supra.

[60] I would hold that even if the exclusion clauses applied, the trial judge was entitled to refuse to enforce paras. 20, 26, and 27 of the agreement.

(iv) Consideration

[61] I also agree with the trial judge's conclusion that there was consideration for the oral agreement. BCD provided consideration by giving up its territory. Shelanu provided consideration by promising to report the joint earnings of itself and BCD, thereby agreeing to pay the six per cent royalty on higher sales. Rather than having two franchises that were in financial difficulty, Print Three gained the benefit of one healthy franchise and the peace of mind and greater financial certainty of royalties in difficult economic times that brought. The consideration from Print Three was its promise to allow Shelanu to merge BCD's sales with its sales and to report them as one.

[62] For these reasons, I would hold that the trial judge did not err in finding that Shelanu was entitled to enforce the three-party oral agreement against Print Three. Print Three breached [page554] its obligation to pay Shelanu the royalty rebate in accordance with the oral agreement and, therefore, is liable for damages as found by the trial judge.

2. The Duty of Good Faith and Fiduciary Duty

[63] The trial judge found that the appellant owed the respondent a duty of good faith either under the Arthur Wishart Act, supra, or at common law. Having regard to my conclusions regarding good faith, set out below, it is unnecessary to decide whether the Arthur Wishart Act, which applies to existing franchises, is applicable in this case where the acts in issue took place prior to the coming into force of the Act.

A. Circumstances giving rise to a duty of good faith

[64] In Wallace v. United Grain Growers Ltd. (c.o.b. Public Press), 1997 332 (SCC), [1997] 3 S.C.R. 701, 152 D.L.R. (4th) 1, the majority of the Supreme Court was prepared to recognize a good faith obligation in employment contracts. Indeed, at paras. 91-95, Iacobucci J. held that contracts of employment have unique characteristics that set them apart from ordinary commercial contracts. He described three special characteristics of employment contracts: (1) the formation of the contract is not the result of the exercise of bargaining power between two equals; (2) the person in the weaker position is unable to achieve more favourable contractual terms because of, for example, that person's inability to access information; (3) the power imbalance continues to affect other facets of the relationship after the contract has been entered into.

[65] In some instances a duty of good faith may arise ordinarily out of the nature of the relationship, or the circumstances created by the other party: see 978011 Ontario Ltd. v. Cornell Engineering Co. (2001), 2001 8522 (ON CA), 53 O.R. (3d) 783, 198 D.L.R. (4th) 615 (C.A.) at para. 35.

[66] The relative position of the parties as outlined by Iacobucci J. in Wallace also exists in the typical franchisor- franchisee relationship. First, it is unusual for a franchisee to be in the position of being equal in bargaining power to the franchisor: See Kentucky Fried Chicken Canada, a Division of Pepsi-Cola Canada Ltd. v. Scott's Food Services Inc. (1998), 1998 4427 (ON CA), 41 B.L.R. (2d) 42, 114 O.A.C. 357 (C.A.), per Goudge J.A. at para. 16; Machias v. Mr. Submarine Ltd., 2002 49643 (ON SC), [2002] O.J. No. 1261 (QL), 24 B.L.R. (3d) 228 (S.C.J.) at para. 109. The second characteristic, inability to negotiate more favourable terms, is met by the fact that a franchise agreement is a contract of adhesion. As I have indicated, a [page555] contract of adhesion is a contract in which the essential clauses were not freely negotiated but were drawn up by one of the parties on its behalf and imposed on the other. Further, insofar as access to information is concerned, the franchisee is dependent on the franchisor for information about the franchise, its location and projected cash flow, and is typically required to take a training program devised by the franchisor. The third characteristic, namely that the relationship continues to be affected by the power imbalance, is also met by the fact the franchisee is required to submit to inspections of its premises and audits of its books on demand, to comply with operation bulletins, and, often is dependent on, or required to buy, equipment or product from the franchisor. It is hardly surprising, therefore, that a number of courts, including the Manitoba Court of Appeal in Imasco Retail Inc. (c.o.b. Shoppers Drug Mart) v. Blanaru, 1995 16131 (MB QB), [1995] 9 W.W.R. 44, 104 Man. R. (2d) 286 (Q.B.), affd (1996), 1996 17995 (MB CA), [1997] 2 W.W.R. 295, 113 Man. R. (2d) 269 (C.A.) have recognized that a duty of good faith exists at common law in the context of a franchisor- franchisee relationship.

B. Whether the trial judge held Print Three to a fiduciary duty

[67] The appellant submits that the trial judge held Print Three to a higher standard than that imposed by the duty of good faith, namely, the duty of a fiduciary. The appellant's submission that the trial judge applied a fiduciary standard to Print Three rests on the trial judge's comment that the relationship of franchisor to franchisee is akin to a partnership. The appellant states partners owe each other a fiduciary duty and that this is the standard that he applied to Print Three's relationship with Shelanu.

[68] The imposition of a duty of good faith and a fiduciary duty are closely related. As stated in Cornell, supra, at para. 33 they, along with the standard of unconscionability:

[a]re points on a continuum in which the law acknowledges a limitation on the principle of self-reliance and imposes an obligation to respect the interests of the other. They are defined by P. Finn"The Fiduciary Principle" in T. Youdan, ed., Equity, Fiduciaries and Trusts, (1989), 1 at 4 as follows:

"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 [page556] 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 [footnotes omitted].

[69] 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: see York Condominium Corp. No. 167 v. Newrey Holdings Ltd. (1981), 1981 1932 (ON CA), 32 O.R. (2d) 458, 122 D.L.R. (3d) 280 (C.A.) at p. 467 O.R., p. 289 D.L.R., leave to appeal to the Supreme Court of Canada refused [1981] 1 S.C.R. xi; Hodgkinson v. Simms, 1994 70 (SCC), [1994] 3 S.C.R. 377, 117 D.L.R. (4th) 161. 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: see for example Mason v. Freedman, 1958 7 (SCC), [1958] S.C.R. 483, 14 D.L.R. (2d) 529.

[70] The trial judge recognized that the relationship between a franchisor and a franchisee would not normally be characterized as a fiduciary one in accordance with Jirna Ltd. v. Mister Donut of Canada Ltd., 1971 42 (ON CA), [1972] 1 O.R. 251, 22 D.L.R. (3d) 639 (C.A.), affd 1973 31 (SCC), [1975] 1 S.C.R. 2, 40 D.L.R. (3d) 303. I do not agree that it logically follows from the trial judge's reference to partners that he applied the fiduciary standard in this case. At a later point in his reasons, the trial judge reiterated that a franchise relationship was akin to that of a partnership and, accordingly, like a partnership required mutual respect. He quoted from the decision of Kelly J. in Gateway Realty Ltd. v. Arton Holdings Ltd. (1991), 1991 2707 (NS SC), 106 N.S.R. (2d) 180 (Sup. Ct.) at pp. 191-92, affd (1992), 1992 NSCA 70, 112 N.S.R. (2d) 180, [1992] N.S.J. No. 175 (QL) (C.A.), to the effect that parties to a contract are required to exercise their rights under that agreement honestly, fairly, and in good faith, and that, when a party acts contrary to community standards of honesty and reasonableness or fairness, he acts in bad faith. The trial judge well knew the distinction between a duty of good faith and a fiduciary duty and did not hold Print Three to a fiduciary duty.

[71] Moreover, the fact that contractual terms are ultimately complied with, does not mean that there has been no breach of the duty of good faith. [page557]

C. Breaches of Print Three's obligations as found by the trial judge

[72] The trial judge found that Print Three breached its duty of good faith towards Shelanu in four respects. The specific breaches found by the trial judge are:

-- Print Three's attempts to rescind the May 1995 agreement were not only a breach of that agreement but, in the circumstances, evinced a lack of good faith dealing by the franchisor;

-- Print Three unilaterally changed the terms and conditions upon which the franchisees agreed to participate in the Air Miles program, and in so doing, breached the representations made and acted upon by Shelanu;

-- Print Three failed to make prompt payment of several royalty rebates and its refusal to pay a royalty rebate for the fourth quarter of 1996; and

-- Print Three's establishment of the Le Print Express system"not only would but did take work and customers from existing Print Three franchises". As a consequence he held that". . . 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."

[73] In relation to the first three breaches, the trial judge awarded damages for breach of contract. He did not award separate damages for breach of the duty of good faith. No damages were awarded for the establishment of the Le Print Express franchise. The breaches, including his finding respecting the establishment of the Le Print Express franchise, led the trial judge to conclude that Print Three did not intend to honour or be bound by the commitments it had made to its franchisees and that, as a result, Shelanu should be discharged from any further obligation under the contract.

[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. See by analogy: 702535 Ontario Inc. v. Lloyd's London, Non-Marine Underwriters (2000), 2000 5684 (ON CA), 184 D.L.R. (4th) 687, [2000] I.L.R. 1-3826 (Ont. C.A.), per O'Connor J.A., at paras. 28-37, leave to appeal to [the] Supreme [page558] Court of Canada dismissed, [2000] S.C.C.A. No. 258. See also the decision of Laskin J.A. in the Court of Appeal in Whiten v. Pilot Insurance Co. (1999), 1999 3051 (ON CA), 42 O.R. (3d) 641, 170 D.L.R. (4th) 280, in dissent, affd 2002 SCC 18, [2002] 1 S.C.R. 595, [2002] S.C.J. No. 19 (QL).

3. Breaches of Print Three's Obligations to Shelanu

A. Royalty rebates

(i) Refusal to recognize the 1995 oral agreement

[75] I have already dealt with the facts and findings of the trial judge in relation to the 1995 oral agreement and have held that Print Three breached that agreement.

[76] Where a duty of good faith exists, not every breach of contract will be a breach of the duty of good faith. An honest disagreement concerning the interpretation of a franchise agreement ultimately decided in favour of the franchisee could be a breach of contract but need not be a breach of the duty of good faith owed by the franchisor. Denial of payment under an agreement should not, however, be made in order to gain leverage or bargaining advantage in a dispute with the other party or out of vindictiveness. In this case the evidence indicates that Print Three's refusal to pay Shelanu the royalty rebate pursuant to the oral agreement was linked to Banks' anger concerning Shelanu's position respecting the Air Miles advertising program. There was evidence upon which the trial judge could hold that the refusal to recognize the 1995 oral agreement was also a breach of the duty of good faith.

(ii) Delay in payment of undisputed royalty rebates

[77] Print Three withheld all royalty rebates payable to Shelanu for the third and fourth quarters of 1995 (July to September 1995 and October to December 1995). All royalty rebates for April to June 1996 were also withheld but that portion about which there was no dispute was paid when Bob Davis met with Shelanu in October 1996. Similarly, the rebates for 1995 were paid in September. No explanation was given for the delay in paying that portion of the royalty rebate about which there was no dispute. The trial judge found Print Three acted arbitrarily in withholding payment of the royalty rebates. I agree Print Three had no reasonable basis for refusing to pay the royalty rebates that were not in dispute.

[78] The fact that the royalty rebates were ultimately paid does not mean that Print Three did not breach its obligations towards Shelanu. The duty of good faith comprises a time component. [page559] That time component requires the party under a duty of good faith to respond promptly to a request from the other party and to make a decision within a reasonable time of receiving that request. Parties under a duty of good faith also have an obligation to make payment of any amounts that are clearly owed to the other party in a timely manner: 702535 Ontario Inc. v. Lloyd's London, supra.

(iii) Disputed royalty rebate because of refusal to allow inspection

[79] Print Three submits that the royalty rebate for the fourth quarter of 1996 was never paid because the Deslauriers refused to allow Davis to inspect the production facility at 60 Bloor Street West. Brian Deslauriers testified that he did not take Davis' request seriously because the stated purpose of the meeting on October 3, 1996 was to discuss the 1995 agreement and he wished to get on with that discussion. The royalty rebate for the fourth quarter of 1996 remained outstanding at the commencement of trial.

[80] The trial judge found that, on a strict reading of the franchise agreement, Davis was entitled to conduct an inspection but that, in view of Print Three's past practice of not enforcing the strict terms of the franchise agreement, Shelanu was entitled to some form of notification that Print Three intended to strictly enforce its rights under the agreement and that, in any event, Print Three could not withhold the royalty rebate once Shelanu made it clear Davis could inspect the production facility. The respondent submits that the trial judge erred in ordering that a royalty rebate be paid for this period. I would uphold the trial judge's conclusion that the rebate is payable based on a different analysis of the franchise agreement.

[81] A franchisee is only entitled to receive a royalty rebate according to para. 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".

[82] Paragraph 3C defines what constitutes full compliance with the agreement. It stipulates that "[i]n addition to other provisions of this agreement""full compliance means timely submission of provincial sales tax returns, timely payment of advertising fees, royalties, other amounts owing to the franchisor or amounts guaranteed by the franchisor to third parties." The phrase"other provisions of this agreement" is vague and ambiguous. The terms specified all have a financial component. It makes commercial sense that Print Three would not grant Shelanu a rebate if [page560] Shelanu were in default of money owing to it for which it could be responsible to pay; this is the main thrust of the provision.

[83] Paragraph 5G of the franchise agreement states that the Franchisee shall permit the franchisor to enter on the premises to conduct:

[a] compliance audit to determine whether Franchise Owner is abiding by the terms of this Agreement and conforming to standards of operation as may have been otherwise detailed in the Operations Manuals, Technical Bulletins or other publications supplied by Franchisor. Franchisor may advise Franchise Owner in writing regarding any deficiencies in Franchise Owner's compliance with Franchisor's standards. Franchise Owner shall have thirty (30) days to cure such deficiencies from the date such written notice is received by Franchise Owner.

[84] On the other hand, para. 7B states that the franchisee shall permit the franchisor to enter the premises:

[i]n order to inspect and audit all aspects of Franchise Owner's business including, but not limited to: books, records, facilities, business equipment, materials and any other matters relating to Franchise Owner's obligations set out in this Agreement.

[85] Thus the right to inspect is contained in both paras. 5G and 7B. Paragraph 5G envisages a compliance audit with respect to standards of operation and gives a franchisee 30 days in which to cure a "deficiency". The term "breach" is not used. The word "deficient" is defined in Webster's Dictionary, 1989 ed., as "inadequate". A franchisee could be in compliance with its franchise agreement but still have inadequacies in its operation that the franchisor wanted corrected. Provided the deficiency was corrected within 30 days, the franchisee would be in compliance with the agreement. Paragraph 7B contains similar wording but envisages a financial audit and contains no time component.

[86] There is no evidence to suggest that Davis wished to conduct a financial audit or, indeed, an audit of any kind. He simply stated he wished to inspect the premises. In any event, upon receiving written notice from Print Three, Shelanu promptly offered to remedy the situation. The inspection had no financial impact and none of the specific requirements defined as "full compliance" was breached. In these circumstances, Shelanu's refusal did not affect its right to a royalty rebate and Print Three could not refuse to pay it.

[87] I would not have considered the dispute with respect to this single payment to be a breach of Print Three's duty of good faith, in and of itself.

[88] Shelanu is entitled to the payment of the disputed royalty rebates. [page561]

B. Air Miles

(i) Facts and finding of the trial judge

[89] The franchise agreement provided that franchisees were to pay an annual three per cent advertising fee to Print Three. The relevant portion of para. 9 respecting advertising states:

Due to the inherent importance and value of advertising and the need for standardization and promotion of the Print Three public image and program, the Franchise Owner agrees to pay to Franchisor an advertising fee of THREE PERCENT (3%) of each month's gross sales. Such payment is due by the tenth (10th) day of the month following the month for which the gross sales were made. 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 and other organizations. Franchisor shall have complete discretion to use such advertising funds in such ways as it feels will best promote the products and services offered by the franchise system.

[90] Following a vote by the franchisees, the advertising fee was suspended between 1991 and 1994, primarily because of the recession. In November 1994, at the franchisees' convention, a vote was held on whether to reintroduce the fee and whether to enter into the Air Miles program. The trial judge found that, without the vote, the franchisees could be obligated to pay the fee and the vote was really about whether to embark on the Air Miles program or some other advertising program. Print Three represented 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." Based on the documents presented in evidence, the trial judge found that that representation was false. The misrepresentation was important because one of the reasons the franchisees were reluctant to participate in the program was that it would consume all of the advertising fees.

[91] A second reason that some franchisees, including the Deslauriers, were opposed to participating in the Air Miles program was because it was apparent to them that, although all of the advertising fees went into the program, not all of the benefits of that program would be capable of being used for the franchisees' business. The trial judge found that in order to get over the franchisees' opposition to the Air Miles program, Print Three represented to 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 [page562] including personal travel. Both Print Three's letter dated May 2, 1995 and the operations manual for the program support the trial judge's finding in this regard.

[92] Shortly after the Air Miles program began, however, Print Three changed these arrangements and directed that all undistributed Air Miles for each outlet could only be used with its approval. The unused Air Miles were placed in accounts in the personal names of certain of its employees. The trial judge found that this unilateral change was a clear breach of the representations made to the franchisees. He held that Shelanu was entitled to damages equivalent to the value of the undistributed Air Miles earned by its franchise to the end of the program.

(ii) Argument and analysis

[93] The appellant submits that any representations respecting unused Air Miles were not in writing and signed by the parties and, therefore, cannot be enforced because they amounted to an amendment of the franchise agreement that was not in writing and signed by the parties as required by that agreement. Further, Print Three submits that it had an absolute discretion respecting the use of the advertising funds and any use of unused Air Miles and thus, the fact it did not abide by its representations is of no consequence. Finally, the appellant also asserts that the representations were "gratuitous offers to Shelanu regarding advertising which were more advantageous than the terms of the Franchise Agreement".

[94] I have already indicated that parties to a written agreement may subsequently enter into a new oral agreement. I have also indicated that courts will refuse to enforce a written agreement requiring that amendments be in writing where that clause no longer represents the intention of the parties. (See paras. 54 and following). With respect to the Air Miles program, the parties agreed to an oral amendment of the agreement respecting advertising fees and their subsequent conduct is indicative that the oral agreement was performed in part. The trial judge clearly found that not all of the money collected was used for the Air Miles program -- the only advertising undertaken -- and this finding is supported by the evidence.

[95] The appellant's submission that Print Three possessed an absolute discretion with respect to the use of advertising funds ignores para. 9 of the franchise agreement which stipulates that the three per cent advertising fee is to compensate Print Three "for the actual cost of advertising and promotional [page563] campaigns" (emphasis added), to provide reasonable compensation to its employees in preparing and purchasing advertising activities, and to reimburse the franchisor for advertising fees paid. Furthermore, nothing in para. 9 gives Print Three the right to use Shelanu's three per cent advertising fees for non-advertising related or personal purposes as happened here. Paragraph 26 of the agreement respecting amendments being in writing has nothing to do with excusing breaches of the agreement.

[96] Even if para. 9 is only a statement of intent and Print Three had an absolute discretion with respect to the use of the Air Miles, Print Three could not exercise that discretion without regard to Shelanu's interests; it was obliged to exercise the discretion in a reasonable manner. See J.D. McCamus"The Duty of Good Faith Contractual Performance" (N.J.I.: Civil Law Seminar, Contract Law: From Form to Remedies, Osgoode Hall Law School, 17 May 2000). Professor McCamus is of the opinion that under ordinary contract principles, a party has an obligation to act reasonably in exercising a discretionary power. Applying this principle, he says the same result could have been reached in cases recognizing the existence of a duty of good faith in the execution of a contract such as Mason v. Freedman, 1958 7 (SCC), [1958] S.C.R. 483, 14 D.L.R. (2d) 529 at p. 486 S.C.R.; Greenberg v. Meffert (1985), 1985 1975 (ON CA), 50 O.R. (2d) 755, 18 D.L.R. (4th) 548 (C.A.), leave to appeal to the Supreme Court of Canada dismissed (1985), 1985 3114 (SCC), 30 D.L.R. (4th) 768; LeMesurier v. Andrus (1986), 1986 2623 (ON CA), 54 O.R. (2d) 1, 25 D.L.R. (4th) 424 (C.A.); and Gateway Realty Ltd. v. Arton Holdings Ltd., supra. In Greenberg v. Meffert, supra, where a breach of a duty of good faith was found, this court held that the words "at the sole discretion", in relation to payment of commission by a real estate company to its real estate agent after termination of the relationship meant that the company"must act reasonably in exercising its discretion, and also honestly and in good faith". Those standards not having been attained, the agent was entitled to his commission. Here, the trial judge found Print Three acted arbitrarily and unreasonably and not in conformity with the standards for exercising a discretion. On the evidence, it was open to him to make this finding.

[97] Lastly, the misrepresentations were not a gratuitous offer. The consideration for the agreement to credit unused air miles was that Shelanu entered into the Air Miles program as opposed to some other advertising program.

[98] As found by the trial judge, Shelanu is entitled to the cash value of the unused Air Miles. [page564]

C. Le Print Express

(i) Facts and finding of the trial judge

[99] Around October 1990, the appellant set up a business initially known as Print Three Express that subsequently became known as Le Print Express. The trial judge found that these outlets were to be smaller than Print Three franchises in order to target individuals and small businesses. The cost to purchase these franchises was lower than the cost to purchase a Print Three franchise and some financing was also offered to potential Le Print Express franchisees. Shelanu complained that the establishment of the Le Print Express concept involved the franchisor in a business that competed with existing Print Three franchises. Brian Deslauriers testified that Le Print Express offered the same kinds of products and services that were, to a large extent, offered by Print Three. In support of his evidence he produced a flyer from the Le Print Express at the Eaton Centre that had been faxed to Shelanu. He further testified that contrary to his understanding that the Le Print Express operations were to be small, occupying 200 square feet, the Eaton operation was three to four times this size and had the same kind of equipment and capabilities as Shelanu. The same personnel and staff who operated and marketed Print Three franchises also handled the requirements of the new franchise. The trial judge held:

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 Le Print Express franchisees 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 franchisees. 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.

(ii) Argument and analysis

[100] The appellant challenges the trial judge's finding of fact that Le Print Express competed with Shelanu's business as well as his conclusion that the establishment of this business took [page565] work and customers from Print Three franchisees and Shelanu in particular. The appellant emphasizes that, while there may have been some overlap of services, Le Print Express was in a different business sector than Print Three.

[101] In Housen v. Nikolaisen, 2002 SCC 33, [2002] S.C.J. No. 31 (QL), the Supreme Court held, at para. 10, that "[t]he standard of review for findings of fact is that such findings are not to be reversed unless it can be established that the trial judge made a 'palpable and overriding error'" (citations omitted). This deferential standard is also applicable to appellate review of inferences of fact: see Housen, supra, at para. 25.

[102] The franchise agreement is silent as to whether the franchisor can engage in a similar business during the term of the agreement. [See Note 1 at end of document] Print Three did, however, agree not to take any action that would be likely to injure the goodwill or reputation associated with the Print Three trademark, logo or mark. [page566]

[103] Print Three targeted corporate accounts, whereas Le Print Express did small copying jobs for individuals and small businesses. None of the Le Print Express franchises was established within Shelanu's exclusive territory; the three Le Print Express locations were the Eaton Centre, Union Station, and Scotia Bank Plaza. Shelanu did not complain about Le Print Express for almost seven years after it was established and Shelanu presented no evidence that it lost income as a result of competition from Le Print Express. The trial judge's reasons do not address these considerations.

[104] The trial judge also rejected a number of Shelanu's submissions that would have affected its claim respecting Le Print Express. Shelanu's statement of claim claimed damages for misrepresentation on the basis that the franchise agreement contained representations that Print Three was an expanding organization; it had a commitment to continue to introduce leading edge technologies and systems in document reproduction technology; it would continue to develop the credibility and presence of the Print Three name and logo; and it would continue to improve and modify the know-how it had developed. The trial judge held that the failure of these representations to materialize were not breaches of the franchise agreement but goals that had not been achieved. In other words, they were not representations of fact.

[105] On the issue of technology, the trial judge described the contribution of Print Three as the bare minimum a franchisee ought to expect in return for royalty payments and held that ". . . in the end result, I am not satisfied on the evidence that the failures of the defendant [Print Three] on this issue were so great as to constitute a breach of its obligations under the franchise agreement." The trial judge noted that the evidence in this case was like that in Khagen Investments Ltd. v. 710497 Ontario Ltd., [1999] O.J. No. 2152 (QL), 98 O.T.C. 241 (S.C.J.), in that there was no evidence as to the standard of service given to other franchisees or whether provision of the same level of service to other franchisees resulted in their failure. He held that these issues could not justify Shelanu's position that it was entitled to treat the franchise agreement at an end as of May 8, 1997.

[106] Brian Deslauriers testified that the number of Print Three franchises declined after Le Print Express was created. The trial judge held that, on balance, the reduction in the number of Print Three franchises was largely the result of prevailing economic conditions. By implication, therefore, the establishment of Le Print Express did not contribute to the decline in the number of Print Three franchises. [page567]

[107] I would therefore, hold that the appellant has met the high standard required to overturn a trial judge's finding of fact that Le Print Express competed with Shelanu and took business from it. My reasons for doing so may be summarized as follows: (1) the different nature of the business engaged in by Le Print Express; (2) Shelanu's delay in complaining about the establishment of that business; (3) the lack of evidence before the trial judge as to Shelanu's consequential loss of income; (4) the trial judge's findings that there had been no misrepresentation concerning what Print Three was to provide in exchange for royalty payments and that Print Three had done the minimum required to discharge those obligations; and (5) the trial judge's finding that the decline in Print Three franchises was primarily due to prevailing economic conditions. The finding that Print Three breached "reasonable commercial standards" must also fail for the same reasons.

[108] Inasmuch as I have not upheld the trial judge's finding of fact in respect of Le Print Express, I would not uphold his conclusion that the establishment of Le Print Express was a breach of Print Three's duty of good faith.

4. Fundamental Breach

A. The findings of the trial judge

[109] The trial judge concluded that the various failings and breaches of the franchise agreement by Print Three constituted a fundamental breach of the franchise agreement. The trial judge further held Shelanu was entitled to terminate the franchise agreement because the breaches

[a]lso 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.

B. The standard of review and analysis

[110] A trial judge's finding of fundamental breach is a matter of mixed fact and law. This is because it is a question "about whether the facts satisfy the legal tests": Housen, supra, at para. 26, citing Canada (Director of Investigation and Research) v. Southam Inc., 1997 385 (SCC), [1997] 1 S.C.R. 748, 144 D.L.R. (4th) 1 at para. 55. The appropriate standard of review is dependent on where the error lies. As stated by Iacobucci and Major JJ. at para. 36:

Matters of mixed fact and law lie along a spectrum. Where, for instance, an error with respect to a finding of negligence can be attributed to the [page568] application of an incorrect standard, a failure to consider a required element of a legal test, or similar error in principle, such an error can be characterized as an error in law, subject to a standard of correctness. Appellate courts must be cautious, however, in finding that a trial judge erred in law in his or her determination of negligence, as it is often difficult to extricate the legal questions from the factual. It is for this reason that these matters are referred to as questions of "mixed law and fact". Where the legal principle is not readily extricable, then the matter is one of "mixed law and fact" and is subject to a more stringent standard. The general rule, as stated in Jaegli Enterprises, supra, is that, where the issue on appeal involves the trial judge's interpretation of the evidence as a whole, it should not be overturned absent palpable and overriding error.

Thus, as stated by Rosenberg J.A. in Algoma Steel Inc. v. Union Gas Ltd. (2003), 2003 30833 (ON CA), 63 O.R. (3d) 78, [2003] O.J. No. 71 (QL) (C.A.) at para. 19"where the issue concerns application of a legal standard to a set of facts the question is one of mixed fact and law and a somewhat less deferential standard may be appropriate, although not the standard of correctness required for questions of law."

[111] In order to conclude that Print Three had committed a fundamental breach of its obligations to Shelanu, the trial judge relied on the evidence as a whole, requiring the application of the more stringent standard of review. At the same time, it must be borne in mind that I have not upheld the trial judge's finding that Print Three breached its duty of good faith to Shelanu by establishing the Le Print Express franchise. It is therefore necessary to consider whether the remaining breaches can support the trial judge's conclusion that there was a fundamental breach of the agreement. I am of the opinion that they cannot. As of the date Shelanu gave notice of termination of its obligations to Print Three, Print Three had abused its discretion respecting Air Miles, failed to make payment of the full royalty rebate based on there being a single franchise, delayed in making payment of royalty rebates admittedly due on three occasions, and refused to pay one royalty rebate allegedly based on Shelanu's breach of the franchise agreement for refusing to allow Davis to inspect its premises. The breaches respecting the Air Miles program and non-payment of royalty rebate were the subject of damages awarded by the trial judge.

[112] It is also necessary to consider what appears to me to be a further palpable and overriding error on the part of the trial judge. This is the trial judge's failure to consider the fact that although Shelanu gave notice of termination of the agreement on May 8, 1997, it continued to use the name Print Three for a further two and a half years and continued to have an exclusive [page569] territory. Shelanu was therefore able to carry on the commercial purpose of the agreement.

[113] In Majdpour v. M & B Acquisition Corp. (2001), 2001 8622 (ON CA), 56 O.R. (3d) 481, 206 D.L.R. (4th) 627 (C.A.), the event alleged to have triggered a fundamental breach of the franchise agreement by the franchisor was a bankruptcy. Because the franchisee was able to carry on the commercial purpose of the agreement intact after the bankruptcy, MacPherson J.A. dismissed the franchisee's claim it was discharged from further performance. That reasoning is equally applicable in this case.

[114] In dismissing the claim for fundamental breach, MacPherson J.A. noted that the test was a restrictive one, namely, whether the conduct of one party deprived the other party of "substantially the whole benefit of the contract" as stated by Wilson J. in Hunter Engineering, supra. [See Note 2 at end of document] This is the classic formulation of the test as set out by Diplock L.J. in Hongkong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd., [1962] 1 All E.R. 474, [1962] 2 Q.B. 26 (C.A.) at p. 66 Q.B.:

[D]oes the occurrence of the event deprive the party who has further undertakings still to perform of substantially the benefit which it was the intention of the parties as expressed in the contract that he should obtain in consideration for performing those undertakings?

[115] Print Three submits that, because the trial judge relied on the words of Gonthier J. at para. 33 of his reasons in Farber v. Royal Trust Co., 1997 387 (SCC), [1997] 1 S.C.R. 846, 145 D.L.R. (4th) 1, namely 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", the trial judge applied the wrong legal test for fundamental breach. The appellant submits that this phraseology is only appropriate for employment law contracts and that the only correct phraseology for fundamental breach is whether the failure of one party to perform its contractual obligations had the effect of depriving the other of "substantially the whole benefit" of the contract.

[116] I do not agree that the phraseology used by Gonthier J. in Farber, supra, is restricted to the employment law context. Indeed this is precisely the phraseology used by G.C. Cheshire [page570] and C.H.S. Fifoot to describe the circumstances in which a breach of contract will excuse further performance in their text The Law of Contract, 5th ed. (London: Butterworths, 1960) at p. 488:

A breach of contract is a cause of discharge only if its effect is to render it purposeless for the innocent to proceed further with performance. Further performance is rendered purposeless if one party either shows an intention no longer to be bound by the contract or breaks a stipulation of major importance to the contract.

[117] I agree, however, that the deprivation of "substantially the whole benefit of the contract" is the phraseology adopted by this court to describe the test for fundamental breach in Robson v. Thorne, Ernst & Whinney (1999), 1999 2845 (ON CA), 127 O.A.C. 215, [1999] O.J. No. 4638 (QL) (C.A.), at para. 18 and Bayer v. Aktiengesellschaft v. Apotex Inc. (1998), 1998 5747 (ON CA), 113 O.A.C. 1, 82 C.P.R. (3d) 526 (C.A.) at para. 34, as well as Majdpour, supra. In the circumstances of this case, the phraseology chosen by the trial judge to describe the test for fundamental breach may not have been the most appropriate one to define the sort of breach that would excuse Shelanu from further performance of its obligations.

[118] Professor Waddams addresses the variety of expressions that have been used to define the sort of breach that will excuse a party from further performance under a contract in his text: Waddams, supra, at para. 583. Waddams says that behind all of these expressions lies a single notion, that of substantial failure of performance. Irrespective of the expression used, he proposes five factors derived from the jurisprudence to measure whether future performance under a contract should be excused at para. 587. In 968703 Ontario Ltd. v. Vernon (2002), 2002 35158 (ON CA), 58 O.R. (3d) 215, 22 B.L.R. (3d) 161 (C.A.), this court, after referring to the decisions in Robson, supra, and Bayer, supra, adopted and applied the factors suggested by Waddams to measure whether future performance should be excused. They are: (a) the ratio of the party's obligation not performed to the obligation as a whole; (b) the seriousness of the breach to the innocent party; (c) the likelihood of repetition of such breach; (d) the seriousness of the consequences of the breach; and (e) the relationship of the part of the obligation performed to the whole obligation. Applying those factors to the breaches by Print Three in this case would not lead to the conclusion that Shelanu should be excused from further performance of its obligations.

[119] Applying Waddams' guidelines in this case would not lead to the conclusion that Shelanu should be excused from future performance. The first and fifth factors appear to be aimed at helping a court to ascertain whether the contract was [page571] substantially performed. See Fairbanks Soap Co. v. Sheppard, 1953 7 (SCC), [1953] 1 S.C.R. 314, [1953] 2 D.L.R. 193. The crux of the agreement between Print Three and Shelanu was the licence to use Print Three's name and trademark in exchange for royalty payments and its exclusive territory. Print Three did not revoke or undermine Shelanu's licence to use Print Three's name and trademark and Shelanu continued to use them. In return, Shelanu was obligated to make royalty payments which it did. Over the ten years of the franchise agreement, Print Three also paid Shelanu the majority of its royalty rebates. I would also disagree that Print Three evinced an intention to no longer be bound by the agreement as a whole although it certainly refused to be bound by parts of it. Print Three did not place another franchisee in Shelanu's territory until after Shelanu's franchise agreement had expired. Shelanu was not deprived of substantially the whole of the benefit of its agreement with Print Three.

[120] The second and fourth factors are aimed at measuring the effect of the breach on the innocent party while the third factor, the likelihood of repetition of the breach, is aimed specifically at whether the aggrieved party should be released because continued performance would be intolerable due to repetition of the breaches. To a small business like Shelanu, the delay in payment of royalty rebates on three occasions, the failure to pay the rebate based on there being a single franchise and the abuse of discretion respecting the advertising program were undoubtedly serious but they do not appear to have made it intolerable for Shelanu to continue to operate the franchise because that is what it continued to do.

[121] Consequently, Shelanu is not entitled to recover the royalties paid by it since May 8, 1997 which the trial judge assessed at $199,622 nor the $59,870 in advertising fees paid by it after that date. (The latter amount would be subject to any credit for unused Air Miles until that program was discontinued.)

[122] Lastly, I would point out that in Hunter Engineering, supra, the court was concerned with the delivery of damaged equipment. The court was not dealing with a contractual relationship that required the parties to continue to interact with each other on an ongoing basis. The same is also true of the situation in Hongkong Fir Shipping, supra. In the context of a franchise agreement, which, as I have noted bears certain similarities to the employment law situation, there is an ongoing, interactive relationship. I note that, following Farber, supra, this court has held that a party may be excused from further performance of an employment contract and the employer held [page572] in constructive breach of the agreement where the employer's treatment of the employee makes continued employment intolerable: Shah v. Xerox Canada Ltd., 2000 2317 (ON CA), [2000] O.J. No. 849 (QL), 49 C.C.E.L. (2d) 166 (C.A.). See also Whiting v. Winnipeg River Brokenhead Community Futures Development Corp. (1998), 1998 19422 (MB CA), 159 D.L.R. (4th) 18, 126 Man. R. (2d) 176 (C.A.).

[123] Having regard to the current jurisprudence, the trial judge might have chosen more apt phraseology to describe the test for fundamental breach but I would not hold that the trial judge erred in law in using the phraseology that he did. Rather, as I have indicated, it is in the application of the test for fundamental breach that he erred.

C. Amounts owing because there was no fundamental breach

[124] Because Shelanu is not excused from its obligations under the franchise agreement, Shelanu is not entitled to recover the royalties it paid to Print Three, which the trial judge assessed at $199,622.

[125] Against the amount of $199,622, I would hold, however, that Shelanu is entitled to receive credit for royalty rebates withheld by Print Three.

[126] Shelanu's notice of termination would not, of itself, disentitle Shelanu to the royalty rebate provided that it continued to be in compliance with its obligations under the agreement. Because the agreement did not expire until December 1999 and Shelanu continued to pay royalties that Print Three accepted until October of that year, it was not in breach of the one-year non-competition clause contained in the agreement while it paid royalties. The trial judge held that an error Print Three made with respect to a Yellow Pages advertisement was not a breach of the agreement and I would agree with his conclusion in that regard.

[127] Shelanu is entitled to a royalty rebate credit during the period it paid royalties.

[128] Print Three is entitled to the $59,870 in advertising fees paid by Shelanu after it gave notice of termination. The latter amount would be subject to any credit for unused Air Miles until that program was discontinued, or to the advertising rebate otherwise payable under the agreement.

[129] Having found that the trial judge erred in holding that Print Three had fundamentally breached the franchise agreement I now turn to Print Three's appeal from the trial judge's dismissal of its counterclaim and Shelanu's cross-appeal on damages. [page573]

5. The Counterclaim and Cross-Appeal

[130] I approach my review of the damages assessed bearing in mind that a trial judge's assessment of damages is ordinarily entitled to great deference. As stated by the Supreme Court of Canada in Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58, [2001] 2 S.C.R. 943, 204 D.L.R. (4th) 513, at pp. 977-78 S.C.R.:

It is common ground that the Court of Appeal was not entitled to substitute its own view of a proper award unless it could be shown that the trial judge had made an error of principle of law, or misapprehended the evidence, or it could be shown there was no evidence on which the trial judge could have reached his or her conclusion, or the trial judge failed to consider relevant factors in the assessment of damages, or considered irrelevant factors, or otherwise, in the result, made "a palpably incorrect" of "wholly erroneous" assessment of the damages. Where one or more of these conditions are met, however, the appellate court is obliged to interfere.

[131] The trial judge held that, in the event he was wrong in concluding there had been a fundamental breach of the agreement, Print Three was entitled to damages that he assessed at $465,500 over a ten-year period. The award has three components: $64,500 for the waiver of a franchise fee; $225,000 for lost royalties and $176,000 for lost advertising fees, both calculated over a ten-year period.

[132] The trial judge dismissed the following claims by Print Three, because there was no evidence to support those assessments:

-- A claim for $750,000 for Shelanu's business, as a turn-key operation, on the basis that "[a]ll of the assets of that business would be the property of the plaintiff with the exception of the name and the telephone number."

-- A complaint that Shelanu did not assign the lease in accordance with para. 15F of the franchise agreement. Print Three took no steps to negotiate a lease so Shelanu could stay in its location when the existing lease expired during the currency of the franchise agreement and Print Three was subject to a number of judgments from creditors. The trial judge held the only commercially reasonable thing for Shelanu to do was to negotiate the lease in its own name.

-- A claim for $180,000 for the cost of equivalent signage. While the trial judge accepted that the loss of the Print Three name in a well-travelled shopping concourse area in a busy section of Toronto could result in damages, he dismissed that claim because there was no evidence before [page574] him sufficient to establish an actual loss or the amount of such a loss.

-- The claim for one new or renewed franchise in Shelanu's territory on the basis that Mr. Davis' evidence that another franchisee would be unwilling to locate in the territory was nothing more than sheer speculation.

[133] Only the finding respecting the lease requires further comment. Under clause 19 of the franchise agreement, Print Three had agreed to give Shelanu an exclusive territory at 60 Bloor Street West until the expiry of the franchise in 1999. In failing to renegotiate the terms of the lease or, if that was not possible, offering to relocate Shelanu at Print Three's expense within the territory, Print Three breached this provision. Once Shelanu had renegotiated the lease in its own name, Print Three did not execute a sublease with Shelanu and reimburse it for any rental deposit as required by the franchise agreement. Given the lapse of time of about three years with neither party complaining about the state of the lease this appears to be yet another instance of the parties amending the agreement by their conduct about which Print Three cannot now complain. In any event, having failed to fulfill its obligations under the franchise agreement, Print Three cannot benefit from its breaches by asserting the right to have the lease assigned to it at the end of the franchise agreement.

[134] I must now deal with the claims the trial judge did allow. The waiver of the franchise fee arose when Paul Kim, an existing franchisee, approached Print Three about putting a franchise in Shelanu's territory about six months prior to the expiry of Shelanu's franchise. Print Three gave Mr. Kim a franchise just north of Shelanu's territory. The Kim franchise was required to operate in direct competition with Shelanu, which continued to operate at the Bloor Location, and, since Print Three could not deliver either the Bloor Location, the customer list, the telephone or fax numbers to the Kim Franchise, Print Three waived its usual franchise fee of $64,500 in order to secure the Kim Franchise without this. The trial judge found that in order for Print Three to mitigate its damages it was necessary for Print Three to waive its franchise fee in granting Mr. Kim a franchise. Having regard to the evidence, there is no basis on which to interfere with the trial judge's finding in this regard.

[135] The trial judge's award of damages for lost royalties and advertising fees over a period of ten years is problematic. The [page575] underpinning for his conclusion appears to be in para. 81 of his reasons wherein he stated:

The loss of the 6 [per cent] royalty and the loss of the advertising fees 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 franchisee in the same territory where the plaintiff was continuing to operate. Indeed, the defendant 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.

(Emphasis added)

I am of the opinion that the trial judge erred in assessing damages based on this assumption.

[136] In assessing damages, the onus is on Print Three to prove its damages on a reasonable preponderance of credible evidence. The trial judge was required to put Print Three in the same position it would have been in had the agreement been performed, that is, had Shelanu not competed for one year in a defined geographic area. Having regard to the trial judge's finding that Print Three was not entitled to Shelanu's business or lease once the franchise agreement ended, which I have upheld, another franchisee could not have been placed in Shelanu's location. The trial judge was not entitled to base his award of damages on an assumption that did not accord with the specific facts of this case. Print Three would not have had a franchisee in Shelanu's location. It would only have had, as it did, a franchisee located just north of Bloor and Cumberland.

[137] The trial judge erred in principle in concluding that Print Three was entitled to damages based on the projected revenue stream from Shelanu's franchise less Mr. Kim's projected revenue over a ten-year period, the entire life of a franchise agreement. If Shelanu had observed the one-year non- competition clause in the franchise agreement, there is no evidence to suggest that all of Shelanu's customers would have become customers of the new franchisee. The Shelanu Print Three franchise was not the only copying business in the geographic area. The geographic restrictions contained in the one-year non-competition clause were five miles from one specific franchisee and seven miles from another. If Shelanu had moved its business just outside the geographic area, there is no evidence to suggest it would have lost all its customers or personal goodwill. As noted earlier, the evidence indicates that Shelanu targeted corporate and business accounts, not walk-in trade. After one year, Shelanu was entitled to compete again with Print Three within the same geographic area. There [page576] is no evidence that, after one year, Shelanu's goodwill would have been so impaired that many of its customers would not have returned to it.

[138] Based on Shelanu's breach of the non-competition clause some damages must also be assessed for loss of revenue to Mr. Kim over one year. The figures for all 42 Print Three franchisees for the five years prior to October 1999, disclosed that the average franchisee paid approximately $25,000 annually in royalties and $4,700 annually in advertising fees. This figure was about one-half the annual royalties and advertising fees paid by Shelanu. The trial judge chose to adopt this average figure as the basis for his calculation and Print Three does not challenge it as being too low. By taking the average yearly sales of the average franchisee as his basis for awarding damages for loss of royalties and advertising fees the trial judge effectively took account of the complex contingencies that Shelanu's personal goodwill may not have been transferred to another franchisee and that Mr. Kim may not have been as competent as Shelanu in operating its franchise. In Martin v. Goldfarb (1998), 1998 4150 (ON CA), 41 O.R. (3d) 161, 163 D.L.R. (4th) 639 (C.A.) at p. 187 O.R., Finlayson J.A. held that a defendant is not entitled to have damages assessed by guesswork when the party bearing the burden of adducing the evidence has failed to do so. However, where there are complex contingencies, incapable of proof, a court must then do its best to assess the quantum of damages.

[139] Having regard to these considerations, in addition to the franchise fee of $64,500, I would substitute an award of damages for one year's loss of revenue and advertising fees which, in accordance with the trial judge's figure for one year, I would fix at $29,700 for a total of $94,200.

IV. DISPOSITION

[140] For the reasons given, I would allow both the appeal and cross-appeal as indicated. In view of the divided success on this appeal, I would order that the parties bear their own costs.

Order accordingly.

Notes

Note 1: The present regulations to the franchise legislation in Ontario now require that the franchise agreement contain a statement of the franchisor's policy respecting setting up a competing business by it. The regulations also require that the franchisee be provided with a description of the franchisor's policy, if any, respecting the proximity between an existing franchise and another franchise granted by the franchisor that distributes similar products or services under a different trade-mark, trade name or logo. In the absence of such disclosure"... there is an expectation on the part of the franchisee that the franchisor will not establish a corporate or franchise location (or another business of channel of distribution) within such proximity or in such a manner that would negatively effect the franchisee's business." See J.P. hoffman"Statutory Obligations of Fair Dealing and Good Faith in Canada" (2nd Annual Franchise Law Conference: A New Act, A New Era of Disclosure -- One Year Later, Ontario Bar Association C.L.E., 22 February 2002) [unpublished], at p. 22. Among the cases discussed are Supermarché A.R.G. Inc. v. Provigo Distribution Inc., [1997] A.Q. No. 3710, [1988] R.J.Q. 47 (C.A.), which held that Provigo owned the supermarkets bearing its name a duty to provide assistance and to support the franchise system and not to compete with it, particularly in the area of pricing. Provigo had breached its statutory duty of good faith under the Civil Code. Kelsey Group Inc. v. 75766 Ontario Ltd., 1990 13661 (ON SC), [1990] O.J. No. 598 (QL), 30 C.P.R. (3d) 355 (H.C.J.) where notices of termination delivered by the franchisor to its franchisee were held to be a smoke screen to enable it to establish another franchise in the franchisee's territory; and Metro-Pacific Cellular Inc. v. Rogers Cantel Inc. (1994), 1994 242 (BC SC), 57 C.P.R. (3d) 538 (B.C.S.C.), where the court held that Cantel could not compete directly with its non-exclusive dealer in downtown Vancouver. Presumably one factor that would be a consideration as to whether the franchisor can set up a competing business is whether the franchisee has an exclusive territory.

Note 2: In Hunter Engineering, supra, at para. 137ff. Dickson C.J. restricted his comments to the use of fundamental breach in the context of enforcing exclusion clauses in a contract and did not express an opinion on the other meaning of fundamental breach which he termed "substantial failure of performance" to relieve a party from future obligations under a contract.